tv Politics Public Policy Today CSPAN June 22, 2015 3:00pm-5:01pm EDT
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with the new -- the evolution of the markets, are there questions of financial stability that we need to ask that are different. you look at some of the newer players on the market, where the volume of trading is. i think it does raise questions both about the plumbing of the system, but also you know about implications on liquidity. >> historically the banks in making these markets. it would seem to be a better perspective of evening things out. the entities who are winding up taking their place, have made their money off volatility, if we take it away in the people who like to take the wave out give it to people who make more -- >> i don't think one can overstate the tradition of the banks doing things in their economic interest to maintain markets. clearly having inventory had been real. i also think if you look at what
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the definition of liquidity is some -- it may not be reasonable to think that there should be no price fluctuation, even if there are dramatic things going on. >> the time of the gentleman has expired. the chair now recognizes the gentleman from missouri. >> thank you, mr. chairman secretary thank you for being here. we're moving toward the fifth anniversary of the pass around of dodd frank. many of us were here during those turbulent and troublesome days. we know that great care was taken in the creation of this act. and we think that we made significant progress. and i think you apparently agree with us as well, that we have
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made tremendous progress. and regulators have moved to -- toward implementation. some of the rule making i agree with, some of it i along with my colleagues have challenged. when you think about dodd frank as a whole. what do you think is the most significant thing left undone? what would you want to see right now completed so that we would have the full strength of dodd frank at work preventing another collapse? >> that's a very good question. there's pieces that need to be completed, and that's not really what you're asking. you're asking, what is the area that we haven't addressed. i'd have to say gse reform is the area we haven't addressed. it would be a good thing if we would -- i'm not sitting here today optimistic that that he is
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going to happen legislatively, it's why we engage so much in the senate in the bipartisan discussion to try to work through an approach to gse reform reform. you mentioned gse reform. there are a lot of courses. doing a great job of -- at least some of the work he's doing some of the housing needs we have in the trust fund. one of the things that i -- you may be able to help me with -- what do we do to enable private money to move back into the market market. >> look, i think that there have
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been some small steps taken but there needs to be an active effort to look at what can we do to have a more private active industry. most mortgages are backed by fha or gse. it's not a great place for the industry and the market to be. which is why i said gse reform, it's a path toward private active private marketplace. and. >> but you -- >> all right, sir. the experiments that have been successful, we see there are ideas there, that you can insulate the public from the first risk and start to bring
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private money into the place. it can be through mortgage insurance and capital market products. more thought has to be put into that area to develop it further. >> you do believe there's an equal secondary market? >>. >> sorry. >> you do believe we need a secondary? >> yes, i think it would be good if there were more private nongovernmental -- >> so the gse's would be a hybrid? >> yeah, or they would have competitors. >> i think there's a -- in this committee, there's some suggestion from time to time that the gse's are not even needed needed. one of the things i'm concerned about, when some prefer it be completely private whether or not the private market you
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believe the private market has an appetite to fully take over or in my -- i would re-enter the market. >> i think right now the structure of our mortgage industry makes the continued operation of fanny and freddie necessary. the idea behind gse reform was to be able to chart a path where there would be a different marketplace in the future. we live in the present. we live in a world with fla and fanny and freddie. >> the time of the gentleman has expired. >> thank you, mr. chairman, very much. and for the record, mr. secretary, one of my colleagues earlier asked if the gse's have repaid the money they have borrowed from the american taxpayer. the simple answer that my colleague tried to elicit was
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that payments they have made to the government now exceed the rescue funds they received. mr. secretary i think you agree here this is not the real answer, nor the real question. the real question is, have they repaid their debt to the american taxpayer? for that answer, i think we can go to the federal reserve bank of new york, that was asked that question. and they put it this way. should these figures be interpreted to mean the treasury and taxpayers have been repaid by fannie mae and freddie mac. and the two firms pay kev tends to the shareholder. no. taxpayers are entitled to a substantial risk premium government support has lowered funding costs and boosted profits, the government has never collected the commitment
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fee that the government has owed from fanny and freddie. >> the false narrative that is perpetuated is that taxpayers have been repaid. it's time to end conserve it othership and return control to the shareholders. from your comment earlier, i assume you disagree with this narrative, and agree with the conclusion of the fed, that failing to work to wind down the gse's and give space for private capitol to come in would be a colossal missed opportunity to put u.s. residential mortgage finance on a more stable long term footing. >> congressman, i totally agree. and i was trying to indicate in my response earlier the risk is being born by taxpayers on an on going basis. and the conserve toreship is not over. i would only add one additional thing to what i said earlier,
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the damage done to our economy by the housing crisis was far more than simple amount of money that was put into the gse's, and i think americans are still healing from the pain of that financial crisis. so i think that the right thing is to do gse reform and get on to a new restructured system, but it is not the right time to be talking about ending the conserve conservetorship. >> i think on that gse reform concept. i'm endorsed reforms that would increase private sector participation in the secondary housing market that would limit disruption to the housing market. if you look at the particulars, more risk sharing is something that can be done to create a lot of space here. a common securitization platform is something that works for the
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gse's and brings in private capital to use that platform. common mortgage backed security would be a good start for congress to pass this year. >> i think the items you just mentioned are the kinds of things we've been talking about and thinking about. obviously there is a common security platform being built. it's something that could be expanded beyond the gse's and be available more broadly. the more we are able to lay a foundation that a private securitization market can could be built on the better off we would be. >> if i have a minute here, i'm going to push -- last week the treasury department announces deliverables for the upcoming strategic and economic dialogue with china. one of the issues a few years back ownership caps were raised from 33 to 44%. this is largely symbolic, it doesn't provide further benefit to firms operating in china. when chinese institutions invest
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in the u.s. they face no ownership cap, or activity restrictions. and this is just one of many impediments that our financial services firms face, when operating there. i wanted # to raise with you that issue and also i raised with you earlier that on this technology restriction, we've got china agreeing to delay implementing a certain restriction on its draft anti-terror laws that would require foreign companies to hand over their encryption keys. clearly our banks and financial services firms, technology firms cannot operate under those conditions in china. recently we were in shanghai and they were pushing that. it is still on third reading, the people's congress is adjourned until next year but that still hangs out there and so we need to have greater push back -- >> i have -- i agree with you totally, i have push back with china's most senior leaders on this issue, and have made it
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clear to them that it is a significant issue here, and it's something that in the context of both the leaders meeting we need to see movement on. >> thank you, chairman. >> the time of the gentleman has expired. >> thank you so much for joining us today secretary leu. i can't resist asking questions about liquidity as well since that's come up several times. i want to take a different approach. as opposed to the required capital standards. i was wondering, in your testimony, you mentioned that it's been a year now since we have floated institutional investors, and i was -- at least your executive summary was not very descriptive of how that's been working.
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i'm wondering if we have seen less use or about the same of assets which are typically a little more liquid than other investments in the money market mutual fund. >> congressman, first the rules i don't believe are effective yet, they were put in final form, but with the future effective date. i think we've seen a continued reduction on short sale funding which is a good thing. we have large amounts of investment in money market funds. and we saw in the financial crisis that there was run risk there, and the reason that the rules were put in place by the sec was to create a safer path forward. i certainly will keep an eye on that as it's implemented, we've
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made clear we have to keep attentive to whether or not they are sufficient or whether there's a need for additional policy. >> but it would not be a good thing if we were to close down -- or essentially shut down the money market? prevent those institutional investors from having the liquidity? that would be something you would be watching out for? >> right, the problem is is that the connection between the money market funds and the rest of the financial system, what we saw during the final crisis was that the risk of money market investors, institutional investors leaving -- selling their position was creating the risk that the overnight funding that the largest financial institutions relied on would evaporate. and that could have caused the entire implosion of major financial institutions.
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we're in a much better place, because there's less reliance on wholesale funding and we have rules in place to make it safer. >> you mentioned also that the threat of migration of servicing from banks to nonbanks recently announced ail gore inch mick lending that goldman sachs wants to do. really demonstrate there's a change in the market structure there's more risk taking incentives. i'm wondering in that context whether or not -- how nonbank sifi's, do you think it's more important to focus on a few industries, fewer institution? or what do you see? do you see an expanded role in the fsoc given the change in the market structure? >> i think we have tried to be very careful and analytic in the approach and not to overreach
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and go into spaces that we don't need to be or belong in 37 the institutions that have been identified are market utilities that have cross cutting exposures. and the largest kinds of firms that are not bank firms where the doerm nation was made that the risk is there. it's not that we're looking to regulate more firms for the sake of regulating more firms. we're going to continue to go through the criteria and we're obviously getting to smaller firms as we get down the list. >> thank you, secretary leu. i was stunned at some of your comments to mr. cleever about gse reform and also that negative equity has declined. homeowners are in a lurch after this recession. a lot of housing in my district deteriorating because you can't
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lend for needed improvements in the home basic things like roofs, plumbing and so on. i guess i just want to get your insight about the health of the homeowner in this environment. >> i would be happy to follow up, i don't have time. i have tried in a few instances to express the concern that credit worthy borrows should have access to the market. and there are a number of things we're looking at in that regard. >> the chair now recognizes the gentleman from florida, mr. pozzi. >> thank you, mr. chairman. mr. secretary, in october of
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2013 the online publication repeal factor.com, submitted a freedom of information request for documents concerning the intergovernmental agreements with the united kingdom, switzerland and canada. the department promptly acknowledged a request on october 24th 2013 stated that expedited treatment has been approved. this is a letter from your agency. however since then, there have been no responses from the department. despite repeated follow-up inquiries from the requester. on january 27th of this year, 15 months after the initial request, i sent you a letter asking for prompt action on the request, and to keep me informed on the response that would be fourth coming. despite additional inquiries, the only answer i received so far is we're working on it.
