>> the home for political junkies and a way to track the government as it happens. >> it is a way for us to stay informed. >> there's a lot of fans on the hill. my colleagues will say i saw you on c-span. >> there's more c-span does to make sure that they know what is going on inside the beltway. >> live this morning's at the brookings was at the brookings institution's from remarks from the assistant secretary who oversaw the troubled asset release program. he's trained by the former federal reserve governors to discuss the lessons learned from the financial crisis. this is live alive and should start in just a moment. [inaudible conversations]

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[inaudible conversations] >> good morning. you all for coming on such a beautiful day. and david wetzel, director of the hudgins center on fiscal and monetary policy here at brookings. once upon a time when people talked about fiscal and monetary policy, the phrase financial stability is either not mention or if it was mentioned it was somebody else got your we learned the hard way during the global financial crisis and the great recession that global financial stability is a really important public good and like it or not, the federal reserve has some responsibility for these minimizing the risk of financial and debility. i am very pleased this morning to welcome neel kashkari, new president of the minneapolis to talk about this.

mr. kashkari has more experience on this than say your ordinary person on the street. as you know, you started as a mechanical engineer, ended up as fact but goldman sachs has attacked his way into a job at the treasury with hank paulson and ended up running the t.a.r.p. program, made himself famous by being on tv defending it because that wasn't enough fun, he went to start an equity fund. jim crow is one of the site you will get together to make money. after that, he ran for governor of california against gary jerry brown jerry brown won if you are wondering as he made a name for himself as a republican candidate who cared about people who make less than $3 million a year. neel is president of the minneapolis to their table and tradition about building and thinking. the president of the minneapolis fed for more than two decades

and then 2004 with ron feldman wrote a book called too big to fail that looked pretty good at that time and looked even better from hindsight. i'm proud to say was published by the brookings press. i would also like to welcome bruce mccoury, former president of the minneapolis fed and a former president of brookings. neel kashkari will speak for will speak for a bit and then lbj and appear by jerry stern and john kohn, my colleague in the vice chair of the fed in sorry weather has prevented at the duke from getting here. turns out it's easier to get here from minneapolis man from the south. neel kashkari. >> thank you for the kind introduction. great to be back at the institution and i'd like to thank the center for hosting us here today. i want to thank you for coming

out. we've got some tough weather. i appreciate you braving the elements for those of you here in the room and are distinguished fellow panelists, jerry stern, chairman bernanke and our long predecessor as well. thank you for being here. i want to remind everyone that the views expressed today are my own and i'm not speaking on behalf of the federal open market committee or the board of governors which sets regulatory supervision policy on the federal reserve system. today i will offer my assessment in the eye (-left-paren and the problem of too big to fail bank spirit i combat this problem from the perspective of a policymaker on the front on the frontline responded to the financial crisis in 2008. when congress moved quickly to pass the.frank asked in 2010, i strongly supported the need for financial reform, but i wanted to see the act implemented before a true firm conclusions about whether or not it's all too big to fail. in the last six years, my colleagues across the system

have worked diligently under the reform framework that congress established and are fully utilizing available tools under the act to address today to fail. while significant progress had made to strengthen the financial system, i believe the act did not go far enough. i believe the biggest banks are still too big to fail and continue to pose an ongoing large risk to our economy. and that's time has passed that would better understand the causes of the crisis and yet it is still fresh in our memories. now is the right time for congress to consider going further than.frank with bold transformational solution to solve this problem once and for all. the federal reserve bank of minneapolis is launching a major initiative to develop an actionable plan to add too big to fail and we will deliver a plan to the public or the end of the year. ultimately, congress must decide by the restructuring of our financial system is justified in

order to mitigate the ongoing risk posed by large banks. although too big to fail banks were not the sole cause of the recent financial crisis and a great recession, there is no question that their presence at the center of our financial system contributed significantly to the magnitude of the crisis and the extensive damage inflicted across the economy. given the scale of job losses, home foreclosures, my savings and cost taxpayers, regulators and main street agree with elected leaders that we must solve the too big to fail problem. we know that markets make mistakes. that is unavoidable in an innovative economy. but these mistakes cannot be allowed to endanger the rest of the country appeared in savings amounts failed in the late 1980s, there was no risk of an economic collapse. when the technology bubble burst in 2000, it was very painful for silicon valley and technology investors, but he did not pose a

systemic risk to our economy. large banks must similarly be able to make mistakes, even very big mistakes without requiring taxpayer bailouts and without triggering widespread economic damage. that must be our goal. since 2008, legislators and regulators have worked hard to address the too big to fail problem. i colleagues in the federal reserve system work closely with other financial regulators have implemented important holes in regulation that are making the financial system stronger. regulators have forced large banks toolbar capital and have deeper more resilient sources of the quiddity. our stress test check whether the most systemically important to share and can withstand a serious shock to the economy. in some cases, institutions have responded to higher regulatory requirements by reducing certain activities, considerable progress has been made in his first deaths in the right direction.

regulators know despite his best efforts, banks will sometimes make mistakes and run into trouble. to ensure that banks can fail without requiring massive taxpayer bailouts, regulators used to living well review process to try to address the hurdles that make large banks so hard to resolve. they establish a resolution approach in tended to give regulators the ability to restructure large banks without massive spillovers and they have propose requiring large banks to issue debt that would help recapitalize if necessary. all of these measures are sensible. policymakers are committed to seeing these important efforts through. the question is, should we be satisfied with this approach or should we do more? the lessons i've learned during the 2008 financial crisis strongly influenced my assessment of new regulatory measures to address the too big to fail problem. i learned in the crisis determining which firms are systemically important, which are too big to fail depends on

economic and financial conditions. and a strong stable economy, and the failure of a given bank might not be systemic. the economy and financial firms and markets may be able to withstand the shocks are such a failure without much harm to other institutions or to families and businesses. in a weak economy, was skittish markets, policymakers will be very worried about such a bank failure. after all, the failure my contractor contagion and cause a widespread downturn. thus although the size of an institution, and connections in importance to the financial system are all relevant in determining whether it is too big to fail. there's no simple formula that defines what a systemic. i wish there were. it requires judgment to assess conditions at the time. i know this is some reach many people, but it is the truth today. perhaps one day we'll have better tools to make determination analytically.

a second lesson for me from the two dozen a crisis is almost by definition, we will not see the next crisis coming and it won't look like what we might be expecting. if we as markets recognize an imbalance in the economy, market participants or take action to protect themselves. when i first went to treasury in 2006, treasury secretary henry paulson directed his staff to work with financial regulators that the federal reserve and the securities and exchange commission to look for what might trigger the next crisis. based on his experience we were due for a crisis because markets have been stable several years. we looked at a number of scenarios including a large bank running into trouble or a hedge fund suffered large losses among other scenarios. we didn't consider nationwide housing downturn. it seems so obvious now. we didn't see it and we were

looking. we must assume other policymakers will see future crisis coming either. a final lesson from the crisis is the externalities of large bank failures can be massive. i am not talking about just a fiscal cost of bailouts. even with the 2008 bailout, the cost of society from the financial crisis in terms of lost jobs, lost income and loss wealth were staggering. many trillions of dollars in devastation for millions of families. failures of large financial institutions post massively asymmetric risks to society that policymakers must bear. we had a choice in 2008. spend taxpayer money to stabilize large banks or don't. and potentially trigger the cost to society. the cost of letting a reactor meltdown is astronomical. given the cost, governments will do whatever they can before they

lose control. regulatory reforms have focused both on making bank savers so they are less likely to fail and on creating tools to resolve troubled banks by imposing losses on creditors without destabilizing the economy. there's some lessons from the recent crisis, i evaluate restructuring tools by asking the following questions. would policymakers responded to a future crisis actually use them and how like they are they to be a fact of? to answer these questions i consider to simplified scenarios. first, an individual large bank runs into trouble while the economy and financial system are otherwise solid and strong. number two, one or more large banks runs into trouble while there's broader weakness in risk in the global economy. my assessment of the tools under the first scenario is that they do have the potential to deal

with the failure of individual large financial and dictation without requiring a bailout for triggering widespread economic damage. we don't know that for certain in the work on this tools work on this tools is incomplete and slow moving. for example, reviews of the living wills find that their significant shortcomings with the government requiring once again to make themselves able to fail without massive fallout. until the work is complete, which could be years from now, we must acknowledge the largest banks are too big to fail and even then we won't know how effective the tools will be until we've actually use them. unfortunately i am far more skeptical that these tools will be useful to policymakers in the second scenario of a stressed economic environment. given the massive externalities of a large bank failure in terms of lost jobs in the last income and loss wealth. no rational policymaker would risk restructuring large firms and imposing large losses on creditors and counterparties

using new tools and a risky environment, let alone a crisis environment like we experienced in 2008. they will be forced to bail out failing institutions as we were. we were forced to support large bank mergers would help stabilize the crisis but that we knew would make too big to fail worse than the long-term. the risk to the u.s. economy and the american people were simply too great not to do whatever he could to prevent a financial collapse. i believe we need to complete the important work my colleagues are doing so at a minimum we are as prepared as we can be to deal with a large bank failure. given the enormous costs associated with another financial crisis and the lack of certainty about whether the new tools to be effective in dealing with them, i believe we must seriously consider bolder transformational options. some other federal reserve policymakers have noted potential benefits of considering more transformational measures.

