unemployment rate to decline until the second quarter of this year. as for detroit, the unimplemented rate of 15.8% is more than five percentage points above the national average. i would point out however that other great cities have faced similar challenges successfully. pittsburg went from being world leader in film production to -- pittsburgh went from road leader in steel production to economic wasteland when that industry collapsed. pittsburg's rebirth has been based on diversified employment in such fields as education and health care. their largest manufacturing firm is no longer one of the city's top 10 employers. the city's unemployment rate is well below the national average.

in pittsburgh, they helped spur innovation and economic growth. here at wayne state university and the university of michigan have played similar roles. . a recent poll shows that despite their acute awareness of the region's problems, 63% of respondents are optimistic about the future of the detroit area. that does not strike me as optimism. optimism. the now -- no

that with patience and determination, this can be a vibrant economic center once again. it takes some time, but it has been done before and it can be done again. we are trying to attract employers. i will bet on the people of detroit. let me now turn into freddie mac. let me turn to the broad priorities as identified by our regulator and conservator. the federal housing finance agency has described the three main duties of the government sponsored entities as follows. we are to provide ongoing

support to the housing market. the mediates witnesses in our company. -- we mediaremediate witnesses r company. we are to prevent avoidable foreclosures. first, i will describe our stable, ongoing support to the housing market which includes a large part of our every day mission. with the market's still see step, we continue to provide funding for mortgages every day in all geographic markets. we funded almost three-

quarters, 72% of all mortgage loans originated last year. gst, 72% last year. we have done this at a time when most other sources of liquidity have dried up. even when private label investors abandoned the market, freddie mac continued to serve our mission on behalf of homeowners and renters across the nation. in this kind of an environment, our cost of c and stability is very valuable. as the head secretary testified before congress in october, we cannot lose sight of the important role that the tse's are playing today in the recovery of the market. without them, they would not be mortgage capital available and it would not be available at the

rates that have been available. last year, freddie mac provided liquidity for nearly $550 billion in home loans. by purchasing or guaranteeing over half a trillion dollars in mortgages or mortgage securities, we helped to 0.2 million borrowers and another 350,000 of renters. compare all of this to the year 2006 when private institutions provided over 60% of the liquidity. we stay in this market in good times and bad. the history shows private lenders to abandon house and

when the going gets tough. we also look at the matters that are safe and affordable. freddie mac owns almost a quarter of the mortgages in the united states less -- get the account for less than 10% of the seriously delinquent mortgages. we own 25%, of which account for less than 10%. by contrast, private label securities represent only 12% of first mortgages outstanding, but they account for one-third of all seriously delinquent loans. when you ask people what fraction they are seriously delinquent, the estimates usually start in go up from there.

less than one than 25 of our loans are seriously delinquent. this record puts us among the very best in the industry. freddie mac is devoting tremendous energy and resources to the task of preventing preventable foreclosures. this is a new focus for us. we are a longtime leader and innovator in helping families hold onto their homes. for the past five years, we have worked to help half a million seriously delinquent borrowers avoid foreclosure. for some home owners, we modified the original terms of the loan to make it more affordable. to others, we offered forbearance, and agreement that temporarily suspend or lowest

payments after a job loss, health issue, or other major event. we also have repayment plans that had passed to amounts to monthly payments to bring homeowners coverage over time. in the first three quarters of 2009 alone, using methods like these that freddie mac helped pioneer could help nearly 100,000 struggling far worse avoid foreclosures. nonetheless, with over 4.5 million families on the brink of losing their home, there is a historic need for a national effort to address these precent -- pressing issues. we are striving to do our part in that effort. i want to talk about foreclosure but not exclusively

escalates to making the home affordable program. mha is the anti foreclosure and refinance program from the obama administration. we are presently focusing most of our home ownership preservation work there. it consists of a couple of main parts. a refinance program and a loan modification program. i will discuss both. over the past year, ours have flocked to take advantage of low interest rates and refinanced their home loans. before mha it was difficult for borrowers to qualify for refinancing if they owed more than 80% of their home's value.