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it's now been 20 months. almost two years since their simple initial request under the freedom of information act, and five months since my letter inquiring about the status of that request. is this the treasury standard for expedited treatment? >> congressman, in general our performance on foya is better than that. i'm not familiar with the specifics, i'm happy to look into it. >> you know it's just hard to believe that there's some season the department is -- >> i'll have to look into the matter and get back to you. >> stonewalling that one. >> on another matter, i'd like to bring your attention. the fiscal year 2012 financial services appropriations bill included report language directly to the secretary of treasury, to submit a report to congress regarding the
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potential risk to the u.s. financial markets and economy posed by financial terrorism in economic warfare. i subsequently met with treasury assistant fitz pain in august of 2012 and was told the treasury would work on that. the report language also included in fiscal year 13 and 14 appropriation bills, in july of 2013, my staff sent nearly a half dozen e-mails to the appropriate treasury staffer for a status update. those e-mails went unanswered. finally, in fiscal year '15 that became public law. the actual bill language was included to the same effect. the secretary of the treasury, in consultation with the appropriate agencies departments, bureaus and commissions that had expertise and complex financial -- house of representatives in the
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senate committees of financial service -- not later than 90 days after the date of enactment of this act on warfare and financial terrorism. congress has thought the issue was important enough that it has included language as far back as fiscal year 2012. the department isn't giving this matter the same attention. i was hoping you could provide us some information about your progress on the report. as the secretary provided this report to the relevant committees in congress, given the department has had knowledge of this issue for over three years, i would have thought the department would have prepared to meet that 90 day threshold set by congress. when can we expect the report? >> i'll have to check on the report the economic of economic warfare and terrorism there's no agency in any government of the world that does a bit more effective job of treasury. i'm happy to defend the record
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we have here, we really are the global leaders making progress in this area. i think it's an area of great bipartisan consensus. >> just doing the report as the law requires would be a great way to boast or toast what you're doing if you would just -- >> i will check on the report. it takes a great deal of my attention and the world's attention. i just -- the report i'll have to check on. >> so will you have someone get to me in the next week on these issues? >> we don't have to wait another two years for that one? and let me know the stats of this report within the next two weeks? would that be too much? >> we'll get back to you. >> i heard you say yes a little while ago to somebody on the other side i was hoping we could get the word yes twice in three hours can we expect that maybe in a week? >> i don't know the status of the issues are, we'll get back
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to you promptly. >> time of the gentleman has expired. the chair now recognizes gentleman from texas. mr. green, ranking member of our oversight investigative subcommittee. >> thank you, mr. chairman. i thank the ranking member i thank the witness for appearing today. mr. secretary in your annual report you cite some concerns about cyber security. ironically yesterday the subcommittee on oversight and investigations held a hearing on the cyber security styled, global perspective on cyber threats. one of the things that we took away, or i did, from this hearing is that there appears to be clear and convincing evidence that cyber threats and attacks
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pose a clear and present danger to our financial system. and i'm pleased to see that you have addressed this and you need additional assistance pursuant to what i'm reading. you indicate that you would like for congress to provide the financial regulators with the authority to oversea third party vendors. and i believe i have some sense of why but i think that the record should reflect your thoughts on why this is so important. >> congressman, this issue of cyber security is it obviously a new issue it's gone right to the top of the worry list and priority list that we have. as i talk to ceo's it's the top issue that many of them have. the challenges are many. it is hard to protect a system, it's hard to have individuals in
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the system. operate in a way that makes it as safe as possible. i think the financial sector is at the lead, and we have a lot of work to do in the financial sector. there's many other areas where the exposure is even greater and some of them overlap i mentioned earlier, if your power and phones are not there it's difficult to run a financial institution. it's very much in the mind of the regulators and the industry. the more tools we have to work together the more likely we are to be successful. a threat that shows up in one place. if you know about it you can look for it as opposed to being blindsided by it. we're making progress we're -- there is much better sharing of
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language than there was. but i don't think we are where we need to go the passage of legislation to enable the greater sharing of information would be very helpful. >> i want to concur with you, the witnesses who appeared yesterday all indicated that you are at the top of the game as it were. that you're doing better than most. >> i don't take much comfort in that though. >> they didn't say there was absolute security. and i understand this, my concerns have to do with the need for authority. what would you have us do immediately to give you this authority. it's in broad terms here, are there specifics you can call to our attention? >> the cyber security legislation that's pending would take down some of the barriers for sharing of information and collaboration in the private sector. getting that in place, would be
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quite helpful. we're doing things now on a voluntary basis where there's risks the firms have to balance, which would be very much at ease if the legislation were to pass. we have executive orders. i would be happy to follow up with you on more specific issues in the financial space, that could be helpful. >> thank you. and finally, this -- you have indicated that you believe that you should be allowed to coordinate a national plan as it were to deal with these responses to cyber threats. and you'd like to coordinate this with law enforcement, homeland security, as well as regulators. how far alonger we with this concept of your having this opportunity to coordinate a national plan. >> well, we're obviously within the federal government we collaborate quite a lot, dhs plays the lead on cyber
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security, i'll tell you in the fine space we have a regular meeting by -- amongst the agencies that work most closely together, and we're looking at what we can do to be more prepared and obviously that gives us the ability to reach out more effectively and develop a plan. >> thank you for your service, and i yield back. >> time of the gentleman has expired. the chair now recognizes the gentleman from south carolina, mr. mull veinny. >> thank you. mr. leu in october, you went to the senate finance committee and had a hearing concerning prioritization of payments, you told them at the time that the systems are automated to pay, because for 224 years, policy of congress has been to pay our bills. you went on to say it wouldn't be easy to pay some things and not others in may of 2014, you gave this chairman a letter saying something slightly different, you said, if the debt limit were not raised and
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assuming treasury had sufficient cash on hand, the systems would be technologically capable of making principle and interest payments while the treasury was not making other payments end quote. when did you come to learn that new york fed was technologically capable of making payments set forth in your letter to the chairman of may 2014. >> congressman, i don't remember the exact date. i can tell you the statement i made at the senate in october 2013 are entirely consistent. what i said in october 2013 is that we make tens of millions of payments and we don't have the capacity to pick and choose among all of them, i didn't address the question of, is it a technical capacity to pay principle and interest. i did indicate that we do have the technical capacity it would be terrible thing to do you would be defaulting on something else, a medicare payment or on a
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veteran's payment or something else. the only solution is to raise the debt limit and not put any president in the decision where they have to make the decision do they pay one thing, but not the#bdj other? >> that was a really good answer the first three times i asked it, i asked you that same question sir, in may of 2014 and you told me you would have to check. when you came back in march of 2015, you told me you had checked but you had forgotten it, and you didn't remember it on that day, but you would look into it again. i sent you a set of written questions and asked you the exact same question. i got two pages with no answer in it. i'm not going to ask you any more questions mr. leu. i feel like i've given you enough opportunities to answer that question. when did you know? it's an answer you should know. if you don't know you should be able to go back and look it up.
