florida which i think is the whole campaign. i'm from florida and i've been accused of being biased, but i think it happened last time he lost to became that race would have been decided on what leader and medium romney's fever only lasted about half a percentage point, so i think florida was the decider then and these other states sort of set the table. >> host: back to new hampshire. so he gets the endorsement today or this week from johnson, the former governor. that's what we are reading today. >> guest: we saw that comment and we knew the new hampshire politics for sure and i don't think among the insiders in new hampshire this is a big shock. so everything is going his way in new hampshire it is his neighboring state after all, and

he -- i think the question for him is what to do about iowa and it's the old dilemma for the front running like it was for hillary. it's a big loss you can just write it off and if you write it off like a giuliani did then you are out of the picture. it's always a tough choice. i think romney -- what i am sensing from watching him in the hiring of people and different things is the of decided to make a play on all iowa because the conservative side is so divided these easements he's got your cain supporters and gingrich, they are really split of and there was no real consensus. they will decide late like they always do in iowa but there's no real consensus. if it stays that way -- peery isn't even in iowa in the double

digits -- if it stays like that which is the 40, 50% of the vote republican caucuses in iowa, evangelicals, if that's divided four ways like that romney could even win on what to read >> host: colorado springs, pat, democrat for craig crawford. good morning. >> caller: good morning. i'm calling concerned -- i was listening to the tv over the weekend and about people already forgot about the last eight years with republicans, that's one thing. i have two sons that served in the service to those kids over there do not come back the way they were before they went over there. >> guest: where did the search? >> guest: >> caller: they served in iraq. they spent eight years each, both of my boys. when they came home they were totally different. they'd tell you they wouldn't wish that war on their worst

enemy. people come for rot -- and listening to the republicans talk about we shouldn't have brought our ways on this early. those are not in their boys. you know, those are our boys that they are sending over there, and another thing, like i said with the jobs, prove the man wrong if you will feel that way. that is all we want, try her. on top of that, one more last thing and then i will hang up. the republicans are about the money. all we want to do is provided. he's got to know they are making good money up on that hill. stop and think about the last 80 years before you start seeing so much about this president. it's not about this president, it's about our country because everybody is crying about china. china is doing fine.

this country is the one that is catching it. >> host: let's hear from our guest. >> guest: i think you ought to have her on the show. [laughter] that is very articulate comment. she represents the kind of voter i think obama is going to get back to the polls excited, working, because -- and that is an argument that he can use with those voters is don't forget the years that came before me. the media kind of makes fun of him when they do that but there are voters out there if in their mind they can recreate the 2000 easter amex he will bring a lot of the votes back that we haven't seen. >> host: he will also see these voters who've seen this type of that line. this is for this monday most voters say the u.s. is in decline. it's a poll showing that american spirit has been sapped overwhelming number believe the

current troubles indicate eighth wonder and deeper fall. that is on the hill. there's also a tweet de think the disparity between the rich and poor is good for america? put in context if you can. >> guest: that is what wall street is all about and people keep saying what do they want, what do they want? it's not their job to solve the problem. the president wants them to identify the problems and widespread heartfelt and i think that income disparity and maybe resentment is a strong word but resentment is with the callers have expressed against the rich and powerful getting breaks that they are not getting. it's not that they resent them for being rich, but that they see our politicians calling them so when it comes to the actual solution to these things they are all over the lot, but the feeling that that is i think what is driving the feeling that the country is in decline is the

disappearing middle class and the disparity between the poor and the rich. >> host: moving on chaparral now, berkeley springs west virginia. republican for mr. crawford. good morning. >> caller: good morning. mr. crawford, i had a chance to speak to you last time you were on c-span. >> guest: where are you from? >> caller: berkeley springs, west virginia. and i am assuming you have read this jobs bill, which the president has put out there. is that correct? >> guest: what i read our, you know, if he read the actual text of the bills it's a little harder to get through to understand everything. i mean, i know that's not going to play well with you probably, but the outlines and the numbers -- i look at those numbers like the congressional quarterly, and then of what i really before in

these kind of bills is the budget office. when they scored a bill that is where you really learn what the bills are all about and what the potential effect might be. >> host: anything else? >> caller: you were talking about a poison pill the bill. what about the fact that he put the clause in there for the union stating that every job that was created had to be paid according to davis, and then for the lawyers he put in the free is saying that any new person that was hired had to have been unemployed for over a year so there he is telling the companies who they can hire and who they can hire whether they are qualified or not. and i would like to know what you think about the obama

administration telling boeing that they cannot open a factory in south carolina. sir you haven't changed. you are still be out there in left field. [laughter] >> host: thank you. >> guest: well i like berkeley springs west virginia by the way, so i will give you that much. [laughter] i think we have a lot of those divisions you are right for the unions, but also for guaranteeing no chance of a bipartisan solution which i'm not sure at this point any way the president even once. >> host: maryland, robert. thank you. >> caller: yes, sir, how are you doing? listening to this conversation, the gentleman from berkeley springs, the gentleman from maryland, the gentleman from denver colorado, colorado springs, all of these people are saying the same things. that this man people who are

willing to destroy themselves during the civil war above all the people and all over the world people think like this gentleman. this is the 20th century. the outdated these kind of people and would not last the way people who think like him are willing to destroy our country and in the interest of preserving their own way of thinking at the destruction of other people is outdated. >> guest: i think that pat buchanan this kind to be a very controversial book out there with a whole chapter about the decline of white people for something and it's all about how i think he calls it the american suicide or something like that, and it's all about kind of what you're talking about, the feeling among those like him and

who agree with him and following but that somehow their culture is under attack and of losing power and influence but i haven't really seen that has been true. >> host: as we look at a strategy we look at a couple of other postings by craig crawford at craigcrawford.com . back to the occupied wall street had lied. gop occupies this been backfires. what do you think your? >> guest: what i've noticed about what happens there when it first came out and we saw the pictures i think they looked at it and it kind of gets back to this pat buchanan stuff they thought it's the hippies again, and they put it in their mind and they felt they could immediately demonize and criticized and ridiculed it, and then a i started noticing some of their language change even their character and after some

of the polling i'm guessing that the republic was not as outraged by the protesters as they had expected them to become and so then they start to say in things like it represents a widespread -- here's the thing. i think they had a chance in the beginning to spin the movement into an -- at least convince the independence that it's an attack against obama, wouldn't convince everybody of that but i think that they were too quick to demonize the movement. >> host: he also wrote that even obama, this is obamacare. >> guest: well, he had a proposal out a thing when they went to congress with the obamacare in the beginning they

put things in there that they didn't really properly store, and it turned out that they couldn't sustain them and so now they are voluntarily when some of those provisions out what sort of opened the pandora's box with pretty important provisions, too that upset the senior groups that had been talked into supporting the obamacare in the first place because of those provisions they are not taken now. >> host: greg from new york city in manhattan. greg is a democrat. hi there. >> caller: good morning. >> host: good morning. >> caller: anyway, i hope i will be able to say what i have to say without getting a dial tone. the projection the media wants to put out there that the obama support system is stagnant is a facade. there is no way of a world that the momentum that this man had in 2008 has been diluted, an

example being certain segments of the population of the country and a man that looks like this man is in the office that they actually believe they can put anybody out against president obama or mashaal bachmann.org mitt romney attached to the more in society controlled by the mormon church to get the movie the inconvenient truth just like the mormons to act on the proposition whatever it was for the gay rights in california. there's a story behind that movie the inconvenient truth the details of the inner workings of the mormon church operates. president obama would have had a better system of rahm emanuel didn't mess up. i can get some republicans on my side. >> guest: well the deal they made the devil in a way was

conditioned on an's agreement with the insurance industry, and that's what led to the president of supporting the public auction were going further in the way that the government insured health care but i want to get back to your point because i want to be clear i agree with you that obama as i was saying earlier i think that obama should come back in the election and my point was that they didn't show up in the midterm election and that is when a lot of the media began to think they disappeared forever. i don't really think so. i just think that the obama centric voters he wasn't on about what and what we learned is a vote for him they are not going to vote for somebody they tell them to vote for. >> let's hear from columbia maryland. brad, good morning. >> caller: good morning. i wanted to talk about the herman cain 9-9-9 plan.

>> guest: its 9-0 and now. >> guest: >> caller: its got a lot of chatter and i like it. the only thing that addresses what the people on wall street are complaining about and that is the politicians being connected to our government and being taken care of by the government because to many of the politicians are facing money from the government and take away all the deductions that have been put in over the years you could really address it. the other thing i like about it is that it does cut business taxes and if we want to improve our balance with china we have to do something to avoid the tradition of jobs going overseas making more and more sense of the business year and expected we are going to employee americans. >> guest: i think that plan was very good for starting a

discussion. i think it's improved as people look at the details realizing how many people's taxes would actually go up and now tweaking it a bit. but here's my problem with the plans and presidential campaigns. i would like to know how were you going to get it passed had we not learned over and over again with these blueprints and the 192 page plans for this or that or the other did they get here this place over here in congress tears apart and it's all about -- i don't think presidential voters lockhart enough at the qualifications and skills of a potential president and managing congress and getting things through congress. doesn't mean they have to be for washington that the governor has a good record. i never see the voters -- the

focus on what the plans are and the media does this, too, but not on -- what skill set to they have to actually get any of this past and that's why i don't see herman cain having the ability to get something this reticles for congress and if that is the case, the discussion is sort of mood. >> host: one last call from the mark and illinois. cecilia. welcome to the program. >> caller: thanks for taking my call. mr. crawford, i.c.e. one keefer olberman all the time and i really thrilled. what i wanted to say is adam free go one of president obama's speech writers in 2010 on the democratic facebook page about trying to remind the voters to believe, and i think as he asks us to believe that we can in

fact change -- just look at the wall street protest right now. a bumper sticker obama and blight in 2012 because i still believe i think that he would give us a vote again and easily win the reelection. i was just wondering what you thought about that idea. >> guest: that is the sort of outreach it's going to work to get voters ahead in 2008 who carried him over the top. as i said before, a lot of people assume they are gone because they didn't show up in the midterm elections in 2010, but i think we have had a couple of callers like this one indicates that they are still out there. >> host: critical for currently political blog turkoman you can read him at craigcrawford.com . >> guest: i have a lively feet of commager's. we welcome people to come on.

we have a good time to read we even share recipes. >> host: thanks for coming on.

make a five to eight minute video on the constitution and you and get it to c-span by the deadline of january 20 and you can win the grand prize of $5,000. for complete details, go to studentcam.org. leaders of the house armed services committee created the defense business panel in september. to look into business challenges facing the defense industry. the panel met on monday for an hour and a half. >> the hearing will come to order. i want to thank everybody for joining us here today.

especially my colleagues back from recess. i hope it was productive for everybody. i believe that today's hearing will serve as a foundational discussion for this panel. i think it moves forward and is working to examine the challenges of doing business in the depravity fence. on the house armed services committee has led the way in improving the the equipment and needs. as most of you know it has successfully have a reform to the weapon system acquisition act through the legislative process to the president's desk. while the bill did much to garner efficiency and create transparency and foster competition, there is room for improving the dod business practices. i'm a strong believer in the fact you can't solve the problem without looking at both sides of the equation and that is exactly what the chairman and ranking member schmidt established this panel. to look to the business side of the acquisition system.