however program -- they wanted to take advantage of the low interest rates available today. the loan to value ratio can be as high as 125%. the program has made a real difference. through the end of last year, we had refinanced loans for almost 170,000 families through this program. families often see their interest payments trot by thousands of dollars per year. together with our longstanding program, refinance about three

had a $79 billion in home loans in the year 2009. this created an estimated $4.5 billion in annual aggregate interest savings for more than 1.7 families -- 1.7 million families. the second piece of this program is called home affordable modification program. this part is designed to modify existing mortgages so they are more sustainable for the long term. through the end of last year, we had initiated nearly 143,000 trial modifications. borrowers are saving an average of $600 per month.

now it may be small compared to the nation's needs. the universe of @ risk borrowers we can help is less than one- tenth of the total. that is the fraction of seriously delinquent loans held by freddie mac. moreover, for a third of the homes on which freddie mac would like to arrange a modification are empty. it is hard to work out a loan modification when nobody is home. if modifying these loans racine, this program will not be needed. we are challenged -- we are committed to supporting this

program of the president. to be even more proactive, we have rolled out additional initiatives and began to invest $25 million in new strategies and products. this initial investment will allow us to see what works best. we are helping tens of thousands of families at the same time. for those of us working to help families save their homes, there is nothing more frustrating than an avoidable foreclosure. when there are so many options available to home owners, but they often do not know what to do or who to believe, who to trust. when borrowers actually work one-on-one with a trusted housing counselor, they are far

more likely to take the steps to save their home. for anti foreclosure team has been reaching out in unprecedented ways for at risk far worse. for example, we hired titanium solution, a national expert in contacting in counseling homeowners to go to the homes of borrowers, and explain, what will happen if they do not take action. when needed, they returned. the homeowners fill out the required documents. to reach even more the lynwood borrowers, our foreclosure prevention experts have teamed up with our team to pilot creative efforts. let me tell you about one we are announcing this week. it is a health network.

we are reaching out to those that have been confused by the@@ >> to give these borrowers confidential, personalized, holistic financial counseling over the phone and help them work through the different options for avoiding for closure. holistic counseling addresses credit cards and other debts, not just mortgage debt in isolation research shows that this kind of counseling that this can substantially improve a borrower's odds of avoiding for closure.

-- for closure -- forclosure. this includes a southwest solutions. they are an outstanding facility. they have successfully helped nearly 1400. the health network is national in scope. by working within national urban league, the national council and other established non-profit organizations, our goal is to make the same counseling available to thousands of freddie mac borrowers across the country. in addition, we will deliver these same kinds of counseling services through regional bar or health centers. we are announcing a were first pilot centers this week in

chicago, washington, d.c., phoenix, and the inland empire in california. the scale and scope of this pilot initiative is unprecedented for freddie mac. if it is successful, we hope to replicate it in other cities. all of these ambitious, aggressive efforts are directed as a difficult task to help more borrowers modify their loans and save their homes. all are premised on the view that we should give these borrowers the same type of personalized, sitting around the kitchen table guidance that they initially got when they first buy a home or apply for a mortgage. it helps them and starts them on the road to successful and sustainable home ownership.

we also estimate that freddie mac helps more than 250,000 borrowers avoid foreclosure in 2009 both to our traditional methods and this mha program. . let me conclude with a few brief thoughts on the nature of our housing finance system and the kind of secondary mortgage market that me -- that we need going forward. obviously, we want to make sure that freddie mac has a voice in the debate in the future. let me be clear. our role is to answer questions,

provide information, and be responsive. others will decide. others are the decision makers. still, given the opportunity, what kinds of facts we bring to the attention -- or will we bring to the attention of the decision makers? what are some of the key traits that we believe the u.s. secondary mortgage market ought to include? and do the gse's help the fought -- housing finance markets achieve these desirable traits? when asked, we will remind decision makers at freddie mac as a constructive, vital rule in the market that will help enable the housing finance to do a number of very important things. let me list five. first, we helped make possible the 30-year fixed-rate mortgage.

