covers congress for congressional quarterly, the house back from their memorial day break. what is ahead of the legislative agenda? >> there are two or three bills that are relatively not controversy all. although they are to fund one bill this week will be the spending bill for military construction in veterans administration republicans describe this as their memorial day bill and also a bill later this week to authorize spending by intelligence agencies. >> what message was majority leader eric cantor trying to send to his members and to others in laying out the congressional agenda his proposed agenda in the memo last friday? >> he described for them what lies ahead for the next two months, congress, the house

representatives to be very busy in june or july and then they take a break and so this two month period as described as very important for us republicans. really there's two things they are trying to do as he describes. one, they want to finish up as much business as they can before we get to the conventions in the campaign. so there are various bills of their. the spending bills that pass as many as possible and there's also bills that where there are differences between the house and senate to that means to be resolved. that's not the primary focus from the republican message. instead they want to focus on the second area kind of one of the issues where republicans want to take the country to show how the election of keeping the republican house and republican

senate and republican senate describing the house in the next two months in areas like tax cuts and tax reform areas like what happens to president obama's health care reform package. we hear eric cantor describing his memo a prepared house republican members for what lies ahead in these areas in the next two months. >> you point out in the congressional quarterly article that message landed with a bit of a thud with some conservative groups. why is that? >> guest: they objected to it, you're right because they say that the conservative interest group leaders that there's too much by partisanship and not enough emphasis on what republicans stand for. the republican leaders disagree and contend that they are

sending their message, but these outside groups say that they've been doing this for the past year the conservative leader's have been saying that house republicans have been too eager to compromise the number of areas, and this is diluting in their view this is deluding the republican and conservative message. >> we have the opportunity to cover democratic employers briefing what did he have to say about the plan for the summer? >> he certainly disagree with the conservatives he gives the opposite point of view criticized in a couple rounds the agenda for the summer one, he said there's not enough. democrats want to address and

the fiscal issues that need to be resolved by the end of 2012 are also the major tax increases that would take place. mr. steny hoyer the majority whip of maryland said that the one problem was the memo and that it doesn't address these issues that need to be addressed and ought to be addressed before the election revenue and waiting for the lame duck and the second point, which again obviously is different than what the conservatives said. employers said that there's too much politics in keeping the memo and not enough substance driven by polls and the republicans partisan interest. >> keeping track of the goings on in the house. you can read the work of ceq.com. thanks for the update. >> my pleasure. >> writing is a transactional

process. writing assumes reading. it goes back to that question about, you know, the free falling in the forest if there is no one there to hear it. if you have written a very wonderful novel than one of the parts of the process is that you want your readers to be enlarged and enriched by it and you have to pull on everything at your disposal to do that. d.c. him only as the avuncular friendly man, which he was to everybody but there's another side of him that want to be the best.

he was obsessed with ratings the report every night he's probably the fiercest competitor ever written about and a version of presidents in general to be the best is very pronounced. calvinist torch economist for both of the department of housing and urban development and for freddie mac and today at the cato institute he made his case for housing policy initiated the financial crisis. his recent paper is what made the financial crisis systemic. he spoke to the members and others for about an hour.

>> [inaudible] i will also be serving as a moderator at today's forum. the recent multibillion-dollar loss jpmorgan had renewed the unsettled debate surrounding both the need for the dodd-frank act as well as the effectiveness. defenders of dodd-frank argue that jpmorgan's losses prove the value while its detractors are active either grossly insufficient or even misguided. last week one of the architects of dodd-frank the former treasury official written in politico that jpmorgan's losses clearly proved that, quote, opponents of the financial reform are wrong. four important and the quantity. today's speaker argued the reform of the financial and mortgage assistance.

dodd-frank however the reforms offered this morning will be derived by an actual analysis of the weaknesses in the financial system. the witnesses have not only been ignored by dodd-frank but many other instances of actually been made worse. any reform of the financial system would only be as good as the assumptions from which it begins to read today we would examine the assumptions behind dodd-frank and behind the financial crisis commission. after finding those assumptions wanting, our speaker will offer his own observations on what exactly caused the failures in the financial system and what made these failures systemic. our speaker is uniquely qualified to offer such an analysis. in the early 1980's we served as the first chief economist freddie mac as well as serving as the chief financial officer. prior to his work at freddie mac kevin served as deputy assistant secretary chief economist for the u.s. department of housing and urban development and his government private sector experience kevin has known a

variety of teaching positions including positions at the university of southern california and also held out a joint positions at the university of pennsylvania, northwestern university, george washington university, perdue and george mason university. certainly gets around the academic circle quite a bit he's been instrumental in the development and the introduction of many of the innovative financial instruments currently in use in domestic international couple markets. he's written and co-author approximately 100 books and articles and added several academic journals. he is a bs in mathematics from the university of massachusetts in amherst and a ph.d. in economics and finance from peru. perhaps more importantly than any of those accomplishments at least in my view kevin is also the author with pat ander shot of the recent cato policy papers the most recent papers titled what made the financial crisis systemic while his earlier papers titled the sub prime lending debacle competitive private markets are the solution to problem both of the papers to

be found on line at www.cato.org and i want to welcome kevin to the podium. [applause] >> thank you very much. >> i want to thank dewaal and mark for setting this up to it as a third generation lives taught to believe that there was no such thing as a free lunch. but i can see how the rules here don't apply. the topic today what made the financial crisis systemic is quite ambitious for the seminar. there's hundreds of stories out there but we are going to try to keep it fairly simple to discuss the two stories. one is the financial crisis on the commission to report in january of last year and then the one single dissent by commissioner wallace in.

>> to spend tens of millions of dollars in half of understaffed that took testimony from 700 people with millions of pages of testimony and produce the report on what caused and causd to study 22 specific causes. we found evidence of all sorts of causes and confluence of the failures closely related to the private label securitization and the one thing that they exonerate it was the political housing goals. and of course the exonerate or they found fannie mae and freddie mac were led into this market by the private label market. the diagnosis is diametrically opposed to that of the financial crisis inquiry commission. that is nothing else counted.

it was the scene of find on without which nothing that the entire crisis related to the existing of the housing policy, and of course with freddie may and fannie mac day led the way, and hud is the mission and provincial regulators and extended those housing goals to others in the market including the private label and so, everything else would be a symptom of what happened when that happened. so, in some sense the financial crisis in pre-commission was set up to emulate the decorah commission. the commission was established during the great depression and reportedly the idea was that it would investigate the cause of the financial crisis in the great depression. but in fact, it was a report that implemented a longstanding agenda, which ultimately related to the implementation of

glass-stegall which brought us the separation of commercial banking from investment banking even though the evidence suggested that that had nothing to do with the depression at that time. and i would argue that that feeds the current crisis. so, under the description if you understand how the housing goals and work, then nothing else matters. and i just read that report. mauney discussion today is basically going to agree the descent. i agree with one point in the financial crisis for that is that good credential regulation feels pervasively and i would even add to that there is a new report with the guardians of finance its failed in doing that. the one thing we have to understand is if those two things alone can cause the financial crisis to be systemic and that's all we need to explain it if everything else

would be a symptom of what happens when you get a crisis that bad. it all starts with the housing goals. what are the housing goals? they are in the original 68 act and they were applied first in the 1970's. but frannie may wanted no part of those and i can remember the arguments we had at that time to try to convince them that they were not finding any way. that would for the did they already met the housing goals. but they were looking ahead and in 1992 they passed the ironically named federal housing enterprise, safety and soundness act, which was more about implementing the housing goals than it was about making your decisions are safe and sound and the whole idea is that they would eventually become more winding with lending to the lower income households that would eventually reach 50 to 70%. the second thing that we did in 1994 is we put a formal requirement that they target the

increase and the homeownership rate from 65% to 70%. that seems a very modest but the u.s. at this time already had the most liberal lending requirements on any of the market economies. so the question was how are they going to be able to get there and this i stole from mark when he was in italy but it's a basic grasp even the fri and fanny always set the goal of the world was to promote homeownership they really never did. it was stuck at about 65% going back to the early 70's with fannie and freddie down to zero and the market share was up 50% and the homeownership rate stuck at 65. so it wasn't at all clear how the homeownership rate was going to get to 70. so, the question is how does fannie and freddie subsidize the war worse so we can increase the ownership rate to 70% and to make the loans more affordable for low-income borrowers.

the only theory that i will give you in the relevance theorem cannot in the 1950's and says something very simple. with every firm, any bank or finance company, for any pool of mortgages the total funding cost is the same regardless of how you decide to fund it, debt to equity, anything else. it makes perfect sense. and the more the risk, the higher the funding cost is going to be to fund that risk. now the exception to that which turns out to be fundamental for understanding the mortgage markets and mortgage securitization was tax. that is the debt is deductible in the returns, so there's a big difference in the cost. the second biggest exception is that with agency status, no matter how little equity you have or how much loan risk you have, the debt costs aren't going to go up, so the key to the funding is an unlimited amount basically the government's cost of the funds

no matter how risky they get or how little capital degette and this is what is supposed to generate the money that is going to fund the subsidies. this gives rise to the called the profit model. and essentially to provide subsidies to finance. now politicians love this because there is nothing on the budget that they have to justify. and private firms are exempt from the political contributions, so it works both ways. one of the commission staffers, tom stanton wrote papers on this 20 years ago that said this is not uncommon. this is basically what a monopoly charter of the king did for the previous thousand years. given a lot of the charter and they are going to favor certain entities. so, fannie mae and freddie mac did basically for the three decades from the 1970's, 80's and 90's is leverage a lot about 100-1 to go into the details and that leverage according to my dhaka lesions generated about 10 billion a year in the tax savings and 10 billion a year and finance cost savings and

that money was sort of split. the bar was not a better deal, 25 to 50 basis points, they probably got about half the subsidy and the other half went to the shareholders and management and back to congress. now the key thing about all of this is it worked well, but you could only leverage to infinity. you cannot derive the capitol to zero petraeus of the magnitude of the subsidies that you can give life by giving the capitol advantages going to be limited. and the 70% homeownership rate to imply a fairly big expansion of the market's from where it had been from 65%, and because the head of the low enough limits and affordable housing requirements, it meant they were going to have to expand the market going down the market in the subsidized lower income households. so, basically by the year 2000, we have the financial institutions leveraged 100-1 hand we have the borrowers putting very little down so they

would leverage a lot, and it turns out the only ones with capital in the mortgage system in the private mortgage insurers and you can see none of this had much impact on the homeownership rate so it isn't clear how they will get the ownership rate up. there's a lot of papers and i see wallace and is here and thank you for coming. he's written most of the speakers. there is a lot of data about the quality of the mortgages when we get to the year 2000. now the previous decade, this all worked pretty well. the stock price quadrupled from 1990 to the year 2000. but by the year 2000, we had already been in a housing boom for about three years and the potential for work is a lot weaker and buy only what about the two elements of the characteristics. one of the down payment requirements are basically replaced because the purchased second mortgages could bypass the mortgage insurer's and they could be funded in the capitol markets or fannie mae itself was

buying seconds. so we no longer have to borrow with any state in the game. the second 1i will point out is the seizure raids which means they didn't even have to pay the full monthly payment and they didn't have to have enough income to qualify and they could refinance after the rate was supposed to go to the index rate. so the borrowers worked only so long as the house prices continued to rise and they didn't care what they pay for the house press because they were putting no equity in to it. so, what that essentially fleets to is the go for broke a model. that is the spur loans people should have known to be risky on the front end just looking at the characters to the bars with high leverage coming and we know at the back end of the benefit of hindsight that they lost money. this was a years of relatively low profits and the losses that they took subsequently actually offset all of those profits. succumb italy losing proposition

right from day one, january 1st, 2000 in my view and for the reasons i think were predictable and that's because they were funding high risk low return mortgages which is something the was very much different than the success story for the previous decades. so what was on the mind is not we can't clearly know. they were either excessively optimistic. some say they were, or they were pushed by the housing goals or they didn't care if they took a lot of losses leader because that can later the legal system did the same thing. they were making loans and they didn't have enough yield to compensate the risk and when they look back in retrospect we know that the securities the issue during this five-year period lost about 30% of the value to the default. so this was a bad bet as well so we have to ask yourself why were the so-called private label securitized willing and able to

make a bad debt for five years? now i actually found this on the internet and then realized that it was in the wallison. they see a picture is worth a thousand words. this could be worth 10,000 words and this is just the plot of house prices on the scale of 100. you can see the biggest pete had been about 125 from 110. so an example in the 1990's i had a real estate development business in la hoya that didn't go very well, but the same attorneys as mitt romney, and i closed down. in 1999 my contractor came back to me and said let's get started up again. and i said look, i said its 1999 and it takes two years to get a permit. by the time we have a house built it will be three years of the year 2002 we will already be on the downside of this market, which we would have been if we

had followed the historical trends that had never been able bigger than that. so of course i was wrong. the question is why did it to grow first to five times and then to ten times the size of the biggest bubble in history. if you can understand this, then you know everything you need to know what is of prime crisis. and so, what happened was in 2005 they continue to go. now the losses that in sood were much deeper. that is by 2007 we know that that cohort of loans or the net loss on the entire pool is about 60% and it's still growing. you can't tell the people felt that they were good loans when they made them and almost everybody defaults and there is almost no equity when they do, and this is where i say they may have been going for broke, the moral hazard is taking a high risk strategy in the early years, but they were growing it broke in these years. that is you know the business is under water.