i wanted to start this series of hearings with a broad look at the industrial base to get the panel a framework for moving forward. today we have all recognized leader some policy regarding the defense industrial base joining us. on november 1st we will follow-up with senior officials from the manufacturing and industrial base policy office and small business office together to give their views on the issue. after that we will move on to several hearings focused on some of the specific issues and challenges facing businesses that are eager to arrive on technology and services to support the war fighters we have terrific witness is with us today and i am very grateful that they have taken the time to share their insights and expertise on the defense industrial base with my colleagues. i'd like to introduce them first mr. barry watts the sectors egypt assessment. mr. fred downey vice president national security aerospace association and pierre chao,

senior associate industrial or international security program center for strategic and industrial studies. again, gentlemen, thanks for taking the time to be with us today. i also wanted to give it to thank mr. schilling and mr. loebsack and their staff for hosting the panel and the quad city area of illinois and audio. we have an informative discussion there with an industry leaders and learned a great deal of what goes on at the rock island arsenal. it was extremely useful and i appreciate all the effort that went into it and i want to thank blackhawk college for letting us use their facilities to hold the meeting at the committee staff prepares a summary of the discussion at rock island and was provided to all the panel members and without objection i would like that to be entered into the record. hearing no objection, so ordered. on friday members of the panel will travel to akron ohio to hear from the industrial base in that area and to meet with engineers and scientists at the university of akron engaged in efforts to help the dod present and mitigate corrosion. in in these tough economic times we have got to make sure your

during everything we can to get the most out of every piece of equipment we ask the american taxpayer to provide mitigating and prevented her version is a critical part of doing so. i'm very much looking forward to that trip and the discussions on developing and the transition to the critical technologies to help the dod system and its equipment and i want to thank ms. sutton for inviting us and i returned to my friend from washington mr. larsen if he might want to make. stomachs before mr. sherman. i appreciate the opportunity to make a brief opening statement. but also, again, to thank you for your leadership on this panel. the panel was tasked with looking at ways the department can improve its contracting practices to the benefit of the war fighters from taxpayers and businesses to read the d.o.t. must continue its efforts of building a strategic and dynamic contracting process one that ensures those of we have great products do not go by the wayside. the component of the process is ensuring that we put it to grow the nation's defense industrial base. u.s. defense base has a long

history of producing the best military systems in the world. we must ensure that this continues for the war fighter and because it creates jobs here in the u.s.. in august the chairman and i heard from several businesses in my own district about success and challenges that they have had with the dod of the contract in. and all of these impact small businesses. these anecdotal accounts help give us an understanding of the real world experience small businesses face the challenges they face while trying to contracting with a very large government bureaucracy. today we have witnesses that have studied the department of defense policy and legal policy implications for rooms that we should seriously consider as we move forward and looking at housing -- home can help small and medium-sized businesses access the department of defense contracting process. i look forward to hearing today's testimony. thank you again mr. sherman. >> thank you. with that we will proceed with our witnesses. first mr. watts, you may proceed

but i've seen your biography. you're a graduate of the university of pittsburgh. you are a native of western pennsylvania or just attended graduate school there? >> [inaudible] >> you don't have that pittsburg accent or a place i didn't pick up on it yet. thank you very much for being here today. i don't know if your microphone is on. push the button. there you go. proceed, please. >> well, chairman shuster, members of the panel, and you for giving me the opportunity to testify. i just want to make a couple quick comments about caveat for the center for strategic and budgetary assessments report that we put off earlier in the year. we focused pretty much on the prime contractors and major defense acquisition programs and that particular report.

as a very small think tank we have very little capacity to do this sort of thing that birds lambert is trying to do over in the pentagon and that is go down to the lower tier and the part of life. even the material supply years. that is an enormous job and a small group like ours it's just beyond what we can do. we also didn't say much about some of the constraints, legislative constraints that make it difficult for the air defense industrial base to access the global defense economy as jack talked about at great length in his recent book, democracy's arsenal. beyond that, i will just make a couple of comments about the three pieces in my written statement. first of all, i'm not going to see much about this.

i think here in congress it's clear that this is not a normal free market economy when we talk about the defense industrial base. it's very different to the consumer electronics or the automobile industry. it is highly regulated. the regulators and the customer are one in the same, the u.s. government, and there are piles and piles of regulations and statutes that try to make the business process as low risk as possible particularly when you do major programs, and i would certainly suggest whatever can be done to try to relieve some of the burden would be useful going forward. given the present fiscal situation that the pentagon is facing, they have had almost a decade of growing budgets. they had supplementals, and now the base defense budget has surely going to start going down and will probably go down for a

period of time into the future. given that, i think it is essential for the pentagon and the u.s. government writ large to develop a coherent long-term strategy for deciding what pieces of the defense industrial base are really going to be important going forward over the next several decades, and make some real strategic choices. we talked in the report of six or seven or eight major areas which we think should be invested in preferentially. we do not give you or suggest a list of what those are. but we think if you're going to have the strategy in so far as strategy is about choice, that you are going to have to focus on capability areas that are probably in the single digits. at the end was 75 for 123 most important things you just don't have a strategy, and it's very difficult given the interest of

the various here on the hill and congress the various services and constituencies and industry to not end up with a very large list, so i think making that choice going forward is really critical. let me just say that it's not easy. you need to start with the challenges that we face on the national security standpoint over the next several decades, and it's going to be difficult enough figuring out what the really seven or eight or maybe nine really important areas are. and second, if we could get some consensus on what those are, there's the problem of deciding what pieces of the industrial base the defense industrial base would really support the capabilities going forward. i mentioned in my statement the capabilities, and if you thought that was important, that was an area we really have invested provincially there is a whole range of different options that

you can choose to give you can buy more cruisers for the missile or emphasize missile defense. you might want to invest long-term and directed energy. you might think more about the submersibles combat hence. there are a whole range of things. both of those choices, deciding what the really important threats to pay attention to over the next several decades, and deciding what pieces of the industrial base are really critical to supporting them. those are difficult choices and with that i will end my five minutes or not. >> thank you very much, mr. watts. with that, mr. downey? >> mr. chairman, mr. larsen, it is a pleasure for me to be here as a representative of more than 350 companies who are part of the aerospace industrial base. the week of september 12th was national airspace week by the congressional resolution. during that week we celebrated our legacy of global leadership

and aviation defence space. in the coming months, several momentous decisions will be made about the nation's budget which will ultimately affect what kind of aerospace and industrial base we will have, what capabilities will possess, and whether or not we will remain juggle -- global leader. those will be taken in the absence of the strategy and if history repeats itself without full participation of those who must manage the industrial base during what is a time of historical reorganization. i think most americans would agree that the 20th century was defined by aerospace and that it was largely our century because we were second to none in aerospace. i think the 21st century but also be defined by year. the question is whether we are still going to be second to none. while most accept the view the industrial bases of the national strategic asset, too many jews to treated with benign neglect

assuming the free market will always work to ensure we still second to none. as mr. watts said, although it never really was a free market it was so successful that many believe it is now a national birthright. but that was then. the industrial base that existed then doesn't exist today. it is a far cry from the military industrial complex of the eisenhower era. in the 20 years since the cold war nearly 150 sycophant defense companies have consolidated to six. a number of big companies left the market. almost none have entered. in the post cold war consolidation has created a situation where the top firms have grown individually, but the market has shrunk significantly. so, far from being the powerhouse that many suggest,

the combined annual revenue of the top seven members of the aerospace and industrial base today is about one-half of the annual revenue of wal-mart. that is what has changed since the days of the cold war. ..

recent analysis performed by dr. fuller at george mason university and others, finds that the total american job loss for just the first part of the budget control act will be approximately 430,000 jobs, and about one-third of those jobs will be from the defense, aero space and industrial space. but it's not just the jobs we'll lose. it's -- ambitious scientist have sought to work for the industry but we're facing increased competition from other high-tech sectors for those workers. without the challenges we're not going to get there.

we need two things. we need budgets that produce programs that are profitable and that reach out to the talent we need, and we need an industrial-based strategy that gives direction and predictability that the industry leaders need to make sound strategic business decision. without those two things, it's doubtful whether we'll have the aero space and defense industrial base that's provided the capable that our soldiers, sailors and airmen and the american people have come to expect. thank you, sir. >> thank you for inviting me. as noted a i'm a senior associate at csi and a managing partner so a student of the

industry and a practitioner in it. you're asking a great question in terms -- and an important one given the budget environment we're in. however, it's a question you need to i think approach with caution because one of the worst things that one can apply when it comes to defense industrial policy is a one-size-fits-all mentality. more damage has been done to the industry. we would suggest that thinking about the industry as a hole, sort of three constituent parts theme merging technology and companies, think cyberand directed energy, mobile applications, the new technologies of today, as one sort over group that has its own issues and topics. you then have the core part of the market, or the mature part, the constituents of mr. downey, the lockheeds, boeing, of the

world and the small business community, and a much more mature legacy component, the remaining monopoly manufacturers, for example, the ship builders, space launch, down to one major supplier, fixed wing aircraft went down to one. the policy issues and the contracting issues are different. on the emerging sort of categories this is where technology is important. access to technological talent. the issues in the schools in science and technology. they can't find enough scientists. export control is critical to this. people are afraid to put technology because they can't get it back out again, has become a serious issue. the lack of venture capital, and even the overall environment for these small emerging companies operating on a budgetary environment, frankly are in continuous resolutions. it's hard for these young companies to come in and do

things. the other thing that's very important to think about, when you think about policies, don't shut down competition too early. in this part of the segment you like having eight, nine, ten different players because we're trying to figure out what technologies think about the aircraft industry looked like in the 1920s, eight or nine different companies, making airplanes, two wings and engines in the front and the back. we didn't know which was the right way. oroville and wilber wright, in their new space launch markets. shutting off competition too early is dangerous, preservation of the science and technology budget its critical for this constituency, so the budgets, funding is the lubricant that keeps this industrial base vital and alive. in the core part of the supplier base, these are the lockheed, martins, boeing, general

dynamics, they represent the jobs we have in our districts today and in many cases they're in some of the most underrepresented areas. this where is the core questions about dod acquisition processes. how difficult is it, how much overhead burdens are we putting on them with unneeded processes and others. the call for strategy and focus that mr. wason and mr. daney called for is going to be absolutely critical. they can figure their way out as long as they know where we're going in the absence of a strategy, it becomes too ease to sit there and say, just like they did in the 1990s, this is too difficult go home or go somewhere else. great example. and defense is a small market for some of these. we went through untold pain related to tanker program. over 160 airplanes in. in the end that represents ten

weeks of production for boeing and airbus. so keeping nat mind. the legacy one is the most complex because it represents core capability, tanks, sub marines, space launch. we have an advantage but down to a small set of suppliers, and, frankly, it sometimes takes a lot of more to keep the core capability set, and we need to decide which are core capability sets we want to continue and where we need to put in sufficient engineering and money to sustain engineering talent, versus who was the last buggy whip manufactureter and should go away because they're in the more legacy side of it. so, from that perspective, the issue of make sure that there is enough money to sustain that old legacy, set of capabilities, becomes one of the most critical questions. this is important for the small priors because i think where you find the most amount of vulnerability is in the last

propeller manufacturer for the u.s. navy, for example, or the last maker of bags for artillery shells. habits for nuns, and the nuns decide to pull their contract, and now suddenly the u.s. navy is worried about who is going to make the last set of linen bags for the artillery shells. you're going to fine all sorts s of strange, bizarre markets of industry that are critical and important, and so from that perspective, the policies that work at one end of the industry don't work at the other so as you through your work, think through the budgets and the impact it has across the different part office the industry. thank you. >> thank you very much. mr. chao, can you talk a little bit more about the technology, the companies and the technology we're keeping out of d.o.d. we heard at a hearing where the

itar regulations, that it's very difficult, once you have a technology that's now open -- in the open market, with our folks provide dod, can't sell commercially now so that constrains them. you're suggesting people are saying, i'm not even going to start selling to the united states government because they're going to capture and it i'm going to be hamstrung. >> one of the thorniest topics on the landscape in terms of export control. this committee and the congress and administration have been looking at this topic. we have the beginnings of a lot of strange, unintended consequences because of the wail the policy has been put into place. been put into place in order to prevent core american technology from leaking out to adversaries. it's having unintended consequences where companies are afraid to put the technology into the u.s. and are keeping it outside. you're seeing this mostly in

very cutting edge telecommunications technology. i'm aware of two instances where global companies decided to sell off their u.s.-related businesses in order to be able to compete globally because it was too difficult. you're beginning to hear other countries, about developing products that are quote-unquote i tar free and when you talk to the companies, they said that would have glad by bought american had be been allowed to sense we weren't we had to build our own technologies. so we have to reconcile that core need of making sure our core technology doesn't go out and mitigating unintended consequences, and i argue those consequences are arising at such a level that it's getting to crisis levels where addressing this issue is going to be absolutely critical. >> talk about cutting off competition. where is that occurring and how is that occurring?