i believe we must be given work now and give serious consideration to a range of options including breaking up the large banks into smaller less connected, less important entities, turning large banks into public utilities by forcing them to hold so much capital they virtually can't help with regulation akin to that of a nuclear power plant. tax in leveraged throughout the financial system to reduce systemic risk wherever they live. options such as these have been mentioned before. policymakers have not yet -- policymakers and legislators have not yet considered the need to implement them in the near term. they are transformational and that can be unsettling. the financial sector has lobbied hard to preserve its current structure and thrown out unless objections to fundamental change. in the immediate aftermath when the.frank -- dodd-frank act was passed, the outlook was to insert and to take truly bold

actions. but the economy is stronger now in the time has come to the past parochial interest and solve the problem. the risk of not doing so are simply too great. many of the arguments against adoption with too big to fail are the societal benefits of such financial giants somehow. i find such arguments unpersuasive. finance lobbyists argued that multinational corporations do business in many countries and their four-day global banks. these same corporations manage thousands of suppliers all around the world. can't they manage a few more banking relationships? they create economies of scope and scale. no doubt this is true. cost benefit analysis requires understanding cause.

but the benefits of scale of large banks outweighed massive externalities so widespread economic collapse. some arguably limit u.s. banks and eyes are scope, they would be at a disadvantage relative to banks and other countries with loose regulations. if other countries want to take extremists, we can't stop them. the united states should do what is right for our economy and establish one set of rules for those who want to do business here. given the complexity of this issue, and a bold plan will be imperfect and they will be unanswered questions of skeptical experts to point to as a reason for inaction. how can we precisely defined which are systemic and dangerous to change. how can our plan adapt in the door is the financial system evolved over decades? what if start regulating some firms just pushes risk onto other less regulated firms and how will these new rules intact families and businesses abilities to make important

investments and what will that mean for employment and economic growth? experts correctly point out there's always the possibility that an economic shock could hit us in the future that is so large or so different from anything we've considered that it overwhelms all of our efforts. in that scenario, the balance sheet of the federal government would be stronger to stabilize the system as was required in 2008. these are all important considerations and there are many more. we must work to address them. if we are serious about owning too big to fail, we cannot let them paralyze us. any plan we come up with will be imperfect. those potential shortcomings must be weighed against the actual risks and actual cost that we know exist today. perfect cannot be the standard before we act. better and safer are reasons enough to act otherwise left under the default path of incrementalism and the risk will someday face another crisis

without having done all they care to protect our economy and the american people. as david said, the federal reserve bank of minneapolis has been at the forefront of understanding the risks and challenges posed by large banks and moral hazard for a long time. our work on these topics goes back literally to the 1970s for specific work on too big to fail the 1990s it as david noted, one of my colleagues here today one of my predecessors gary stern both authored the original book on this topic, too big to fail, arguing in 2043 years before the crisis they argued they would not stick to their no bailout pledges. they were right. building on this important work and worked on since the crisis, fellow reserve is launching a major initiative to can either transformational options and develop an actionable plan to attend too big to fail. starting in the spring will hold a series of policy symposium to explore various options are

maxtor researchers around the country. we'll country. google also invited leaders from policy and regulatory institution and yes the financial sector to offer their views and test one another's assumption. we will consider the likely benefits, cost, risk and implementation challenges of these options and we will invite the media to do symposium semites train them so the public can follow about and learn with us. following symposiums will publish arrays, summarizing our key takeaways on each issue so i'll can provide feedback in the feedback can begin now. we've established a website where anyone can share their ideas for solving too big to fail. if you are a researcher, if you work in the financial area just have a good idea for solving too big to fail, wherever you are come to share with us at minneapolis fed.org. we will use all of this work to inform our plan to attend too big to fail bush will be

released by year-end for legislators, policymakers and the public to consider. congress created the federal reserve system to help prevent financial crises from inflicting widespread damage to the u.s. economy. doing everything we can to address the systemic risks posed by large banks will be an important step to fulfilling the mission. seven years after the crisis, i believe it is now time to move forward in and too big to fail. thank you very much. [applause]

[inaudible conversations] >> thank you very much. starting your tenure as president by giving something to think about, it's taken a long time to learn how to give the to give a speech as to give a speech as a fed president for no one understands what you are saying. glad we got you before they trained you. i want to start by asking a question and then turn to gary and to don. the dodd-frank act begins to promote the financial stability of the united states by improving accountability and in the financial system, to end too big to fail, protect the american taxpayer by adding yellow, protect consumers from abusive financial practices and

other purposes. your argument basically is we did not go far enough. >> a lot of dodd-frank has done good or the financial system is stronger today but i do not think we've gone far enough. eric rosengren gave a speech in which he made two points. he said one, we have reduced the probability of failure and we have reduced the cost by forcing the banks to have more capital and more debt that can be filled in before the tax ayers. do you disagree with those assertions? >> i agree with the first assertion of the large banks and financial traveler. it is not simply the cost of the bailout. if the economic damage inflicted across society. think about an analogy i use, the fukushima disaster. they built a wall so high to prevent a tsunami from playing. the question is though a high

enough, second question is how devastating it is to society to react or flood and i don't think the second point that we have dealt with that either. >> what you think? do you agree or not? >> no. i certainly share meals objective of this ending too big to fail, that is allowing any large financial and touche and to fail with minimal data on the financial system and on the economy. absolutely have to do that. that is part of the market system. you've got to be ready not only to earn huge profits, but to fail. knowing that your shareholders and creditors have to be ready to lose their money. so we share goals. you start from the premise that you just answered david's question that we haven't done

enough. and i guess i'm not sure. it is possible, but i would like to hear more arguments about why the authorities won't use the new tools they were given. one of the lessons was one reason we had to intervene the way we did because the alumni were on the same team trying to save the system because we didn't have enough tools. the system was too fragile. we didn't have enough tools. you have the resolution regime. you apparently don't think that's going to work and you don't think authorities will use it. the congress has attempted to certainly wall off the things the authorities did to save the big rigs before. i don't know why those won't work.

they go back to congress for another t.a.r.p. it will be several generations before that's possible. this thing better word. i think the authorities will use the new resolution or out like to be convinced about how they could get around it. i think the new resolution regime once fully in place probably will work. probably as big, and then i think there's a lot of desert and creditors, using that capital to capital as the operating subs in the systemically import part, i would like to hear why you think that is not going to be sufficient in the next crisis if there's more than one institution that not the same

time. i don't know. there's a lot of stuff being done, but his stance and a good she is. before you say let's break up the big banks, let's use government to intervene in the private sector in a way that is pretty major. that is taking a private entity and breaking it into different pieces. i think you have to convince me what is being put in place will work. >> you want to comment? >> i think i largely agree with don. i think the key of the current legislation effectively dealing with too big to fail as political process. frankly, i'm comforted by the fact that none of those proposals have been approved yet because i think they are very difficult to do well and if they had been approved that would be suspicious they really worked on adequate quality of and wouldn't be affect this. it is a big mistake to dismiss

that are under a potential living wills. they are mandated by congress and regulators have to approve them once they are acceptable. it doesn't require any additional legislation. it doesn't require getting in political battles about what to do what to do. it is in place. if they are done well, they are designed from a problem at one or more major financial institution said the contagion effects on the overall economy are manageable. that is what they are designed to do and therefore you don't need the government to intervene to protect uninsured creditors or others. the majority is out. it's not obvious that the proposals once they are in place will be adequate. i don't think there's any reason to start with the presumption that they won't be.

after all, regulators around the two get this right. i think it is absolutely critical. there's a lot of honest they are. the jury is out. but if it's put in place appropriately and if it's communicated to the public appropriately and in particular to uninsured creditors and shareholders appropriately, you should get different person in the microplates of risk-taking and institutions going forward simply because you have a plan in place. frankly i think there's a lot of potential there. if they were still playing the policy game, that is where i would start and that is where i put my emphasis. >> neel, you know what the jury's verdict does. what makes you so sure the system will work as title ii a dodd-frank and the living well said chess?