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in fact one time you told me you did go back and look it up, and you knew it but forgot it before you got here. mr. lynch asked you whether you thought your answers to this committee were disdainful. you said, no, you thought they were rev ran the. i kept waiting for the laughter after that. i've asked you some really serious questions, we've asked you some really serious questions. the other questions i asked you, not the first time, this is not an empty question, mr. leu. we try to make you look bad. we are interested in answering the questions because of the market turmoil always raises its head as we come up against the debt ceiling. in addition to the question i asked you about when you knew i also asked you i said in the event we reached the debt limit and exhaust extraordinary measures, can the treasury department continue to make principal and interest payments on the debt? you've had, by the way, six
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months to answer these questions. i also would ask you, we commit in the event we reach the debt limit and exhaust extraordinary measures, the treasury will continue to make principle and interest payments on the debt. you didn't answer that either. what are we to imply nor your refusal for a year and a half to these questions? >> well -- >> no i let you go until you stopped. in fact i was even go to go until i had a minute and a half left. you had your chance, my turn. we are interested in asking these questions, because we are concerned about what happens in the markets. we would hope that the secretary of the treasury of the united states would be just as concerned. your name is on the money mr. leu. we have given you a chance to calm the markets. you've refused to do so. we've given you a chance to give this committee an answer, you refuse to do so. number one you don't want us to
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know the information we ask for because it's harmful to you or the administration. and the other implication, is that the answers regarding payments, are not being given to us because you want the chaos. you think it's preferable to you and your administration this administration to have the chaos, it will help you achieve politically what you want to achieve. i'm done asking mr. leu. when the chaos comes it will not be on the shoulders of the people on this committee, it will be on you. you've had a chance to calm the markets and refuse to do so. >> the time of the gentleman has expired. the chair now recognizes the gentleman from minnesota, mr. ellison. >> i'd like to thank the chair and the ranking member for the time. and i'd actually like to thank you, mr. secretary for answering some of the written questions i'd give you. i know it's not easy doing that. you did give us some answers and they were answers that we can
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use, i want to extend my thanks and appreciation for that. you're going to get a question from me about somalia. i know you're shocked. what i'd like to ask you is if you have any information on the bill that we passed last year into law. in was a bill we passed last year that was called the money improvement act. the goal of the bill was to improve oversight of nondepository financial institutions, now that the law is in place, all well supervising the money services businesses. i just want to know what you know, and if you don't know anything i understand, because i didn't tell you i was going to ask you that. if you do know, i would be happy to get a report. >> congressman thank you. as we've discussed many times, this issue is a very important
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one. and we're concerned about the problems that families are having in making payments. we're working on the implementation of the legislation, and i'm happy to get back to you with a more detailed response on the status of the implementation. we're more broadly working on this issue of how to deal with remittances in somalia. as i think you know, we're involved with the world bank to develop solutions to the problem. and that really means building up some capacity in the somali financial system. right now, there's not a real financial system to engage with. we have had meetings at a senior level in somalia, the political level at the central bank level. i know that our undersecretary will be traveling to your district to have some meetings on this issue. >> well, i appreciate that. and i just want to say again, i'm four square with the administration's effort to stop
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terrorist financing on a task force to help achieve that. on the other hand we can bet so successful at that effort we close off all the money, that i think would be unfortunate, because it would serve the interests of el shabaab and terrorists over there, to see the collapsing of the somali economy. which depends on the remistttances to the degree of 40%. i would like to talk with you more about the implementation of that program. i know that you all are doing some technical assistance to somalia. i talk with political leaders there, and try to give them my best perspective on how they can improve their system. could you talk a little bit about the work that you all are doing on that technical assistance area? and what sort of message that you'd like them to receive in order to develop that solid banking system that i think
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they're going to need. >> there's not an easy answer to that question. it's hard to exaggerate how little they're starting with in terms of building a functioning financial system. and the tragedy is that there are legitimate transactions like family remittances that should be able to go forward, it's very hard to know that the money isn't going to go into hands that will do real harm. trying to figure out how to build that system is why we're working with the world bank. we can't go into somalia the way we go into some countries because of the security conditions. we have people coming out of somalia into other countries for training. it's not the most efficient way to do it. our people are great when they can go in and work with people side by side. we just can't do that in somalia. we're trying to do it offsite, to help them build the skills. it's going to take. it's a process, it's not something you can just hand over and have a functioning system. they're trying, we're going to
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work with them and we have to be creative finding the ways to start that building process. >> i want to urge you on behalf of the people who live in minnesota and many other parts of this country. we're actually going to start a somali caucus because we have constituents who live in both districts and definitely want to see them -- see that country get stable and strong and not be a haven or an attractive nuisance for bad people. we try to do our part, and we hope you will continue to push with that technical assistance. >> we will do so, and we will continue to work with you and try to find a solution to this. >> the timing of the gentleman has expired. the chair recognizes the gentleman from tennessee mr. finger. >> thank you, mr. chairman, thank you for being here today. i'm going to go back to an issue you and i talked about a few months ago, liquidity. recent comments from larry somers, former treasury
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secretary under president clinton and later served as an adviser in the white house. he recently warned regulartory authorities have made a mistake, when they looks at each institution, you'll be safer if you withdraw from the markets a bit. and forgot if all institutions withdraw from the markets a bit, the markets will be less liquid. i think there is real issue there, frankly a lot of the effort that's going into macro prudential should be into making sure we have liquidity. what is your reaction to his comments about the role of the regulations, not just dodd frank, but layered capital and liquidity mandates? >> as i've said in response to several questions today, i think this issue requires our very serious attention, i think there are a number of factors that have been at work. it ranges from the point we're
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at in the economic cycle and the volatility that's natural at that point to the emergence of new market mechanisms that are different and present different risks to the volume of corporate bond issuance. i have also said that we have -- our eye on whether or not there are regulatory issues it's one of the things we need to look at. so i'm not approaching this from the point of view that we know exactly what it is. frankly, i don't think anyone knows exactly what the answer was. >> you think it would be a possibility that it could be over regulation. >> i think the factors i described i know are at work. the question of regulation is much more speculative. people have jumped prematurely to a conclusion about regulation, which would take our eye off of where the real risks lie. >> would you say we need more regulation. >> we have come a long way since the financial crisis. our system is safer and sounder
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we have the ability for our institutions to with stand a bump in the road that they didn't have before. that doesn't mean we should ever stop. >> you think more is needed? >> i didn't say more or less, we can't say that -- you know you can't take 50 years between looking at these questions, that didn't turn out so well. we need to keep our eye on the future, and we have to to be open to the possibility that there are multiple different factors at the core of an issue. on something like liquidity it is a fundamental importance that we have a deep and liquid market here. you still have to separate out treasury markets from corporate markets to high risk markets. they're not all the same. liquidity issues aren't all the same. >> summer's comments have been echoed by everyone, many overseas regulators such as mark carney at the bank of england. we talked about you issuing a
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data driven analysis. and i think you have said it's going to be in a white paper coming out. >> hopefully -- our goal is to get it this summer, and we'll share it as soon as it's completed. >> it seems like we -- every time we have a hearing, we talk about the problems that we face, and more regulation. i know i'm going to differ with you, and i know you have -- >> it didn't sound -- >> i know, it sounds like you are inclined to be for more. >> we have to be open to less also. i didn't say more. >> i will -- >> get you over to more or less. >> it's what seems to be happening is the more liquid that's tied up in the markets it's not the bigger institutions that pay the price here. it's the small guys. it's the guys back in states like tennessee and arkansas that end up paying the folks at the bottom, and we need to make sure that when something does happen, there is enough liquidity available to take care of these issues. thank you. and with that i yield back the
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balance of my time. >> chair now recognizes the gentleman from colorado mr. perlmutter. >> thanks, mr. chair thank you, mr. secretary for staying cool under the withering cross-examination of my republican colleagues. i just really have a different view than the chairman than mr. duffy as to what's going on in the economy. you may as well start with all the records being set by dow jones. it's up from 6500 at the end of george bush to 18,000. the s&p 500 from about 700 to 2100. the nasdaq is three times what it was. foreclosures are down, very low, there's been a tremendous improvement across pretty much all sectors, from manufacturing to hotels to whatever. so when they're talking about calming the markets and you're causing them to royal. i want to thank you for rebuilding the markets.