you just know that nobody has called you on it yet. they haven't made you declare bankruptcy so you take all of the cash out of it that you can until somebody finally closes you down. and fannie mae and freddie mac i have a brief anecdote back in the 70's i was supposed to be the regulator but of course there was only 61% of my time it was like with one eye shut they were not going to be serious with the regulation the had a lot of people that were involved making it get housing bills so it basically amounted to me making one telephone call your pocket it went something like this. how are you doing today? we're doing great over your it's fantastic. >> a look in your books are about $10 million under water. he says yeah, but who cares we can ensure all of the debt that we want and we can compete with anybody in the market. we can drive out of business. what difference does it make?

how many financial analysts believe canellos and economists do have a shot? >> there's one guy down there with newsletters. how about legislative affairs and people in charge of the care? there must be 50 come 75, going like crazy. so that tells you what you really need to know about these entities. they didn't push a bankruptcy constraint. so, why -- and this is the end of my story and then i'm going to explain how it happened. but why it happened, why did the financial crisis become systemic? evin through this period it never reached the home ownership goal. got close to it but never reached the 70%. there was a new criteria that was imposed in addition to all of the other affordable housing goals commission regulator says a 50% market share against a so-called private label securitization. fannie mae and freddie mac were

cooperating. the fund of almost half of it and they did this to meet the housing goals because those securities counted for the gold at the same time they were competing with them for market share because they were required by the regulators to do it. so i called them pls. when they went for broke in the first half of the decade, fannie mae and freddie mac went for broke the competition with them. in the next three years to me and freddie mac went broke. i only have one slight left on fannie mae and freddie mac and then we are going to talk about how the private label securitization market worked. had there been a private label securitization market, fannie mae and freddie mac still could have caused a systemic crisis because they had no way of generating the capitol subsidy to get the home ownership rate of to 70%. now it's possible the politicians would have relieved them of that goal and just

ignored it. with private label securitization going over the cliff, the market share mandate was going to force them to do this. now there has been a lot of defenses that have still been offered for fannie mae and freddie mac. one is that the followed. when i tried that excuse with my mother she said what do you do? everybody else was doing it so we did. that excuse didn't work very well. but is anybody jumping over a cliff to their death with to jump over a cliff to your def? no. but fannie mae and freddie mac went vv to one of followers. they were leaders except for one period in 2004 when the credential regulation did for the only time trump commission regulations and precisely because they had waiting for the two biggest gap financial scandals in the history so the financial regulator put a capital climate and as soon as i was removed then they then led the way. the second defense was from the mission regulator okay so i

pushed them over the cliff but they would have done it any way because i had them convinced there were tremendous profits to be made in this market. i haven't found evidence that is the notion that they really believed that there were profits. i say was a suicide mission they are more likely to find 70 virgins in that mission in profits for the loans they were making in real talking about 2006 to 2007. as a, i -- the excuses don't wash. the tougher question is why did the private label securitized -- how could they survive for eight years and we know to be dhaka business from day one? the question is why didn't the regulators stop them how could the achieve comparable leverage when we know that was set by the government? why did the smart at risk investors stopped buying the securities then you can't find them the market would be shut

down. how could everybody for eight years make up front bookend cash profits before it closes down? why didn't the speculator is stop it? if you can answer those questions you will know why they were allowed to go on for so long, and the short answers are it had nothing to do with market discipline and market failure because there was no market discipline. they've been replaced by regulation across the board. you either have one or the ever and then we had a bad regulation in each case. the affordable housing goal really trust the provincial regulation and the regulators didn't stop them from making bad loans and then so why and how. the bank regulation arbitrage provided similar leverage to these private labels to kaiser's as fannie mae and freddie mac were able to achieve. it was replaced by the state and local governments and then it was the regulatory accounting that allowed them to book take

profits that kept this whole model alive and in the and you can't shut the government which is what was driving the house crisis seven period of time, so basically what i'm going to give you now are the confessions of somebody who was a former freddie mac but mostly a former private label securitized. hauer the private label securitized requirements sat? anybody know? the financial crisis in very commission didn't tell you. they don't know because they're very opaque and one of the reasons is the private label securitization wasn't created to do was created in the government agency and ginnie mae didn't need the requirements. the government acted so other country used debt and equity where they were much more straightforward. the legal distinction is that other types of funding are financing and the securitization

was from day one. i know i'm running out of time so i will do this briefly. remember i told you that the tax problem that the equity was taxed? the whole reason they created the security was because they needed a vehicle. was exempt from all of the state law and regulations that would allow it and nobody else to bypass them and create a national market for trading securities but they were not exempt from the irs. we are going to tax all of those to a mortgage pool before they distribute it and the only way they could get around that was to go to the opinion that if they had a trust they could pass it through so they created what investors said was the worst possible instrument of all time to get 360 monthly cash flows and we didn't know how much interest and principal was coming that's not what investors wanted to buy. now the origins of the private label securitization that during the 1970's and thea lee 19 etds we were working on the legislation which would allow

the private issue first to do exactly what the public was doing and that was avoided the tax and also manage the cash flow in any way they wanted, and i remember that all legislation so we have a lot of guilty people that i see. then i move to freddie mac where we were also exempt from the rules and we did the first mortgage securities that was trounced that had different trenches for different investors that it violated the rule because we took the same clause with $10 million in profits because investors were willing to pay more. when i went to imperial and the mortgage-backed bond i had a pulled underwater mortgages, so i did a financing that was financing for gap but it was a seal at the tax because i wanted to accelerate the tax law and begin to drift off the books and was cheaper financing than the deposits. why might you ask?

because i over collateralized. if you over collateral is one thing you should under collateralize something else. it didn't because it was under collateralizing the deposits and that's where the regulatory of the charge comes from. so i took that to michael milken and i said you would know all of those bonds useless klaxon we determined to the aaa securities. she was a little apprehensive of the time, but we did the first collateralized obligation which did exactly that and you will see later that these techniques the investment bankers used in this last crisis than we did the first asset backed collateralized obligation related but the key to the last one was we did the first cash flow bond and before that the rating agencies that required the market-to-market this was the first one in which they rated the bonds and said the cash flow from the underlying mortgages has to be able to be sufficient to cover the interest from the debt and that is the way of of the securitizations

were done after that. dan in the 1980's we had the risk requirements. now, having deposit insurance what it is slickly is 16% down to eight and that is what we see here the banks of the dueling charter with fannie and freddie mac. but the regulatory arbitrage cut it because they have a 4% cattle requirement and beyond that if you securitized you could get the same cash flow down to only 2% capital. now with the costs of not giving up if you increase your leverage eightfold and increase your return on equity eightfold you magnify everything with leverage if you lose money you're going to lose eight times as much money instead of making eight so the regulatory arbitrage was there in the 1980's weakest k new heights in the later years. so basically the lesson is from

the 1980's private label securitization it was exactly the same thing as freddie mac and fannie mae you could ensure all said that you wanted no matter how risky they were and no matter how much we have because you are using another form of the agency that they had backed by the private insurance and the loan rates would go up. space to get to the first subprimal debacle, the legislation was passed and that provide more opportunities for the regulatory arbitrage basically what was about was the multi class a securities there were a million ways to do this but there were chongqing by credit risk and the simplest one you can think of is having a senior security and then everything below the investment equity and they were doing it with sob prime loans but interestingly piece of prime loans were not eligible for financing by fannie mae and freddie mac because they had bad

or worse and supposedly had a lot of equity in the house. so, my first day on the job, i am meeting the ceo of the bank subsidiary bragging about the profitability of the securitizations and i look at it and say well, you know, it's profitable but where did the mortgages go? i looked at the balance sheet. the mortgages are gone who owns them and he says while the investment banker retained interest from me on the day that the deal closed. i said how could he take you enough to buy them? i know they are not worth a very much. we promised to buy them back the very next day. i said well, the good news is -- the bad news is that called packing and that is what michael milken went to jail for. the good news is i hear it is a free attractive self but when the close of the end of the year they would come and get you. seven my job is to get the jump off the balance sheet by the end

of the year. believe me i was a new year's eve until 10:00 at night trying to close the deal because i couldn't sell it with a huge debt on the new york stock exchange which i have the manage rights to there wasn't a technique they used and i could pocket with a wink and a nod i will make it to you later. the reason the regulators have done this is this high risks of prime lending and they were doing the double leverage that is retained the reza troubles and the the reza troubles would be leveraged 10-1 and then you can get the ratio of about a thousand-juan peron was of prime loans it magnifies the losses and the regulators stop it but like everything else, they have a loophole that says that a regulatory capital doesn't apply to the investment bankers. we will buy them and sell them and retain the interest.

what happened was there was no point any more of keeping these loans on the books. the regulators heated them on the books because they were lousy loans and they would have made huge reserves of you left them in there. as we some of the finance company had traded as a finance company in the new york stock exchange. we put the ownership, we created charities and the accountants created a sliver of ownership that was so small that it was worthless. we took a loss on the tax purposes for the contribution to the charity and that is where they went, so they disappeared from anybody's books. the finance companies held the subordinated interested in the funded the senior interesting you can fund a senior interest everywhere because i already told you banks could fight this with only 1.6% of capital. but even in the 1990's, banks have with a call structured investment vehicles which allow them even more leverage. that's like 1% capital. and this all started because everybody, economists, politicians come in the 1970's said that the gse securities

were illiquid. welcome the commercial paper sturdy days securities for 40 years. they are marketable but they are not liquid so the whole structure was extremely fragile because they were issuing the 30 day commercial paper and basically they have a pushback to the bank. it was a regulatory arbitrage that got the requirements down below 1% to fund these pools of mortgages. so then funding and subordinated is all that you really have to do. but you could go to the junk bond market and every three months each time you do securitization your recording profits beyond not getting any cash out so you can only go to the market and the stock market if you have book profits. where did the book profits come from? well, these interests were hypothetical cash flows.