>> it comes back to what contagion is. imagine a stressed economic environment in several big eggs under stress at the same time. you are a creditor of one of those banks, said the bank owes you money. you ipad holder. another bank that looks just like yours was converted to equity. they are not happy in that environment to not have that common the last thing they want and the environment is the alchemy investment. they want their money back. if your ipad holder that looks a lot like the first institution, what are you going to do? get out of that all possible. the contagion risk is the thing that you know as well as i do with so devilishly hard to deal with during the last crisis. i'm not suggesting will come up with a plan to solve every economic scenario no matter how big. look at the environment we are in today and a global economic environment where there's increased volatility in bank

shares in europe have come under travel. remember when you were there? do you really think in 2008 if you had the ability to say we are going to haircut these from one bank can't you would've pulled the trigger? i don't think so. >> at the system had been put in place a number of years before and on type initiative but the explicit promise under these circumstances, we certainly would have tried at first and then those bonds become equity so the rest of the organization is safer. they were overnight funds and failing in these long-term creditors protect the short-term creditors and that is where the danger was. so i think if there's ways of doing that, the market is beginning to believe this beard

look at what is happening to the cocos in europe and the prices of those. >> these contingent bonds -- >> the avenue and capitol drugs to a certain level. the turmoil that mail is referencing and banking markets over the last couple weeks, the risk premiums on a bonds than the prices of these convertible bonds have really been affect it. so it feels like the market believes the authorities will these two some of the creditors to increase equity at the banks. now, i think as you said, we are not all the way they are. the living will process needs to work out here at the total lass observing capital, how much credit should be a day that can be converted. is it high enough to protect the

taxpayers? are there systems in place at the fdic, bank of england and the european central bank to wind down defense to two shins, put them in receivership in a safe kind of way. those are still works in progress. >> so i like this concept of the loss of observing capital that convert to equity with the intention of recapitalize in the firm. why be cute about it? why not raise capital requirements and make inequity so there's no confusion. these big banks also issued the investment vehicles. they had no legal obligation to bail out. they had a reputational obligation. the legal framework became a relevant. it became that their customers expected. how do we deal with that? >> t. think even more capital in the big day is a good idea?

>> i don't get is necessarily a bad idea. >> not exactly a ringing endorsement. >> i don't find it by itself to be obviously sufficient. when they put it this way. it doesn't take advantage of other improvements we can make. i wouldn't put all of my eggs in just one basket. so i think there are a number of things that can be done. but already talked about another thing we haven't talked about and i'm sure this will sound mundane to some people, but my experience, senior bankers are willing to push back and/or ignore regulatory pressure. much less likely to do so when they get it from their boards of directors. i think that is an avenue that has been underutilized and i think there's some obvious things that can and should be done. in some cases they have been, but not in all and perhaps not a

mandate. the independent chairman, the ceo of the institution should also not be chair of the yours. you should have a fair number of independent direct nurse, term limit so that they don't get captured by management, et cetera, et cetera. this is all corporate government stuff. but it is things that my judgment ought to be done because it will -- it has the potential to improve the situation at relatively low cost. i would go down that path as well. another path in neil's remarks he talked about parochial interests. parochial interests are obvious and a lot of places, one of which is values among the regulators. paul volcker has been working on this issue off and on for decades. i am tempted to say and

exaggerate the situation a little bit because i don't quite mean it. our current regulatory structure with the fad and the occ and the fda vienna cftc and i could go on and on. it's an efficient, in effect to. it's not effective as it could emf indefensible. why don't we fix that? we all can think of three or four reasons why we don't fix that. let's all too big to fail? no. will help lead to a better regulated supervised financial system? yes. does it illustrate parochial issues and the difficulty dealing with them? yes. >> how do we know that the problem is solved? what indicators that tell you we have pretty much gone far enough to deal with too big to fail? >> well, one way and this is obviously a hard thing to know for sure. we emphasize we can never eliminate all risk.

there's always a risk so large. >> you are saying we haven't eliminated enough. >> as i was preparing us i actually think this nuclear reactor analogy is a decent one. >> banks really appreciate your frequent use. >> i'm sure they appreciate this whole discussion. >> the reports on the fukushima disasters that they should have done my homework. there has been one this large in the last dozen years. that's a report i just read. there has been a -- evidence of the tidal wave. i'm not saying we have to prepare for a shock that comes once every 4000 years, but we had 180 years ago in the great depression. those are two big shots. should we build a financial system strong enough to have a shock though it had us once every hundred years? that's an ambitious goal but i would like to go for it. >> how will we know? we have seen for instance the rating agent is beginning to

believe that governments will not bail out the banks. we are doing stress test. if we make the stress test scenario more severe it will be more confident, how will you know when we have gone far enough? >> i wish i had a precise and their. another analogy the banks will love you think about airport security. we are always evolving airport security over the last terrorist threat. we take our shoes off when i go through the x-ray machine. doesn't make it any safer? no. the next attack will look different than the prior. it requires judgment and sharing with you based on my experience looking at the types of things we've dealt with, i don't think we've gotten nearly enough. another analogy, remember norma schwarzkopf, i saw this interview with dan when he said preparing for war is like

preparing for an orchestra. everyone is back to us and rehearsed. everyone knows their part. the curtain goes up in its conduct in the orchestra and a nod and faces him onstage at the machete. and so all of the things they put in place right now are eminently sensible, steps in the right direction. what happens in the shock is thus unlike anything we thought of? who should at least be honest with the american people and say this could happen again. we are doing sensible measures in the right direction, but we want to be honest with you that this could happen again. >> we have been expressing reservations about what neil has proposed. let me say what he has got here is thought-provoking and provocative and worth consideration. let me also add after going forward to come up with

something before the end of the earth effective, at least to provide a sense of urgency dealing with the issue. we are six years past dodd-frank. it doesn't strike me as acceptable that we are all working on the details. i know what the reason our, but if there was a real sense of urgency here, i think we would be further along. >> i should remind people we will have some questions in a bid to defuse the hash tag, one of the colleagues in the minneapolis fed is monitoring twitter but their questions from not wait to get into the row. two questions. so congress that it doesn't want more bailouts. congress has limited the ability of the federal reserve to do what it did in 2008. it has given the fdic, for better or worse powers and the fdic developing powers.

are you saying in a crunch the lawyers and treasury lawyers are so good they will find a way to evade the rules that congress set up, which is responsibility, or are you suggesting we will be once again in the middle of the night the chair of the fed, whoever it is going to congress on ben did me for a t.a.r.p. to point out. >> it will depend on the situation. i know many of my colleagues have said this. the idea we all hate horse isolate it causes away from the fire fighters. the tools we utilize and ultimately with a t.a.r.p. authority were crucial to stabilizing the u.s. economy. that is not the right solution. the right solution is to take action and make sure the system is stronger and to take what action now in advance. when i ran for office, i used to joke that the first thing as going to do is governor is dan

traffic. it's easy to make a declaration that we banned this. there can be no bailout. it's actually how the world works? the reality is we live in today, we need to be honest with one another about the risk. >> do we have anything to learn from how other countries are handling the situation? >> don is obviously involved in the u.k. my assessment is facing more comfortable having the major risks in their financial systems and economies. the banking sector in many cases as a percentage of gdp is larger and so i feel we are further along in some cases than they are. i would love to hear. >> the swiss have added a lot and required much more capital from their very big things, which are much bigger relative to the economies. the british after they got dad

have talked about restrict mean what banks can do. but we in the u.k. have done on the financial policy committee at the bank of england because the british think you could learn something which does not seem to be an american tradition. at least not since the revolution. >> in the u.k., we have increase capital requirements quite considerably come included in the of increasing man on a globally systemic, globally important banking institutions. i would say just a little sidebar, if anything the fact that the banks are much bigger portion of gdp in the u.k. in the u.s. makes the u.k. more intent on dealing with this. the second thing that has happened is they've said the independent commission on banking which was convened by the parliament for five years

ago after the crisis said one way of dealing with this too big to fail at issue as let's take the parts of the bank that are really systemically important, the ones that take deposits and make love to consumers and small businesses, payments run through, let's take them apart, and make them separate institutions within a bank holding company and hold them to a higher capital requirements. and that is in the process. i would note that is kind of like the u.s. system. so we have bank holding companies, depositories separated from the investment banks of the federal reserve board has put higher leverage requirements and on the holding company. there is considerable similarities. the others named that the british are doing is taking the resolution thing very seriously.