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from the recession that we were in at the end of george bush. i don't know if you have your report in front of you, but there are some very important graphs that i'd like you to take a look at if you have your report in front of you. so let's take a look just as easy ones, starting with 4.1.4. that is just for -- under the obama administration, we see oil imports drop and increase like we haven't seen in decades. do you see that one? >> i do. >> how about 4.1.6. civilian unemployment rate dropping like a rock? this is on page 20 of the report. after the 2007/2008 recession. you see that? >> yes. >> now let's talk about fsoc. if you would turn to page 62 and 63. i want to look at graphs 5.3.16
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and 5.3.19. see those? >> yes. >> if you could tell us what graph 5.3.16 is? >> now, you're -- i read the words, i'm looking at some of these graphs. >> let me tell you what it is and then you can expand on it if you like. at the -- as the recession took place, starting in 2008. 2007 and 2008 we saw loan loss reserves fall. so banks couldn't with stand more and more losses. since fsoc was created in 2010, what do you see in terms of the loan loss reserves? they've almost triples. >> we're seeing performing loans doing better and the foreclosure issue settle in. >> now let's look at the one that's really quite telling. that's 5.3.19. fdic insured failed institution
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institutions, you see that? >> my friend the chairman was talking about this recovery, and why isn't it bigger, other than the fact we have 13 million new jobs, we see pensions at all time highs. but under republican administrations, i think between 1980 and 1990, we had the reagan administration and the first george bush administration, look at the number of failed institutions. you see that. >> i do. >> it falls off to virtually zero under the clinton administration. there were no bank failures, you see that? we see a tremendous spike in failed institutions, you see that? >> so now it's fallen off precipitously. we're here to talk about the fsoc and about dodd frank and putting some structure into the market so we don't have a failed banking system. would you like to comment on that? >> i think that you have talked about the improvement of the
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economy in a compelling well obviously the graphs illustrated but so does the number of people working every day. i think there's no doubt, but that the steps we've taken through wall street reform and f 1 oc have made our system safer. we also have economic recovery underway, which is why everything is also getting better. what i don't think we can do is kind of rest comfortably that there's no problem out there to worry about. because what will happen is, we'll get to the down point of a business cycle there will be stress in the system, and we owe it to the american people to make sure we're in a position when times get tough, that we don't go back to the 2007-2008 kind of situation. that's what we're doing. >> and i completely agree with you, that's why you need the loan loss reserves so you can with stand a down turn. that's why we take into consideration these precautions. if i were -- >> if i were my republican
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friends, i would be grasping at this straw too. i want to thank you, and i want to thank the president for putting this economy back on track. and i yield back. >> the time of the gentleman has expired. the chair now recognizes the gentleman from florida, mr. ross. >> thank you mr. chairman. >> pleasure to have you here again. i want to talk about the ultimate goal of fsoc. fsoc's goal is to reduce risk in the markets is it not? >> yes, it's to reduce, make sure we have financial stability always on our minds. >> and the elimination of risks too. i don't think that's the ultimate goal. let's talk about why i focused on stability. let's talk good stability. in gaining stability. we need to make sure our institutions have a proper road map. right now, we have a designation of a sifi that leads to an institution now trying to find
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out how they get out. i give you credit with what happened in february. allow opportunity every five years to get a decertification of being a sifi. my concern is why don't we have in place a road map. a precautionary measure to prevent them from ever being designated as a sifi. >> the process is not one where we assume everyone could be a sifi. to go through, the firms that present themselves because of their size, complexity and structure. >> true, but are we not focusing on more of a treatment for the cure instead of giving the prevention of the problem? >> i think the reality is, no two firms present themselves in an identical place. the way we go through the analysis looks at each firm and the risk that it presents. >> it should be done that way. in a proactive way, if these firms being looked at were given some guidance to prevent them
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from going over the cliff. we wouldn't have to have the designation. let me move into something quickly on asset managers. i think they're pretty important, and i have some concerns about them being sifis. for example, in dodd frank it says that some of the criteria to include are leverage, the extent and nature of the off balance sheets the exposure of the companies, the amount and type of liabilities of the company. let's talk about leverage. what is a leverage ratio that you would consider to be worrisome some 30-1? >> i don't want to give you a single number. >> so the smaller would be better? >> yeah. >> knowing that 5-1 may be a concern. >> it depends on what the investments are in. >> correct. >> it's a combination of leverage and risk. >> asset managers won't have a greater than one and a half to one risk. in fact, i think van guard is
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almost minuscule. it seems that that should be a consideration that would prevent them from being a sifi. >> we have made our focus for this last period of time looking at the activities that contain the most risk. >> but they don't really contain risk. they don't even have any collateral as such to put at risk. >> asset managers have different business models. some of them are leverage, some are not. >> but the leverage is minuscule. let me go into this if i can. once you're a sifi you become jointly and separately liable for all sifis, is that right? >> i'm not sure what you mean. >> the sifis themselves will bail out the sifis. >> i'm not sure what you're referring to. >> let me move on then to what the impact is if an asset manager were to be deemed a sifi. you of course realize the cost
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of compliance but asset managers deal in mutual funds 401(k)s investments that deal with people's retirements and pensions. there's a study out there by the american action forum that indicated that the capital requirements necessary if an asset manager was deemed a sifi could raise the cost as much as 25%, that cover the life of that program of the retiree could be over $100,000. will that not be taken into consideration when trying to determine whether they're a sifi or not? >> obviously those same retirees have an interest in making sure that they have access to their savings when they need them and -- >> but it could have a significant impact on the mom and pop -- >> i don't start out with the presumption that firms should or shouldn't be analysis. we have to come to a conclusion of what risk factors we're looking at and if they warrant any kind of action. >> i agree with you. i think it would be a good
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preventative measure to do it in conjunction with the institution so they can prevent that risk from being taken and continue in a financially stable environment. >> my sense is that the asset manager industry is very much offering its views as we go through this process. >> very strongly, yes, sir. my time is up. i'll yield back. >> the chair now recognizes the gentleman from maryland, mr. delaney. >> thank you mr. chairman and thank you mr. secretary for being here. i want to associate myself with the comments that congressman ross just made because i have a similar view on asset managers but i don't want to take the time on that. i think you talked about the prioritization of our debts. it seems like that's a misguided idea because the best credits in the world which obviously we should view the united states as certainly one of them never priorityize their debts. berkshire hathaway, exxon
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mobile, all their debts are treated the same where as weak credits are forced by the market to priorityize their debts. so it strikes me it would be a misguided idea to force the united states government into a position where it was somehow signaling to the world that we're a weak credit. very quickly if you don't mind. >> i couldn't agree more. i think that the reality is the technical question of could you pay a principle and interest misses the point which is that if you pick and choose what you pay you're going to default on something. >> and present very differently than the way we want the united states to present. >> even if you reach the conclusion that you had to do that because it would be disastrous not to, it's a terrible place to be because you're still in default. the only thing that solves the issue is that raise the debt limit. >> when you think about the role of banks which have been very important to our economy for a long period of time which is why the government has supported them which is why we also try to
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regulate them in ways that make sense, right now banks are not all that important when markets are good. there's a lot of other alternatives for liquidity, but they're really really important when markets are bad because there's no incentive for market-based participants to participate in markets when they're bad other than if they're kind of vulture investors trying to get really good deals. i worry that what happened with liquidity has put these banks in a position that if there were some kind of a crises they wouldn't be able to respond as well. i know there's a lot of reasons why this liquidity data is emerging, but it seems to me -- and this is coming from someone who is supportive of dodd frank. i think all of the things we did we obviously had to do. it seems to me the notion of having high liquidity standards for banks coupled with not looking at risk-weighted assets from a capital test and having this kind of overlay where you
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still risk weighed assets but you need a minimum amount of capital which puts a lot of capital against really low risk weight assets like treasuries, it seems to me those create very big incentives for banks not to be liquidity providers in a crises. do you agree with that assessment? >> i think the liquidity rules, the theory behind them, was you look at the overall exposure of the firm. they didn't make distinctions between different kinds of assets. i obviously think the treasuries in cash have a degree of safety that's different than almost any other asset in the world, but that's a different approach than saying everything is treated the same. >> would you support changes to the regulatory framework that actually eliminated disinsent tifs for institutions to hold treasuries in cash so that they're actually in a position to do their job in a crises? >> i don't think we have any evidence that they're not in a
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position to do their job. the treasury markets remain deep in liquid and as i've said a couple of times today, i don't think that what people looked at on october 15th in terms of movement on treasuries had to do with a lack of -- it wasn't the effect of any kind of regulatory environment. >> but the people running these institutions seem to think they have a disincentive to hold liquidity in cash. >> i've give you an example. i've heard a lot of them say as if it affects the treasury market that vol kerr has something to do with it. >> i'm talking about treasuries. >> i think you asked the right question, is it something in the leverage rules. >> it used to be no matter how many treasuries you had you didn't have to have capital against them. now you kind of do. so that in my mind, if i was running an institution that would make me have less of them. >> right. i think that it is very important for us to maintain the deep and liquid treasure markets. it is something that is part of what makes our dollar the
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world's reserve currency. it's part of our economic back bone. i don't see a weakness in the treasury market right now but i can assure you a day doesn't go by that i don't ask questions about it. >> xm bank, i've talked about ideas where institutions like xm are required to sell off some of their portfolio on a regular basis so there's better transparency as to how their assets are priced. do you support approaches like that? >> i'm not familiar with that. i'd be happy to look at it. i think the xm bank does important work for leveling the playing field for u.s. exporters. >> and i agree with that position. i just think additional transparency around how they price their assets -- >> i just haven't looked at that. i would be happy to look at that. >> the time for the gentleman has expired. the chair wishes to alert members to accommodate the secretary's schedule. we anticipate clearing three more members in the cue. presently that would be mr. stooifrs mr. pitten jer, and
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mr. barr depending on whether or not somebody else walks in on the democratic side. the gentleman from ohio is now recognized. >> thank you, mr. chairman mr. secretary. you've already answered questions from mr. duffy and mr. ross and mr. fincher about liquidity. i want to ask a couple things about that. you said you don't think that's a problem and to you the world is rainbows and everything is liquidity. >> i don't think that's what i said. >> you said there wasn't a problem with liquidity? >> i said we haven't seen problems in the treasury. i think there are issues about liquidity that require attention and i went through at some length the issues we need to pay attention to. >> great. let's talk a little bit about that. so you do believe that we need to give it a little attention. as your role of chair of the f sock, have you directed the office of financial research to
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study this problem and how the policies that are completed and proposed might come together to cause a problem, or have you asked them anything at all? some of us would love to see them do a study. i wrote them a letter asking them to do a study and i'm just curious if you've asked them to do a study on liquidity. >> they are doing work in this area. they've obviously issued some analysis, and i know they have other work that is ongoing. i think it's not just an ofr question but a question that we have to ask in domestic finance in treasury, securities and banking regulators have to ask. i think that there's a serious conversation in this area. what i've tried to make clear is that it would be a mistake to jump to conclusions about what the relationship between the safer, sounder world after financial reform and liquidity is. we have to be open to it but not
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assume that that's the whole explanation. >> i don't disagree with you which why i asked you if you had asked the ofr to do a study. you indicated there's some work going on. when can we expect to see a study? >> i would have to get back to you. >> please do because that's their job. their job -- it's called the office of financial research, so it seems to me that they are the most logical place to look at it. >> they've been doing a lot of analysis on october 15th for example, to understand what happened on that day, and they are very much in the space of helping to make it possible to look between the data that different regulators have and do the analysis. >> which is their job and i'm just asking you to have them do their job and make that available to us because as policy makers we would love to see that. it may impact some of the policies we decide to make. as somebody who enforces those policies that are made by congress obviously you have
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some ability to change the way you do your job too. but we would love to see that information and the sooner we can see it, the sooner we can make an informed decision as opposed to maybe me assuming it is a problem and you assuming it's not. >> i couldn't agree more that we have to understand things before we act. >> please ask them to do a study that is detailed with regard to this because i think when you see what's going on between the vol kerr rule and the department of labor and what's going on in the private sector separately from regulation where a lot of people are simplifying their business model getting out of risky businesses, those three things come together in a way that could really cause a liquidity crises in the future. i just want to make sure we look toward it and try to anticipate it and head it off. so please, i would urge you to do that. the other question i've got real
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quickly is with regard to designating systemically important institutions. has anybody talked to you about that because i didn't hear whether anybody had talked to you about that today? >> there were quite a number of questions earlier. i'm not sure what question you had. >> do you think the $50 billion -- let's talk about bangs for a second -- the $50 billion level, many folks including the federal reserve have said that's an inadequate and artificial number. how do you feel with that number in the law? >> i think that it's important that we use the flexibility we have to treat institutions of different sizes differently and we've tried to do that and we need to continue to ask is it being done as well as we can do it. i think it's a mistake to think that a $2 billion institutions is the same as a $50 billion institution or a $100 billion institutions. some of the suggestions i've heard about drawing the line say at $500 billion are very bad policy.