by giving families stability and certainty, this is a true economic aspect for our nation. second, we are the constants liquidity provider, the source of a mortgage market last year. we are the backstop bid, meeting our customers know that there will always be a buyer for our loan. it will keep lending and in the environment and keep prices more stable. we deal of innovation in the mortgage market's better than a purely a government entity. we are an important countercyclical influence that stays in the housing finance market even when purely private capital has pulled out. this has been proven by the

events of the last two years. we don't claim to be perfect. i am glad our regulator was strengthened and for the reform and regulation is virtually certain. we perform a vital -- the program is essential. we're making decisions about fmha and other issues without being guarded solely by profitability that no purely private bank ever could. there is much positive to be said about the gse's, and i hope the value will be recognized. that is what our employees care about and are deeply motivating. it means we are needed. we have a unique and vital role. there is nothing better than

having a purpose which is meaningful and important. it is why freddie mac's employees are the most committed i have ever had the privilege to lead. that is why a their special skills are so vital for the nation. with that, i want to thank you very much for your attention, and i would be happy to answer your questions. thank you. [applause] >> thank you for your remarks. we have a few questions here. the first one is really from a student that the student didn't quite get the chance to ask the question during the earlier session. the question is, can you hear me? kent is that better? how large is the risk of inveigh -- inflation over the next several years.

how will that affect the u.s.'s ability to run mortgages? >> there are two schools of thought about emulation. it is not much of their problem. we have enough unused capacity in terms of labor and manufacturing productivity. the companies will be able to raise prices over the next couple of years. there is some worry about inflation down the road. certainly, the fiscal policy right now is deeply -- deeply in deficit. many people think that it could, if unchecked, lead to inflation. inflation will not be much of a problem, and therefore, there is great likelihood that the interest rates will stay at their current low levels.

our forecast for the year 2010 is that mortgage rates will stay in that span of 5% or 6%. there could be some move up in mortgage rates as the government reduces their support of mortgage-backed securities. that is why we would think that there would be some movement during the course of the year. last year and last week, you could buy a 30-year fixed-rate mortgage with limited prepayment penalty and the rate was less than 5%. it is incredibly low. we don't think it will stay at that level for the entire year as the government pulls back. it will stand control and not be higher than 6%. >> there were several questions about barney frank's remarks about doing away with fannie and freddie. the questions are related to what kind of an effect this has on your organization, and if you were to advise mr. frank about

restructuring, what would you tell him? >> i am a real barney frank van. i feel like i know him reasonably well. recall that i spent a lot of years in boston and ran a financial services company. he chairs the financial-services committee. i had the chance to visit with him in the past. i have gotten to know his staff quite well. i am a real admirer of congressman frank. he is incredibly bright. he is committed. he is a true public servant. he really cares. i admire him greatly. secondly, in my speech, i talked about the fact that freddie mac is not a decision maker. we don't even get to lobby or advocate. that is precluded in our current

state. not a decision maker. i totally get that the house financial-services committee chaired by congressman frank is a decision maker. a very important decision maker that will be heavily involved in the decision as to what happens to the gse's. i do have to say that friday was not my best day. either in my life for at freddie mac. because i am an investment person, i do pay attention to a bloomberg. that is a news lifeline for those in the investment business. there was a headline that came across about 11:00 that congressman frank was having a a hearing and said that he would like the company that i was ceo

of to be abolished. i felt that the votes were there, the house financial services committee would be voting for the abolishment of freddie mac and fannie. not a great headline. it was picked up and there were many articles that used that word "abolish." i have not had a chance to visit with the congressman. i look forward to doing so. i know i will have the opportunity to do so. we will talk about it. i get that he is the decision maker. but in this interim period, it wasn't a great day for me or our 6000 employees that saw that headline. it is something i met with employees with on monday.