the living wills, but also we have the financial policy committee are considering how much of that total loss of serving capital is required. we are trying to run cost benefit analysis to your point, neil, how much equity, how much do and we came out with a number for equity without balance the cost to benefit and will put the den on top of that. a sickly the british are doing the same things happening here. but i would say if anything they are more concerned about this then maybe the u.s. should be given how big it is. >> you correctly observed that the cost of another financial crisis is enormous and so therefore the benefit to avoiding one has to be pretty big. one hears quite a bit these days that one race in the u.s.

economy isn't doing better is because we have made the banks too risk-averse, that the proliferation of bank regulatory agencies that kerry stern only partially lifted, we could have had the consumer financial protection bureau and the financial stability oversight council want to do house made -- is causing -- is hurting us in economic growth. do you take the warning seriously or do you think they are outweighed by the risk of another crisis? >> and very sensitive to the fact that small banks and community banks are being caught up in the regulatory net that is focused on the largest banks. if we took more aggressive action to make the large banks safer, perhaps we could really the burden across the system and free up community banks and regulations that it's easier to lend to families and small businesses. i take that curiously and we can

address that is part of the solution i'm hoping we can come up with. >> i'd like to take a point that kerry may think come back to the u.s. kerry's point about the fragmentation of the regulatory structure in the u.s. i used to think what kind of lived within and there were people worked, but i don't anymore. i think it is a very serious problem. one reason it has taken so long for the dodd-frank rules to be put in place as it requires cooperation among all these agencies and date each have a slightly different perspective. finally, the organization, one big way in which the u.k. is organized differently from the u.s. and i should have said this right away if the financial policy committee. there is a committee a little bit that doesn't have 10

agencies sitting around the table focused entirely on the systemic risk and the resilient of the u.k. financial system to a tidal wave, to a serious tail event. we've been given the tools, including residential realist date which are really here in the u.s. and capital liquidity to do this. whether it will be successful, only time will tell. but i do think the u.k. is much better organized to keep the system safer than the u.s., many of which don't have explicit financial mandate. >> do take seriously the claims of banks and others in regulation and the cacophony in the economy? >> only partially at best for a couple reasons.

i agree with neil that it doesn't make a lot of sense to include community banks. in fact, clearly it's not systemically important in the same umbrella. that is a waste of resources and lots of different ways. we are certainly smart enough. we see after every recession a reaction from the regulators about which is to tighten banks in the financial services industry. that is so is followed by concerns that in some cases reality of credit and available at even to quality borrowers, et cetera, et cetera and people get over it and life goes on. we have seen that before. i think we are seeing that again. these are not mutually exclusive, but the best way to understand what is happening to the u.s. economy in the wake of the financial crisis is i think

for those of you who are familiar with their book, i think it is called this time is different. that is tongue-in-cheek. they wrote a book and they've gotten extensive historical research across countries, et cetera comment better. the message of the book is economic recovery following serious financial crisis or not to be frustrating, disappointing, some standard comment better, better, not wholly independent the largely independent that. it's the hangover of the financial crisis. if i were trying to understand the u.s. economy in the last six, seven years, that is where the start. >> one final question before we turn to the audience and that is the politics of making a speech like this now. there are lines in your speech that i can imagine bernie sanders or elizabeth warren dating. it is not what one expects from a goldman sachs republican

responsible for ripping off the taxpayers. [laughter] what is going through your mind? what led you to decide a couple of months into the job that you wanted to start playing in the sandbox? >> i was interested because i wanted to take on the biggest economic and financial challenge we have is a country and i didn't know at the challenge is to be. when i got to the bank, i found a lot of expertise on too big to fail, large banks and big regulation. as i started talking to expert colleagues about my ideas and concerns i had, i give a speech at the chicago fed in 2011 were a sad here's some of my concern. we've got more to learn, more work to do. those ideas were still in my head. as i got into the bag, i started talking to experts in testing may be a and realize there are

still big risks here. the fed's core mission is financial stability. if i'm not willing to stand up and share my concern, i wouldn't be doing my job. that is what is motivating. i wrote the first draft of this in the summer before i even started at the bank and i wanted to get my colleague's reaction to it. here we are. >> let's take some questions. we have microphones going around. i would like people to stand up if they have a question. tell us who you are. why do we start over here. >> iconic thank you very much. i would like to ask you regarding data and deflation.

you show -- to 200 trillion. i would like to ask you regarding the environment where we see deflation in many countries, and do you think following the debtors in real terms is going to be a challenge for financial security? >> just make sure i understand, where it understand, we're in a period of very low in flushing for falling prices, deflation. does that make the problem even worse? >> there's no question if we were in a situation of deflation that part of the problem and why it's so painful for economies is exactly that. it makes the debt overhang so much worse because they grow in real terms. that is why central banks around the world are committed to achieving their inflation target in the 2% target establishment. >> ben bernanke.

>> so the academics can always be in favor of that. that and make an argument on your site and see if you agree with it. a lot of folks on the fomc think interest rates ought to be managed in part to avoid financial instability. it strikes me the decision to move monetary policy in ways inconsistent with the near-term employment and inflation mandates is potentially a very big cost that people are undertaking because they are worried about the implications of debt buildup and so on. would you agree with that as an argument in your side is structural changes that are potentially bad monetary policy to try and make financial stability goals? >> absolutely i agree with that. some of my now collects on the fomc reserve and presidents ran a scenario from a dry run if

there was a bubble this outcome and what tools could the years and they found themselves very limited in having to go with the tool to deflate the bubble which is a difficult thing to do because you can't target it. if we can make the financial system stronger on its own, relieving some burdens on the monetary policy process that they can focus on the dual mandate. otherwise some people argue we have too many mandate. now we have a dual mandate and financial stability mandate and as you said chairman bernanke, there's times those are in hot up with one another. i do agree with that. >> one reason i worry the u.s. isn't as well organized for macroprudential policies that could mean against using regulation and supervision against ldap's other imbalances in the financial system because i think it would put more pressure. i prefer to do that so i think

another respond to your concerns would be to do something about the regulatory system buildup of macroprudential capabilities in the u.s. and organized them. >> are better or worse i don't necessarily agree with that. and i am on record. one of the last things i wrote when i was still at the minneapolis fed was try to raise the issue of should use on a kerry policy asset price bubbles , recognizing of course that identify in a bubble not the easiest thing in the world. and i suspect quite uncomfortable with that baby nihilist. but it's the same thing the same daniel is talking about earlier. given the cost of the financial crisis in looking back at it, it seems worth asking the question, should monetary policy have been wurster did however you want to

define it, prior to the crisis because the cost of the crisis turned out to be so great. i don't think you can just dismiss that. there may be better ways of addressing that, although frankly i have yet to hear a clear definition of what macroprudential regulation is, much less how effect that might be. but i don't think you can just dismiss it because the cost benefits in the last financial crisis via >> the argument is not that it should be dismissed, but it is not a good place to be that their first action because it would involve raising interest rates so much that we would rather have some other tools do it. you are is just a prudential is some as a way to describe something they don't understand. >> yes, we don't know how much it would take to raise interest rates. one of my former colleagues was

sitting here come a couple of my former colleagues were sitting here. i do want to put words in their mouth, but they would say well, and a surprise increase in interest rates would have a big effect. the fed has worked very hard at transparency and helping market participants understand them as possible when it's coming and so forth. that is not the only policy. so let's have the cards on the table. >> is a question in the back there. >> thank you, sir. i really like the metaphors he used to the nuclear reactor, fire hoses. i have to ask a question about where we are still in 2008. do you believe that the economy is still on my support because we are still having to keep interest rates low and in fact we are still having to do the money pumped into the system? do you believe that is still the

case or do you think it's going to be changing soon? >> the gentleman over here. >> so, it took three years for four years for real estate prices to drop by a third because there is so much time involved in that we were able to build paper on paper and it created a huge worldwide economic crisis. the banks proved that they could do it again in six months where they were blending aggressively to the oil patch of $100 a barrel. ..