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that would take the next six largest institutions out of the heightened supervision. >> let me suggest an alternative approach. have you looked at non-bank assets, the assets that are not under the covered institution? i'd ask you to look at that because that's where the systemic risk is indicated. >> the time of the gentleman has expired. the chair recognizes the gentleman from north carolina. >> secretary there's been some discussion today a considerable amount regarding the debt. from what i understood you seem to be dismissive of this. do you see it as a threat? >> i spent most of my professional life trying to control spending so i don't dismiss it at all. i think we've made enormous progress. >> do you see it as a level of concern as much as iran in terms of national security and
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economic security? how would you place it? >> if we had stayed on the course we were on in 2008 i would say we've made progress -- >> with due respect, this is the question i'm asking, how do you view the threat? do you view it as important, as a concern that we have with iran and the security threat there? the economic threat that we have with the 1ñdebt, is that as compelling to you? >> there are obviously different kinds of threats. we have made more progress on our fiscal position than in terms of moving iran. >> you heard the statement from the admiral earlier and from peter orzach still today, the former budget writer for president obama, still talking about the direction of spending and the concerns of the debt. i was with irskin bowls over the weekend. he made a statement regarding
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the spending levels and the debt and where that's headed. a lot of people see it as a major priority and a concern. what i'm asking you do you see the same level of concern when you put your head on the pillow at night, does that keep you awake as much as al qaeda? >> congressman, we have made enormous progress -- >> that's not my question in all due respect. >> it's the reason why my answer is what my answer is. if you had asked me this question in 2009 i would have given you a different answer. >> that's why i'm asking you today, is it a vital concern today? >> i don't think it's the most pressing concern today because we have controlled the rate of growth. >> $18 trillion is not a concern? >> we've stabilized the deficit and the growth of the debt. >> the trajectory of spending is going up. >> for the next ten years we have a stable deficit situation. >> october 2014 the deficit is projected to return to an upper
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path over the rest of the decade and beyond. sir, a lot of smart people disagree with you. a lot of smart people are concerned about the trajectory of spending and the imploding debt and the fiscal crises that it's going to put us in. what i'm asking you is, do you not share that concern? >> i'm telling you i do have a concern about our fiscal policy. we have to maintain a responsible fiscal policy. we also have to maintain growth and we have to -- >> do you think it's enough to talk about to bring it -- >> we've done more than talk. we've reduced -- >> sir, with all due respect, the man that you report to has he ever brought it up at inauguration, at the state of the union? he came here to the capitol this week to talk about tpa. has he ever come to talk to the members of congress about the debt and the -- >> congressman, when he took office -- >> do you advise him to address this debt concern? >> congressman, we have reduced the deficit percentage of gdp.
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that speaks to what we're doing and what we've done. >> there's a lot of smart people who perceive you and your job and have serious concerns about it. let me go onto another issue and that deals with fata. there are 34 countries as you know committed to the 40 recommendations of fata and going after terrorism and terrorism financing. whatc capabilities do we have of going after those countries that are not in compliance? we have turkey, we have qatar. clearly/á9 hey're complicit with terrorism financing. what role can you play as enforcer in that fata is not an enforcer, they merely have the standards, and yet clearly we see the infractions by those who, in some measure, would -- like turkey is a member of
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n.a.t.o. >> it's been an important process to bring the world together to control bad practices and bad activity. we are very much engaged on a bilateral basis with any country that we see doing things or not doing things that they need to do -- >> have you talked out turkey on the matter? >> i have talked with our counterparts in turkey about what they need to do in their banking system. >> have you called out qatar? >> i've talked to people around the world and they respond and they move. it's not an easy process where you turn a switch and have everybody doing everything they need to do. we're very engaged with everyone around the world. >> thank you for your service. i yield back. >> our last questioner will be the gentleman from kentucky. >> mr. secretary thank you for your patience and staying with us here. since we've talked a lot today
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about market liquidity, let me book end our discussion about that subject. market liquidity has declined 46% since its peek in march of 2008 and a ree9 "wall street journal" provides thiszv talk to almost any banker investorxn) hedge fund manager today and one topic is likely to dominate the conversation. it is the lack of liquidity in the markets and what this might mean for the world economy and their businesses. market veterans say they have never experienced conditions like it. banks have become to reluctant to make impacts that it's become hard to execute large trades even in the vast foreign exchange and government bond markets without moving prices. i want to address my question to your skepticism that regulation has played a part in this liquidity issue. have you heard from bankers many of your former colleagues on wall street and bankers that
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i've heard from as well, that they are less likely today to engage in market-makingties as a result of voluntaryvol kerr and other regulatory pressures. >> i've heard things supported by fact and some of which are not. >> as secretary of treasury you have -- >> i talk to people all the time. >> and they've given you that feedback. >> yes. >> what is it that leads you to doubt their sincerity. >> i'm not doubting their sincerity. you cited at the end of the piece that you read that people are saying they're having trouble moving blocks of bonds in any size they want without any movement of price. i think that that has something to do with market structure. you have different players in the market now. it may mean that to maintain liquidity you have to do multiple transactions. it's different from not being able to trance act. >> i understand, but would you
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acknowledge that when banks become reluctant to engage in liquidity? >> there's different kinds of market making going on. there's a lot of market making going on and you can't roll back the clock. the fact that you have the emergence of say electronic trading and high frequency trading, there's a lot of activity taking place in that space that isn't the traditional broker/dealer model. >> let me take one example. $350 billion of senior security commercial industrial loans provide financing for very dynamic job-producing companies many of which are in my own district. would you acknowledge that the volkerr rule has forced banks to take pretty significant losses in aaa and aacl krchltclo paper? >> obviously that rule is still taking effect. >> they're being forced to
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dwoois? >> the banks are not going to have proprietary investments they've had in the past. that means they're going to have to sell some assets. >> sir, do you know how many aaa or aa clo notes defaulted over the last 20 years? the answer is zero. the rule is forcing banks to devest in safe investments. you've got to acknowledge that that has a destabilizing impact on the financial stability of these institutions. >> what risk is there with aaa or aa notes that have never defaulted over 20 years and performed well over the financial crises? >> the objective of the rule was to reduce the level of risk exposure firms by getting them out of proprietary investments.