that is if everything went right in the four duty to fight to ten years on the road we are going to see some cash back into the sec did two things. they said you can present value those to return the profits now, and of course postponing the losses because you don't have to take a loan-loss reserves because nobody knows where the assets are. and they did another thing. they said we want you to discount those cash flows at 80 per cent which was a risk really set the time, so all of the profits came from the accounting when i use the market rate, the market rate on the securities for the retain the interest 35% when you use up the profits disappear, then i had my finance guys run the accumulated default loss and they said everything is going to default from day one. they've never had a good security that isn't going to go into default. how can they keep on generating these profits? i had the book to consolidate earnings in my book and i didn't want any part of that, but i was forced to by the regulators come

so the one thing i could do is get my board to sell the stock. the shorts are going to be out there bringing the stock down it's going to crash and then month after month we are almost for three years to got madder and madder because the stock just kept on going up in price and they were missing the market and they couldn't believe why i was selling. so finally i am having a drink with my largest investor and i say just tell me off the record your my biggest investor and you know that i am selling the stock of this new york stock exchange company and every time i saw you with a bond with is that you know that i don't know? and he said well, i know that i get a management bonus every year based on my performance and i've been getting bonuses based on writing the market and you haven't because you're black sheets you and my investments love me. i said yes but have you looked at the value of those residuals very closely? i figured he hadn't. he said with me introduce you to

my russian physicist. dmitri then explains the models of the cash flow credit loss the fallujah for models away. i said what is the bottom line? he said losing money since they won the are going to be sold on all these securities. i said if you know this, then why are you buying it? he said i'm still making my bonus and we will dump after the year ends. the shorts get short because i am bigger than they are. i have more buying power than they do selling were shorting the power. so they didn't make it to the year and because russia defaulted and when russia defaulted the securitization market rose up and when the market's fears of we didn't have enough capital to keep the market going. shareholders started selling the stock and bond holders stopped funding the company, and within about three months every single publicly traded so prime finance company declared bankruptcy. and the investors of course blamed the russians. they said nobody could see this coming. and the sec hired goldman sachs

to mark up the value of the assets and the mark the residuals on the zero and marked the securities down about 50%. is does this sound familiar yet? then they hire all of these lawyers to sue me and say how could you look these earnings and i had to explain to them they made me. so, what was different from what was already happening we get to the year 2000? vlore was for much worse. the regulatory arbitrage i will show you what they are doing, that is much worse. the investment assertions are much worse. the credit losses are greater. with profits you could generate or bigger than they ever were in the previous generation and they were cash profits and fannie mae and freddie mac joined the party. so, there's a lot different and a lot the same. so the senior investors, there was a huge global shortage of senior securities aaa and aa based on regulatory driven demand. they said everybody should be buying aa and aaa said the

investment bankers did exactly what i did in the 80's. they said let's take the job. we will make it into the aaa. that's an easy thing to do. you'll for collateralized. you take a piece that got fenner. they had to get a little bigger but i'm talking about they went from two-thirds of the percentage of 22%. they were relatively tiny and not enough to stop anybody. and everything got funded so everything is getting cut into the ceos during this period up to about 80% of the appeal less -- pls. fannie mae and freddie mac are funding about half of the aaa pls because they meet the housing goals ha. now the hedge funds this is a long story that i don't think has been told too much, but this is the money st. hedge funds get a management incentive fee that says to keep 25% of the upside over and above the risk free trade and i don't pay back the downside just like the one i was telling you about but it's much worse.

state and local retirement funds their advisers had a similar upside incentive and no downside risk. and even the pension would get, many tensions in the state and local retirement fund would get an extra year of pension benefit if the performance was good, and on the downside to the taxpayers guaranteed it. so they had to go for the mentality. and in fact if you think about it, almost every state and local government in the country assumes they are going to earn 8% real adjusted. the market rate on that, a treasury tax was only to somehow they think they are going to make this three times the market rate is four times and they never do, so this money is pouring into the hedge fund to have to spend it somehow. wall street expanded vertically. the start sponsoring hedge funds. then in the sec comes along and they say investment banks can leverage twice the commercial banks were 40-1 and that isn't only counting the balance sheet things so the investment banks started to buy out the loans and

the lenders because now they can put the securities they don't sell on the balance sheet and this whole stuff about the proprietary trading really had nothing to do with that. they were doing what i did in the 80's, the fifth proxy's sell assets someplace that retail interest and who determines the price? well they say we will leave this up to the traders said they were virtually worthless assets and the book them and huge yields on them that they hadn't earned in the bigot multimillion-dollar bonuses every year like a million a year was a big deal for the treaty but nobody's made any money yet to read the commercial banks provide all of the leverage that is to bring the on balance sheet and off-balance sheet for the aaa aa securities and the also leverage up the jr piece is that the investment banks. so, everything has had a leverage. shadow banks got a lot of attention on the financial crisis. they did nothing wrong. they were just victims.

they were not regulated digg.com mashaal paper. the issue the way to much based on the same regulatory arbitrage trades of huge cash profits all for this period note that the loans are bad and we can see how everybody could make the cash profits the the highlight is these excess securities the was created because you had a very low yield on the aaa driven apart by fannie and freddie and you could assume a very high yield even though they were not going to pay it and so you've created a security and as long as the house prices kept on going up, and the diesel to postponed the subordination calls triggered the cash disbursements to by the end of this period if they were unlike the previous dhaka we have nobodies cash constraints of your buddies making profits and for the has plenty of cash to keep them all going. so what happened is the kept on

producing from 2004 through 2007 everything went into the cbo's and all the other securities. the hedge fund money doubles again and quadruples command in most of this is state and local money. so there's virtually no smart money ahead of the aaa. their funding 95, 98% and they say we are only taking, you know, the zeros risk peace. as most of the funding. they might not have no net. the house of the last question really is -- then we will wrap up in the short time market why didn't somebody stop it? be sure it yourself and was technically feasible. you could do this with credit to be sold swaps. this got a lot of negative attention, but it seems to me that it almost was the vehicle worked perfectly. the contracts were written mostly by the too big to fail banks and for aig but they didn't write them from the subsidiary written by the treasury, which was eventually

timothy geithner's responsibility was riding the credit to be called swaps, and there was asymmetric capital. that is the fed was cutting the capitol relief to the buyers of the credit field swaps which was inappropriate thing to do so long as the soul was in the credit stifel sophos for posting an equal amount of capital if they were getting relief. i doubt they were because they never quite work that way. but i would say this. surprisingly according to german bernanke and secretary geithner they pay off 100% of tikrit stifel swaps and they won't lose a dime on the bailout of any of these financial institutions that road than including aig. but there was a huge price disconnect because the booking of the value of the assets is twice what they were worth. it didn't make a difference to read bear stearns said the redemption and hedge funds was the first time anybody sold and when they saw they realized the market price was only half of

what they booked a match and of course it crashed. the last question we have is why shortly after this started like in 2002 were in 2004 we couldn't stop it? because a lot of people would say it was irrational exuberance everybody thought prices were going up. that is no evidence in my mind everybody behavior rationally based on the incentives is no fury that says that's true and even the leading economist who is a behavioral economist says well even if even he is irrational, the people who ensure the securities are totally irrational so it doesn't take anybody else to be rational. only the shorts, so why didn't they? and there's a great book on that by michael lewis because they were shorting the government. you can't sure the government. we thought we learned that 20 or 40 years earlier, so i thought that the funniest line and was the exonerated.

the yield on there that didn't go up. of course it shouldn't. the government is backing them. why should they go out. so this time as different as the title of the book. i will save you from reading of three words to the title. the point was 800 years of the financial crisis this time it wasn't different. it's always the same thing. it's always been public policy fall the that causes the financial crisis and the state and local governments are only a minor player because the share was so low, but as i say the liabilities are all great to me and california was mostly spanish, california two big to fail and too broke to bail so that is the same thing that they're facing right now. we've already been through all of the problems of having these balance sheet liabilities that don't have any capital what

happens so the only prescription is to enforce the capitol requirements. you have to have capital. fannie and freddie must go. why have a monopolist? they have to mid-market capital requirements what is the point? and we all know the monopoly isn't supposed to be good so that is getting a lot of discussion. , the fha is a and deeply under water now, it's not going anywhere. once you shift the risk for freddie fannie mae or freddie mac it's putting into the government and who knows how to be all that out. i've got one more site. the home loan banks never failed because the over collateralized devotee the tory arbitrage. that's why when they went in the home loan bank had half of the collateral and there was nothing left for the fdic so it is an overkill lateralization game securitization should go because

it is inherently undercapitalized and i would say that the capitol requirement should be transparent cover bonds have somewhat more capital requirements, but they tend to have overcome novelization just like i did in my first bond deal because the investors don't trust the regulators the quality of the capitol or the quality of the loans that institution as providing some and the excess collateral you have to have capital someplace. we will wrap them up and take questions to this barracks before, kevin. [applause] let me again note that both of the papers from which this deride are available online, and i think you would prefer a little bit slower so there's a tremendous amount of detail. u.s. for the microphone and you have a question and certainly let's keep it in the form of a question rather than a comment.

secure the answer to the question is as dramatic as the regulations, financial regulations, and this is the answer. does it in a bowl or force the traders into this? >> i would want to clarify. my answer is that fannie mae and freddie mac didn't perceive themselves subject a bankruptcy gunster and in so only they had the market power to keep that bubble going for as long as it went. if it had just been the private label securitization than you would have seen the same thing happened as has happened in the 1990's. they would have won that battle early on. not right away. it took awhile but how many people here in washington knew about the financial debacle of the 1990's? >> my point. it didn't make washington because it wasn't systemic

because fannie mae and freddie mac were not in it and the level collapsed. so it's the price bubble to be to have to keep on focusing on the price bubble. what could cause them to go up not devotees in the housing prices up in the psychological information. it's the power of the government that doesn't stop in the bubble and they couldn't stop because the regulators said they had to maintain a 50% market share. i am saying that the bad regulation on the part of the private sector so called private sector which is publicly the securities. >> in the course of your presentation, which is an excellent one covering most of the ongoing crisis which actually goes back to 1966

according to henry kaufman. did he realize that in your description of the bank activities that you have really invalidated what peter said because the too big to fail banks are part and parcel of all of this they were in all these transactions and they also have indulged in capital arbitrage at every point. so looking forward this is what it's about. so how do you factor that in and have you identified the same phenomena among the two big to fail banks then you did with fannie and freddie? >> that's an excellent question. i would say that too big to fail is a huge problem and, you know, going from fannie and freddie if they put the same political risk on the banks and then look at

them the same way and some of the regulatory perspective they allowed this to happen as i say it's not only pervasive it was comics they were over leveraged on the regulatory arbitrage going back to '92. but they never stopped it. so, it would be no better. now, one might hope that the political pressures that could be put on zinni may and freddie mac as government sponsored enterprises would be less in terms of the banking institution that that is they would have to put political pressure to say we don't want to be pushed to make bad loans. but i understand the risk, and i think that you want to try to have a securitization market that relies on the underlying loans that has as many issuers as possible so that you are not focusing all of that risk in the systemically important institutions the home loan banks have been considered one option to do that but then again they are system ackley important commesso, you know, you could shift the risk there and they would fail.

>> i didn't see a lot of discussion in your presentation on mobile interest rates would be a factor in the housing bubble and perhaps even for monetary policy of the federal research i was hoping we could talk a little bit about that. >> sure. as i said, there's a thousand stories and this is one of the stories. interest rates are very low, but what i'm focused on is why in housing. interest rates were low the bubble could have gone anywhere. excess credit releases the reason why it went into the housing bubble and it took the housing bobble to make that work. it's the trouble lay financing is extremely low end of regulation time and again, that created a spread that drove the profitability, the seeming profitability the more cash to got to make the profits the bigger the losses were going to be at the end of the day but you didn't recognize the losses until the crisis started coming.

.. >> so, kevin going back to the ain't dote with the conversation with david max well, how would you have recapped that conversation, now knowing what you know now. or would you say, david, yeah, i think you're right? >> i was on a task force about

that time, policy task force, and when the savings were under water, the reason savings and loans were underwater they had no -- and then monetary policy drove interest rates up mortgage rates got to 18/18% they were underwater. the treasury solution was to raise the taxes. take away the tax benefit. which wouldn't have saved them. the real problem was, fannie may was going to be allowed to go for book. and savings and loan were told to go for broke too. work your way out of the problem and we won't tell anybody. the savings and loan were told to go for broke in reality. i did it dr the ones who did it real estate were partially successful. there was a big mark down. so, i don't know. what would we do different? , i mean, there was never a good time. when the region administration

came in, the contact of the could believe of economic adviser i said now is the time to do something with the fannie may problem before it explodes. the housing market was dispresessed with interest rates and said it isn't a good time. it was never a good time. [inau] conservatorship. >> i didn't read his book. you have to ask him. i think the chinese said, these are government, if you think they're not government. we own a lot of them. we're telling you these are government. and you know, they didn't have any choice but to do what the chinese said, right. if they wanted more explicit that the government was going to back them. -- they were not sold all over the globe. government securities nobody could say they're not backed now. in the 1980s i tried to point out that -- which was technically insole vent by a lot of money was only sponsored by the government.

it wasn't backed and then they picture of the next day, when they figured that out. they had the picture of the chairman of the loan bank claim of the ensurer shaking hands with the treasury ebbing secretary. put that picture to make sure everybody understand. we're going to be behind them even though it started as being a sponsored form of insurance. they couldn't walk away at that point. >> that's an point emphasis prior to the early than you saw during the bubble it increased to almost a fifth. i think the calculation wrongly we did not honor fled and nanny the would go up. given the number of treasury secretaries without any legal authority to do so on a said that fannie and freddie were backed. creating that perception is worth noting under sec tech tony

snow. they were trying to set up a -- the procedures were reversed when mr. paulson took over. >> doctor, the degree has identified another area where housing somewhat you anemic. that is a lot of state and local governments imposed land use restrictions that limited the supply of new housing. and so i'm wondering how that we grates into your analysis here. >> i think that if you look at that graph of house prices, and then you took that -- terms of where the land use or the call it the planned community, find that the price rises were bigger where the supply was restricted and less where you could build where you want med. was a average. i agree with it totally.