>> i speak as a layman. on the street we still believe the big banks were bailed out and daughter frank is still fighting the last-- >> three questions-- well, to questions in a comment. let's start-- maybe you can clarify this. does the fed had the financial capacity to deal with a crisis if one occurs despite what congress did? >> yes. i think i wouldn't characterize the fed's capital as a slush fund. an entry on a balance sheet.

the capital itself didn't really play a role in any of the things that the fed did. i don't think congress should be just taking that capital without a careful-- careful consideration of the whole structure and how it should be capitalized etc., so i don't agree that taking that was a great idea, a good way to finance highways. there are better ways to do that, but i don't think that by itself doesn't effect of the fed's ability to do other things , make loans in particular in a crisis. i think congress has constrained that, particularly loans to nonbanking institutions, has to get the permission of the secretary of the treasury and a lot of emphasis on security and a lot of transparency that i worry about some of the restrictions that are already on

the feds that has nothing to do with the highway bill. >> macneill, do you think it's correct to characterize-- to characterize the us economy is still on life support? >> no, i think we have come along way since the depth of the crisis in the economy is stronger and if you look at the statement in january,-- can you imagine me being quiet? >> no. >> the committee's judgment is that economic outlook is for moderate economic growth and if the outlook-- if the reality ends up like the outlook then i think we will head in a better direction. >> over here. >> thank you. larry with accountability central. a lot of interesting points here. i will go one step further and i think the regulatory agencies

should help us miserably in this last crisis and do you believe that they have rehabilitated enough to, you know, get us through another one? , but my real question is are we over-- overengineering these relations? it seems to me that maybe people should have looked up the on their computer models and actually seen what was happening going on on the ground that. wages are flat, terrible mortgage rates, no one questioning any of that, so maybe we have to inject more common sense and regulation into this equation. thank you. >> thank you. i have a question to neel. you mention auctions are necessary. i think already give regulate

authority to break up larger banks. it gave-- [inaudible] >> do you think the legislature was necessary and could you explain. >> so i make sure i got it. you are saying the regulators already have some authority to break up the big banks and is he suggesting that they use that authority or are you said just he a new legislative powers? >> my view is to do anything transformational systemwide we would mean new legislation. i agree the authorities have the ability within the living will

framework, fdic and the fed or together to target individual institutions, but my read of dodd frank is a lush the debate i don't think my personal opinion and the intention of congress was that it was meant to be a tool for transportation of the financial sector. i think a solution is something that is appropriate and necessary for congress to weigh in on and take an active role and decide what that transmission looks like rather than using one little tool over here and trying to use that across the whole system. >> i think we have questions from twitter. >> a theme being talked about is the difference in treatment between the larger banks and the small banks and a question that isn't there still contagion risk among small banks if a number, you know, if the many of them are involved, you know, how do those risks weigh against the risks faced by the large banks?

>> so, when i mentioned my speech elizabeth savings and loan crisis, you had a's thousand small banks fail and that was devastating for the banks and their communities and i was devastating, but there was no broader risk of economic contagion or collapse, so to me if we can get our financial system in a situation where we can take on major shocks without requiring taxpayer bailouts and triggering widespread downturn, that should be our goal. >> there was a recession. >> it was more than the threats, some of the banks were in trouble, but there was a recession and the recession was prolonged and the recovery was damped by this credit restriction that occurred after that, so i guess if you talk a big banks that was systemically important and broke it up into eight smaller banks that each had the same balance sheet.

>> and the same strategy. >> you would not be doing anything. >> if you break it up and there is no change in their business model or behavior, but when you have corporate governance like gary talked about with different ceos and boards of directors and different geographies, that is probably not the situation we will end up in and by the way, this whole process i'm not saying break up the bank says the right solution. it is one solution. if you took the big banks and stuffed .5% capital in them come and they will than they are today and take a much bigger wave. >> i am not persuaded that even a large number of community failure would pose a systemic risk at the financial system or the economy. community bankers sometimes like to invoke that for a level playing field consideration etc., but i don't find it convincing. >> the woman in the brown. could you stand up, so they can

find you. >> full disclosure i was one of those regulators and long time ago, not in the most recent crisis, but i was involved in the new england commercial real estate crisis. >> which regulator did you work for? >> i was with the occ and 91 of the things that needs to be addressed and we are circling around it is that banks fail for two reasons, the liquidity and may fail for lack of capital. capital is assess my liabilities. when-- in terms of systemic risk , when you have assets that are concentrated and you have systemic risk whether that is across a variety of small institutions or concentrated amongst large institutions. one of the things you have not addressed, you mentioned it and

kind of slipped through it was the issue up, well, if we do in the united states, we really don't have to look locally, but i think our economy has changed. we are in a much more fluid, much more global economy than ever before. i wonder, what would be the implications if we make regulation, if we look and say we will just make them smaller or more controlled through taxing them or requiring massive amounts of capital requirements. wouldn't that funding move overseas anyway and therefore, wouldn't that create that negative externalities that you were talking about before? >> i understand your concern. my view is we have to focus on what we can control and in an ideal world we would issue regulations and everyone around the world would share the same

regulations and there would be perfect harmony, but we have to focus on what we control and we can control the regular tour environment in the us and a degree should start there and make the changes we need to make to make the us financial system sound. let's have one set of rules, so a foreign global banks want to do business here that the follow our rules and by the way, i expect small and midsize banks of the us to grow and fill some of the void that may be created. also, whatever we end up doing if we go further we have to implement a gradually over time and as we implement it gradually , i expect to see the banking sector in the economy evolved to fill whatever gaps may be created. >> thank you. question for neel. even the chairman talked about the possible interaction and interference of monetary policy and macro credential management. hoping you can discuss your views about ways in the most recent innovation negative interest rate helps or hinders the financial institution? >> well, i think-- i will refer

back to allen's testimony last week. the board of governors in f1 seat feels like they have the authority to use if necessary, but our current outlook is not that we would have to use it, is for modern economic growth. gradually increasing interest rates with inflation backup over the meeting perm to our target and i will probably leave it at that. >> i don't think it necessarily affects the ability to regulate, so interestingly the federal reserve board is stressing the banks against negative treasury bill rates, anyhow. >> they are-- in the most recent stress tests, the ones i guess they will be doing this year, they are asking the banks to tell them-- how their capital would be affected if interest rates went into negative territory. [inaudible]

[inaudible] [inaudible] scenic imposing negative interest rates to whatever degree on banks affects their ability to operate as lender, i'm curious on the regulatory perspective if that helps, hinders, has no impact. >> i guess i would say i think these are things that are looked at carefully and those are factors that will be considered as the committee moves forward. >> neel, you use the term transformational change because of the risk that you believe remains. then, you list first in that

list, breaking up the big banks and then you go on to list some others as potential transformational change. as soon-- my thought is that as soon as you mentioned breaking up the big banks, no one hears anything else and writes off the whole idea and that therefore, some of the other ideas that have been mentioned-- that you mentioned and have been mentioned by your co-pay list like corporate governance change and your mention of packing higher leverage, hire etc. etc. regulatory consolidation, these are transformational in their own ways and they do not conjure up the ghost of trust busting. >> i appreciate your comments and i think there is a lot of wisdom to what you said and that's why want to emphasize that we are not announcing a solution.