>> it's not occurring yet, but as we go into a tighter budget environment, it's going to become very easy to sit there and take a look at the list and say, boy, i'm running ten uav competitions or programs, maybe i should just go to one. and all i'm saying is, ten to eight is probably okay. ten to one would be disastrous because we're still trying to figure out that technology, for example. and others where the answer is becoming more evident, just like with the aircraft industry, where we settled on a common solution, a single-wing monocoque. >> thank you. the department of defense came out with a report talking about long-term investment, short-term strategic -- i think mr. watts talked about that. the report is almost schizophrenic. talks about those thing being important and yet it's going to allow the market to drive our needs or provide for our needs,

and you're saying in your report we need some kind of strategic plan moving forward to keep the legacies and core competencies. did you see the report at all? >> yes, i have looked at it. >> your assessment? >> well, it seems to continue to assume that this industry operates like consumer electronics or the automobile industry, and if that's not the case, then trying to develop a strategy based on an incorrect assumption and understanding unf the nature of what you're trying to manage and build a strategy for is probably not going to succeed. going back to 1980, because of the acceptance of that assumption, that incorrect assumption, that it's a normal market and competition will work the same as it does in consumer electronics or flat-screen tvs,

the policies based on that assumption have generally done more harm than good. so, now, in fairness to that report, they did talk about the service aspects of the defense acquisition, as opposed to major weapon systems, and the use of competition may be more useful in services in the defense procurement. so, there's a point to be made there in terms of the way they structured the report, but still the assumption about the nature or the industry, as far as i can tell, has become wrong since the '50s? >> you concur? >> i do entirely. competition certainly ought to be used for those sectors of the industry where it may be effective, electronics is a key area. but there's not going to be much

competition for a nuclear submarine or a long-range bomber. there just aren't enough companies in the market. so you can't have classic competition in some core capabilities, and the challenge for the pentagon is to understand the difference and construct a strategy that is adequate to deal with the differences, as pierre said. >> i intended d.o.d. and ask why they believed this is -- can be market-driven when it's clear, and most people who look at it, common sense is d.o.d. is the regulator, the procurer, one u.s. department of defense. why do you think in their mind -- just kicking the can down the road because we have fiscal financial restraints? >> i'm just puzzled by why that

has persisted as long as it has. all i can say. seems to be a myth at best. perhaps it's just -- we look at the really normal parts of our industry. we think competition and innovation are very important and we just sort of assume that it's pretty much a thing of the defense industry on the one hand. on the other hand, if you look at down-select from an rfp to move into development of a program, most of the competition ends at that point, and notwithstanding essentially the direction in law from that 2009 reform act which suggested the secretary of the defense should try to maintain competition throughout the life of the program. it just hasn't been happening, and the best example is the second engine for the joint strike fighter. if you go back and review the

reason secretary gates gave for not going ahead with that, it was basically the tradeoff between the real 2.7 bill of real costs to develop the engine and the more theoretical, long-term -- actually being able to complete two engines over the life of the airplane, which they judged is more theoretical and didn't think it was worth the 2.7 billion. >> mr. chairman, if i might add, i think part of the answer to your question is simply not watching what is happening to the market in general. in the '50s and '60s, when we were designing ten aircraft and producing six, competition made sense. when you have a market of one or two actual producers today, and no real prospect in a very

capital intensive sector, of attracting new competitors into the market, then you have to look for something different, and that's a hard thing to do. it's much easier simply to assume the competition will give you the innovation. >> i would also submit to you, again, it's the difference between the different segments. when the pentagon writes the report they're looking at emerging technology if you put an rfp out and stay i want a fiber solution or put a pdna every soldier's hand you're going to get a lot of competition. that's not who they're representing. that's not who they're talking to it's to sit there and say, i want competition in tech manufacturing is silly. he haven't designed a new one. i have a good supplier, i'm down to one and would be wasting money. that's more of a negotiated relationship as opposed to where you can have an open relationship, and again, some services, newer technologies, that works fine and that's where

i think you have the schizophrenia of the report because they're talking about that part of the industry. i suspect most of the people you're talking about the pain in the defense industry from the more -- part of the industry that is natureow based. >> thank you, mr. chairman. just an observation. in the first eight to ten years of this decade, when there seemed to be relative plenty for the defense budget, we were getting the same complaints. so, fiscal restraint is here and coming, and we have the same complaints. sort of gets to mr. watts' point. i'll take your word for it that the complaints were the same. as always, never enough money, and always plenty of bad ideas being brought to the government for funding. as well as good ideas. and our goal here is to be sure that good ideas, no matter where they come from, get a hearing to

increase the opportunities for our war fighters, to get products and services and support they need. one example is interesting -- i guess i'd ask mr. downey the question as to satellite. there is a new entrant in the market who is seeking to become a competitor in the defense side of the business. so -- but the core part, as you describe it, the core part of the industry, either -- well, i won't say they don't want that competitor, but the rules are set up to encourage -- to support the core part of the industry and to seemingly discourage the new entrant. so, the space versus the boeing on the satellite side.

how do we bridge that problem as an example? it's a perfect example where these are -- you have a new and emerging entrant who actually now wants to jump the gap to become a competitor in a larger program. >> great example. the classache aircraft movers, and the light vehicle -- each one of these sectors has players in each place. part is driven by the policy and the technological solutions that the pentagon wants to go after. it's the core way we're going to do our satellites, is large sort of monolith, multibillion dollar satellite. it's going to be hard to give that to a small startup, and it would drift itself towards

there. our policy suggestion or thing that some people have suggested is while you're keeping that core legacy, ensuring there is a certain amount of money reserved for the technological innovation amongst the younger ones, is money worth spending as the hedge, and in order to usher along some over the newer technologies. in markets where there's a large commercial market, the commercial market will do that for the pentagon. in places where it's a little harder and there isn't a big market, -- i'm going to pick one and say that it's probably too early to hand it over to that young startup. i want to keep my core but on the other hand you're probably going to want to usher along these new guys to see what the new technology is. >> mr. downey. >> i think it's a great question, and we're going to

have to figure out how to integrate new innovative ways of building capables that we have built before. but in general, a great idea isn't a capable. a capability is the ability to design, develop, produce, and support a system throughout its life cycle, and to build the skilled work force that can do those things. our policies today are to buy fewer and fewer pieces of equipment, have fewer programs with far more time between new program starts. it's very, very difficult to sustain that life cycle capability, and that kind of environment. most saginaw companies don't have the staying power or resources to do that. so, having a one-time capability to compete for one thing doesn't necessarily mean you sustain the

capability in terms of a unique military capability. >> but that's one of the challenges of owl -- all our companies in general, that longer lead time. so, again, it's a process that plays against them as opposed to encouraging newer intrantses into even the smaller niche areas of the defense budget, and something we heard from folks in certainly my district and from other places as well. so, i think accepting that as a reality is part of what we don't want to do here. we want to accept that as a challenge to the pentagon to change as a way to encourage smaller and medium-sized businesses into maybe -- maybe we can define what is an appropriate market and not an appropriate market and help them along. we'll hear from folks next week on this point.

the point you made about the aero space is not the one of the past but we need budgets that produce programs that of profitable and stable. i don't want to put words in your mouth. from your members' point of view and from the current market's point of view, clearly a -- stable contracts that help provide a profit to the business is a good idea from your side of things, and probably the number one priority, despite the brochures. our number one priority is the war fighter and making sure they get the services and products and things that we're asking so they can do the things we're asking them to do. where those match is a great idea. where they don't match, i'd rather see is prevail, that is the pentagon prevail. so that we're getting the services first. if we do that, then that may not help you all prevail so so

trying to find the sweet spot where you're coming -- folks are coming and saying we need programs that are profitable, frankly we have to say we want programmed that work on time and you're responsible for that, too. >> well, i don't think there's any difference in what we're saying at all. if you have a strategy, you know where you're going, you have pretickettibility and stability, and you have a reasonable way to do strategic business planning, that satisfies your shareholders -- we have to remember that the members of the aerospace and industrial space are largely private companies. they're not government companies. if they don't need expectations of return on investment -- and here's an expert on that -- then their boards are going to force

them into more profitable areas. so, the more predictability and stability you have, the better opportunity to calculate that critical return on investment, and the stability allows you to build those things that work, that are on time and on the contracted price. the more instability you have, we say the less likelihood you're going to get an era where you don't see cost increases and schedule slippages. so, we've got to get to the point where we have that understanding of what's wanted, when it's wanted, and it isn't changed on an annual basis or when a new administration turns

a critical must-have into a nice-to-have but expendable. >> the challenge we obviously face is -- we have heard from other folks -- another solution is the board decides to go out and purchase that smaller company. right? they good out and purchase the capability and bring it inhouse themselves, which is a challenge we have heard from other folks. how do we maintain -- how do we help maintain the incentive structure to the independents and smallness and innovation side of the small and medium sized businesses stays independent and innovative as opposed to getting sucked into becoming a division or subsidiary of a company. >> partly been drench by the lack of visible in the market place. large companies have 1-1/2% and

have been substituting m & a for that research and development because in the absence of knowing where the building wants to go, the only thing they can do is watch that little guy succeed, and at least they know that they're buying from tom guy, so i'll pull them in. the other thing about the profitability, this is the only market space where the custom we're gladly pay a million at 8% mrs. rather than $500 million at 20% margin. it's completely turned around and that mentality gives disintives for innovation and new entrances and et cetera. so your proposal for reforming the system, be very careful in watching carefully about those -- the assault on the profits, which i can understand from a political standpoint, actually is going to end up generating the exact opposite.