>> question over here. >> thank you. [inaudible] the federal reaction to financial crisis and don frank all of that stuff. given what you know now, what do you think is going to happen next down the road? >> well, you know, don frank was 2600 pages. i think we're talking about tens of thousands to hundreds of thousands of pages of regulation. i can tell you any one page of regulation had to three law firms. no two would agree on what they meant up. you have to have a third one. nobody is going to have figure how to be in compliance. said that the rule is intuitively banks shouldn't be betting with the money. it was based on proprietary trading. it had nothing to do with the

glass stegall chaffs sales and trading activity nor bringing hedge funds. it nothing to do with the trading and hedge funds. they were parking the assets at twice their value on fcc rules. it's makes intuitive sense they shouldn't have massive trading operations. that's what the problem was the last time around. it nothing to do with it. jp morgan, everybody is up in arms with them. they had 110 regulators under the existing regulations. jp morgan's headquarters no clue what the trade was. it was a small fraction of one quarterrers earning. you upset about what happened to jp mar gone to say that the regulators is going to stop it is farfetched. the only thing in my view was the market discipline which took too long. we can't have the dref dids --

they're basically shorting the regulators saying this was a regulatory failure. now the whole thing is exposed when they the bring the house of cards down. idea treasury now has in the building 300 economists and other who are supposed to prevent steamic risks. they're in the belly of the beast. what are they going to be able to do? >> to reintegrate that. i think say the theme part of the rash tell me, if not the primary -- we've had decades-long where we've replaced market discipline with regulatory oversight you've seen repeated in regular story oversight don frank continues along the trend. they try to replace. in that regard it's almost frowned fail. i note since the vocal rule was mention excement of course, -- half the securities were that

taken the maid lained one freddie and fannie securities. again, i don't think my own opinion of don frank is going to help us avoid the next crisis. i think we need to be careful about the seven debt risk in the united states. and how that affects the financial system. i know, we are coming up on 1:00 i don't want to keep everybody for too long. let's see one or two last questions and we'll wrap up. >> okay you think with e wind gown the gse by selling off the assets to the mortgage corporations or do an idea of how we could do that and do you think the 30 year mortgage would go away if we were to get rid of the gse? >> i think -- sort of the, you know, the reason it was created was too wind down fannie and fraudy. it was -- only for fha loans.

it no point to exist once outside of the charting legislation went and created a new securities market. of course you can wind them down. the whole notion where we won't have fixed rate loans without them. their intermediaries. there's got to be investors on the other side. you can't do anything unless you can sell it. it turns out that when these constitutions were created and when we got the dependent on fix rate mortgages, not 85% of the market on the other side was fix-rated liabilities. it was life insurance companies we had relatively low inflation. when you go back to the 1980s everybody has fixed rates liabilities going on. that's down to about 15% of the market. there are none. it's all hedged to inflation. nobody wants that. there's a small other side of the market if you want a fix-rated loan that's a pure gamble on your part if you can pay it off, if interest rates go

down. you have to pay for it. they're not going to change the price until they're getting subsidies. >> points to emphasis, at least two the risk inheriting the risk freddie and fannie never had held mortgages on the interest rate risk when they bought bias or -- it was taken the interest rate risk and they provided the credit rate guarantee. it's important to keep in mind between the years are the interest rate risks. that was not something that they necessarily took in place. ly note, we have procedures in law put into the housing economic recovery act of 2008 where there are severship provisions to wind them down. the don frank liquidation provisions mirror those. if you believe that don frank gives us the power to wind down jp mor morgan or city bank. you must believe we have the power to wind them down. if you believe we don't we

don't. >> with that, i want to thank the audience. we have copies here and online as well. thanks for coming. [applause] [inaudible conversations] the senate recess this week we're showing you book tv and prime time starting at kl p.m. eastern. a look at the u.s. and world

economies. first, have discussion the economic divide in america in their book, "the rich and the rest of us." at 9:20 they share their opinion on the current administration in the book "debacle" after that, 10 they look at the world economy. book tv all this week in prime time here on c-span2. spend the weekend at watch that, kansas with book tv and mesh history tv. saturday at noon eastern literary life with book tv on c-span2 robert on american presidents an black entrepreneurs from business in black and white. dennis on the founding of beach craft and the barn stormer and the lady. also brown the rare book collection at water mark west rare books. sunday at 5:00 p.m. eastern on american history tv experience

early plane fight at the museum. the early days of flight at the kansash aviation museum.hhh two participates from the civil right movement in 1985 sat down for service at the drugstore. once a month c-span local content vehicles explore the history and literary life of cities across the america. this weekend from wichita, kansas on c-span2 and three. next remarks from girl scout ceo anna maria char chez. she launched a new effort known as "togetherthere" which promotes women in the leadership positions. this portion is twenty five minutes. [inaudible conversations]. >> good afternoon and welcome to the national press club. my name is teresa i'm the 1205

president. we are the world's leading professional organization for journalist. committed to our future true the programming with the events such as these while fostering a free press worldwide. for more information about the national press club, please visit our website at www.press.org. to donate to the programs that are offered through the public it substitute, please visit press.org/institute. on behalf of our members worldwide. i'd like to welcome our speaker and those of you attending the event. our head table includeses guest of our speaker as well as working journalists who are club members. if you hear applause in the audience we note members of the public are attending it isn't an a lack of journalistic activity. i like to welcome our c-span audience and our public radio

audiences. our luncheons are also featured on the member-produced weekly pod cast from the national press club. available on itunes. you can also follow the action on twitter, using npc lunch. after our guest concludes. we'll have a question and answer segment. i'll ask as many questions as time permits. i'd like to introduce the head table guests. i'd like each of you to stand up as your night is announced. peggy, girl scout and a congressional correspondent for hispanic outlooks. marine, girl scout annapolis star washington correspondent. dianne booth, girl scout and girl scout leader, author and freelance writer. lisa gable national board member, guest of our speaker today. k shaw nelson. gill court author.

sheila johnson entertainment over of the washington mystics and a guest of the speaker today. angela bloomberg news and vice president of the national press club a 12-year girl court and current leader. debra executive vice president and speaker committee member who organized the event. debra prarps in ceo which connects quotes. lydia chief executive officer girl scout counsel of the nation's capitol. she's holding the -- girl scouts rock the mall on june 9. she a getion of the speaker. value rei jackson. susan, girl scout, press secretary for legislative affairs, natural resource defense counsel and national press club board member.

joan michaelson girl scout, executive producer and host of green connections radio. and also joining us today in spirit and wax girl scout founder juliet gordon low who made the debut at the wax museum here in washington, d.c. [applause] when many people hear girl scouts they think of cookies. thin mints, tag alongs and the caramel delights. for our speaker, anna maria think cookies mean goal setting and training skills. when she was growing up in arizona, she joined the girl scouts and went away to camp at age 10. that was a moment of revelation for the young will tina from a

not wealthy small town. as she tells the story it was the first opportunity she had go away by herself without her family. she was with girls her own age from all over the state from many different background. that camping experience gave her the sense that it was cool to be a girl. and there was a bigger world out there than she ever thought about. that is exactly what juliet gordon low had in mind when she bleshed the girl scouts. that was 100 years ago. before women had the right to vote, were expected to go to college, or participate in the business world. low who was the product of a turn of the century southern upbringing found her true calling in bringing girls of all backgrounds together to learn about self-reliance, diversity, and actively participating in civic life. in fact, the first girl scout handbook was called how girls can help their country. low would be pleased to know that two-thirds of the female

members of congress have been girl scouts. and all three female secretaries of state continue lisa rice madeline albright and hillary clinton as well as sandra 0'connor, i have nice williams,. including feature leaders here in the audience. becky town send and members of troop 4006 from virginia. yesterday the ptd honored low with the presidential medal of freedom. today anna maria chavez brought her here her is a scholarship to yale and a career in public service counseling then public arizona member on different areas. she spent some time here in dc as well in senior roles at the u.s. department of transportation, the small business administration and the

federal highway administration. she became the ceo of girl scouts u.s.a. a year and a half ago. and she quickly found out leading a national organization means dealing with politickings. so even as she leads the 100th ankers are i are celebration she is dealing with political fire from some who say scouting promotes sexuality and even abortion and the u.s. conference of catholic bishops said they are investigating the organization. it means taking the organization into the digital age with virtual troops that meet online and new badge that girls can earn for net etiquette. she hopes to make the mark in the big way. she has launched an ambitious program to close the leadership gap between men and women within one generation. we look forward to hearing all about it. please welcome anna maria chavez.

[applause] thank you. >> thank you for the wonderful introduction. my mother appreciates the fact that you used the official bio. she gets credit. i want to thank the head table, thank you for making this happen. my colleague, i am really grateful to lead a national organization but in partnership with 112 girl scout counsels across the country. lead ya leads the national's capitol and a great partner. thank you for being here. to at national board representative lisa and lind disci. i bring her good wish as well. to those in the audience today to support us and girl scouts who, by the way, we work for every day we're proud of you. you know, i wanted to start actually my remarks talking about a girl. a girl, a very special girl.

a girl that grew in china. a little about the girl. if you imagine your hand, okay. in her hand she didn't have fingers. a palm and a thumb. there was a family that traveled to chain to adopt her in an or fan inch. they brought her to georgia where they loved her and cared for her. even the daily task of tieing a shoe or picking up toy was difficult for the girl whom they named daniel. she had lots of aspirations but the parents wanted to figure out what they could do for her in her life. as anybody does these days, they googled a solution. and they found a whole community out there of people who wanted to support the young lady. they found a group in particular, a group of leaders who wanted to investigate a process to how this little girl named daniel. -- to help the girl. they went out and for six months investigated different options. they visited manufacturing

plants, they went to craft stores, after six months about 180 hours of research and work they go oned a prosthetic handmade out of molding, sort of, you know, things they could figure out how to use in the craft store. velcro, they put it on the hand and it worked. for the first time, the girl was able to write her name. these amazing individuals are called the flying monkeys. the flying monkeys. truly. that's what their names are. it is a girl scout troop from ames, iowa. they're amazing. so amazing that these members went out to win a global competition beating out almost 200 other teams, and claiming a $20,000 prize to patent their device they call bob 1. now it's a great story. i tell it because not only

inspires me, but it inspires other girls. you know, think about six intrept middle schoolgirls sitting there figure how do we create a hand for a little girl? you know, and so, thinking about these girls, i really get sort of bullish about america's future given the fact that we have girls out there that incredible inagree knewty, creativity and not only that they're thinking about other people and how they can help. as the chief executive officer for the girl scouts of the u.s.a. i have the privilege and the honor of seeing these girls across the country. you know, this story has a good ending unfortunately there's another side to this. i will be honest it distresses me. it disstresses because i know remarkable girls trying to do great things. but enough of them grow up to realize their full potential

because unfortunately don't see enough women in leadership positions across the country at this time. i don't understand if you look at congress, only 16% of our elected officials are women. across the corporate america, women occupy only 15% of seats on board rooms and just 2% hold a top job at the fortune 500 company. women manage only 3% of all hedge funds and 10% of mutual funds. yet, women own funds sitly outperform funds in general even during tough times such as these. women hold just 16% of the top positions at movie studios and own fewer than 6 percent of tv stations in the united states. currently, women make up only 6.5% of the science advisory

board members the u.s. high-tech firms. so, let me give you another image. imagine this, imagine a classroom in an elementary school with fifty kids. evenly divided between boys and girls. and then ask every single girl to lead the room. and ask the group of twenty five boys and one girl to take on and solve a challenging problem. well, that's the situation we have here in the united states. and unfortunately, you know, we are making progress in some areas. yes, young women are going on to college, you know, they're earning a degree. nearly half of all law schools are girls, are women. as i've noted in too many cases, we're not getting girls from aspirations to action. especially when it comes to critical field like science, technology, engineering, and science, and math.