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i think we'll be better off when that's implemented and i think the markets will adapt. >> you don't dispute the fact that vol kerr forces banks to devest of aaa that hasn't defaulted in 20 years? >> with the exception of treasuries, it's a pretty tight rule. >> let me conclude with one other point. that is community banks. community banks in my district, the bankers tell me that dodd frank and avalanche and compliance kogs has really beared that out. there's consolidation in the industry. so the big banks the sifi banks, are larger, and too big to fail is a bigger problem now because we don't have diversity and we don't have as much competition in the system. can you respond to that financial stability issue? >> i think the consolidation was
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going on before wall street reform was enacted and i'm not sure that that consolidation is leading to the sifis taking over. it's mostly smaller banks combining. we have a real shared interest in making sure communities have access to community banks. >> i'd encourage you to look at industry kohlconsolidation as a problem because it is exacerbating too big to fail. yield back. >> there are other members in the cue but they will not be recognized today. i'd like to thank secretary liu for his secretary. all members will have five legislative days within which to submit additional written questions which will be forwarded to the witness for his response. mr. secretary, we would ask that your office respond as promptly as you are able and i mean this most respectfully and sincerely, we would ask that treasury would cease the response dump at midnight before your appearances. that is a sincere request to
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tomorrow morning we'll bring you another hearing on the recent security breach at the office of personnel management affecting the records of millions of federal employees and others who work for companies with government contracts. director katherine arch let ta will testify. that will be live tomorrow at 10:30 a.m. eastern here on c-span 3. tonight representative joe barton on the fcc rules and the issues of privacy in cyber security. >> whose information is it? is it automatically in the public domain because i choose to use a mobile app and we know that the way these things work, they go into the cloud and all that.
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can i use it and still have a reasonable expectation of personal privacy. if you take the latter view that it is personal that changes the way you regulate and legislate. if you take the position that i'm participating by using the app, i am foregoing my individual right to privacy, that's a different issue in its entirety. tonight at 8:00 eastern on the communicators, on c-span 2. when congress is in session c-span 3 brings you more of the best access to congress with live coverage of hearings, news conferences, and key public affairs events. every weekend it's american history tv, traveling to historic sites discussions with authors and historians and eye
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witness accounts of events that define the nation. c-span 3, coverage of congress, and american history tv. agriculture secretary testified last week before the house education and work force committee on federal child nutrition programs. that committee examined rules and regulations for child nutrition programs and whether reforms are needed. the health hunger-free kids act of 2010 is set to expire on september 30th of this year and this committee is considering its reauthorization. >> a quorum on education will come to order. good morning, secretary. welcome to the education work force committee. thank you for joining us to discuss an issue i know we all care deeply about. that's providing low income children and families access to healthy meals and snacks.
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we know the important role nutrition plays in a child's development and education. as i've said before it's common sense that if children are hungry or mall nourished, they are less likely to succeed in the classroom. that's why the federal government has long invested to provide the nutrition assistance they need. ensuring children have access to healthy food is a goal we all share and lies at the heart of our effort to reform federal child nutrition programs, many of which are set to expire later this year. we have conducted several hearings and briefings to learn more about these programs as well as the rules and regulations that dictate their implementation at the state and local levels. what we've learned is that the latest reauthorization of federal child nutrition laws is the most far reaching and costliest in a generation. current law requires the
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department to prescribe how much money schools charge for meals, what food can and cannot be served in schools and how much of it can be served. in other words washington is responsible for deciding what and how much our children eat. these regulations have created an environment where students are not getting the nourishment they need and food and taxpayer dollars wind up literally in the trash can. the president of the school nutrition association conveyed to the committee the concern she is hearing from school nutrition professionals across the country. julia described how regulations are resulting in harmful consequences that threaten the ability of schools to best serve students. she went on to decry the sharp increase in cost and waste and decline in student lunch participation under the new requirement. more than 90% of participating schools are complying with the law. first as we learn from the government accountability office, it is highly likely this number is overly optimistic.
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let's not forget that schools who choose to participate must comply with the law. the question isn't how many schools are in compliance. the question is at what cost. the department estimates that participating school districts will be forced to absorb $3.2 billion over a five-year period. to make matters worse fewer students are being served. since regulations were put in place, participation in the school meal programs has declined more rapidly than any other period over the last three decades. with 1.4 million fewer children being served each day. i saw these challenges first hand during my visit to the prior lake school district in savage, minnesota. students described smaller portion sizes and limited options that left students hungry and more likely to buy junk food. after the students petitioned the school board, prior lake has decided to drop out of the program next school year. it's the only way the school can
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meet the needs of its students. the problems with the law do not stop there. the office of inspector general identified examples of programs misusing taxpayer dollars raising serious concerns about whether or not we are sassassisting those in need. we must find solutions that will ensure children are well served. we know developing a one size fits all approach is not the answer. more mandates and more money aren't the answer either. instead we should look to improve these programs by giving states and school districts the flexibility they need to fulfill the promise of child nutrition assistance. duke storn from the not for profit organization share our strength advised at a recent hearing, quote it's critical to remove bureaucratic barriers and create efficiencies that allow us to reach those kids who currently go without. close quote. i look forward to achieving just that without imposing more
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burdens on our schools. mr. secretary thank you for joining us to share your perspective on these important issues. i look forward to our discussion. with that i will now recognize the committee's ranking member, mr. scott, for his opening remarks. >> thank you, mr. chairman for holding this hearing. today we'll discuss the implementation of the 2010 healthy hunger-free kids act as well as policy ideas for the upcoming reauthorization of the child nutrition act. i'd like to thank the secretary of agriculture for being with us. more than 60 years ago through the enactment of the first federal child new nutrition program, the school lunch act of 1946 congress recognized that feeding hungry children was an imperative for the health and security of our nation because so many of our youth were mall nourished and not prepared for military service. in 1946 the 79th congress passed the national school lunch act,
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quote, as a measure of national security to safeguard the health and well-being of the nation's children and to encourage domestic consumption of nutrition agricultural commodities and other food by assisting the states through grants and aid and other means in providing an adequate supply of food and other facilities for the establishment, maintenance, operation, and expansion of nonprofit school lunch programs. today we're faced with another crises that impacts our nation's national security. our children are now too obese to enlist in our nation's military. one-third of children in this country are obese or overweight and childhood obesity has tripled over the last 30 years. according to one report, our nationw3 has the second highest obesity rate in the world and illnesses are costing a shocking $190 billion a year. this not only weakens our economy but increases our budget deficits. while all segments of our population are effected, low
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income families are especially vulnerable to obesity and other chronic diseases due to the additional risk factors associated with poverty. the poorest among us have the least access to healthy foods. many times without full service grocery stores in their communities. in my home state of virginia the first lady has been focusing not only on ending childhood hunger but improving access to virginia's fresh and locally grown agricultural commodities. this helps children, supports our farmers and strengthens local economies. the negative affects associated with poor nutrition are preventible. we have a long way to go but there are positive signs of progress. special nutrition programs for women, infants and children has consistently proven to be a cost effective investment that improves the nutrition and
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health of low income families. for some students, their only access to nutrition meals is at school, through the school meal programs, and we know that children and teens can consume up to half of their total calories at school. during the average school day in 2011 more than 31 million school children ate school lunch and over 12 million ate school breakfast it's breakfast. it's up to us to ensure our children are fed nutrition meals. the first time in over 30 years this act has given the opportunity to make reforms that improve the nutrition and hunger safety net for millions of children. studies have shown that children are eating more fruits and vegetables and in many schools there has been widespread acceptance of the nutrition programs. as we address the implementation of the law it is important to
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remember that the guidelines are evidence based not based on politics or corporate bottom lines lines. they reflect the healthy eating habits most of us in the room try to follow each day. while there are a small number of schools still working to meet compliance with the new standards, the vast majority of schools, 95%, report that they are successfully implementing the new healthy meal standards. these programs are powerful tools in providing greater economic opportunities for at risk youth and helping them break free of the tragic cycle of poverty. it is critical that we work with schools to ensure that they have the support they need to be successful. i look forward to hearing about the usdas technical assistance nesh initiative, team up for success, and how the unique challenges of schools are being met. today we have the opportunity to discuss the scope and impact of the new school meals and wic programs and i hope we will also discuss ways to improve and strengthen them.
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this year's reauthorization of the child new nutrition programs should build on the progress we've made in the last five years. thank you, mr. chairman. >> all members will be permitted to submit written statements. without objection the hearing record will remain open for 14 days to allow material referenced during the hearing to be submitted for the official hearing record. i'll introduce our distinguished witness who probably needs no introduction being a cabinet secretary. as a reminder, the honorable tom vilsack is secretary of the department of agriculture and has served since 2009 and managed a staff of over 100,000 as they implement the administration's agriculture policies including oversight and implementation of the federal child nutrition programs. prior to his appointment, secretary vilsack served two terms as a governor of iowa as
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well as two terms as a state senator. it's always nice to have somebody from the neighboring state here mr. secretary. i'll now ask you please to stand and raised;ñ do you solemnly swear or affirm that the testimony you're about to give will be the truth, the whole truth and nothing but the truth. >> i do. >> let the record reflect our witness answered in the affirmative, and they always do. before i recognize you to provide your testimony let me remind you very briefly of the lighting system. some hearing rooms have gotten a lot more sophisticated than our old one. we've got the green, yellow and red lights. you can largely ignore those. i've never gavelled down a cabinet secretary for opening remarks that were a little too long, but please be mindful that we have a lot of members who want to ask questions. when we get to the question and answer period, i will do my best to keep my colleagues to the five-minute rule.