the industry would gladly trade lower volume for higher profit each time. for some reason that's not in the mix. >> thank you, mr. chairman. >> thank you, mr. chairman, and. >> thank you for coming, and your testimony. i just really have one question. we talk about the industrial base in this country and how -- frankly how it is the last major form of industry we have left here that is done here, and how we keep that, and mr. downey you said, obviously we need to have some confidence in projections forward and how we can keep procuring stuff like this. one thing -- i don't think it gets enough traction and i think it's directly linked -- is the turn we have taken in space exploration associated with defense. can you talk -- i know there's a

lot of one office small suppliers involved in that industry can you touch on that a little bit? >> the -- we are concerned about the space industrial base, especially as it relates to the national defense space industrial base. there's some good news. there are -- there is an emergence of commercial space companies. some of them are in fact our members, and we look for great things for them. but i would make the same case. space is an expensive proposition. the return on investment right now is somewhat problematic. and we need the government strategy that keeps us moving forward with -- on the cutting

edge of technology. there have been many who said they'd bet you a lot that the next boots on the moon are going to be chinese, and i'm not sure that they're wrong. and only the government -- only nasa and the pentagon can have the kind of vision that translates into programs that build the capabilities, and then as the commercial companies build their capabilities, i think they'll be serious members of the united states space industrial base. but we risk losing critical parts. we don't have a heavy-lift capability. our satellite capability is atrophying, and everybody knows what the situation is with our

manned space program. right now we're dependent on the russians to get to the space station, and the capability will atrophy. it will. and the small companies that make up the supplier base won't have the majors to sell to. they'll turn to something else and then we have to start again. >> i think even looking forward and planning -- and we hear the testimony all the time, but even when the d.o.d. tries to project what's going to happen, that changes tomorrow. so, in a way it's an oxymoron to go back and forth, we're planning for the future, but the future changed yesterday after we already put the report out. so i understand the frustrating aspect of this. but to help us nail down the way

to keep the industrial base here is a frustrating proposition. thank you. i yield back, mr. chairman. >> thank you, mr. runyan. >> thank you, mr. chairman. and i would like to thank the chair and the ranking member for taking us to rock island. it was a very interestinged a vetch tour for someone -- adventure for someone from hawaii to see a working foundary. i want to start first with mr. downey. i was reviewing your publication, defense investment, finding the right balance, and you say things like, how much is enough? which is an interesting concept. how much is enough? but i think the problem that i see that we are having is the fact that when we talk about the defense industrial base, we have -- some of us think about things like r & d because we know the big seven or the big five in 1993, 30 companies went

down to five in essence. and then we forget the other component of it is truly an industrial base. like the foundary, who is the manufacturer? then we have this conflict, how do we decide what is going to be manufactured because of what we're developing, and it comes down to really a sense of, what is, from our perspective, the defense going to look like, the military is going to look like into the future? and each of you have your different areas. can you tell me, each one of you, beginning with mr. downey, and then mr. chao and mr. watts, what is the fundamental end goal that we're looking at -- i'm talking about people but what is the end goal? let's take it ten years out, 2021. what are re planning for? until we have a clear view of that, how can we then decide, enough is enough? or when is enough enough?

is 4.4% of gdp enough? and how do we intend that money and escape the industrial -- keep the industrial base, which is manufacturing and research and development, when we go from 30 to five. >> i think -- i detect this as two parts. one is that we do need a strategy to decide what we want our military to do in the future, what forces we need to do it, and what technologies and weapons we want to provide them to do it. that's, frankly, supposed to be the job of the qdr. it's not done a terrific job there. so that's about getting down to what specifically we're going to do and what we need.

the report you talked about was one where we looked at the issue from a macro level, and said, the united states, since mid-20th century, has been a global power with global responsibilities and global reach. that we have ended up with a military -- relative size of about 1.5 million active, and when we looked at the budgets over time, and the ups and downs of the budgets, what we found was that, in order to have the global military, with global reach and global responsibility, everytime we came down much below 4% of gdp, and at the same time reduced the investment accounts below -- much below 5%

at the top line, we end up with a hollow force, whatever the goals were. and so i think -- a point i made earlier, you have to mike those choices but you have to have adequate resources, and so we started with the assumption that the united states is going to remain a global power, with a global force, with global responsibilities, and we looked at the -- an interesting point, too, that increasingly that 1.5 million looks smaller and smaller to do all those things. so, we have had a historical policy of using the technology advantage we have had, and so the amount of money that it takes to field one of those

1.5 million is going to be increasing in the future. you're not going reduce that requirement. number one, we do need to know where we're going. that's a national level political decision. we need to know how we're going to do it militarily. that's a ultimately -- a professional military recommendation with a national political decision. but it's going to need the resources and, we believe at aia, those resources are probably not going to fall much below 4% of gdp or 35% of the top line for investment, whatever those decisions are, or those plans are going to end up being hollowed out in one way or another, and the resourcing part is a congressional

responsibility and decision. >> mr. chairman, i'm out of time; so could the other gentlemen send it in writing to me? thank youer much. >> mr. west. >> also, we'll probably go around again if you have anymore questions. >> i have a couple more. >> thank you, mr. chairman, and ranking member, and thanks for being here, and i spent a couple of days in the military. a lot of the frustrations i saw, especially when you look at sh crusader, f-22, advance amphibious assault vehicle, and in the last 20 years we have gone from a 526 navy vessels down 285, yet ten years ago, about 19 guys got together, we spent 1.5 million on the tom hawk cruise missile, they hijack airplanes and flew them into buildings. and we're not funding top

requirements for communications. i'd like to ask this question. your assessment. do you really believe that there's a huge disconnect between national security strategy, national military strategy, and then, of course, the requirements we send out to the defense industrial base so that we can start developing a sensing of the next 20-30 to maybe 40 years of this military that we have to have to be able to fight against what is a very determined enemy that is not that much technologically advanced? i'd like to hear your assessment on that. and then what can we do to rectify that situation? >> all right. i'll take a stab at that one. >> can you pull the mic closer to you. >> oh, okay. is that good enough? okay. let me just mention one very

broad capability we have had really since the second world war and that's overseas projection of conventional forces. associated with that, one of the pieces we have developed certainly over the last couple of decades, long-range precision strike, and frankly since desert storm we have had almost a monopoly in the area. but that technology is starting to prolive rate, guided mortars, guided are till rare -- artillery, and traditional over the beach amphibious assault. so that would suggest we're going to have to make some substantial changes and adjustments. i would be hard-pressed to think we would like to get out of the precision strike business.

i think that's going to -- that's an area which is fundamentalie dependent on networking, isr, advanced capabilities we have spent a lot of time and money and effort relative to, and in a broad sense you wouldn't want to back out of that particular business long-term. given the fact that the chinese, for example, are going fairly fast down the same path in developing nix, and capables against, say, surface come about and aircraft carrier, reaching out to range as far away from the chinese coast as guam, suggests that the future of the carrier battle group may be at risk. we've depended on that for overseas presence and power projection for a long time. those are hard choices that i

think the services are going to have to make. so, let me just mention that as one. i mean, another area that i know is not conventional but to think about where our nuclear capabilities have gone since the cold war ended. it would be nice if we could get in my lifetime, to a world without nuclear weapons. i personally am fairly skeptical. i don't think we convinced too many others around the planet who possess nuclear weapons it's time to give them up and they no longer have value and that's an area of the industrial base where we preserved the design capables at lawrence livermore and los alamos, and i'm sure you're aware, secretary gates and sectedsecretary vodman on served we no longer have production capable of weapons.

>> 20-25 years to get something made for the field. -- in 1900 they were planning a war against the germans or the brits, and by 1920, just fought the early minnesota, by 1960, the russian, by 1980 they're at the top, by 2000, it's four guys in an airplane, and by 2020, who knows. so, shrinking, looking at the -- again in term threes form evident, looking at shortening that cycle can only be a good thing from the perspective of getting that mismatch out of the way, and, by the way, shorter cycle, which means more competition, more programs, is very healthy for an industry. one program every 20 years is unhealthy. >> would you repeat? i couldn't hear you. >> one program -- yeah.

if i'm running one program far 20 years, that's very unhealthy for an industry, versus not. this whole element of how long it takes to us get a weapons system is really one of these core root cause elements, and we solve the problem in the way we did ac acquisitions for the war because we had a quick turn, and healthy base related to that. it's the other part of the system which you're looking at from a restorm standpoint. that part of the fundamental issue. >> quick comment, mr. west. i think as an old soldier myself, i sympathize with your frustrations. i had them as well. one thing that virtually i'd be leery to do is predict too precisely who we're going to fight, where we're going to

fight, with what you're going to fight and when we're going to do it. historically we have always been wrong when we have done that too much. so, part of the problem, i think, is retaining the capable we need. we're not going to end up buying everything that is wanted or designed, but when the system gets to the point that you described, the possibility is, we won't buy much of anything, as pierre said, and the capable to do that will atrophy and might grate -- migrate away, and some of it may not be recoverable at all. >> thank you, mr. chairman. i yield back. >> thank you for your leadership, and to the ranking member, thank you as well.

>> thank you for your testimony. i have great concern, as i'm sure everyone here does, of the sacrifices that you described. i tend to believe if you can't make it, you're at the mercy of those who can, which is not a good place for the united states of america to be. so, this is so very, very important. mr. downey, on page five of your testimony you talk about other nations, including our closest allies, and sustain what they consider to be strategic national assets. can you expand on that, tell me who and what? >> most e most nations have an industrial base for their defense. i wouldn't go so far to say it's exceedingly successful and effective in all case, but france does, united kingdom

does, germany does, i believe china does. but the key that they tend to focus on is what capabilities from a national standpoint they want to retain. they don't always get it right. but at least it's part of their process. the british have the process of the defense white paper system, which includes defense white papers. we do not include industrial-based considerations in our strategic planning historically. and the most recent qdr, there's exactly one paragraph about industrial base, and nobody in the industrial base, that i'm aware of, participated in even developing that one paragraph, let alone a strategy. yet i sat in a meeting in london

a couple years ago where the then-british defense minister met with the senior leaders of the british defense industry, and outlined where he was going to go, said that he had heard their concerns and that he was going to take care of part of that by including in the strategy an effective outreach program for foreign sales. now, that may not be a complete strategy, but it's at least a somewhat coherent one, and one which we don't have is a coherent one. >> i appreciate your answer. there are so many questions. let me ask you this. clearly i think that maintaining a stable and strong and nimble industrial policy is critically important. you talked about the need for the strategic plan.

i think the second component you focused in on was communication. if you could just speak to the need for, you say, much better communication and coordination between the pentagon and industry than has been our historical norm. in a nutshell, what do we do? >> in a nutshell, historically we haven't done much of it for almost a ten-year period during the first decade to my knowledge there wasn't one meeting between the secretary of defense and the collective leaders of the u.s. aerospace and defense industry. that's been turned around. former secretary gates and current secretary panetta has begun to meet with the leaders of the aerospace and difference industry, and the industry reciprocated by forming an industrial based task force to look at impacts, with the hope that we can help the pentagon if

they so choose. but even if they develop an industrial based strategy, if they do it without industry, it would be like having naval stray without talking to the chief of nave operations. >> the one question i have, even if all those improvements take place, we still have the issue that this panel has seen over and over again dealing with the communication into smaller and mid-sized providers. so, can you speak to that issue as well?? when you say industry, i'm getting you're not talking about them -- >> no, i am. matter of fact, in our association, for example, we have a supplier management council that includes members of the supply base, and that is represented on our executive committee by one of their

leaders, currently chuck gray from a small company. so, their considerations are included in all of the work that we do and all of the advocacy we do with the pentagon and elsewhere. >> do you have further questions? >> thank you very much, mr. chairman. when you talk about the -- you specifically mentioned some capabilities that you seed a trophying from the -- have you looked at the satellite capability and the manned space capables. part of the challenge i face and maybe others do, is how do you quantify what that means to us? >> well, we're working on trying to get a better handle on the impacts. one thing we do know, the first part of that life cycle that begins to atrophy is the design

capability. as the program matures, the company who is making the product, has less and less need for the people who do design, and so if they don't have other places to put them or other programs that require design, then they're going to get rid of them, and there are a number of design teams that have been reduced or that have actually been disbanded because there's no work for them. and it goes back to which ones do we not want to have that happen to? i would probably suggest that right now we wouldn't want to lose our capability to design a nuclear submarine. the british went down that road and found they couldn't

reconstitute that capability, and dozen years later they decided they needed it. so i hope the pentagon is looking at that much more carefully to decide which of those capabilities and which of the skills represented by the people that may by lost if the budget is reduced too much. they have to have and then come up with plans to do it, and some cases that may not seem the most cost effective thing program-by-program, but on a national security basis, it might be most cost effective thing you do. >> i share the frustration over the idea that every expenditure -- it's an interesting what we're seeing in budgeting here, that anything that doesn't appear as an expenditure is an inefficiency, and that isn't the truth, and the whole con set of life cycles and the cost of not doing thing, that is what we really need to

help translate, in order to get some more sense back into the way we're proceeding, not just in the industrial base and certainly d.o.d., but frankly infrastructure, the cost of not building infrastructure is not zero. it's still there and it's going to be maybe more costly and inefficient. so anybody else have any comments? >> make a comment to your question. in the absence of a defense industrial strategy, we're actually making one up by every, a way acquisition decision we make. we need to stop lying to ourselves and admit we're doing it, and'll say something insinned yeah, -- insinned yeah, we focus on very strange things, so i have a very detailed industrial base strategy related to black berets but i don't have one related to semiconductors, and the chinese set up a policy

where they're drawing in every technology, and it would almost be fie due sharely irresponsible for a executive not to put their plants plants into chinese, and we're letting it drift away. so i think they're hitting exactly on the right point about what is strategically important. ...