it's a vicious cycle. and as the saying goes, you can't buy something you can't see. if there aren't enough successful women in technology in the engineering girls can't sit back and go i can do that. i see myself there. so, again, i work with a lot of girls. i travel the country, one of the best jobs in the world is the job i'm sitting in today. i get to talk to girls ages 5 through 17 and they tell me their dreams. they say, eagle one. that's what they call me, eagle one. they say, eagle one, help us because this is what the reality is for us. you know, i go to school, and i'm psyched about math and science. and then around fourth grade people are like girls don't do math and science so they opt out. then they go on and go to high school. and they're thinking about student government and they get up and do things and unfortunately some of the

remarks, girls, that's being too bossy. why are you doing that? then they go into the careers and again, sometimes they don't see the female role models in the firms the company in this case want to work at. what they say to me, the girls say, help us. help us change the messages that girls are getting in today's society. because unfortunately, at girl scouts we have a research institute that brings out some unfortunately negative data around girls. right now, a research says that nearly 90% of girls say the fashion industry in the media plays a lot a pressure on them to be -- and the fact is, that 42% of girls in the country are growing up economically disadvantaged, and those rates are higher for hispanic and african-american girls in the country. while eight out of ten girls are interested in interacting with successful women, a majority of them 60% say they haven't been offered a chance to visit the

workplaces of successful women in the community during the last school year. now, did anyone wonder why 60% of girls today that leadership is near important to them or say they don't want to be leaders. so, i know that you're probably taking pause with me because, again, we've got get beyond the data. now, looking at girls specifically around -- we found a great statistickic recently on february 14th said girls love -- if you ask most girls the majority of them will say i love math and science. what they want, is a hand up. they want somebody to say come buy them and mentor them around the issues. talking to girls, we want to let them know it's a career option. we can't have girls opting out. they can change the world. you know what? it's not just about girl

scouts. it's about all girls. there's one girl in particular, her name is angela. amazing girl. she at the ripe age of 17 invented a nano part call. now just any particle one that kills cancer cells. and surprising enough, not surprising she won a $100,000 grand prize recently at the math and science competition. onlying up next to her is miriam. who is 17 she had done some research on tabor i ared land lines around the world. she wanted to do something. she went out and created, actually, an alternative. a device that actually goes out there and identifies where these mines are buried. she wanted $25,000 fellowship and her invention is a great thing. people can produce it at the cheap cost in other countries. the point is this, when you inspire girls, when you give

them an opportunity, when you support them, when you mentor them, they're going to get on the journey because they truly know the path. sometimes adults we kind of put barriers in the away. stereo types, negative images, if you're sitting there with a girl and you start kicking the barriers out of the way, that are going to jump to where they need to be. i'm fortunate, i have a lot of people in my life that mentored me. from a young age in arizona, where i was apparently poor, we were rich in love. but, i remember thinking, the only thing i wanted to be was a girl scout. and, when i had the opportunity to become a member of the movement, i moved to san antonio texas dragged my husband and son work for the girls in southwest texas. i remember sitting there, and thinking about girls and, you know, for a girl, it's very simple. they see organization as

iconic. one day we were doing the recruitment event. in girl scouting we work in partnership with school districts across the country. we did the bro sheers, we take it to the school. we hope it gets into the teacher's boxes and hope they take the form and put in the girl's bags and hope it gets home and the parent finds the 0 form. that works one day in san antonio, texas. there was a little girl who was 8 years old. she had the form in the backpack, and she showed up at one of the recruitment events at the elementary school one night. after everything was done, my staff and the volunteers looked and there was one person left. it was the -year-old girl. beautiful little girl. they're like, where are your parents? she said i came by myself. there's my bicycle. and they're like, it's late. it's like 8:30. she's like, i know i forget my way. can you take me home. we found out the young lady was

living with her father, working two jobs, he had been laid off. they scraped and scraped because it's only $12 to be a girl scout. that's all it costs. one year $12. for them that was a heavy lift. they lifted under so sofa crush shons. she found $12 in change. she brought that change in a bottle, and she put in front of recruiter and said, we might be poor, we might be alone today, i want to be a girl scout. i know, i'm going to be able to change the world. i got tell you, she changed my life because i knew at that time it wasn't about just girl scouts. it was about girl changing their lives but changing the world. you know, they're ready. it's up to adults, it's up to adults to step up say and you know what? let me pay that $12.

let me bayou the sash. let me give you the opportunity to integrate with amazing women and men who want to support your journey. come on now, go at the flying monkeys. go ask angela or marion, for us, we sit here in the nation's capitol, where innovation and creativity and governor nans happens. can you imagine if we doubled the numbers of girls in the pipeline of leadership here in the nation's capital. right now? look at the roster girl scout alumni. teresa read the list and goes on and on. imagine if right now we only serve 8% of girls in the country. man if we doubled that percentage. you know, in our studying, recently, we found that if you compared girl scout alumni to nonaloom nigh, they outperformed

in almost every single measure. they were making more money per year. they had a higher educational attainment, they were happier, and they were contributing to the community. they were volunteering with and they were voting and they were voting often. and what we also discovered is that currently we have 59 million living aloom nigh in this country. approximately one in two women has spent time in the organization during her lifetime. what i love about it, is that it is going to give us the opportunity to connect with that lum any to bring them in to mentor other girls. our system is simple. it's worked for 100 years. it's called, discover, connect, and take action. allow a girl to discover the issues around here in the local community or in the globe. connect her to other people who are interested in that project, and then allow her with her

imagination to take action to make a difference. so it works, 100 years. julia gordon low would tell you if she stood here today. it works. we're not in every zip code of the country but we're in 92 countries in the world making a difference for the girls and the communities. i need your help. we can't do it alone. so we're going to create an opportunity for you, it's called "togetherthere." it is the largest, boldest, advocacy for girl's leaders in the nation. what we're trying to do with the help is create balance leadership in the country in one generation. so that every single girl has the opportunity to step into that leadership role. because we're going to need her smart ideas, we're going to need her sit next to boys in the classroom and contribute. and, you know, it's not about

boys against girls or men against women. i'm a mother of 10-year-old beautiful boy. but what it's about is this great country. and it's about this girl scout moment that needs to continue. we need to help more girls. now, the issue for us, we can't do it by ourself. it's going to take every nonprofit that serves youth, every government leader, every parent, every entrepreneur to invest in girls. unfortunately today, only 7% of the philanthropic dollars go to girl causes in the country. it's not enough. we have to invest in girls. i am convinced that somewhere out there, across the beautiful country, there's a girl sitting there with a cure for alzheimer's. there's a girl figuring out how do i make other's lives better like daniel? but the question is, whether we

get her there? will we? do we have enough passion around the issue will we decade the time to sponsor and mentor the girl. will we be strong enough if the moral fibroer to say today, today not on my watch will you make a girl feel less than. yes, when people start casting dissipates against an iconic organization will you stand up and say that is not true? i'm going to end just with a simple story. the fact of the matter is, i stand before you as a product of the create organization. but for girl scouts, i probably perhaps would have been on a girl ever different path. i was on all the indicater lists. right. will tina, i was in a agricultural community, my parents hadn't gone to college, but you know what? somebody, an adult, in a real

community reached out her hand and said you matter. today on on my watch, you matter. along the way, my path was filled with adults that underthe potentials of girls. what i ask you today in the country watching you invest in one girl. it could be your neighbor, could be your daughter, your niece. it could be a daughter of somebody in foster care or in child productive services. -- child protective s services. take the time because there's a girl sitting in memphis, tennessee, or aims iowa who needs us. i'm convinced that with when a girl succeeds, the country succeeds. thank you. [applause]

while the senate is in recess this week we're showing book tv in prime time. starting at 8:00 p.m. evening a look at the u.s. and world economies. discussion the economic divide in america in their book, the rich and the rest of us." at 9:20 share their opinion on the current administration in the book "debacle." after that, at 10:35 looks at the world economy in "inequality and instability." book tv all week on prime time on c span two. >> writing is a transactional process. writing assumes reading. it goes book that question

about, you know, a tree falling in the forest. if there's no one there to hear it. if you written a wonderful novel, one of the parts profit excess you want readers to be enlarged and enriched by it. you have to pull on e.g. in your disposal to do it. author anna quindlen talk about her perspectives on guide to special policy. live on sunday in in-depth. her latest rem nation on life is lots of cattles, plenty of cake. starting at noon eastern on c-span2. on sunday. early crier this spring federal reserve chairman returned to the former profession as a teacher. the four classes at george washington university. his particular class focused on what lead up to the 2008 financial collapse with him

didn't contribute to the housing bubble. this is an hour and twenty minutes. [inaudible] [inaudible] [inaudible conversations]. >> let's get started i'll like to welcome the students back for the second lecture. as well as the faculty. i know, we have new guests and friends that are here today. you in for the treat. if it was anything like it was tuesday, it will be another great session. chairman bernanke. [applause] thank you very much. you came back! [laughter] that's good news. as you know, today is the second of four lectures on the financial crisis in the federal reserve. as i said, i think it's much it's very help to feel try to put the recent crisis and the ongoing recovery into a historical context.

so last time we talked about the origins central banking going back to bank of england and the debates of the 19th century, the origins of the federal reserve, and the federal reserve first challenge chaffs the great depression of the 1930s. we drew some lessons from the 1930s that will come back and be relevant as we discussion more recent events. today i'm going to pick up the history after world war ii, talking about some important episodes after the war, but i will be getting in today to the beginnings of the crisis. so the latter part of today's lecture and all of next week will be about the crisis. now, as we go along, i want to make sure you keep your eye on the ball, the two basic ideas,

the two basic missions of a central bank are first, mark cro economic stability, may be containing stability growth and keeping inflation low and stable. of course, as you know the principal policy tool for maintaining macroeconomics. the feds or other central banks will use open market operations purchases and fails of securities in markets to move interest rates up or down. in doing so trying to create a more table macro. the other part of the mission is financial stability. central banks are focused on trying to ensuresha the financial system is functioning properly. in particular, they want to prevent, if possible, and if the no to mitigates the effects of

financial crisis or financial panic. we talked about the lend of last resort function, the notion that in a financial panic a central bank can follow the rule of the lending freely and providing short term credit to financial institutions a central bank can justify set the effects of run or a panic and the accompanying damage to the financial system in the economy. but let's move ahead and talk about the history of. we left off at world war ii, which ended the depression which lead to a sharp drop none employment as people went to work building e miss and serve the home front. one of the aspects of war is how they get financed. normally they are financed very substantially by borrowing. and this was not a surprise u.s.

national debt was build up substantially during world world war ii to pay if the war. in the fed in cooperation with the treasury used the ability to manage interest rates to keep interest rates low so as to make it cheaper for the government to finance world war ii. so that was the role of the fed during the war. now, after the war ended, the debt was still there, the government was worried about paying the interest on the national get, which was at a very high level. and so, there was considerable pressure on the fed to keep interest rates low, even after the war but there was a draw back to that, if you keep interest rates low, even if the economy is grow and recovering. you're risking inflation. so by 19 say, the fed was very

concerned about inflation prospectives in the united states and after the series of complex negotiations, the treasury agreed to end the arrangement and let the feds interested rate independently as needed it achieve the economic stability. it was called the treasury report of 1951. it was important because it was the first clear acknowledgment by the government that the federal reserve should be allowed to operate on an independent basis. and today, around the world there's a strong consensus that central banks operate independently will deliver better results than those which are dominated by the government. in particular, a central bank which is independent can ignore short-term political pressures for example to pump up the economy before an election. in doing so, it can take a longer perspective and get better results. the evidence for this is

strong. as a result, major central banks around the world are typical independent which means that they make their decisionser irrespective of short term political measure pressures in the 1950s and '60s, the primary concern of the fed was macroeconomic substantial. you see a picture of the chairman william mar martin he was chairman from 1951 to '70s. he was leader the fed. the chairman's ending at 18 years and six months. he didn't break the record. i know, he was disappointed about that. but in that case, we had two federal reserve chairman who were between them accountedded for more than 37 years of leadership during the fed during the postwar period. now monitory policy during the