not our and tort workforce -- and not our entire work force, but it was a concern. it was not a great weekend for our employees. it is something that as a ceo i have to deal with. i have to keep them energized and motivated, working on the president's program, making sure that we provide liquidity and stability to the mortgage market. i have to do all i can to keep them energized and focused on that mission. we have done a good job so far. certainly, the headline was not helpful. >> after six months, with their reassessment of the capabilities of freddie mac? >> absolutely remarkable. what is amazing about this company, i was winding up my life at putnam, and got to thinking about being the ceo of

freddie mac. this was june or something like that of 2009. at that point, they did not have a ceo, a chief financial officer, and it did not have a chief operating officer. a company on the order of 6000 employees with none of those three positions at the top. one can only imagine what the company might have been like. i arrived there in the summer, and it was remarkable. a very well-functioning company with great people there. wonderful people running the wonderful people running the functi with a good team like atmosphere. how truly committed to the mission that they are. i comeñi from the financial services world. the asset management world, the banking world. throughout my whole life, we

have talked about serving the client and taking care of the client. what is different is that at freddie mac, they really believe it. that is the reason that people come to work at the company. it has blown away. i have found them to be incredibly respected of me. >> i have several questions, here. >> i have a thick skin. >> there are several questions about what happened, historic plea, and what changes need to be made at freddie mac and elsewhere to avoid these problems in the future. we would like to know what you think happened. >> i am actually not want to be very helpful in that area. area, because i don't think it is my place to talk about what i might or might

not have done in the past or to second-guess people or assign blame. my focus is on the future and trying to help the mortgage market going forward. i just will offer the following statistic. as all of you, the country, the decision makers are evaluating the work that was done by freddie mac, remember this. we are responsible for 25% of the mortgages, and only 9% of them are in serious default. our default ratio is on the order of about 3.8%. for the national average, it is about 8 or 9%. i think those statistics make it absolutely clear that, for the most part, freddie mac did a

very good job of supporting the housing market, it uses sound judgment when they were making the loans. i am sure they were not perfect. with the benefit of hindsight, others could have done a better job. it seems those statistics and the company did a pretty reasonable job. the major shortcoming was that the only business they were in by charter was the housing finance business, and there has been just a complete seat change in the housing markets. if that is all that you invest in, and you have a default rate of 3 or 4%, you will have economic problems. >> there were questions about people having good credit ratings and not being able to get mortgages. eighth thoughts about how that might ease up in the future? >> not surprisingly, it is a pendulum.

i don't think that is a surprise to anybody. it is true for manufacturing companies and individuals. after there is a problem, credit titans up throughout the entire economy. and the economy starts doing better and people try to get more comfortable with extended credit and to get loose over time. i have watched this, and it is a sequence we will have the work group. it might be a little bit tougher to get mortgages. i can further say that last year, the total amount of mortgages we put on were $550 billion. we were very active in the market. it is totally possible to work with people. it is very high quality.

>> there are several questions about what changes may have occurred inside of freddie mac so that the same problem won't occur in the next three or five years. >> right now, our principal focus has not been on changing the company some much as it has been being responsive to the crisis that we are facing and doing all that we can to keep people in their homes and make sure that we support the president's programs, to make sure there is mortgage money available. that we meet our goal of liquidity, affordability, and stability for the mortgage market. i would say that we continue to add resources in the area of credit and risk. we want to do an even better job. that is not an indication that we weren't doing it well in the past, but we understand that we

have got to make sure that we are a strong company and that is one of the places where we put some resources. i underscored the notion that my tenure was not about fundamental change as focusing on doing everything we can to try to keep the mortgage market liquid and support the president goes to programs. >> another question from a student. an inspiring investor, i guess. >> is freddie mac stock safer to buy because it is government sponsored? are you buying a stock? [laughter] >> great question. we have to make that distinguish ment between common stock and stressed. it is probably not so true with regard to the equity. the equity is not guaranteed by

the government. it is a very volatile stock. it trades in the zone of $1. one would have to think of it as a risky speculative stock. we have drawn down about $52 billion from the government. we pay 10% interest rate on that. we pay about $5 billion. i guess for a young person, i would want them to understand the full risk associated with that equity investment. as in the buying -- and as for me buying the stock, i have to make the disclosure, and i have made none.