if you look at the last three or four or five national security strategy documents, they tend fundamentally in my judgment to be wishful without getting on to the difficult issues of a exactly how were we going to get from point a to point b or nt and they have not been helpful in addressing what issues we want to keep. >> thank you coming back to what we talked about the acquisition cycle, one of the things i know that the army has instituted this something called the rapid and equipping force. a good buddy of mine is having that episode. what are your recommendations? things we could look at, things we could do, things we could push for coming from this panel and the armed services committee has held we shorten that acquisition cycle and get more of these emerging technologies in companies involved so that we

can be more adaptive because the soldiers, sailors, airmen, marines are quite active on the battlefield but it seems that we on this aspect in the industry are not as quickly responding and adaptive. >> you have hit a great topic. we have painfully learned those lessons over the past decade. one of the biggest things i think you need to watch as a group is the tendency that once we are gone to have forgotten those lessons in fact 200 years of history says we will forget those lessons and go back to our old habits so one of the key things we can do is how do you speed those hard lessons learned into the system because there's a basic presumption that in some ways there is a barbell shape target one part of the market for the industry that is tied to this today the rapid acquisition, leveraging the commercial technologies on fighting against guys with a box

cutters and spending $10 million developing devices, not a smart thing. the troops know how to do that. dealers the other thing in the adversary and this need it requires to do that. how can i get them to move faster and cross pollinate? don't extend the lesson too far in either direction. the number one thing i think we can do is make sure that that mentality that's adopted gets shifted into the core process where appropriate particularly related to the new technologies where you need the fast terms. think how obsolete the technology is in some of those 25 years platforms we just talked about. >> i'm not sure there is a whole lot of new ideas. most of them have been identified and articulate it. number one, decide what we want, walk down the requirement, and billed to the equine and deacons

-- requirement and cooperation between those who need it and those who are going to build it and reduce the impediments to building it and doing it quickly without excessive cost and we knew a lot of those were, excessive oversight, excessive paperwork, excessive nonmaterial audits. i had one of our ceos who told me the program ended over three years before the auditor showed up -- >> would you suspend for a second. >> i don't want to miss what you're saying. >> he had a program if the pentagon completed about three years before. there were only a handful of people who were actually on that

program and the auditor showed up. there were actually more than had ever worked on the program, and he had to go out and hire some accounting people on the back end. now that's cost. that's going back in the system, so ben rich, who was the head of the works pointed of in his book what that over his tenure the oversight and paperwork had increased to the point that in his words we put more and more into the big end of the funnel to get less and less out of the small end, and it just got worse and worse and he wrote that in 1994, you can imagine what it's like at this point. >> back in 2006 when the general

retired and did an acquisition assessment and one of the recommendations in that report was something called time certain acquisition would, where do you set up four or five-year part either deliver the product by the board program is canceled kind of approach. only understand win they did the outside look at the last the general weary group welsh was involved and has a lot of acquisition experience and made the same recommendation you will find in our report. the caveat that goes with that of course will work is you have to ruthlessly adhere to the time certain delivery schedules and not sit there towards the end of the program as it is starting to slip in terms of schedule and the cost is going up and decided we spend all that money so we can't afford to actually cut it off. that is a very difficult thing as i am sure all of you know in

terms of listening to the industry constituents from the state's. last i will just mention to touch on what fred talked about the oversight i recently talked from people from one of the major contractors where they had a project that had originally been built for one of the services and now they were starting to sell commercial versions of it and the difference in oversight at the government contractor oversight of the program actually in the factory was a difference between 546 on the commercial side and 100 plus on the government side and it correctly said that cost. there is no doubt about it. it also makes the schedules one will.

>> thank you mr. chairman. i yield back. >> thank you mr. chairman. by the commission, and, i still want your writing to my last line of questions. mr. busbee nine let's move on. i like your concept of the policy by acquisition and i think it is a great way of putting it and it is probably what we are doing. i also went over your sort of slideshow, and what caught my eye of course was the second page that said a few days to think of industrial policy affairs. one of the things in here that causes me some concern, and i'd like to go over with with you. you talk of the life cycle of the technology industry and the sector and it is the curve that ends up with the stability declined which seems you have all of these other things on the bottom and basically points to the competition and that is really the purpose of i think this committee. we were looking at as we begin

to look at the cuts and the defense budget we were more concentrated on the small and the medium-sized businesses because the big guys as your chart in here shows the practically everything else, but this is troubling to me. because what you seem to be saying is we are headed for fewer competitors and we are headed for some kind of a decline. am i reading the chart correctly? >> from the technological standpoint that a free industry runs through its normal cycle and the commercial industry once the car runs through faster and the cycle gets restarted. the part of the kerb at three boots the cycle and so i think again if you to be harsh about the technologies we are most stressed about aircraft, space launch, shipbuilding those are technologies of the 1920's.

the difference between the commercial world and the defense is we actually still use this technology so that the d klein goes on for a very long period which is why i would hope stability in terms of maturity of technology and so all it says is that the policies and the things you want to focus on are different. that is going to be a negotiated relationship with that because of the age of those technologies there will naturally be fewer competitors, period full stop. >> but we also seem to be saying because we continue the maintaining of the old technologies of 1910 which as you are saying we may put a new coat of paint or beef at a little bit, but we are seeing them doing what you're kind of gardening or telling us to guard against which is we are maintaining the old technology because by doing that we are

setting the policy through the acquisition. >> in some cases you should because there is still very but technology. no one has yet come up with a substitute for the submarine. it's a core capability no one has come up with a substitute for the hagee space launch you have some who are trying to do that and that's why i think as you look at this and mr. downey's point it's where you should be spending your part-time because it is the problem of how to keep capability alive, while the same time you should be spending the money we should be encouraging the young innovators to see who's going to come up with an answer for that, and because i guarantee something. if we don't, the adversaries will. they don't have $700 billion to spend on sustaining that base. they are trying to solve the same problem at one-tenth of the cost and guess what, that is invaded which is why they come up with a box cutters or drones or others.

>> weigel i still have you, the barbell which is what you were mentioning i think in the relationship to the congressman west you have it also in your hand out. i'm trying to understand slice one and two and if you can do that quickly for me. >> it's two different ways of looking at it. one way to think about it from the dynamics of the left-hand side of the bar bill which is tied to the side of today very much again play technology off the shelf, think of the mrap and the technologies in fact three of the five designs were overseas designs able to pull the more traditional side of it is our old state system of the acquisition that we know and love and a sort of, you know, move along. that is one way of thinking about it. the other way of thinking about it also was from the type of companies. the smaller, younger more innovative ones are the ones that we found that have been

taking advantage of the rapid acquisition system. i'm not going to give the creation of the building of what scs or the large networks to a small startup. it's just not the right scale of appropriateness so you need both. the biggest dilemma for the companies themselves is can they operate on both ends of the barbell or not and so that is what they are struggling with and they are beginning to question once the war is over will the left-hand side with any more? i would submit to you the live and that will all the time the intelligence community lives in that world all the time so there is an enduring mark at. >> thank you. thank you mr. troup. >> thank you. you mentioned about the mrap and the special forces colonel, he was in somalia and talked about the had deployed some of armored vehicles in south africa or somewhere and he came back and said we need these for the urban

environment again while we had the situation in iraq and in going back to the point we don't predict very well what we are going to be doing and i guess we don't listen to people in those situations and know what they are talking about. you had mentioned earlier that secretary leon panetta and secretary gates started to engage the large defense contractors. is the dod doing anything in your view sufficient enough to reach down to the mid level and smaller companies to engage with them in some kind of dialogue? can you talk about that a little bit? >> it's harder. there are things like the program that i find useful and there are other entities who sort of our tasked to do that like darpa, and in dealing with

those companies that has been one of the biggest frustrations on how to start interface and began to get in. they would love to have an ombudsman or somebody that can be their champion. they look to the small business sort of fat cats to do that. as you know, some groups are better than others in terms of following that. it is a perpetual source of -- >> the would be something you'd recommend us to look out and somebody that is looking up for the smaller guy? there's an office said the dod that is supposed to do that and we are going to have them in front of us but i get the sense they don't have too many resources behind them to do that. >> there is, then again, the thing to be careful about is setting the small business set-aside which a understand is a part of the policy also has sometimes some of these unintended consequences.

there are companies that have low of sticking with in that and don't want to graduate because once you graduate you are in the maelstrom and that isn't quite what we want them to do. we want them to use that and frederick into that made to your without having to sell out and so we always have to be very vigilant about these kind of one-size-fits-all kind of things. >> i think they are and if your witness in the coming hearing will be able to talk to a lot of that. one of the problems is the pentagon coming up with an inventory of who the aerospace and defense industrial base suppliers actually are. we don't really have an inventory. but to the quote oem, the large producers, have a good handle on with their supply chain is, but there isn't much of a horizontal, so we, brett lambert

who's the deputy assistant secretary had does have a program with thin but there are a lot of them i think 25,000 suppliers is kind of a guesstimate. 97,500, that's -- so that's pretty hard, and frankly i think my own personal opinion is you should look at it. doing business with the pentagon is difficult, intimidating, and for small companies, darn near impossible to have the lawyers, accountants and advocates when it's necessary to understand the federal acquisition regulations and operate successfully without penalty in that will scare away a lot of people and is steering some of the people of iraq to

leave doing it now out of the business. and i think if we don't get a handle on that we are going to lose key believe that we wish we had. >> comments? i would just comment on being able to access the global defense industry is really is a significant constraint these days. the specialty metals thing came back in iraq who when people had started running into the ied and have humvees that were not of armor and to these in the country but that ran into the very amendment kind of restrictions which sort of said

to people really if you are going to follow the rules of a regulation and go all the way back to the united states this would aid them locally and these kind of constraints i think in that particular case probably lead to some people buying don young. the country seems we do need to do something about it. >> one final question. what is the proper role for the industry to work with in assessing the health and the structure to move forward, what's the role of the industry? >> the dod is going to supply an awful lot of the data that they don't have for a starter as a team with the defense department for homeland security, i think the better off he were going to be. >> we have enough laws in place in your view that stop us from doing that, keeping them at arm's length instead of bringing

them in to be a part of the team? >> i go back to a program that in my industry days was really familiar with the two are which is not devotees favored acquisition for a variety of reasons including the cost at the end of the program will. but that program was eventually won by northrop. the competitor was lockheed and the air force basically wanted a highflier it was granted the high altitude into the story. two years or so into the program they changed their mind, and as i discussed with some of the staffers on the panel, a couple weeks back that required a major redesign except the airplane flying we need so if you impose