'50s and '60s. was simple. the economy was growing. the u.s. economy was dominant, the fears about a renewed drimtion had not come true, and as a result, a lot of growth was occurring with the fred trying to do intaiskly follow a lien against the wind monetary policy. which the economy is growing quickly, or perhaps too quickly, the fed tight ins to try to strain overheating. when it's growing slowly the fed lowers interest rates and creates financial disciple los in order to avoid a recession. william martin was very attentive to the risks of inflation. you see the quote, inflation is a thief in the night. he tried through the lien policy to keep inflation and growth

stable, and indeed, despite the fact that the '50s were tumultuous it was after all a serious war in korea. there a a couple of recession during the period. it a productive and prosperous decade as the economy went back to civilian operations after the end of world war ii. however as usual thins were not to remain completely trouble free. starting in the mid 1960s for a variety of reasons. monetary policy became too easy. after the period of time, and given the fed didn't change the policy stance, this easy monetary policy lead to a surge in inflation and inflation expectations. on the right, you see a graph of inflation. you see from 1960 to '64

inflation averaged a little over 1% per year. it picked up during the scram vietnam period. by the end of the '70s the cpi inflation rate piqued at about 18%. you can see it was a growing problem. starting instarting in the mid '60s and into the '70s. so important question, you know, why was monetary policy so easy as to allow inflation to become a problem in the '70s? well, one issue was really a technical issue, which was that monetary policy makers became too optimistic about how it could run without generating inflation pressures. there was a general review that unemployment could be kept at the lower level by 3% or 4% by

keep inflation better you would get the better performance higher em employ level. again in the prosperity of he '50s and '0eus the feds began to follow that approach. there was actually quite a subtle issue here, which was that economic theory and practice in the '50s and early '60s suggested there was a permanent trade-off between inflation and employment, the notion being if we could keep inflation a little bit above normal, we could get permanent increases in employment. per permanent in unemployment. that was the view taken by economists during the time. it was mill ton free month who wrote in the '0eus who wrote it was going cause trouble. he argued that increasing inflation may give you a little bit of bumpup in em employment. it might cause it to fall for

awhile it's going to be a transitory effect. the analogy might be to a candy bar. if you take it in the short run, it gives you a little bit of burst of energy after awhile it makes you fat. monetary policy was like that. freedom month argued and he turned out to be right that attempts to keep unemployment too low were going to end up create inflation. so that issue was one reason monetary policy was too easy. there are also debates still today about whether or not there were political pressures put on the fed after all, it was a period of, again, of government deficits as the government was trying to deal with vietnam and the great society. that may have influenced the feds' behavior. now, the fed obviously you can't

have sustained inflation without monetary policy being too easy. another famous quote, inflation is always and everywhere a monetary phenomena. there were a bunch of factors that made it worse and more difficult for the fed to justify set the increase in inflation. first, there were a number of shocks to the prices of oil and food. a very striking example was in 1973 in october of 1973, the yom kippur war in the middle east broke out inspect in rereally auation to a u.s. support of israel, the opec, the organization patrol yum exporting countries, found some cartel power put an embargo on on oil exports in the short period of time, in the early 1980s, the price of oil almost

quadrupled. a people were lining up at gas stations to make sure their gas tanks were full. there was a system of even rashing. if your license plate was even you can could on certain days and odd certain days. there was a serious issue and. fiscal policy, i also mentioned, fiscal policy was overall too lose during the late '60s and '70s the vietnam war increased government spending and increased deficit which put pressure on the capacity of the economy. now, another element that just mentioned briefly, is wage price controls. when inflation got up to about 5% in the early '70s president

nixon introduced wage price control. a series of law which forbade from raise their prices. there was exceptions and they were trying to find exceptions. it was an unsuccessful policy, on the one hand, as you know, prices are the thermostat of an economy, they are the mechanism by which an economy functions. putting controls on wages and prices menlt they were shortages and all kinds of other problems throughout the economy. but in addition, again, as mill ton put, it is like the dealing with a overheating furnace by breaking the thermostat. the problem was the fact there was too much demand driving up prices, and simply putting passing a low which is people can't raise prices doesn't address the underlying problem. so the wage price patrol kept

prices artificially low for the years. it made it harder for the feds to figure out what was going on. when collapses in disarray because it was created so many problems in the economy. inflation surged as a spring. it was released at the end of the wage price controls. so there a lot of reasons supporting the increase in inflation. i think a general lesson, here is picture of arthur burns which was the chairman of the fed during the 1970s in a rapidly changing world which is a ledge. which is true. i think one way to think about the whole episode is that after world war ii, and the end and the conquest of the discrepancy and the prosperity they saw economists and policy makers became too confident about the ability to keep the economy on

an even keel. and there was the term fine tune, the notion that the fed and other fiscal policy and other government policies could keep the economy more or less perfectly on course and not worry about bumps and wiggles in the economy. that turned out to be too optimistic, too human being resistic. and we learned that collectively during the '70s when the efforts of policy maker resulted not in the lower unemployment rate when was the original goal, but instead a higher and sharp increase in inflation. so, i think, one of the themes here is that, and this probably applies to any complex endeavor that a little humility never huts. there was an reaction to the incongratulations in the '70s. the key person in this period is chairman paul, who remains to

the day, influential figure in economic policy discussions. to deal with the double digit inflation, i should say first that president carter, who re-election was under serious threat by the poor performance of the u.s. economy, appointed paul to be the new chairman of the fed. and in part, he did so because president carter thought that volker who was a tough central banker to do what was necessary to get inflation under control. paul, who spanned 6'8" created a impression of somebody who is willing to take strong action, and perhaps it wasn't a total coincidence. so paul came into office, he was only in office for a few months when he determined that strong

action was needed to address the inflation problem. and in october of '79, he and the federal market committee, the policy making committee of the fed, instituted a strong break in the way that monetary policy was managed. .. inflation fell quite sharply and you can see from 1980 to 1983

fell from about 12 or 13% all the way down to about 3% so relatively quick. a decline in inflation, that offset the problems of the late seventies. so in that respect the policies of the 80's were quite susceptible. they were achieved -- achieved their bubbling -- wringing inflation under control. however nothing is free and one of the effects of the policies was to raise interest rates quite sharply. i do remember vaguely -- i just got out of graduate school about 81 or 82 and i do remember looking at the possibility of buying a home and a 30 year mortgage rate at 18.5%. so interest rates were quite high and as you might expect that brought down economic

activity and affected inflation as well. so, if you look at the graph you can see the unemployment rate, the high interest rate which was necessary to bring down inflation also caused a sharp recession and affect the unemployment rate in 1982 was almost 11%, even higher than we than we saw in the most recent recession. so there was definitely a very negative side effects from volcker's activity. now, i think an interesting aspect of this is that the political pressure you can imagine on the fed and on chairman volcker was intense. during this period, it was common practice to mail to the fed two by fours and on the 2 x 4's it would say stop construction or save the farmer or whatever it might be because the high interest rates are having very nick at effects on the economy and i have a few of

these on my desk just to remind me that inflation is a concern and we are is have to pay attention to price stability but this is also an example of why independence is important. if paul booker had been reelected perhaps if he wouldn't have been able to sustain this policy but instead he maintained an independent monetary policy and he received at least sufficient support from president reagan and from the congress and he was able to carry through the policy which again succeeded in bringing inflation down. now, during the seventies obviously the output of inflation was very volatile. we saw how much inflation moved around and we saw that there was a pretty sharp recession also in 1973 after the opec embargo and

then of course there was more voluntarily be in the early 80s when volcker brought down inflation and the economy went into a recession. now, paul volcker left the chairmanship in 1987 and he was replaced by alan greenspan, who again held the position for almost 19 years, from 87. one of his important accomplishments of his tenure was achieving greater economic stability. greater economic stability and impressive growth and standards of living in the united states. so in fact there were so much improvement in the stability of the economy that the period has come to be known as the great moderation as opposed to the great stagflation of the seventies or the great depression of the 30s. this was a very real and striking phenomenon, the great

moderation. the rst picture here shows you the variability of real gdp growth, so the graph covers the period from 1950 all the way up essentially to the present. the line just shows you quarterly growth rates in gdp so a sharp line, a sharp peak shows an increase in gdp growth, a negative decline shows a fall in gdp growth and these are quarterly numbers. you can see the ounce ines, periods of growth followed by periods of slower growth. the yellow bar is one standard deviation bands, essentially a measure of the average volatility of gdp growth quarter to quarter during the period between 1950 and 1986, or 85 i guess. and you can see that gdp growth was pretty variable throughout

the entire period. there was a lot of volatility in the economy and there were number processions including the severe one in 73 and 81. now, amazingly starting from 1986, look at what happens to gdp variability between 1986 and 2007 or so. the variability from quarter to quarter is much less and the blue line shows the average variability one standard deviation bin per gdp growth in the latter period and it's very striking how much more stable the economy was over this 20 or so year period. this was true not only for real gdp growth but it was also true for inflation. so again the same picture basically. the vertical line in the middle of the graph splits the time period from pre-1990s -- 1986 to pose 1986. the graph shows inflation quarter by quarter as measured

by the consumer price index. again, the 10 bar shows one standard deviation average volatility of inflation in the pre-1986 period. you can see the huge spikes of inflation in the seventies, and then in the post-86 you see much more stable, much lower volatility. so both growth and inflation were much more stable and really quite remarkable extent and something that economists commented on quite frequently. that was the so-called great moderation. now, why? why was the economy so much more stable between the mid-80s and the mid-to thousands? well, there is lots of research, lot of issues and a lot of papers. i think there's a good bit of

evidence that monetary policy played a role in creating better stability, in particular volcker's contribution was, even though his short-term efforts to bring down inflation in the early 80s led to a high -- lead to a lot of pain, there was a payoff in that payoff was an economy which is much more stable, with low stable inflation, more stable monetary policy, more confidence on the part of this list people in households and that can should country be to very importantly to broader stability. so, you remember that there was no long-term trade-off between inflation and unemployment and you couldn't permanently lower unemployment but in a different sense it was true. in a different sense low and stable inflation over long period of time does make an economy more stable and supports

healthy growth and productivity and economic activity. the low inflation is obviously a very good thing to have and the reduction in inflation that occurred in the 80's was really a global phenomenon. all around the world, even developing countries brought down their inflation rate considerably and that has been a positive for economic growth and stability since the mid-80s. now, not all of the great moderation was caused by monetary policy. there are other factors no doubt playing a role. imagine just general structural changes in the economy and an example would be that over time, firms have learned how to manage their inventories much more effectively. the practice of so-called inventory management is a

practice whereby instead of having large stocks on hand, firms only acquire inputs when they need them to produce and without large stocks of inventory at hand that reduces an important source of fluctuation in the economy because if demand slows down and you have a big inventory then you don't do more production for quite while andy run down the inventory but improved management and inventory, just an example of many sided are better business practices and other factors in the economy that made things more stable and it also may be the case that there was better lock that we had fewer oil price shocks and other things happening and that too may have contributed to the great moderation. but the previous picture showed -- i hope that it's clear that it was not quite a striking change in the way the economy operated after the mid-80s.

okay now, this takes us into the mid-to thousands so now finally we can begin to talk about the financial stress and development. just a final word about the great moderation, one of the other aspects of that period is that there weren't any big damaging financial crises in the united states. there was the stock market crash in 1987 but it didn't do much damage. a more significant events was the movement brought to the dotcom --.com mac's dock and that touched off a recession in 2001, but one of the inferences that people took away from the great moderation was not only was the economy or stable but the financial system became more stable as well and as a result financial stability policies

word deemphasize to some extent during this period. let's turn now finally to the prelude to the financial crisis. what i will do today is just talk about some of the initiating, triggering events particularly the housing bubble and we will get next week into more details about what happened during the crisis. one of the key events that led ultimately to the recent crisis was a big increase in house prices. so, the graph on the right shows prices of existing single-family homes, where january 2000 was 100. from the late 1990s until early 2006, house prices across the country increased by about

130%. that line going straight up is a very sharp increase in home prices and as i will discuss at the same time that was happening or perhaps later in the process, the lending standards for new mortgages to buy homes were deteriorating. now, clearly a big part of what was happening to create the housing bubble or the increase in housing prices was the psychology. after all, the late '90s was a period as you know again about optimism about the tech stocks and the stock market more generally in some of that optimism, some of that psychology no doubt fed over into the housing market. so there was an increasing sense that house prices would keep rising and that housing was a can't lose investment.