we are announcing a process. there is a lot of bold transformational ideas out there from experts across the country and in my view we have not given them yet the consideration they deserve and what i am try to do as many as together to create a process to give those different options series consideration and then hopefully we can figure out what the best, nation may be. >> i wonder if the panel agrees that capitalism is dependent on economic growth for its suitability as a basis for an economic system and therefore if we are in for prolonged economic stagnation with the cost of capital at zero or even enter into negative territory, might not capitalism be replaced by some system that is not dependent on usery? >> gem in front of you. >> also, most often the quantity which is used by central banks instability decisions assume two

things, one time at varying and the second one is-- [inaudible] >> the question is, the assumption that does monetary policy of a role and if not-- >> so, what risks are you talking about? >> risk premium created by the inc.'s own activity, but in the event the risk. [inaudible] >> is it true anything about monetary policy and models you think of the risk premium is indigenous imac? >> both. the risk premium depends on the risk appetites and that might be affected by things outside of

monetary policy like global political geopolitical risks and at the same time i think the monetary authority recognize that what they do and how they are perceived to be operating and what they-- what the future brings and whether they can convince people it's a good future venture has an effect on risk premiums. >> neel, do you think what we are talking about here is the end of capitalism, that the banking system has gone to the point where we cannot accept market economy would banks privately owned? >> not at all. the market economy still will be the key to our future, key to economic growth, increasing prosperity. we just need to have a market economy where we prosperity and take off some of the risk and collapse onto the table table. >> twitter. >> pretty briefly, why now and why you in terms of your sort of

leaning on this issue? >> why now and why me, i just started from the minneapolis fed and i'm moving as fast as i can. [laughter] >> i feel like when i bring to this is a unique perspective like on as being one of the few people on the frontline respond to the financial crisis and that colors my thinking and views as i look at the various reforms implement it. the minneapolis fed has a lot of expertise in large banks and i think bringing things together to say, hey, i think we can do more let's do more in the last thing i will say is that there are a lot of extras are in the country who have strong ideas about this. we don't presuppose that we have all of the answers and we are trying to create a process to bring experts together and say let's together find a better solution. >> will come back to brookings.

i was a little concerned that you are not more enthusiastic about the same point of entry approach in that way of dealing with a large institutions. it seems like if you have enough total loss capacity so that it would very hard for any bank to run through you will basically say that taxpayers will not support big banks. using the single point of entry you are able to resolve them through title i entitled to in a way that does not disrupt the system. by creating a bridge bank you can allow foreign subsidiaries to operate, so why have we not solve the problem? why do you want to do things that might come up the gears more tax why not recognize this innovation for what it is? >> my concern is that if it really is that credible and really not going to trigger contagion it will probably price like equity, so why are we

poking around? what are we just raise the equity requirements and banks instead of adding this complexity and interaction? there is tremendous complexity in the regulations. if i am remembering correctly and i had to stretch my mind here, think about fannie and freddie and 08. they were technically never supposed to be the responsibility of the us government. we had to step in and put the taxpayers behind fannie and freddie. hold on, fannie and freddie also had supported needed that that was they are available to recapitalize the firm and we ended up protecting the, so that was there specifically to provide protection. one is you are saying that basically we can't take the government at its word that in a crisis they will never allow the bondholders to take the hit that

they have been warned against. that is a separate question and the answer is why has the banks issued bonds that could become capital? what is the advantage of that over just having them more equity. >> it appeals to different investors and probably a little less expensive than equity, something that will pay interest until it converts to equity. i think these are the types of instruments, particularly those convertible bonds we are talking about earlier. in the us, they are not issuing those. they are issuing i guess they are issuing more equity, but more preferred shares. other subordinated that is a holding committee thing, so yeah, there are different investors, different characteristics and i assume

there will be a different-- >> i mentioned this earlier, but go back to the feds. there was no legal requirement for the banks to bailout-- >> i don't see the analogy. >> in the midst of a crisis, all of a sudden if you analyze the balance between the banks they looked healthier and help the management said we have a reputation requirement to stand behind it. >> do you think the banks will have a concern about their reputation if they convert the bonds? >> i am just saying the less-- the lesson is that these very clear legal frameworks that leclair today, are not so clear the time the crisis. >> are you going to go-- this may be way off, will you go to market to market accounting? >> it seems to me that is critical here to read otherwise, the regulators, the recognition of losses get delayed and until

they find out indeed it is swamping capital and i know a lot of people in financial and services as soon as you say market to market accounting, that is like there is a rat running around the room here. it takes a model to see a model, so if you don't like that what is better? >> i think the regulators have been pushing certainly pushing the accountants to allow the banks to recognize losses in a more forward looking way than they have in the past. i think the market to market accounting is very useful, but it fit trick in the market-- market side of the balance sheet and so when the bond selloff the banks have more equity, not really, so it's a tricky issue, but i think recognizing the value of the assets and the impairments of the loans is absolutely critical for the health of the system and the market discipline.

>> there is one here. the jarmon in the front end and we will call it a day. >> i'm a policy with third way and i want to go back to the announcement of the minneapolis fed initiative for ending too big to fail. you acknowledged it eventually require congressional action. that is probably the biggest obstacle given that a lot of members of congress don't agree with your premise that dodd frank did not go far enough, so how is your initiative address this in a way we have not been able to in the last six years to make the gentleman here. >> thank you. we are facing a global economy right now feeble global economy 500th you think it is possible that the next global financial crisis downturn will be triggered not from here but from a foreign market?

>> neel, are you going to fix congress also while you are at it a mac we have to do what we can and we have a response abilities to educate the public and we could disappear into a closet and come out in nine months and come out with our answer. the reason we have a public process with live streaming this symposium and having press is to also educate the public along with us and hopefully we can get members of commerce on both sides of the aisle to pay attention to participate and take this seriously, so i think your point we have to do what we can to get there. >> anyone want-- what are the odds that the next global financial crisis has its origins not northern california, but somewhere else outside the united states? >> i think they are pretty high, but i also think and certainly a lot of the weakness that people are worried about today is less in the us and more overseas, but i also think it's important to

note that there is a lot of international cooperation to strengthen banking systems everywhere through the financial stability board. and to agree on resolution regime's. to agree on higher capitals. to agree on a framework that will make the system much safer and more resilient to shocks where they come from. everyone is very very aware that they could come from anywhere and neel's point is absolutely true, where-- whatever triggers something bad coming down we probably don't see it and won't see it until it is right on top of us. >> earlier someone mentioned oil prices. should we have seen that? again, not the same thing as the housing bubble, but i don't know anyone that said there is an oil bubble of me need to take action to protect various interests of the economy, so things happen. and we need to be humble about

how well we can predict them. >> i don't think we will identify the source of the next crisis before happens. i think that is highly unlikely. i think the best thing we can do is be prepared for it from whatever the source, which to me means getting the-- straightening out the incentives in the financial services industry. >> you think we are better off than we were the day before this all started in 2007? >> yes, clearly better off. we are maybe on the second or third base. but, we know where home plate is or at bay-- at least i think i know where home plate is. we got to get their. >> okay p read with that please join me in thanking our panelists,. [applause]. [inaudible conversations] [inaudible conversations]

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[inaudible conversations] [inaudible conversations] >> a reminder if you missed any of our coverage of this discussion you can watch it anytime in the c-span video library. a photo from this morning of the chair and the bench of the late supreme court justice antonin scalia who passed away over the weekend at the age of 79. the chair, bench underway all draped in black today. the national law general rights it dates back to lease the death of chief justice chase in 1873.

the court announcement stated that today. has not occurred in recent years because justice is rarely die while in office. sources close to the scully a family announced that justice scalia's body will lie in repo repose. coming out live at 2 p.m. at the atlantic council launches its future of iraq task force with former u.s. ambassadors to iraq, ryan crocker and james jeffrey and the former multinational chief of staff live it to be featured on c-span2. with congress out this week for the presidents' day recess we're featuring booktv in prime time.

that's all tonight starting at eight eastern here on c-span2. >> road to the white house began in iowa. the caucuses which date back to 1972 and then we moved to new hampshire, the first in the nation primary which has a long and rich history. now we begin to test the candidates and their message. south carolina the first southern primary and then to the party caucuses innovative for the democrats and republicans. more than likely we'll see a number of candidates public drop out so the field will then narrow. then we move into early march. super tuesday the start of winner-take-all primaries which means that delegate count will be critical. as we watch back out continued

for the candidates we will get a better sense of whose message has resonated in his own the path to the nomination. >> the house energy and commerce subcommittee on oversight and investigations held in the nation's preparedness for biological threats. the hearing comes on the release of 33 recommendations from the blue ribbon study panel on biodefense. members and other experts stressed the importance of developing a comprehensive strategy to improve the nation's biodefense. one of the key recommendations from the panel called for centralized leadership position within the vice president's office. >> good morning. we will begin this hearing. before start we'll have both and couple hours we want to make sure we move quickly through this. before i start i want to acknowledge our good friend and ranking member of the committee, frank pallone comp test up with

us today because his father died. we keep the spam in our prayers. although i did not personally know frank pallone sinjar, i know he raised a good son. so we thank them for that. and will continue on from there. next jointed it also with my colleague who is wearing denver broncos orange and congratulations for the super bowl. they must be good team as they beat the steelers. now on with our hearing. good morning. we are reminded, on nearly a daily basis, that there are those who seek to do us harm through a variety of means, including biological attacks. the threats from attack and disease outbreaks are growing and ever changing, and we are ill prepared to detect and respond to these threats as rapidly as needed. put simply, we have been caught flat-footed too many times in the past. we face a deadly enemy we cannot see. see. our methods defined are woefully inadequate. we may not even know it's there until it's too late and this is