a lot of cost and a lot of the lay by having the essentially requirements in that particular program we haven't talked much about the requirement process but that is another piece of the whole system, which in my view could use a lot more coherence and discipline. >> mr. downey? >> mr. chairman, there are in fact impediments to the adequate cooperation. some of those are cultural, samarra institutional, some fall into the category of laws and regulations, and some of them are absolutely correct. at some level you have competition and you do have the need to protect proprietary information on both sides. but increasingly the industry views the relationship and i'm

not just talking the last few months or the last couple of years. it is increasingly adversarial witnessed the most recent letter out of the administration that what we tighten or reduce the ability of the military officers to participate in the widely attended events. so you end up with a problem of what is intended, what's written, was interpreted, and when you get down into the organization it's just an awful lot easier to avoid the whole thing than to defend yourself or try to explain it later. >> i think it is a terrible problem. to talk to people when it is completely appropriate. mr. chao? >> it is a huge issue and it is

politically difficult and hard to raise and it's a mother with creating an unintended consequence. if i can't talk to people and i can't get basic information what happens? you are then forced to recruit retiring military people because that's the only way you get to understand what's going on which then raises the specter of the issue of what's going on so white - laws about that and i get even more and more removed every step of the way to the point i can't talk to my basic customer to understand what is going on. and so that then has other consequences. but to sit there and say i want to speed up the revolving door is a political suicide so it is a topic we don't really touch on, but again i think that you are touching on one of the fundamental issues if you can figure out a way to gently look at the issue i would encourage you to do so. >> that brings us right back this is not a free market system

its a free-market system explain it to me and i will try to come up with something that satisfies your need so it brings us right around and that is one of the things we need to explore because we know that it is a big problem. again, want to thank all of you for giving of your time today and your expertise. i'm sure as you move forward she has some questions and we may have questions hopefully we can talk to you and get your input because just in this room a couple weeks ago we had a meeting with a four hour secretary rumsfeld and i said we have this panel and whether it is the the part of defense he looked at me and smiled and said if i was advising the small business i would tell them don't do business with the dod. he said it's too difficult. the comparison was it's like sleeping with the hippopotamus. eventually it's going to roll over and crush you and you will never know what did it to you. so it was a very concerning comment of i'm not willing to take that point i think it is

critical, and he did say also that a lot of the great ideas if not all the great ideas in the technology are coming from the small and medium companies that are nimble and difficult and that is what we hope to come up with some solutions to change that and the culture and the laws and make sure that a small medium-size company continues to be a very important part of the technology that emerges to protect the war fighters and the nation so again thank you all for being here and we have a field hearing friday in akron ohio looking for 28 you have a number of companies, so looking forward to that as we go to ohio and most of the members can join us. thank you very much. this hearing is adjourned. [inaudible conversations]

there was a strategy going after a snake utah of the head and the rest of the snake by is and that's been the of media unfortunately the reality has been different. >> weigel most of the other founding fathers are taking prettily of those companies on the eastern seaboard, jefferson is already dreaming of his empire for liberty that will go all the way maybe to the mississippi of the misery and even to those great harbors on the pacific, monterey and san

francisco. >> i covered the military and the cia after that and the years before and after 9/11 and as a reporter on the beat i had seen things grow up around me i wasn't sure what they were. people live in known for a long time disappeared into the world's that didn't exist before or they had no titles for agencies i never heard of and after ten years of working in that realm you sort of say what is going on. >> i finally decided to call let the ripple effect which was a chapter titled because i realized that every time we use water it sets off a ripple effect, a series of consequences most of us are aware of. next a hearing on the benefits and risks of certain year fixed-rate mortgages. members of the senate banking committee are looking into

whether or not the government should continue to support such loans to home buyers. this is a little more than an hour. >> i called a hearing to order. i'd like to speak the witnesses for being with us today. it'll be the 11th housing finance performance hearing held by the committee. before we begin our series of hearings, i will raise my agenda for the committee which included several prior for the housing finance reform, maintaining the widely available 30 year fixed rate mortgage was one of those priorities. i firmly believe that we need to

reform our housing finance system but i am concerned about the consequences for the housing market and the economy that could result. a new system that eliminates in the mortgage product in the country would be a step backwards rather than an improvement to the housing market let me be clear i'm not advocating the 30-year fixed-rate mortgage the the only product available. shorter term fixed rate loans like the 15 year or 20 year mortgage can be appropriate for certain or worse the families and mortgages. the underwritten conventional adjustable-rate mortgages can also be appropriate for the borrowers who can't report them. however, any new housing financial system must ensure the

third year fixed-rate mortgage continues to be widely available to the borrowers across the country. the pre-payable long-term fixed-rate mortgage allows the households to their finances better and establishes a stable housing cost which is not always available by lending. homeownership is not the right choice for everyone will but those who choose to own a home is 30 year fixed-rate mortgage is the most predicted option for financing a home. witness had testimony during the last hearing stated that under some proposed systems the 30 year fixed-rate mortgage would likely require substantial down payments from higher incomes and higher interest rates restricting the borrowers to a substantially smaller number

compared to today. this is the last thing the housing recovery needs. our witnesses have experienced knowledge about the impact of the 30-year fixed-rate mortgages have had on the homeowners. the mortgage market and the economy. i look forward to hearing the testimony regarding its merit as well as the options for congress one thune if we are to continue what we believe is a necessary product. with that, i will turn to senator shelby. >> thank you. thank you, mr. sherman. today's hearing, as you said, like salmon the pros and cons of the federal government continuing basically the sense of that is a 30 year fixed-rate mortgage. during the great depression, the federal government established the direct and indirect subsidies for the 30-year fixed-rate mortgage. for many americans the 30-year

fixed-rate mortgage has made ownership possible, yet the failure of fannie and freddie and the 169 billion-dollar bailout of the institutions demonstrate that the federal government support for the 30 year mortgage comes with a cost to the according leave the committee ever decides to undertake the housing finance reforms it would need to determine whether the benefits of the government support, with authority year fixed-rate mortgage of raise the cost. in addition if it decides to continue to subsidize the 30-year fixed-rate mortgage, the committee will need to find a way to protect taxpayers from having to pay for bailouts in the future. today's hearing should provide some insight into how the federal government supports the 30-year fixed-rate mortgage impact of consumers and taxpayers. for example, in the of 30 year fixed rate -- in the 30-year fixed-rate mortgage always the best option for consumers?

is the prepayment option including in these 30 year fixed-rate mortgages truly free? and what has the subsidy of the product already cost the american tax payer and can this product be offered without that? consumer choice i think is very important to the consumers should be able to purchase a 30 year fixed-rate mortgage at the appropriate market rate. if they determine that the product is best for them. i think we must not create incentives that should push people towards a free year fixed-rate mortgage even when it would be harmful to them. i also hope to learn from today's hearing on supplies in the third year fixed-rate mortgage impacts on financial systems. for instance is the claim that the financial crisis could have been averted if only more people possessed of a third year fixed-rate mortgage as fact or

fiction. what unintended consequences have been created by subsidizing the 30-year fixed-rate mortgage? these are all important questions, and there are many more that i think the to be answered as we go along. for many people, it is assumed that the narrative surrounding the 30-year fixed-rate mortgage has already been written and that there is no need to investigate the facts. as we proceed with housing finance reform, i think we must seek an understanding of the fact another word which is leading by anecdote is not acceptable. we need to take a hard look at this product and determine if the preferential pricing resulting from the subsidies truly creates a public good. only by doing a thorough fact based analysis can we develop sensible profound housing policy. thank you mr. sherman. >> thank you, senator shelby. are there any other members who wish to make a brief opening statement?

>> thank you. i want to remind the cause of the record will be open for the next seven days for opening statements in any other materials you would like to submit. now i would like to welcome the witnesses for the panel today. our first witness is this janis c.a., the director of the boston policy project with the national council. mr. fenton as president and ceo of afinity federal credit union on behalf of the national association of the federal credit unions. dr. anthony sanders is a professor of finance at george mason university school of management dr. paul willen is a senior economist and policy adviser for the federal reserve bank in boston.

and finally, we have dr. susan woodward, the president of the econometrics and former chief economist at the sec and prior to that, hud. ms. bowdler, you may proceed with your testimony. >> thank you and good morning and thank you for having me. i'm the director of the building policy project at the national council of la raza. my project promotes fair market to obtain assets and build wealth they can share with their children. i hope that today's hearing will shed light on a critical issue, the importance of the 30-year fixed-rate mortgage. without this flexible financing tool homeownership would become a luxury of the affluent. we urge congress not to abandon their commitment to provide a path to home ownership which has

long been the cornerstone of the middle class wealth. this morning i will provide an overview of the importance of the 30-year fixed-rate mortgage and i will share our ideas on how to maintain a responsible path to homeownership for the future generations. let me start with the benefits of the 30 year fixed. the long term makes the acid more affordable, the fixed-rate provide certainty, modest downpayments, opened the door for those with sufficient incomes but who lack family wealth, the amortization feature means the borrower can predict the final payment and build wealth as principle is repaid and finally, most times surf year fixed-rate notes are repayable which means they can read refinance without penalty and there are two reasons why supporting the 30-year fixed-rate mortgage is good public policy. and it so much of affordable for the working class families who didn't inherit wealth, and it provides stability to families that have to budget carefully to keep their biggest asset and investment, their home.

together these huddled create a stronger middle class. this is especially true for hispanic and black homeowners for whom home equity mix of the majority of the wealth and fortunately the benefits of homeownership haven't been equally available in abundance of research document to the on fair sharing of farmers of color to toxic mortgages, even when they qualify for primm loans. the supreme loans are not on the expensive they are more likely to end up in default so it's not surprising that they have been hit hard by the foreclosure crisis in fact new data shows the households exceed that of latino by a staggering 18-1 and 20-1 for african-americans. this is attributed to the differences of hallam equity and foreclosure. critics of the 30 year fixed note with larger families would be better off and adjustable mortgages. however most families do not view their home as a get rich quick scheme. they don't play the market and they don't hedge interest-rate risks.