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mr. secretary, you're recognized. >> mr. chairman, thank you very much. in the interest of time, perhaps the chair would allow me to associate myself with the ranking member's remarks and the chairman's remarks relating to the integrity of the program. if you take representative scott's remarks and your remarks on the integrity of the program, you pretty much have my opening statement. with that i'd be happy to answer questions. >> did we even bother to turn on the green light. >> chris: mr. secretary, that's absolutely outstanding. that does set a record. >> put my on the clock. as i mentioned to you very briefly that i would give you a chance to talk about the numbers here, but i went to visit a school in my district to learn
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about the school meal program because some of the students had written a letter and signed a petition suggesting that maybe they ought to get out of the program. so i went to visit them and very, very nice school. students coming through the lunch program with amazing technology. they had a little card and they can put it up there and immediately the cashier saw who they were and if they were on the program. then i sat down with the four students and the principal and some other adults there as well. i found it very interesting in the discussion with the students, there was two young women -- this is a high school -- two young men. one of the young men was getting ready to go on scholarship out to arizona to play football. and i'm not sure how much he weighed. i didn't ask him, but well north of 200 pounds. one of the young women clearly weighed probably half of that.
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and yet part of their complaint was the system has got us trapped here because we have to have the same portions. and that doesn't make any sense to us. if you're going to go to play football on a scholarship it seems, they thought and it seems to be reasonable to me, you ought to have more food. so what was happening was that because the portions weren't large enough in all cases, they were taking their own money and going and buying food and it clearly was not the sort of healthy lunch that was being served in the school cafeteria. it was indeed a healthy lunch and they didn't have complaints about how the food tasted. they said they liked the broccoli, so i took them at their word and they liked the fruit and so forth. but they certainly were upset about the portions and the fact that they then had to go and buy more food, stop off at a fast food place or something like that, was clearly not what we're trying to get to here.
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and this was a relatively wealthy school and these kids probably had the money where they can stop and buy that food. some students without those resources couldn't do it. so it seems to me that while the students wanted healthy meals but the meals that they were being served didn't meet their needs and they were so upset about that that they petitioned to drop out of the program, now of course the school has agreed to drop out of the program how can you say if you are saying that the program is working as advertised when you have those kinds of problems? you clearly have an issue where a football player it seems ought to have a considerably bigger portion than someone half their weight. >> mr. chairman, i think i'd start by explaining that the standards that have been established were based on expert
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advice and direction from the institute of medicine in terms of what an average sized individual would need at that point in time during the day. it's roughly 25 calories less than the meals were previous to the healthy hunger free kids act. this is not, in fairness all you can eat at applebee's. this is a school lunch program. the reality is based on surveys the vast majority of high school students elementary students and middle school students have accepted and are in favor of these standards. a recent survey had 70% of elementary and middle school kids saying they liked the standards and 63% of high school kids. i don't doubt that you're going to find a few folks who have concerns and that's why we've suggested that they can bring a snack. there's no reason why they can't bring a snack to school. there's also a sharing table. opportunities for those who aren't going to eat everything
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that's on their plate for whatever reason can share with those who want more food. there are vending machines at the school that will provide consistent smart and healthy snacks. so there are ways to address this issue without necessarily rolling back the standards and creating a significant rollback. the reason why i associated myself with representative scott's comments is that we are dealing with twin issues here. we're dealing with 17 million youngsters who are food insecure. at the same time we are dealing with nearly a third of our youngsters who are obese or at risk of being obese and indeed our national security is threatened which is why mission readiness has been so strongly in favor of these standards, retired admirals and generals saying we've got to get our kids in better shape. on balance if you follow the expert advice, provide options and snacks and sharing tables and you see a preponderance of students accepting these standards, i think we are on the right track.
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i'm convinced that we have -- we've also looked at the issue of plate waste suggesting somehow that folks are throwing food away. the reality is harvard has looked at this the red center has looked at this and found kids are consuming more fruits and vegetables and there's no more plate waste than there was before the passage of the healthy kids act. >> my time has expired. mr. scott? >> thank you. mr. secretary, i understand that 95% of the school districts are reporting that they are in compliance with the upgraded standards in the last reauthorization, is that right? >> that's correct and that's why they're entitled to six cents reimbursement increase. >> is there any reason to reduce the standards? >> we have provided flexibility in sodium, whole grains and other aspects of the rule. i think we'll continue to look
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for opportunities to be flexible but i don't think you want to roll the standards back. >> are the standards based on medical and professional scientific advice? >> they are consistent with the institute of medicine standards. >> does the program community eligible where if an overwhelming portion of the students are eligible, that you can go school-wide and forget about eligibility and just serve everybody. can you talk about that program a little bit and how it avoids a lot of the administrative costs associated with the program? >> 14000 schools over 2,000 school districts and 6.4 million children are benefitting from the community eligibility program. it essentially says to a school district if you have more than 40% of your youngsters who are directly satisfied as being tannive elible or medicaid eligible you don't have to require a student to take an
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application form home have it be filled out by mom or dad and brought back to school and calculated and aggregated by the school district. it allows the school district to essentially receive reimbursement based on a mathematical computation. that's the amount of resource that the school district gets. school districts have -- about half have adopted it. i think there are two reasons why we need to continue to press this program. one is that indeed it saves money for the administration. roughly $29 a student is saved. secondly, it provides more accurate reads in terms of the number of kids who are actually going to participate in the program. so it reduces error rates and provides greater access. saving costs reducing error rates and greater access. we continue to promote this. one of the issues, frankly, is school districts use the free and reduced lunch calculation to
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determine their eligible for title one funding, so i've spoken to secretary duncan about whether or not we can create a similar mathematical formulation that would give over the issue with title one and i suspect if we did that we would probably see even greater participation. >> thank you. have you done any rules and regulation changes for the school breakfast and lunch programs that ensure that more children are participating? >> there are more children participate not guilty school breakfast. well over 1 million students are participating, 300 million more meals are being served this year than previous years. i think one of the greatest things that we've been able to do is to reduce the stigma of school breakfast so kids are not necessarily segregated at the beginning of the school day in the cafeteria, so that people can make a judgment about their financial well-being. and so based on those kinds of standards and based on those
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kinds of activities, we're seeing an increase. obviously we don't have attached to it additional reimbursement rates as we did with the school lunch program. but we are seeing increased participation and teachers will tell you that they are happy to see this because a hungry child is not a child who's ready to learn. >> have you seen any evidence that nutrition programs save money by reducing healthcare costs or other expenses? >> to the extent that we are dealing with the obesity issue, it's about $14 billion a year in annual health costs for kids currently. and those will increase when they take the chronic diseases that they're currently suffering from into adulthood. to the extent that we can get a handle on the obesity issue and to the extent that we provide proper nutrition to kids who are living in food insecure homes, we're going to see better healthcare outcomes and frankly we see that already with the wic
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program. more immunizations. >> and that reflects reduced costs? >> it obviously does. the same argument could probably be true for the summer feeding program as well. >> thank the gentleman. dr. fox? >> thank you mr. chairman, and thank you mr. secretary for being here. i want to associate myself with the comments of the chairman in terms of his comments relating to the imposition of rules from washington which impose one size fits all attitude. i think -- and my question will reflect that but you said something in your comments or in answer to a question that i think illustrates that so well. you said there's no reason why they cannot bring a snack. that is up until now. until such time as perhaps the
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agriculture department determines that children can't bring snacks. the attitude is you're allowing them to bring snacks. so that the rule making comes from here, the permission is being given by washington. that ought to be freedom of choice. the attitude that there's no reason means you haven't declared rule. but let me ask my question about the competitive foods rule because it goes along with that. you issued a rule in 2013 called the competitive foods rule. you couldn't estimate the cost or the effect on school revenue without any certainty, but you did note that 247,000 comments which focused on finances most of them were concerned that the rule would reduce school revenue. additionally, it's estimated school revenue authorities received on average 16% of their
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receive from competitive food sales. so how did you determine the rule was responsible action and requirement from this administration? >> well, first of all, let me clarify my remark involving snacks if i might. i wasn't suggesting that folks were being allowed to bring snacks. they've always been allowed to bring snacks. there's no prohibition and there never will be a prohibition about mom or dad allowing the youngster to take something to school to snack on. if i didn't make that clear, i should have. studies of the vending machines providing healthier snacks have indicated that there has not been a significant decline in revenue to school districts that have studied this and looked at this. i would say what's of interest to me is that we provided $94 million at the beginning of this process for school districts to be able to utilize the money to assist them in better