dodge a this is our last question. why would you want to be the ceo of this organization? >> yeah. [laughter] my wife and i met in law school, and i have great regard for her. she has asked me that question before when i took the job and several times thereafter. it gave me a chance to reflect on it. first of all, i think it has something to do with my age. i am not sure that it would be exactly the right career development for somebody that was in the heart of their career because there is a much uncertainty that is going to happen.

it came at the right time in my life. i could spend whatever time to try to stabilize the company, get in shape, and it can go on to the next chapter. i thought it would be helpful for this organization to have somebody be the ceo who did not have a really strong ax to grind in the outcome. we wanted to do what was best for the company and the employees in terms of the final determination in not what is best for their particular career. because of my age, that was an easy thing to do. i struggled with that decision whether i wanted to do it, because of the things you read in the newspaper, but once i did, i felt good about it. a little shaky last friday, but

generally felt very positive every day because of the people. they have been so welcoming to may. it has been a great thing to do. >> thank you very much. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> thank you so much for a leadership that enthusiasm for your position and for being with us today. the key for all you do for the regent and the economic club. ladies and gentlemen, thank you for being with us. at this meeting is adjourned. up next, the court -- the second quarter of appeals hears freedom of information cases.

then the 2001 budget and economic outlook. and at 7:00 a.m. eastern, washington journal, where the topics include the topics of the day and al qaeda's termination to acquire weapons of mass destruction. >> tomorrow, senator byron dorgan of legislation he is attempting to right. majority leader harry reid is expected to present a plan next week. see newsmakers tomorrow a 10:00 a.m. and 6:00 p.m. eastern on c- span. >> sunday, the history of executive power from george washington to george w. bush. author john yoo speaks about his

book. >> this is c-span's "america and the court's." next, oral arguments from fox news vs. the board of governors and bloomberg vs. the board of governors from the second circuit court of appeals in new york city. the court will decide whether or not to block a lower-court ruling that will force the federal reserve to reveal the identities of financial restitution is that may have collapsed without assistance from the government's to our

program. -- tarp program. [inaudible] >> i will call the day calendar and asking everybody is here. in the two cases to be heard in tandem, good afternoon. the board of governors will split the argument between two lawyers. what will be the principle of division? >> [inaudible]

>> you ought to make that clear, because it does not lend itself to any division. i see everyone else is here. ok. united states vs. rojas, counsel present? good afternoon. united states vs. acosta andmillow? everybody is here. chobaz vs. holder. singleton vs. holder? last cas is melience vs. immigration court of appeals. at this time, we will hear bloomberg vs. board of governors and fox news vs. board of

governors. we will hear those cases in tandem. >> thank you, your honor. may it please the court, i am from the department of justice on behalf of the board of governors. there with me with the board of governors, and they mentioned that she will be focusing primarily on the arm to the board, and issues that are specific to the fox litigation. the board releases a substantial amount of information about the discount window and the other emergency credit facilities at issue here, including aggregate lending data, eligibility requirements, and collateral requirements. what it has not released under explicit promises of confidentiality since the beginning of the discount window program many years ago

are specific loan information regarding short-term liquidity loans and the identity of the institutions who received those loans. loans. @@@@@ @ @ @ @ @ @ @ @ > @ h@ @ by and large, this is about the identity and the loan amount and

maturity dates of these specific loans. >> i would like to address the standard of review. >> you're saying that the identity of the fall or, the loan amount -- follower, the loan amount, the terms and maturity date are information that you obtained? and the person is borrowing back? >> yes, through the reserve. >> if i borrow $10 from you and i give you an idea that says who i am and what i am going to give it back deal -- and when i am going to give it back to you, what is there they don't already know? >> i do already know. if somebody asks me for that information, i know it, but i have also obtained it from you. >> when i give you my i know

you, what is it that you don't know before you get it from me. you already know you have given $10. you know you have given $10 in may. presumably we made a deal as to when you get it back. >> is a little different here, your honor. here we have a situation where the terms are set in advance. it is more like a line of credit. the collateral has already been pledged. it is already there. here is how much i want. the terms are already said. the fed already has that information. >> by whom are the terms set? >> the terms are set by the fed.