frightening. the federal government's ambivalence towards biological threats must end. today, the biological threats confronting the u.s. generally fall within three distinct categories, one, naturally-occurring, two, accidental incidents, and three, intentional acts, which are often associated with acts of terrorism. we must be ready to guard against and respond to each of these threats. it is easier for nation states and terrorists to obtain the resources necessary to produce biological weapons than ever before. and given the ease with which one can obtain these resources, it is difficult for the intelligence community to collect, analyze, and produce intelligence about biological threats. the threat of a biological attack is not as remote as one would hope. at the same time, pandemic and other highly pathogenic diseases are occurring with greater frequency and spreading more quickly throughout the world. as human populations put increasing pressure on remote areas and with ease of global travel, we will see more and more infectious diseases emerge. since 2002, the world has seen outbreaks of sars, chikungunya,

cholera, influenza, measles, ebola, mers, and now zika. the u.s. response to ebola was a humbling reminder of the adage that everyone has a plan until they are punched in the face. we were not prepared for ebola. actions that were described with great confidence one day were likely determined to be ineffective the next. this is what shakes the public's confidence. instead of ensuring that the u.s. had strong, central leadership, the administration's answer was to appoint an ebola czar who served for three months. sadly, the ad hoc approach continues. a zika outbreak threatens the continental u.s. what the world initially thought was a mild illness could, in fact, have far greater consequences if the virus also brings increases in microcephaly, guillain-barre syndrome, eye disorders, and potential for later developmental problems in children. while the administration has submitted a $1.8 billion emergency request to combat zika, its latest budget request continues to leave funding gaps of more than $1.8 billion in project bioshield's special reserve fund and pandemic flu countermeasures.

over the last three years, this subcommittee has examined the impacts of and our preparedness for natural and accidental biological incidents. we have held hearings on our flawed response to the ebola crisis, the need for better preparedness for pandemic and seasonal influenzas, the unsafe practices by the department of defense and the centers for disease control on the handling of live anthrax, and the department of homeland security's broken biowatch system. in the coming weeks we will examine the federal response to the zika virus. each of these topics has a common denominator, the federal government was not adequately prepared. for years, we have lunged from crisis to crisis, reacting to what just occurred instead of planning for the next outbreak or attack. the subcommittee's oversight work has made a difference in each area, but i am very concerned that the federal government lacks an overall plan for biodefense. instead of being reactionary we must be proactive with a new approach. last fall the blue-ribbon study ouhave on biodefense published national blueprint for

biodefense. the panel examined the current state of biodefense in the united states, examining issues related to prevention, deterrence, preparedness, detection, and response, to name a few. this is not a book to sit dusty on the shelf but one people should read. i am pleased that two very distinguished commission members, secretary donna shalala and the former chairman of this subcommittee, congressman jim greenwood, are here today to speak about the important work of the panel. we thank you. the panel's findings that we are dangerously vulnerable to a biological event because we lack leadership and an overall strategy, are frightening. the panel made thirty-three recommendations, many of which fall within the jurisdiction of the energy and commerce committee and impact work that this subcommittee has done and will continue to do. the need for improved leadership echoes throughout the panel's report, and is unfortunately a theme we hear far too often about the federal government. without leadership there is no coordination of biodefense research, preparedness, and other issues. without leadership there is no strategy. the panel also makes a number of specific recommendations. we must improve our biosurveillance and biodetection capabilities.

we need to detect pathogens in the air in hours and eventually minutes, not days. agencies already collecting surveillance data should share it, not squirrel it away. we need a platform that allows for rapid diagnostic testing and vaccine development that can be applied not only to the diseases and pathogens we currently know about, but also to the ones we have not yet discovered. the energy and commerce committee, and this subcommittee in particular, must take the lead in understanding and improving our biodefense capabilities. i thank our witnesses for being with us today. we look forward to hearing your testimony i now recognize the ranking member of the subcommittee for five minutes. >> thank you so much, mr. chairman. i want to welcome our witnesses come in particular former congressman greenwood who sat right there in the chair you're sitting in for many years and who sat next to me while we had a lot of hearings on these issues that you mentioned in your opening statement today.

i know he's just as frustrated as you and i are about the fact that we still continue to lurch from crisis to crisis in this country without any kind of unified or comprehensive response to some of these issues. when i was listening to your opening statement, mr. chairman, i thought to myself, who says bipartisanship is dead? because my opening statement mirrors your opening statement to the point of talking about some of the very same examples that you discuss. so i won't read the whole opening statement because i do not subscribe to the adage that everything has been said but it hasn't been said by everybody. so i will put into the record. i just want to highlight a couple of the issues. we got zika virus going on as you mentioned right now, and we're scrambling once again after the fact to deploy the appropriate resources to protect our citizens as it spreads. last year it was the ebola

outbreak. we did finally organize a response to that and we are still trying to put the systems in place to make sure that ebola doesn't spring up again. this national loop current for biodefense made a number of important findings on how to respond to these natural occurring threats, but also had respond to deliberate attacks. as you mentioned, mr. chairman, the panel made three dozen recommendations to better posture our government to respond to these emerging bio threats. now, for those of us who were here during the fall of 2001, we remember vividly those little two envelopes of anthrax that arrived on capitol hill of the chaos it caused within congress. offices were closed, buildings were fumigated, some congressional business was suspended. thousands of staffers and members of congress lined up to

get tested for exposure. and even worse of course some of the workers and the postal centers died. this is a relatively small attack. so imagine what happened if we had a large attack in a major metropolitan area or someplace else. that's why we have to be organized to deal with these things, and that's what brings us back to the findings of this panel. there are a number of really important recommendations and iraq and into every member of this panel and every member of the audience that you read, you read the actual blueprint because it is sobering. i think that the top observation that's made in this blueprint is that the nation is under prepared for a bio attack because we still lack centralized biodefense leadership. the panel recommends appointment of a single national leader under which preparedness for and

response to biological threats could be consolidated. the panel recommends this authority be institutionalized in the office of the vice president of the united states. and what the panel says is that this will, quote, ensure the biodefense will be addressed by every administration at the highest levels with adequate access to the president. i think this is a their unique recommendation and one we should explore. i just want to say one more thing, mr. chairman. one of the grand traditions of the oversight and investigations subcommittee is to shine light on issues like this and to actually move the dialogue forward. i was really gratified to hear you saying in your opening statement that you don't just intend to have this hearing today and let this go. i think if we really have a series of hearings diving deeply into the recommendations of the committee and take their recommendation that we have some of these hearings, we can make a long-term difference in how this

nation is prepared. that maybe the very best legacy that not only does blue-ribbon committee but also this subcommittee of energy and commerce can lead. with that i will put my full statement in the record but i would also like to ask unanimous consent to put ranking member alone in state in the record due to his inability to be here with us due to his father's death. thank you very much and i yield back. >> i will ask unanimous consent any other members rate in opening statements begin it into the record without objection they will be entered. given the rush we want to make sure we are everything and every member gets a chance to ask the question before vote. i will introduce the witnesses on the panel for today's hearing. the first witness on today's ballot is the honorable donna shalala. welcome. it's an honor. from a sect of health and human services, over the course of her career she has demonstrated a strong commitment to public

service, running peace corps to the apartment of housing and urban development she is a recipient of the medal of freedom and serves as president of the clinton foundation we appreciate your time. next my friend and colleague from pennsylvania jim greenwood, former congressman from a district of pennsylvania. chairman of the subcommittee from 2001-2004. he's a member of the blue ribbon study panel on biodefense and assert since 2005 of president and ceo of the bio at the logical innovation association the guesswork with the organization to aid in the development of solutions. it's major challenges. we look forward to hearing your insights. next tara o'toole this is a senior advisor and executive vice president at in-q-tel that works because of that connection in cooperation between venture backed technology startups u.s. intelligence community. dr. o'toole firmly served as under sector of science and

technology of the department of homeland security and assistant secretary for fundamental health and safety, and looking forward to hearing your expertise today. thank you also for being a. now i will yield to mr. florist who will introduce our next witness. >> thank you, mr. chairman. i think you probably this hearing today and for the courtesy of flying me to introduce one of my classmates and i felt texas aggie and renowned expert on public health. dr. gerald parker serves as vice president for public health preparedness and response of the texas a&m health science center. he oversees the largest federal public-private partnership with the help -- advanced research and development authority, referred to as barda. for vaccine development. prior to his current role, he had a distinguished career of public and military service including serving as the deputy assistant secretary of defense or chemical and biological defense. and deposition who was responsible of the military's readiness of many issues before us today. he served as a principal deputy

assistant secretary in the office of the assistant secretary for preparedness and response that hhs. again mr. chairman, thank you for allowing me the time to introduce dr. parker, a senior leadership position of the texas a&m health science center, hhs and dhs are critical to the topic before this committee. thank you, doctor parker for being with us today. i yield back. >> if there's no more statements we will proceed. this committee is holding an investigative hearing and when doing so is that the practice of taking testimony under all. to any of our witnesses have any objection to taking evidence under oath? the chair advises you that under the rules of the house and the rules of committee you are entitled to be advised by counsel. do any of you wish to be advised by counsel? all the witnesses said no. did you at all these rides and raise your right hand i will swear you in the.