i lived in california for a while and earlier than this there was a period period in which house prices were rising and all people talked about a cocktail parties is what is your house price now and how much money are you making on your home and a kind of made working unnecessary because all you had to do was check your real estate revenue. so there was a lot of excitement and enthusiasm about that house prices were going up and making everybody rich. at the same time, as this was happening, the standards was -- for underwriting new mortgages were getting worse and worse which in turn was bringing more and more people into the housing market and pushing up prices even further. so let's talk a bit about the mortgage and what happened. prior to the early 2000's, homebuyers were typically asked to make a significant down payment, 10%, 15%, maybe 20% of

the home price and of course they had to document their finances, their income and their assets in great detail to persuade the bank to make them a loan which in many cases might need four or five times their annual salary. unfortunately as house prices rose, many lenders began to offer mortgages to less qualified borrowers, so-called non-prime mortgages, and these mortgages often required little to no down payment and little to no documentation. i think the sub-prime mortgages were the lowest quality mortgages in terms of the credit of the borrowers but there were other mortgages that were below so-called prime mortgages, so-called all day and other types of mortgages that were also not up to the traditional standards of the credit underwriter so i say non-prime. what was happening again was that essentially lenders,

mortgage lenders were moving further down the credit spectrum lending to more and more people whose credit was less stellar. you can see this in a number of different ways. on the left side of this picture is the share, the percentage of mortgage originations, that is mortgages created, that were not prime, either sub-prime or alt-a or some other lower-quality mortgage and you can see the very sharp increase particularly in the middle to thousands and in 2006, almost a third of all mortgages that were originated were non-prime. another indicator of deterioration of mortgage quality on the right figure is the percent of non-prime loans with low word no documentation. if you think about this, if

you're going to make a loan to somebody whose credit is shaky, doesn't have a down payment and maybe their fico score is low and so on, you would want to ask them even more questions about their income and their prospects, but in fact it went the other way. 60% of non-prime loans had little or no documentation to describe the credit for -- creditworthiness of the borrower so there was an ongoing consideration of mortgage quality. now, this situation couldn't go on forever. this picture shows -- sorry, the picture shows the debt-service ratio. as house prices went up-and-up and up, the amount of income or the share of income on your monthly mortgage payment went up and as you can see, eventually,

the mortgage payments became quite large share of personal disposable income, finally reaching the point that the cost of homeownership was high enough that it began finally to dampen the demand for new houses. and as we see that ratio basically interest rates came down but the main point is here, hi payments on mortgages finally meant that there were no longer borrowers, new home purchasers so house prices worsthearst, the bubble burst and here is a picture of home prices. you can see again, a sharp increase in the late '90s up until about 2006, but from 2006

until today, house prices have fallen more than 30% so there has been a very sharp decline in home prices across the country. now one comment about this picture and if you look at this picture you might save yourself, oh my gosh we have a long way to go because you can see how prices today are still a good bit above where they were 15 years ago. but remember, these prices are in dollar or nominal terms with no adjustment for inflation so even if there was 2% inflation a year, over a period of 15 years that would raise prices by 30 or 40%, so if you adjust this for inflation, you get house prices now coming much closer to where they were before the beginning of the bubble. now, the house price collapse had significant consequences.

one consequence is that many people who had felt rich because their home values have gone up and they had a lot of equity, suddenly they found themselves under underwater, which means that their mortgage, the amount of money they owed, was greater than the value of their home. so this is negative equity. so, this is an upside down situation where the borrower is in fact, has negative wealth or negative equity in the home and you can see that starting in 2007, the number of mortgages that were in negative equity grew very sharply. currently there are about 12 or 15 million mortgages out of a total of 55 million or so in the united states so roughly 20 to 25% of all mortgages are now currently underwater so that is a very big change from the situation we saw before.

at the same time, given the decline in house prices, given the fact that a lot of people are owed more than they could afford, the decline in house prices also lead to a big increase in mortgage delinquency is, people not paying on time and ultimately the banks taking over the property, called a foreclosure, and reselling the property to somebody else. these mortgage delinquencies, you can see in 2009, there were more than 5 million mortgages in delinquency which is again almost 10% of all mortgages. so a very very high rate of delinquency. now of course, what we just looked at was the effects of the housing on borrowers and

homeowners and those are quite serious but of course there's another side to this which is the lenders, the people who made the loans, and obviously with something close to 10% of mortgages in delinquency, banks and other holders of mortgage related securities suffered by the losses and that proved to be an important trigger of the crisis. now there is an interesting question here. in 99, 2001 we had a big increase in stock traces including but not only dot.com or tech bubble prices and those prices fell very sharply in 2,002,001 and a lot of wealth was enjoyed by that. and in fact the amount of paper wealth by the decline and.com pat -- dot.com prices was not

any different than the amount of wealth destroyed by the housing bubble and yet as you know, the dotcom bust all led only lead only to a mild recession, the 2001 recession went from march to november of 2000. it was not only an eight-month recession. unemployment rose but it was not anything nearly so dramatic as the mid-80s or more recently. and so, here we had the big loom and bust in the asset price but without too much real serious or lasting damage to the economy. now, in a recent case, we had a housing boom and bust. if we were looking back at 2001 we would think well, that is going to cause a slowdown in the economy but probably it won't be that serious. and that was one of the views that we were discussing in the fed in 2006 when we saw how

houses declined and it might be more like the 2001 episode then something different. of course as we know, the decline in house prices had a much bigger impact on the financial system and the economy, the decline in stock traces and to understand this, it's important to make a distinction between triggers and vulnerabilities. the decline in house prices in the mortgage losses were a trigger. to use another metaphor, it was -- but there would not haveeen a concentration unless there was a lot of -- and in this case there were vulnerabilities in the financial system that the housing bust was set afire. in other words there were weaknesses in the financial system that were -- that

transformed what might of others twice been a modest and a much more severe crisis. what were those former police? what was it about the financial system of the united states and of other countries as well that transformed the housing boom and bust into again a much more serious crisis? again we will talk about this in much more detail next week but just a preview, there were vulnerabilities in both the private sector of our financial system and also in the public sector. on the private sector, many borrowers and lenders took out too much debt, too much leverage and one reason they might've done that is because of the great moderation. there were 20 years of relatively calm economic and financial conditions and people became more confident and more willing to take on more debt. the problem with taking on too much debt is that if you don't have much margin, if the value of your assets goes down like

the value of your house, you have an asset that is worth less than the amount of money you borrowed. the second problem and a very important problem was that throughout this period, financial contracts and financial -- were becoming more and more complex but the ability of tanks and other financial systems to monitor and measure and manage those risks was not keeping up. that is, there are i.t. systems, their resources they devoted to its management were insufficient for them to understand fully what risks they were actually taking, hub and the risks were. so if you would ask a bank in 2006, suppose house prices fall 20% they probably would have greatly underestimated the effect of that on their balance sheets because they didn't have the capacity to measure accurately or completely the

risk that they were facing. the third problem which i will come back to again is the funding side. financial firms in a variety of contests relied heavily on short-term funding like commercial paper which can have a duration of as short as one day or most of it is less than 90 days, so like the banks in the 19th century that were relying on deposits and making loans, they had essentially on the liability side of their balance sheet, they have very short-term, liquid form of liability which we will see was subject to runs in the same way that deposits were subject to runs of the 19th century. the final private sector vulnerability was the use of exotic financial instruments or complex derivatives and so on. an example of this was the credit default swaps employed by

the aig financial products company. aig used the credit default swaps essentially to sell insurance to investors on the complex financial instruments that these investors help. so basically what aig was promising was that if you lose any money on the collateralized debt obligation or whatever these things are, we will make them good. as long as the economy of doing well in the financial system was the doing well they were just collecting the premiums on the insurance essentially and there was no problem but once things went bad, being on one side of all the debt since they were exposed to enormous losses, which had us we will see very serious consequences. so those are some of the problems that occurred on the private sector. let me talk a little bit about the public sector. there were also serious problems there as well. first, the financial regulatory

structure was -- had changed of course a number of times and basically the same structure that i'm been created in 1930s during the depression in particular they couldn't keep up with all kinds of changes in the structure of the financial system. one aspect of that was that there were many important financial firms that didn't really have any serious comprehensive supervision by any financial regulator so an example of this was aig which was an insurance company. the insurance regulator but primarily the insurance products they sold, the office of thrift supervision primarily as a small banking bill on but nobody was looking carefully at the problem that i was just describing. another category of firms that didn't have much oversight where investment banks like lehman brothers and bear stearns and

merrill lynch. there was no statutory oversight of those firms. they they had a voluntary agreement with the fcc for oversight that there really was not comprehensive oversight in those terms and as i will talk about another firm was the government-sponsored enterprise, fannie and freddie which did have regulators but who i will explain were very inadequate. the regulatory structure and lots of holes in it and there were many important firms during the crisis they didn't have good oversight. there were also come even, even where the laws provided for regulation and supervision, it often wasn't done as well as you should have been and while this was true across a whole range of agencies and parts of government, but they talk about the fed. the fed made mistakes in

supervision and regulation. i think too i would point out, one would be in our supervision of banks and bank holding companies, we didn't press hard enough on this issue of measuring their risks. i mention before that a lot of tanks simply didn't have the capacity to thoroughly understand the risks that they were taking. the supervisor should have pressed them harder to develop that capacity and should have restricted their ability to take these risky positions. i think the fed and other bank supervisors didn't press hard enough on this and that turned out to be obviously a very big problem. another area where the fed i think performed poorly was in consumer protection. the fed had some authority to provide some protection to mortgage far worse that would have, if used, effectively,

would have reduced at least some of the bad lending that occurred during the latter part of the housing bubble. but, for a variety of reasons that wasn't done, not nearly to the extent it should have been. in 2007, when i became chairman we did undertake some of these protections but it was obviously too late, to avoid, to avoid the crisis. so, where there were authorities and powers, they weren't always effectively used and that obviously lead to some weaknesses. and then a final and perhaps more subtle point, the way our regulatory system is set up, individual agencies like the fed or like the occ or the office of thrift supervision, typically have as their responsibility the

firms of the office of thrift supervision was only responsible for similar institutions. unfortunately, the problems that arose during the crisis were much broader base than that. they transcended any single farm or small group of firms, they transcended the whole system and so essentially what was missing here was enough attention being paid to things that could affect the system as a whole as opposed to the individual firms, so nobody was really in charge of looking to see whether there were problems related to the overall financial system or the relationship between different markets and different firms that could create stress or even a crisis, so those are some of the vulnerabilities in the public sector. we are going to come back to, we are going to come back to these vulnerabilities and how they played out next week.

let me conclude here by talking about a controversial topic which is another aspect, which is the role of monetary policy. now, many people have argued that another contributor to the housing bubble was the fact that the fed kept interest rates low in the early part of 2000, following the recession of 2001. so when the economy got very weak and there was very slow job growth and when inflation fell very low the fed cut interest rates in 2008 -- 2003 the federal funds rate got down to 1%. there are people who argue that this was one of the reasons that the house prices went up as much as they did and in fact it is true that low interest rates, is to increase the demand for housing and thereby to strengthen the economy.

now as i they say this is very controversial, but it's also very important not only because we want to understand the crisis but because going forward, we want to think about what should we take into account when they look at monetary policy and wish it would be thinking about in the housing bubble when we make monetary policy. now we have looked at this in great detail inside the fed and there has been a lot of research outside the fed and i know -- i will warn you there is no consensus on this and you'll probably hear different points of view but the evidence that i have seen that we have done within the fed suggest that monetary policy did not play an important role in raising housing prices during the upswing. let me just talk a little bit about some of the evidence on this question. one piece of evidence is the international comparison. people don't appreciate that the united states, the boom in the and the bust in the united

states was not unique. many countries around the world had booms and busts in the house prices and those booms and busts were not very closely related to monetary policies of those different countries. for example, the united kingdom had a house price boom that was as big or bigger than that of the united states that monetary policy was much tighter in the u.k. than it was in the united states so a bit of a puzzle for the monetary house them. another example which is not on the slide, as you know, germany and spain are both -- both share the euro so they have the same central bank, the european central bank in the same central policy. germany's house prices remained absolutely flat during the entire crisis and spain had an enormous increase considerably larger than that of the united states so the national evidence raises at least some concern.