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implementation. today now five years after the passage of that act there's still $24 million of that resource that has not been spent by schools. we have encouraged school districts in states where the money has not been spent to encourage the utilization of those resources if schools are suffering or having difficulty. so it is odd to me that we still have $24 million on the table. hopefully this hearing will allows you to continue to put that information out so people take advantage of those resources. >> you can give me this answer later, but i wonder, have you tried in the department of agriculture to put the employees in the department of agriculture on the school food lunch program for a week or two to see how they respond to it? i think it would be an interesting experiment. but i have a second question. the usdas oig highlighted high rates of improper payments in the national school breakfast and lunch program. they said the lunch program is
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one of 13 federal high error programs. i know you and the ranking member talked about the integrity of the program, but what are you doing to address the high error rates reduce fraudulent benefits, and make sure the programs are serving those most in need. >> there are three reasons why we have the error rate that we have and i think we would be in agreement with this committee it's an unacceptabley high error rate. parents providing information about income is not necessarily accurate or complete. there's an obligation that they provide to the state and sometimes there are errors in that processf[jp'd there's an error at the cashier location when a person goes through the line. a couple things about this error rate. the dollar amount is a little suspect because if you're going through the line and you don't take one item that you're supposed to take, that entire cost of that meal is considered
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to be in error. so probably more information needs to be gleaned in terms of what the cost of these errors are. one, we've provided a series of professional standards that will i think increase the professional standards of the folks at the cashier's table so they will make fewer errors. two, we've begun the process of data mining to determine where we might provide additional help and assistance in schools that are repeatedly having problems. three, we are pressing community eligibility as well as direct certification because we know in the direct certification program there's a significant decline in errors when the direct certification process is used. we are also looking at simplifying the application and providing an online application so we reduce errors in that respect. we're also developing an office of integrity within the school lunch program. but we would have better results, i think if we could receive permission from congress to do more reviews of schools
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than we currently have. there's a it's the only program of this kind where there's a limitation where we can only look at 3% of schools. if we had an opportunity to look at more than 3% i think we would have greater accountability on all three areas. we are seeing a reduction in error rates on the obligation side because we've been working with states. we have work to do on the certification and the cashier side. >> the gentleman lady's time has expired. >> thank you mr. chairman and thank you, mr. secretary. let me ask a couple questions about greater access. maybe speak to some of the current barriers for year-round service that students need and how potentially this year's reauthorization could do a lot to reduce or hopefully eliminate some of those barriers. the healthy hunger-free kids act is very important. it extended service, involved
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community-based organizations year-round, extended weekends holidays. how do we -- how can we go forward to expand greater access to children and to families? >> i think one of the focuses that we've had is during the summer months. obviously i think as has been stated earlier, children receive somewhere between a third and two-thirds of their calories at school, and we are in the process of trying to figure out how to deal with those gaps. i'm proud of the fact that we're serving 23 million more summer meals than we did several years ago, but there's still work to be done because only 16% of kids who are eligible for summer meals are participating. we're looking at several things. one, we're looking obviously at greater partnerships. i was in baltimore yesterday at a library encouraging libraries to potentially look at sites where kids are spending a lot of time during the summer months. we're making sure that we reach out to schools and take a look
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at whether or not they might be willing to participate in the seamless school project which allows schools to the summer months. we're continuing to look for ways in which we can encourage organizations to participate. there's a significant effort relating to summer feeding which i think will go a long way to addressing some of the concerns that you have outlined. the community eligibility and direct certification efforts will make sure that kids who are currently not getting served in school districts because their parents don't get the application in or for whatever reason, those kids will be served, so we strongly encourage a continuation of those programs and expansion of those program ss. >> we received examples about the abuse of wic, the lack of
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choices, why some schools drop out i appreciate the fact that you reference those examples with the studies. >> just to be clear about this, since 2013 when we fully implemented these standards, 58 schools out of 99,000 plus dropped out of the program. some of the schools that were profiled in "time" magazine at the beginning of this process that dropped out are now coming back, in because they realized that they weren't going to save money, it was something that was necessary. with the resources and equipment grant s
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grants. the team up for success program allows us to have struggling schools teamed up and mentored, all of this is designed to provide assistance and help and we think it's making a difference. >> there's a system of budgeting for dynamic scoring. and as such, it never includes savings. and i wish that now with this new system we would include savings. because my question to you, nutrition, preparedness for learning. health all are investment ss in anticipation, what are we looking at in terms of what we're saving, not only society, but in terms of money as well. >> i apologize, i should have this number off the top of my head, there's been a study done
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of the wick program in terms of its potential impact and effect on children, women and infants. it focuses and recognizes with improved immunization, improved healthier births, we are saving money, to the extent that we get a handle on the obesity issue as we discussed earlier, that will help provide savings. but at the end of the day, this is about making sure that youngsters are in the best position to be as productive as they want to be and can. and the reality is if you're hungry or concerned about your self-image in school, you're going to be having a harder time. that's one of the reasons why we're focused on making sure these standards are implemented properly and making sure kids get access as they need. >> mr. thompson, you're recognized. >> good to see you. >> good to see you. i wanted to zero in on a certain
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question of the standards. you mentioned about academic professionals who were somehow responsible and behind the standards, although as i recall. and from the process, and also from the -- my visits, i spent a lot of time in schools, ate a lot of school lunches. it seems like our school nutritional professionals were largely ignored and they have a lot of concerns. my initial question i have for you has to do with the milk area. the standard reads that only fat free or low fat fluid milk 1% or less is allowed. if truly those academic researchers who set that standard were spot on we wouldn't be seeing between -- since 2012 and 2014, schools
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serving 187 million fewer half pints of milk, despite the fact that the population in the public schools is going up so i'm not looking for criticism i'm looking for solutions to that that. given what we know about the nutritional value of milk is significant, it's kaz for concern. to give schools more options recently introduced hr-247 in conjunction with my colleague. one of the bill's provisions would provide schools with the option of offering low fat 1% flavored milk rather than only fat free if milk contains no more than 150 calories per eight ounce serving. still concerned with the overarching purpose of what the 2010 act was written under. i just want to check. do you agree that declining rates of milk consults are cause
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for concern, should the usda work with congress to preserve milk's integral role on school meals. >> i'm going to get double teamed on this issue. i got to tell you, this is it my personal view, i agree with you. i think if adding that option would encourage kids to drink more milk, we should do that. >> i think a little bit of flavor goes a long way. >> that's my personal preference. i honestly, the challenge here as we've created so many options for kids today, in terms of what they consume. in terms of the nutritional bang for the buck there's probably nothing better than a glass of milk. so i think there ought to be a way of working with your proposal to provide a bit more flexibility. and hopefully we would see more
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consumption of milk. >> we're going to milk this topic for all i can switch over to a very important program, that personally my wife and i when we were first starting out with our first child, we were legible for the wic program, penny and parker were. contrary to the institutes of medicine, the final wic rule placed new restrictions on the availability of 2% milk nor children ages two or older. can you explain the basis for this new role and why was it finalized without allowing for a public comment period? >> i think there was an extensive opportunity for comment on the wic rules over the course of several years, we believed that we received all of the input that we needed to make a determination in terms of the wic program, i think the goal
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here is to provide supplement and compliment what people are traditionally and normally purchasing. it isn't necessarily to be the be all and end all, it is actually a compliment and supplement. i think the development of the wic package was designed to say, people are already buying a lot of this and this and this, what aren't they buying that they may be able to benefit from? i suspect that that's part of the reason, if there is a more technical reason for that congressman, i will get it to you. >> you mentioned 3% is what you're allowed to survey or measure. is there a number you would be looking for, if it's 3% now, what would you like to sigh it be. >> it will be more consistent with every other program where we have greater flexibility to check. what we do know is, the more we
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do of this, the greater the accountability. we can solve it and bring that error rate number down which you all believe is unacceptably high, and you're absolutely right about that. >> gentleman's tom has expired. with my dairy farmers smiling ever more brightly i'll recognize mr. courtney. >> thank you for your testimony and your leadership over the last six and a half years, eight and a half years. the ranking member mentioned in his opening remarks, the interesting genesis of school lunch programs that followed in the wake of world war ii. fast forwarding to the last reauthorization of 2010 as a member of this committee. i remember vividly some of those powerful testimony that we had was from retired military leaders who were describing a totally different challenge that our country faces now in terms of military readiness. mission readiness which you
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alluded to again is a group of 450 retired military leaders who just recently issued a report, which again reiterated the fact that one out of four 17 to 24-year-olds are not fit to fight, and one out of eight who are actually serving are actually obese, diagnosed obese that's $1.5 billion just to the dod's budget alone in terms of dealing with that program. when they say retreat is not an option, they're talking about retreat in terms of nutrition 58 standards, i think that's important to make that point clear. and i guess one question about the compliance issue, whether it's 90% or 95%, is gao. i mean what i think is important sometimes to not resite it is that what your department has been trying to do starting from zero in 2010 when the president signed this into law was
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