they are investing in the nest egg into the community with anticipation of the long-term returns. the predictability and security of the 30-year fixed-rate mortgage helps them to meet those goals. of course no one is suggesting a family and her home ownership unprepared. and we definitely need a robust market for families for whom ownership is not available or desirable. with that said, now is not the time to abandon our commitment to putting ownership in reach of qualified families when it's their time. several decades of innovative affordable lending have taught us how to reduce the risk of lending to the new buyers and low wealth households. for example a recent comparison of the lake borrowers were the only difference was the kind of loan that they received and the affordable for the year versus the supreme loan the 30 year fixed dramatically outperformed discipline loan. over the last 13 years the homeownership network counselors have helped more than 25,000 moderate income families

purchase a home with a prime mortgage. they've received the right one of the right supported it can be homeowners to build wealth even with modest incomes and low down payments. unfortunately, tight credit standards pricing adjustments by the gse and overlay of the fha or limiting the prime loans in the market today and presenting the qualified families from taking advantage of low rates and home prices. the lending is most concerned and earlier this year federal bank regulators promoted the idea of the wealth standard that would submit high down payment requirements and regulations. and critics of fannie and freddie are going further by pushing for the complete dismantling of the current secondary market system even though the lenders especially small, yet he lenders say they would not be able to offer a fully amortizing 30 year loan and a completely private system. rather than dismiss a proven financed will and affordability teachers, we should work together to preserve those

aspects of our housing finance system that work well. i have attached to my written statement a set of principles to guide our thinking on the reform. it signed by 16 other civil rights organizations, in addition to the principles laid out in that letter i have three specific recommendations today. maintain secondary market liquidity for affordable for the year fixed-rate loans made equally available to all qualified families. support the pre-purchased housing counseling and other credit enhancements that we know work for working families. and reduce barriers to purchasing a home by eliminating and expanding the use of the proven affordable models. thank you and i would be happy to answer any questions. >> thank you. mr. fenton, you may proceed. >> thank you midranking member johnson of shelby. my name is john willen fenton. we appreciate the opportunity to

share our views on how to finance reform and the value of the 30-year fixed-rate mortgage for credit unions are members. credit unions were not the cause of the economic crisis and an examination of the lending data indicates the mortgage lending has outperformed bank mortgage lending during the downturn. credit unions focus on placing their numbers in solid products that they could afford. furthermore, there is no evidence that the recession and collapse of the housing market was due to the presence of the 30-year fixed-rate mortgages. congress gave credit union's authority to offer 30 your mortgage is back in 1977 and has since been our dominant instrument in the mortgage origination. the fixed-rate mortgage is regarded as a consumer from the incident because it is straightforward, easy to understand and provides a predictable monthly payment schedule. the fixed-rate mortgage, the lending institution assumes the risk associated with interest rate risk increases. having too many long-term fixed-rate mortgages in the

portfolio suggests the financial institution to the greater risk and can be cause for exam or concern. at affinity we mitigate risk on the long term fixed rate mortgage portfolio by hedging with interest-rate swaps, caps and match borrowings. selling in the secondary market to fannie and freddie is tener important risk mitigation tool. the securitizations activity with fannie and freddie help lower the 63 mortgages and are an important factor in its viability. without the government will for the market the 30-year fixed-rate mortgage may still look cyst. but likely with higher cost to the consumer and scarce availability. long-term fixed-rate mortgages become risky positions for credit unions. for safety and soundness reasons consumers may face additional costs to mitigate risk. the lack of a government was a stabilizing force in the secondary market would have a significant impact on the to devotee of credit unions to offer affordable consumer friendly mortgages said joseph d. year fixed-rate mortgage. we believe that it would further

but the fear of the body of the mortgage products and increase the cost of the mortgages to the consumers. fannie and freddie as well as home loan banks are valuable partners who seek to hedge against the interest rate risk sharing their fixed-rate mortgages on the secondary market. because fannie and freddie will buy loans on the market, the credit union is lonely able to mitigate the risk associated with these interest rates, but the liquidity created allows them to reinvest those in to their membership or institution by making the new loans. of these relationships credit unions would be unable to provide the services to the financial products their memberships demand and expect. matthew would like to express what perverts communions with access to the market necessary to serve the mortgage needs of our 93 million members. as you consider legislative proposals for housing finance reform, we believe there is a core set of principles that must be considered to ensure the

continuance treated fairly. the healthy in the real will second market must be maintained. there should be at least hugh gse entities to ensure competition and perform the essential functions currently performed by fannie and freddie. the u.s. government should this explicit guarantees of payment of principal on mortgage for the mortgage-backed securities. during any transition to a new system, credit unions must have an interactive access to the gse and the secondary market. five credit unions can support a model of the gse that is consistent with a cooperative for mutual entities small. six the board of divisors should be formed to be co seven, while the role of the u.s. government and secondary market is final, the gse should be self funded. the a.r.m. structures should please increased incidence on the quality of loans, risk-based pricing forces should reflect the quality difference. eight, fannie and freddie should

continue to function until such time as necessary to repair the government debts. and ten, reform of the nation's housing finance system may take into account a consequence of any legislation on the health and lay the body of the federal home loan banks. in conclusion the 30-year fixed-rate mortgage remains the most popular mortgage product to them warm to the commanders today. this is helpful for the market to the recovery of the economy that remains a widely available product. the ability of credit unions to make the loans and mitigate the interest-rate risk by selling them to willen is important. to reform the nation's having financed system it's important to consider the importance they have on a crowd in. a we thank you for your time and opportunity to testify before you here today. and i would welcome any questions you may have. s make mr. chairman and distinguished members of the committee - dr. willen and i may

professor george mason university, and a senior scholar scholar. it's an honor to testify before you in this committee today. the fixed rate mortgage occupies a role of the housing finance system, the dominant instrument since the great depression, the account for more than 90% of mortgage originations. one reason why it's enjoyed this enduring popularity is that the frn is a consumer from the instrument. my only does it offer payment stability, the instrument provides a one-sided the bet in the bar were's favor. if it rises if they fall he could benefit to lower the mortgage interest rate. but these consumer benefits have cost the provider of fixed nominal interest rate as long as 30 years and the prepayment option offers a significant cost of the rates rise the borrower has a below market rate on its books. if the fall the lender is then

replaced with a lower one winters incorporated of rates that all of the borrowers pay regardless of whether they benefit from a refinance or not exercise and payment options in the contract also are a significant transaction to the borrower and imposes additional operating cost for the mortgage industry. the adjustable rate mortgage or also have come to our monthly benefits fixed-rate mortgages even without the government guaranteed just like they've done in the previous years. this may be a short term affect some claim they cannot do this simply because freddie mac, fannie mae i was looking at yesterday but it's too late. the only country in the world was a high concentration in the government housing mortgage subsidies. most countries have higher

percentages and did not suffer the magnitude of the housing bubble burst the the u.s. experienced it. fervor fifth hi yr armed in short mortgages so there's nothing magical about of the 30-year fixed-rate mortgage and home ownership. fourth raid on jam. thir tabare phyllis to. from the 100 basis points. fifth, all through the air fare extra mortgages. why not give consumers a choice what's expensive non-payable mortgage interest to carry the interest or if mortgage was refinancing penalties resulting in lower interest rate for consumers. sixth, it is a 95% market share is risky for consumers since the principal pleased that so slowly. a small half house price and

very often quickly. should we be promoting the mortgages instead? the 30-year fixed-rate mortgage leads to the consumption of larger housing compared to the 15 year mortgages since the payments are reduced on the slower principal amortization. is that a public policy objectives to put households in the biggest houses they can afford? eight, the arms are actually consumer friendly and that by sharing the interest-rate risk with lenders and investors and borrowers will be more careful about taking on more debt. that is vying to much house even the underwriting allows them to. if we examine the 2001-2002 and to prez acquisition refined that arms have actually lower default rates than the mortgages and tent, please bear this in mind. homeowners according to the federal reserve lost $7.25 trillion in the peak of the housing bubble. can we afford to do this again?

should we be putting everybody in the low down payment for 30 years loan amortization mortgages which are catastrophic to those households if the market tanks again. i never said why some like the comfort of the fixed mortgage payments but it comes across in mortgage rates and across the taxpayers. on the other hand i don't equate the government policy encouraging households by the larger houses and take on greater risk that they can afford as consumer friendly. thank you for the opportunity to testify. >> thank you to read dr. willen, you may proceed. >> thank you to determine johnson, a ranking member shall become members of the committee, i think you for your invitation to testify. my name is paul a.r.m. and i'm an economist and adviser of the federal reserve bank of boston. i come to you today however as a researcher and not as a representative of the boston fed

or the board of governors. when going to take on today in my remarks as a kind of conventional wisdom of the fixed-rate mortgage, and it starts with of the invention of the fixed-rate mortgage which is attributed to the fha. the conventional wisdom is that in the 1930's prior to the 1930's and the depression most american families were almost all of them have short-term variable-rate mortgages. these mortgages exposed them to a volatile payments in lieu caused massive disruptions during the depression. so the fha, conventional wisdom says invented a new type of mortgage which is a long term fixed rate mortgage and the point of it was the payment of our were made never changed until loan was paid off. london available to payment shop. i think the conventional wisdom used the mortgages in something as a safety mortgage, sort of the safety elevator came along

before the safety of the dirt of the cable in the elevator stopped the passengers plunged hundreds of feet to certain deaths if the city mortgaged of something that was risky like the previous elevators and there was something inherently safe. the conventional wisdom goes on to say that in the 2000, the lenders forgot the lessons of the 30's and started shooting complex, exotic adjustable rate mortgages. borrowers were hit with the payment shocks and the critical number of co-payment shocks is what raises the chris assembly to take on the conventional instead argue them don't fit the fact. the mortgage was not invented 1930 by evin trey i actually noticed an earlier but they were not some niche player in the alvan will market. the with the lowest source of funding for the american family when they got a mortgage. they were widely used and in the 1929 when the year immediately

preceding the depression when they were supposedly invented, 40% by dollar value by in a much harder to the to how your number the good loans originated with the society and 95% of them those originations were long term fixed right fully amortized mortgage. you can see it is in table two of my prepared testimony. a building in the society you're going to devastate me maybe it wasn't an issue in the depression about the most recent crisis? clauson that caused by payment shocks and adjustable rate mortgages? swain table ten of my prepared testimony come ashore sunday that the we put together with anyone that has looked at the individual level of data, has looked at the mortgage level data or property level has come to the same conclusion. our sample is of foreclosures of these are all borrowers who lost their home and what we show is 80% of them suffered no payment

shock prior to be faulted on their mortgage. the mortgage payment they made when the desalted was exactly the same as the payment they made when they got the loan, the initial payment on their mortgage. in fact, of that sample, 59% of them actually at a fixed-rate mortgages, that is like 1.6 million more mortgages. that alone should disabuse us of any notion that they are inherently safe products to hispanico kissell let me just conclude by saying that when owning an helm, a family financed by a mortgage, a family faces many risks. there's jobwatch, illinois, business failure, divorce, and we have learned recently the most important of all there's falling house prices. research has shown over and over again is that compared to those risks, fluctuating mortgage payments presents a small problem so let me just say that the benefits in terms of the foreclosure prevention of insuring availability of a mortgage with a payment that can

never go up in my opinion is very small. let me say i hope you find these findings in your work us policy makers and think you again for the opportunity to appear today. i would be happy to address any questions. >> thank you. dr. woodward, you may proceed. >> thank you, to the committee staff. i'm honored to invited to share my views, thank you so much for inviting me. i'm susan woodward year representing myself. i'm an independent economist now but i lived for ten years in washington and served for the chief economist that had another four years in the securities exchange commission. the critics of the 40 year fixed rate loan claim that it is unfair for the homeowners to benefit from the risk avoided by the fifth street loans while tax payers bear the risk from it. i think what this claim forgets is that the tax payers are homeowners, too. if we consider the lifetime exposure of the homeowner tax

payers, there is nothing unfair about the street off. in fact it think it is a really important piece of the social policy. but let me offer first a few facts. the homeownership rate now stands between 65 to 70%. the faction of households that eventually become homeowners at some point in their lives is more like 85%. second, household incomes rise every time and peak at about age 55. third, homeowning household on average have higher incomes and pay more taxes than others. thus the people who benefit from the availability of the 30-year fixed-rate loan are also the same people who pay taxes if and when problems arise. the benefits come when families are young and have similar need for security and the same people potentially bear the cost when they are older and have more income. this is a fair trade-off asked, tell them what the deal is. my guess they will say yes, we want this to be available.

and we shouldn't forget the rest of the adjustable-rate loans as it has been downplayed so far, but in the current environment i think there's some considerable risks. the a.r.m. design is flawed because it doesn't think the payment changes to house will then come changes. these are numbers irrelevant to today. suppose the real inflation picked up from say 2% to 4% a painting the homeowners rate from 4% to 6%. the likely change in the homeowners and come is the current inflation rate of a lot 4%. but the bar were payment on the george will rise about 25%. only fluent house will to the lot of room to maneuver can tolerate this level of cash flow and certainty, and was mostly affluent households. prior to the financial crisis had the adjustable rate loans. arms threaten the economy, too.

the recession of 1980, 1982 would have been for the bourse with high year levels of mortgage defaults on the bigger collapse in economic activity if all borrowers have a farm loans them. so that's my first point. yes the 30-year fixed-rate loan has some risk and potential cost to taxpayers but since taxpayers are all virtually all the letters also there's nothing unfair about the street off. okay, the second issue to we need government support for the 30 year fixed? i believe the answer is yes it helps. the two most important innovations in financial markets in the 20th century were undertaken by the federal government. the first was the support for the long-term advertising fixed rate prepaid loans through. ..