>> is not something they you learn from a person? >> the rate and eligibility requirements are set by the fed. that is not what this case is about. i want to the identity of the bar or, how much they said -- >> let me just -- you're saying that the media wants to know how much they asked for? my understanding is that the media wants to know how much you gave them? >> is exactly the same thing. >> in any circumstance, and any government agency, if the government agency grants some permission, some exemption, a loan, whatever it may be that is the action of the government agency when it grants something to a corporation or whatever it may be, that is shielded from disclosure because by revealing

that the government agency granted something, there would be a revelation that the person who received the grant had asked for it? >> it does not apply to the situation. >> what is the difference? correct me if i am wrong. you are saying that here is the broadcasters -- they are asking -- tell us how much you loaned to these banks. what were the loans and the terms? you are saying, if we told you how much we loaned them, you would be able to discern from that that they asked for a loan in that amount. therefore, this is confidential information acquired from a bar or. isn't that what you're saying? -- from a borrower. isn't that what you're saying? am i correct that that is your

argument? >> is a little bit different. the way that these programs -- it is a little bit different. the way that these programs work, it does not say let's tweak the terms, lets up the rate. let's of the corral -- and left up to the collateral. -- let's up the collateral. >> is there a gross amount that cap to that? judging to -- you said it is similar to a line of credit. is there a line of credit? >> there would be a gross amount of eligibility, but that information is not what is in the documents here. >> why should you not disclose the amount that you on?

the fed is being asked, tell us how much you loaned from the bar work, read it from the bar were -- from the bar were -- borrower. how do you come with an exemption when somebody asks, show us what you, the fed, loaned to these borrowing banks. where is the exemption? explain it to me. >> there are two set brett prongs. >> exploit about information obtained from the borrower. >> we believe the information that comes from the identity of the bar or -- of the borrower,

and the amount that the borrower requested, the task to get that money. the rate that is release, the terms of the alone in general terms -- how much should the borrower ask for? who is the borrower? how much did you loan might be something different. this is the equivalent of saying that i want all of the loan applications that were submitted. >> that is not what they asked for. they ask how much loans did you make? >> this would reveal the exact information. >> revealing the collateral which is one thing they ask for is not revealing that exact information as you have described it here.

-- a precise collateral that is pledged to go explain to me -- >> explain to me how we are to ruin your favor on this, and we have a case in which someone comes and says to the federal energy commission or something like that, d.c. the and drilling regulations.

the answer is, no, no, we can't give you that. if we showed what exemptions we gave, we would be showing who it was that asked for exceptions and what exemptions were asked for. that is information obtained from a borrower. how would i abstain from your position in this case? >> you would say -- >> that is not what they ask for in this case, and that is now they're asking for in that case. they're asking for what as the federal agency granted to applicants? >> we believe the federal reserve board -- in this case, it is a ministerial act in the

department of energy scenario. surely grand this license? should we loan this money? this is a compilation of the material of mid -- of the information submitted. it is much like the case that we cited. >> the board -- is not possible to deny the application? >> it would be limited to overnight loans from an institution that essentially has already been deemed not quite ready. essentially, is a line of credit.