the second issue is the size of the bubble. it is true that changing interest rates and mortgage rate should affect house prices and demands for home -- homes as i said and there's a lot of evidence if you look at that overlong period of time. when you look at how much interest rates changed including mortgage rates and how much house prices moved, based on historical relationships you can only blame a small part on the increase in house prices. in other words increase in house prices was way too large to be explained by the small changing interest rate associated with monetary policy in the early part of the 2000. the final piece of evidence i would raise is the timing of the bubble. robert schiller, an economist who is well-known for well-known for his work on bubbles including the housing bubble, argued that the housing bubble began in 1998, which of course was well before the 2001

recession and therefore they quds in federal reserve interest rates. moreover, house prices rose very sharply after 2004 so the timing doesn't line up particularly well. now what the timing does it just might be a couple of other possible suggestions. one is obviously 98 was right in the middle of the tech bubble, the tech room and it could eat that again, the same psychological optimism, the same mentality may have been feeding house prices as well. another possibility is that as as been pointed out by number of economists that in the late '90s there was a very serious financial crisis that hit a number of asian countries and other emerging market economies as well and after that crisis,

one response was that many emerging market countries began to accumulate large amounts of reserve and began to acquire same dollar assets. there was a big increase in demand for assets including mortgages they came from abroad as countries decided they needed to acquire more dollar assets and reserves. i think interestingly probably the strongest correlation across the country that you can find to the house price increases is capital inflow, the amount of money coming in to buy mortgages and other safer or save assets in and that timing what fits with the beginning. so, those are some arguments against the view that the monetary policy was a big source but an important source but emphasize economists continue to debate this issue and it's a very important issue.

going forward we also have to think about the implications of low interest rates on the economy and the financial system and in particular currently, just out of caution we are doing a lot of financial oversight and a lot of regulatory oversight to make sure that we do the best we can to ensure that nothing is getting unbalanced in the financial system. here are a few references to take with you if you want to get into this more. the bottom one is a couple of years ago would summarize some of the evidence. my speech is based heavily on the second which is the internal federal reserve research. carmen reinhart makes the point that interest rates didn't move enough to move house prices and they also make the point about capital inflows and a recent survey which comes to the

inclusion -- conclusion in the end that there was no connection but again i emphasize this is something that continues to be debated. what were the consequences of the crisis? we will talk more about the crisis next time, but the economic consequences were severe. here is the measure of financial stress, just an index of a variety of financial indicators that the financial system was under great stress and this is what happens in 2008 and 2009. a sharp increase in financial stress in the financial market. the stock arcade plunged. the first declined their where it says 2000 to 2001 recession, that was the very large decline in the tech stocks, but notice the decline in the stock market and the more recent recession was even bigger than the one in

2,002,001. home construction, you can see the very sharp decline there. home construction fell before the recession because of course it was a trigger of the crisis but you can see it still hasn't really begun to recover. and then finally unemployment rose very sharply and peeked around 10% and has currently fallen down to about 8.3%. so in the next two lectures we are going to get into the crisis in more detail, talk about how the housing boom and bust and the vulnerabilities in the financial system led to the worst financial crisis at least since the great depression and probably even worse than the depression and how the fed responded to that crisis and then in lecture for we will talk about the recession recovery and the aftermath and again the policy responses there. so that is what i wanted to cover today and we have a few

minutes and i would be happy to take questions. you might want to take a mic. [inaudible] [inaudible] >> well it is challenging and it is certainly one of the reasons that you know, we have so many economists and models and everything we can use to try to figure out what the appropriate moment is to ease policy and it's not an easy thing.

forecasting is not very accurate so we have to provisionally keep looking at what is happening and making adjustments as we go along. the seventies was particularly difficult because at that time inflation expectations were not at all tied down. one thing that happened then was that, if gas prices went up, people began to expect higher inflation and then they began to to go and demand higher wages to compensate for the higher prices. then of course higher wages would lead to higher prices and so on and so on and the result of the fact that everybody expected inflation to go up and nobody had any confidence that the fatter government in general but keep inflation low and stable. a very different situation now and this owes a lot to paul volcker and chairman greenspan as well as after long period of low inflation most people are pretty comfortable that inflation will stay reasonably low given -- despite the fact that there are ups and downs with gas prices and so on and

that helps a lot because inflation staying low, the fed has more leeway. if policy is easy for a period, that is not necessarily going to key into a wage price spiral that will -- keeping inflation expectations is one of the great accomplishments of chairman volcker and chairman greenspan and an important objective of central banks around the world. so the environment changes over time and it's a difficult task but the seventies were particularly difficult because at that time with expert haitians so volatile, and any kind of inflation pressure from gas prices or whatever quickly fed into wage demands and into other prices so in it much more difficult situation.

[inaudible] [inaudible] [inaudible] [laughter] [inaudible] >> the very first speech -- co i was the governor and i was on the fed board during that time in the very first speech i wrote when i became the governor in 2002 was about bubbles and

financial supervision and regulation and the theme of my speech was use the right tool for the job. the problem with tying interest-rate policies to perceived bubbles in asset prices is like using a sledgehammer to kill a mosquito. the problem is what part of the economy. interest rates are dedicated to overall economic stability so we estimate that in order to have stopped the increase in house prices interest rates would have been raised very dramatically in a period where the economy was very weak and unemployment was still above normal come inflation was falling down towards zero and so they're right, generally speaking, the right way to use monetary policy is to achieve overall macroeconomic stability and that doesn't mean you shouldn't ignore financial imbalances and i think what we could have done and would have been to be more

aggressive on the supervisory and predatory side to make sure the mortgage mortgages being made were of that are quality and appropriately wanted sharing their ricin so-and-so the first line of defense should be regulation and supervision. now, i think one of the lessons i talked about today was not to be too sure of anything. to keep it humble and for that reason i think we should never rule out the possibility that of all of our regulatory and other types of interventions don't achieve the stability in the financial system we want, as a last resort monetary policy might be modified to some extent to deal with that. but again, because monetary policy is such a blunt tool which affects all asset prices and affects the entire economy you can fit -- get a laser type of tool that is going to be much better for everybody.

[inaudible] [inaudible] >> well, first of all we would like to get a better balance in general so monetary policy situates capital formation as well. it also tends to promote exports so we would like to get over all over time, we would like to get a better balance consumption investment and exports as well as government spending as the main component of final demands a monetary policies consistent with a better balance. with that being said, we are now way below where we were before the crisis and consumer spending is not recovered. it's still quite weak relative to where it was before the crisis. private debt has come down quite a bit and importantly you

mention global imbalances so if we are talking about the current imbalance in the trade deficit that the u.s. has, it has come down quite significantly so all of those things have moved, if anything, in some sense too far in the short-run because we lack a source of demand that is keeping the economy growing. now, again, i agree that just as every country needs to have an appropriate balance in consumption and capital formation and exports and government spending and that is an important task for us going forward, but right now debt consumption and so on, we are still way low relative to the pattern before the crisis. >> the latter part of your lecture was about policy in the 2000 dot.com bubble.

you argue that didn't stricker the increases, the increase in house prices but to look at it from another point of view, what is your take on the argument that the low interest rates and private investors and banks used riskier trades because of the lowest rates of the time and how that also could have been a trigger to the crisis? >> that is a good question i think there is effect of low interest rates on risk-taking but once again very similar to the previous question, it's an issue of getting the right balance. you know during a recession generally speaking, on most dimensions, investors become very cautious. that is certainly where they have been for more of the recent paso again you want to get an appropriate balance for the amount of risk being taken, not too much and not too little, though once again this is yet another reason why financial

supervision and regulation needs to be playing a role. particularly with institutions, large institutions, banks. we need to be looking directly at those firms and making sure that they are managing their risks appropriately. again it's a question of what is the right tool for the job. i should go over to the side. mr. lippman. >> daniel lippman. the housing bubble shows clearly one thing led to another and eventually like a fault. what did you think would happen to the rising house prices and the rising bubble? did you think it would eventually lead to a recession because i know there's a book called the big short where some investors were -- [inaudible] what is your take on that? >> as i tried to argue, the

decline in house prices itself, by itself, was not obviously a major threat. when i was the chief -- i was the head of the chairman of the council of economic adviser for president bush and in 2005 we did an analysis for him of what would happen if house prices came down and what we concluded was we would have a recession but we didn't anticipate that the financial crisis, we didn't anticipate the decline in house prices would have such a broad-based effect on the stability of the financial system. with when i became chairman in 2006 house prices were already declining and in my two weeks after i became chairman i gave a testimony where i said house prices are falling and it's going to have a negative impact on economy and we are not sure about the consequences and so on so so-and-so the fact house prices might come down, you know, that is always a possibility. the really hard thing at least

in my view, to anticipate fully was that the effects of the decline in house prices would be so much more severe than the similar decline in dot.com stock and again the reason as i will get into more next time, is the way in which the decline in house prices affected mortgages and affected the soundness of the financial system and created a panic which in turn led to the instability of the financial system so we have a whole chain of events that was critical. it was not just the decline in house prices. it was the whole chain. miles. >> you my name is miles. amidst the dispersion of cheap credit in the years preceding the housing crisis there was a bipartisan push for an american homeownership originally spearheaded by president clinton and later carried out by george w. bush. to what degree could be argued that an aggressive government policies supporting increased lending during his period contributed to the eventual erosion of red standards on behalf of the mortgage

originators? >> another controversial question. certainly there was some pressure to increase homeownership. there was the american dream aspect of owning a home and so on. homeownership arose during this period but i think to put it all into government is probably wrong in this case. most of the worst loans were made by private-sector lenders and then sold to private-sector securitizations. they didn't touch fannie and freddie and they went dreadfully to investors. fannie and freddie did acquire some sub-prime mortgages but actually that was a little bit later in the process rather than beginning of the process so i think there was some of this going on everywhere but clearly the private sector, without any encouragement from the government, was a big player in the decline in mortgage underwriting and in the selling of package mortgages to private investors.

yeah. >> i think one of the hallmarks under your leadership has been -- and for all that has been set in the broom here, but i'm wondering whether you think perhaps too much transparency can actually damage credibility of the central bank and sort of get things wrong i guess? >> we didn't get to transparency today but just generally, i think i agree. transparency is very important. important for at least a couple of reasons. one is i talked to talk to ready about the importance of a central bank being a independent but if the central bank is independent, and making important decisions which affect everybody, then obviously it has to be accountable. people have to understand what it is doing and why it is doing it, why it makes its decisions and so for democratic accountability is important for the central bank to be

transparent and i testify all the time and i give speeches and i have all kinds of town halls and other kinds of meetings like this and i think it's very important for me at press conferences, it's important to explain what we are doing and why we are doing it. that is one reason for transparency. the other is that over time this understanding most of the time transparency can make monetary policies work better so for example if the federal reserve communicates that its future actions will be x or y and conveys that information to the markets, the markets may respond to that by building those expectations into interest rates and may have a more powerful effect on on the economy. communication also reduces uncertainty and helps increase the impact of monetary policy in the financial market. i have time for one more.

>> thank you mr. chairman. my question is in regards to price stability and inflation expectations. you mentioned macroeconomic stability and long-run economic growth and given the mass amounts of liquidity how is that able to maintain keeping expectations so low? >> we are going to have to come back. let me asked to try to stick with the topic are going last day we'll be talking about current monetary policy but let me answer in the following very brief way which is that i think we owe something to our predecessors in this respect, chairman volcker in particular and also chairman greenspan. they got inflation down the line kept there and people get used to what they see, right? in a world in which inflation remains low year after year, people become more and more

confident that the central bank or the fed or whoever, will meet its mandate of keeping inflation low so it has been very striking that even though we have had movements in oil prices and other shocks to the economy, deep recession in the financial crisis, throughout most of the period inflation expectations have been very well tied down to about the 2% range that the fed is trying to hit. thanks and next week will go more into the crisis. thank you very much. [applause] >> this has certainly exceeded my expect nations and we are grateful you stayed all the way until 2:00 again. as with tuesday i know there are still questions so what are you send one or two questions to the black or site so we can capture them so we can talk about them next week -- not next week that the following week when we have the discussion.