>> with a long-term real mortgage rate that is a big number. i believe there is no cost to taxpayers from ginnie mae this was all entirely already ensured fha loans from the improved packaging.

at the end of the day we would have institutions like fannie or freddie are ginnie without some government push especially now when the large banks have better access to the capital market and the smaller lenders. if we give them the access there are many reasons that we should come and then we should have control of federal government in the market. thank you. >> professor woodward what elements of the housing market must be preserved to ensure the availability of the 30-year fixed-rate mortgage where the bar were several areas like those in my state of south dakota? >> an entity like it ginnie mae adam think there is any threat to a of the removal of ginnie mae but fannie and freddie or whatever the

successors are for the conventional market. that is the essential piece to turn ill-equipped whole loans to likud securities through the entity like this. >> doctor, in the past three years you have seen a major difference in the origination of the adjustable rate mortgages as the a credit markets dried up. and the increase in the percentage of fixed-rate products. but if that were limited, how good the the availability of credit for year average americans changes in times of economic turmoil? >> there are few separate questions. i think creates need to make sure that we separate out with 30-year first days

fixed-rate mortgage we are here to discuss the fixed rate part of that day and what happened in the last four years and the mortgage market collapsed is every part collapsed including the government insured part with fannie and freddie. if the mortgage market was injured be they just as well could have to back up the adjustable rate but the portion of the market that we intervene to help was that part that is why what is survived. when the federal reserve is engaged in large-scale asset purchases we almost exclusively but a mortgage backed securities backed buy the fixed-rate product. >> ms. bowdler i have a question about eliminating

the government guarantee. how will that affect the availability of the 30-year fixed-rate prepay a mortgage ultimately how this this affect the average borrower? >> our understanding from have been talked to lenders that without the guarantee they would not alone the not over the 30-year fixed-rate mortgages or offer long-term financing at rates the average person and can afford. yes on sort of financing needs to exist without the next-generation of fannie and freddie but not for the average middle-class family but to put it to or down payment to have done the interest rate shock. >> senior research what of

the adjustable-rate mortgages how the interest rates adjust? >> they need at least the mba. it cannot even be 1% of households to understand the interest rates. the intergrades borrowing rate i had a friend panic daughter come to be in 102007 rakish she could not refinance her arm. i got her documents it was tied to the 12 month moving average it did say fairly benign arm index the issue was complete the panicked and she had no idea. once i told her what it would look like and she

calmed down and let it reset and was fine but most households understand the interest-rate two which the arms are linked. finance is hard. people go to school long time to learn finance. >> what is the characteristics of the bar words that come to your institution, ed mr. fenton to request the 30-year fixed-rate mortgages? >> the characteristics of our diverse. told to come to borrow and the product itself who have to offer members choice then have all the threat levels of background but at a time

of low interest rates you have to be able to afford projects like the 30-year fixed-rate mortgage. to evaluate each member. >> dr. sanders, a central argument made by some advocates by the federal guarantees of mortgages is without them the 30-year fixed-rate mortgage is not available to consumers. for the moment, said decide whether the 30 year mortgage is always the best product for consumers, based on your research come if the consumer desires this product would be available even if there is not a federal guarantee?

many years back i bought a house. a conventional 30-year mortgage formed -- from an insurance company. and to come up with a healthy downpayment. >> my experience has been fixed-rate mortgages from s&ls and banks. never touched by fannie and freddie. once we get out of this russian they will start making loans again but now since fha and fannie and freddie have such a dominant presence in the securitization market as pointed out one of the key things of our various bailouts is to build up the 30-year fixed and not the arm, in then to undercut the

private sector. and everyone mentions the fact there is interest-rate with the 30-year fixed the more than willing to dump them on to the taxpayer of fannie and freddie. might understand but we should be forced as consumers to bear the risk purses have somebody in keokuk iowa have a higher tax bill because somebody had a fixed-rate mortgage go under water. it will come back. >> >> the prepayment option in your testimony those who have the 30-year fixed-rate mortgage with the prepayment option is paying for that to. explain. >> and other countries

unless you move for another termination and stuck with the interest-rate and compare and other countries the non repairable mortgages it could be anywhere between 30 or 70 basis plans. we could help consumers out by not offering the prepay mortgages and cut their expenses. arms are cheaper and 15 fixed is cheaper. i don't know why we focus on the most expensive to give the consumers the health. >> i do agree that a lot of consumers don't understand the adjustable rate mortgage. what can we do to make them understand? do we be more explicit in their terms when they make a loan to say you will pay x dollars today but this could

go up or down? rather than sign here in sign here? >> a lot of them don't understand. >> we discuss this and it is very simple to have they a cover sheet to have the risk page to say here is your current rate fixed to that amount of time then it goes up to the libor plus the spread. i know susan will kick me after this is over but if they consumers see something and has the terminology like libor in the contract then why did you sign it? i was just some research to help them look into these things. this is clarified nicely but

it is much more benign. libor alarm index are not a problem we could make it more clear perhaps but not for the rest of the country's. >> dr. woodward states the 30-year fixed-rate loan is some question of the easier for households to understand the and in the adjustable rate mortgage and saves the average household will understand what to risk it is undertaking with the arm rates and then talk about the behavior approach suggesting that consumers are that capable of making educated to races. of i think they could. based on your research, have you seen any evidence to suggest consumers are not

sophisticated enough to handle the adjustable-rate mortgage which has led to the increase of foreclosures? and a follow up. are there instances in which the 30-year fixed-rate mortgage could be more harmful to a bar where the and the adjustable rate mortgage? >> first, most people don't understand what a transmission is our house or works but that does not stop them from driving cars. of the risk imbedded in the adjustable-rate mortgage and compared to comply moresque the movie and come risk is tiny. no one understands imply rest. to understand the distribution come nobody

understands that those who live with the end come risk and they deal with it. and people deal with 25% income loss of one year that don't end up in foreclosure or bring growth to. the answer to the first question. everybody focuses on effective rate of the adjustable-rate mortgage cantaloupe and dismiss the fact they can go down. not randomly but when interest rates go down. when do they go down?

usually in a recession and have gone down by 500 basis flights on a libor. for people who have fixed-rate mortgages 2005 through 2007, most of them are paying 5.5% or more. and less than half a 3% they do that within a assistance from a one. but those who fought bitterly with their servicer to get a modification. >> the adjustable-rate mortgage has the automatic built in stabilizer property. one more thing. prepayment is not free. have to have been entirely new mortgage.

>> that is built into the price? >> the option is not free but why are we having the problem because fitch me and the closing costs and also costing so londoner. >> but in all fairness the adjustable-rate mortgage you have to tell your consumer it can go down. but it could go up as well. >> a thank people don't realize that. but they should. >> they should. the resend message to six, there it is a writer of

it goes through exactly leave could find due out this is one of france when it looked godown. >> senator reid? >> in your testimony dr. you point* out the adjustable rate mortgages are defaulting more than the fixed rate. or fixed-rate default less often. sell sphere night because there defaulted? >> i will be careful. there is a difference. relatively small. know we're on magnitude of the increase of foreclosures we have seen. going from one or 2% of barr's about 5% is not because of the adjustable-rate mortgage but because of falling house

prices. they do default more but what we said in my write-in testimony is those are taking it out are different than the fixed-rate with the assumption is they took up the fixed rate they would be more likely to default. they intend to keep property for assured period a time that is why they went with the adjustable rate mortgage and people are more likely to speculate not about the product itself. and the adjustable rate is much effective because of the following magistrates. those optional arms and our

the poster child, because and it is better than we expected 2007. the reason why is a negative equity or something else for a live event. that is why they default on the mortgage. that does not depend on the fixed or adjustable rate, and nothing you can do about that. but we have spent a lot of time talking about how to stimulate consumption by lower interest rate products , it does that automatically. it is difficult to measure the data but they have more cash flow with which to consume. that is the goal that we

have. >> what is your view of the adjustable rate? >> that the sign up arms are different from fixed. in the terms of how they change and affect households, we had an episode of interest rates and they were not just ordinary households. very affluent. 1983 now interest rates have come down and we have been to see in the full force them to do look at the term. >> but could they? yes. more likely to go up all lot

then down a lot. we cannot go down very much. it is the case if those payments will rise 25% and household and come increases, you want household's other good at managing their finances taking that risk. what we can see in the data is the default rates are higher. the households are taking a risk somewhere else. >> we had an experience in 1980 with interest-rate. >> i am old enough to remember. >> my father told me about it. [laughter] yen canada they saw what of

turbulence and that is what influences people to get into the 30-year fixed where i suspect 25 gratuities six to above fixed-rate look really good. >> day do devil lot of defaults as the arms reset in the market where it is managed by the government not a complete the adjustable-rate like the one-year treasury or the libor. civic they give is chairman. >> senator crawford? >> thank you. as we look at the gse and the loan guarantees and the

fact credit was available, it seems it had two defects. when year of the artificially low interest-rate it drives up the private -- prices of housing because people are looking at the mortgage payments. going back to dr. wondered looking at what people are looking at what is the payment going to be regardless of the i's there issues are governed by guarantees which artificially kept prices lower than they should have ben an end it has driven up home price is no question. i am not asking a question. it is a fact. it has then you have a situation no price vigneault

speeeight says they have the bubble nothing in the market slowing that down. without the government guarantee the private sector which redo of the 30 year mortgage market without government guarantees and not as robust because we have a housing crisis but much of what has happened could have been avoided without the gse playing the major role that they did. could you respond to that? >> i will take the first crack. yes. of the aegean seas courtesy of the guarantee whether implied or explicit underpriced can charge lower rates and it sounds good but when you couple that with lower down payment mortgages

and with the housing prices climbing up, a said this is making housing affordable. they no longer have the slogan but they did a couple of decades ago and as soon as i said 4.2 trillion dollars of equities but with those low household citic securities are dangerous and in need to be paired practice feedback it is interesting to be here yen a a a whole of the structure to make money of her right but everybody i think wants to see us move away today.

that is universal. but ms. reem back to where they are at this moment, never understood why we don't have day bill 10 prepayment penalty. why is it in the psychology a one-way street? with commercial buildings did you pay off the loan you have to pay a penalty. i am sorry. of the rates are lower than when you finance you have to pay a penalty. it seems that would solve a big part of the problem. >> i was going to put that in my testimony on the commercial side and locked out, a prepayment penalties saying if you refinance you pay a hefty price. one reason we don't in the residential market, we have a huge empire of mortgage-backed securities

that are fannie/freddie and ginnie mae. to facilitate you want liquid repayments the option is blackout ever by a speculated and they could avoid there is not a lot of the action and the fact that the traders like the pre-payment option. >> regarding prepayment dome eight? >> it is mike understanding the absence of the prepayment penalty is a matter of state law. all 50 states have a limit on the prepayment penalties that can be created. as far as of mortgage-backed security market goes what they want is not the absence of the prepayment penalty the securities where they are all the same so they can train as liquid instruments.

>> so the penalty is that the zero? >> it doesn't matter the zero or $100 or $1,000 but they want all mortgages to have the same breed payment penalties so they can train identically. >> my time is up. . .