[witnesses were sworn in] thank you. all the witnesses said i'd do. you are not under oath and subject to the penalties set forth in title 18 section 1001 of the united states code. we would not entertain each of you with a five minute summary of your opening statement. we will begin with ms. shalala. you are recognized for five minutes. turn the microphone on and hold it close to you. >> good afternoon mr. chairman, congresswoman degette and members of the subcommittee. i submitted likely testimony for the record. thank you for inviting us here to present our views and recommendations of the bipartisan blue ribbon study panel on biodefense. i am pleased to be joining former representative jim greenwood. we are here at half of our co-chairs, former senator joe

lieberman and governor tom ridge and other members of our panel, ormiston matured later tom daschle and former homeland security adviser ken wainstein. it's also good to see dr. gerald parker who was one of our ex officio's as well as doctor tara o'toole who constantly advises all of us about this important subject. we are deeply concerned about the biological threat whether intentionally induced, naturally occurring or accidentally released. i want to emphasize those three issues he does this is not a report just on intentionally induced biological threat. it also covers the naturally occurring ones or the accidentally released. i want to take a moment to address the threat now but let me recommend that you get a classified briefing at your earliest opportunity. make no mistake, we've been told

that our enemies are seriously considering the use of biological weapons. during the invasion of afghanistan, the united states uncovered evidence that al-qaeda was going to develop biological weapons. more recently isil has gained control of enough land this will infrastructure, scientific expertise and professional military personnel to potentially create and deploy biological weapons. and they have expressed their intent to use them. additionally, the verification protocols associated with the biological weapons and toxin convention or a week and do not do what the world needs them to do, differentiate between legitimate and malicious activities. we are equally concerned about the threat of naturally occurring diseases with catastrophic pandemic potential. it's often very difficult for our scientists to guess the correct combination of viruses

that will even make up the strain of influenza that will circulate the following year. nevertheless, diseases did not have to kill millions to produce impact. there are a number of diseases that have affected my own state of florida and new york and puerto rico and the u.s. virgin islands, america samoa over the last two years. zika virus is on the move as well. in some cases resulting in micro and so fluffy in newborns are contacted from their mother. the first case of local transmission has occurred in the united states, in dallas which, of course, was the first city with an ebola case. this transmission did not occur mosquitoes. it was sexually-transmitted. imagine a devastating societal consequences if we cannot stop the spread of this disease. accidental releases also

contribute to biological risk. i'm sure you're aware of the recent laboratory biosecurity and biosafety mishaps at a number of our high level laboratories. the organisms in which these laboratories work are too serious, too infectious and two deadly for us to react indignantly only to forget after a few months and move on to the next challenge. our change must be institutionalized and sustained, and that is our fundamental message today. our attention span tends to increase and decrease cyclically as different events occur and their impacts fade over time. since i was secretary of health and human services i have seen three administrations increase and decrease their emphasis on biological threats. usually in response to and after recovering from incidents such as the anthrax events of 2001, sars, h1n1, mers and ebola.

and now we're all going up again for the zika virus. we need a leader at the highest level of government to take responsibility and develop a comprehensive strategy and the unified budget, and lead the whole of government along with nongovernmental partners to improve our national biodefense. and to do so attentively and consistently. we recommend that person be the vice president of the united states. one of the few against the government agencies and the nongovernmental partners to work together. we are not necessarily talking about new programs or funding. instead we believe we can build on existing programs and infrastructure. and let me give you a few examples. we ought to be able to take and environmental biodetection system was originally designed for the battlefield, evaluate it, give it seems useful, then

modify it to fulfill our needs domestically. we should see how we could build on our pre-existing pervasive and familiar system of community pharmacies to get pharmaceuticals to localities in the midst of the biological incident, and maybe create smaller caches in advance. we cannot depend solely on a federally driven public point of dispensing model. or take our hospitals which need accreditation criteria associate with funding provided by the centers for medicare and medicaid services. we can use that to address various specialties like, for example. doing the same for biodefense would cultivate better hospital preparedness for major infectious disease events. in doing so we could create a stratified hospital system in advance of the biological prevent knowing exactly which

facilities are best positioned to handle cases. the funding -- >> could you -- >> we could get is far greater than what is currently available through the hospital preparedness program. why we support this grant program, it is simply never going to be resourced enough to meet the needs -- >> could you get a wrapup because you're over a couple of minutes. i want to make sure we have time for everybody. >> i'm closing. in closing i just want to note the congress plays a critical role in providing necessary oversight and legislation. we need all of you to consider these recommendations, and hopefully to move forward here and now after you've heard jim greenwood we would be happy to answer any questions you have. >> at the very much. mr. greenwood your recognizer five minutes. >> i'm tempted asking in his consent to insert your opening statement and opening tatement of ranking member degette to a report because it's gratifying to see how alike you are with our recommendation.

a.q. for invited to discuss prepared us for biological threats on behalf of the bipartisan blue ribbon study panel on defense. as the former chair of the subcommittee i am honored to be testifying here today. this hearing is quite time enough because the catastrophic biological event as we flickered but because one has not occurred on u.s. soil. whether it's the reproduction of smallpox bioterrorism a dirty bomb in urban center for another pandemic influenza outbreak. as the panel notes in a report we are under prepared to respond to these threats and we must take immediate steps to be better prepared. it's been a great post to serve on a panel with my colleagues, our reports are sometimes the biological threat is real and it is growing. while we're prepared, better prepared today than we were a decade ago, due to federal and private sector investment, the fact is we're still dramatically under prepared.

our report outlines 33 recommendations. as stated we as a panel all strongly support the first recommendation calling for a centralization of leadership over biodefense in the office of the vice president. i would like to for the focus on the recommendations related to strengthening the public-private partnership as industry plays a key role in protecting our nation. consider a company with a novel technology applicable to the bow threats of emerging diseases identified by hhs. this company wants to part with the government but there are still many unique market challenges, unlike projects and products in a promotes medical countermeasures is defined in supported solely by the federal government making it a major source of research funding and the primary purchaser of vaccines, therapies and diagnostics against these unique threats. many companies big and research

at their own risk conducting r&d even for receiving federal government funds. over the last two years government funding has been decreased just as the number of threats have been increasing. the investor community use these products as risky and a distraction from similar products that have a clear commercial value. making it difficult to raise the necessary r&d funds for mcm's in the private capital markets. the pathway is not always clear. lastly industry has seen a precipitous drop in the level of funds for the purchase of the final in seconds. for many countries the biggest risk that they will invest significant intro funds and time developing product only to find there is no clear procurement strategy the u.s. government due to sudden shifts in priorities. given all this, strongly support the need for a comprehensive

multi-year strategic plan that unified budget that clearly outlines priorities for r&d and procurement or medical countermeasures and pandemic influenza products. such a strategic a doctorate would provide much-needed transparency on governmental priorities and project requirements the something companies to determine what products to pursue in this partnership. the ncm enterprise must be fully fund. project bioshield special reserve fund was created to provide companies with a guaranteed market for mcms establishing any tenure advance appropriation of 5.6 billion. it as rfs indeed prove successful in attracting companies to invest in m.c.m. r&d. 12 incidents were procured during the ten-year period and there are over 200 mcms in the pipeline. progress major congress' initial $5.6 billion investment is now in jeopardy. the sof was