yes, this bank is eligible, and the transaction occurs. the case like the buffalo evening news that involved -- they are making a specific determination, the equivalent of a loan application. they are saying that i would like all the credit card transactions of a particular individual. >> and the amount that was given in losses to deal the amount that was passed. it is some statement of collateral? >> yes. it is essentially saying that i

want a loan application, information that reveals the identity of the borrower. and its relief as we discuss it -- >> your brief also says that healthy financial institutions also borrow from the federal reserve banks, and they do it for ordinary operational reasons. while everyone of these loans have a stigma attached? -- why would every one of these loans have a stigma attached? >> it is used by healthy banks and banks that are sick. why, therefore would disclosure that alone took place signify to the public at large that the bank is sick as opposed to a healthy? >> is not used unless there is liquidity problems. -- it is not used unless there

are liquidity problems. you can get on the funds market at a lesser rate. these loans are over collateralized. there are hair cut attached, it far exceeds the loan, so you don't go here unless you have a liquidity problem. it can be a temporary problem. it is not something that you want to happen every day. to be a healthy, fully capitalized institution, you have a few outstanding accounts -- >> would you concede that under the securities laws, each bank could, if it shows to reveal its investors in a filing with the sec, all the information that you claim would be disastrous to be released. >> a bank could do that.

the sec does not require it. it requires relevant information, but a voluntary disclosure -- >we do not have any instances of a loan by mount disclosure. they have made the decision that they can disclose -- >> they could disclose that if they thought it was material information for the public. >> they could disclose that. that could be a calculation that they make. it does not mean that there is no stigma. the stigma is very real. >> to do you draw any distinction with the generalized impairment of reputation? >> i don't think his reputation >> this is a problem or there will be an assumption that the

bank is in trouble. this is an industry in which confidence is key. >> is it an unwarranted inference? it can be. >> anything can be an unwarranted inference, but if i understand your argument, you are saying that the harm is that people who do business with the bank will find out the true facts that the bank is having a liquidity problem. we do not want people to find out that a bank is having a liquidity problem. is that what you are saying? >> yes. but we are not talking about brinks -- banks that are on the brink of failure. that is the most you can get. >> from one day to 90 days. >> it is very short period how

long does it take a process -- g does it take to process a request? >> it requires 20 days + -- to pull this together and go through at -- to go through it, we are up to 30 days. it is well over a year old. >> should we take into account the length of time -- >> is not a situation where a party comes and and says, here is my request for information, historical information from five years ago. i want information up to yesterday. now we have had litigation going on for a year or two, we need to reevaluate. >> is there a stigma that would have any effect whatsoever by

the time -- [unintelligible] >> they pride themselves on being up-to-date. that essentially whether a bank is in trouble if that is a sign your about. >> after they discuss that, the information is still fresh. >> it only matters if it is really a stigma. i am having trouble with it being a stigma outside of the day that is going the have some effect on wall street. >> it is easy to discern patterns. the expert affidavit that we submitted from years of experience in trying to overcome

this stigma has made it very clear that there is, in these, -- there is, indeed, a stigma. not even a confirmed run in the 90's -- >> is there -- banks frequently make these borrowings because they have an overnight problem the beef up the problem -- the resources. if none of that has ever known because of the restraints placed on disclosure, i have blown it

out of proportion. >> in the judgment of the expert witnesses are in fact that if this were information disclosed, we are talking about a little bit of information here. the expert judgment is that people would stop using these facilities and the declaration talks about that. >> in the discount window is a resource of last resort, that people would let their banks go under rather than suffer the stigma of asking for money? suffer the stigma of walking up to a window and say i would like to $0.50 billion please?

>> it is not simply a question of going under or not going under. >> that is a choice that is made by management of a bank whether to seek or not >> rather than use these a very important facilities that are designed to keep liquidity going to avoid the credit problems we have had very recently to allow these lenders to continue to make long-term commitments. if you won't go to this window, those are not necessarily failures, but you are facing -- not maintaining assets that can't be turned into liquid assets very quickly. this is what is addressed. >> you are talking about a crisis essentially of a moment.

it is essentially a day or week. 20 days to answer a request to go you are not saying that 19 days has gone by to go most agencies have two-year back the loans. the defense department -- and the board of governors does not have a very large backlog. there is a case called tax analysts, and we have the notion that we wouldn't have to

release them very quickly. the stigma would disappear after -- as soon as the loan is paid back, for instance. there are issues of risk- management if you look back and say that the bank borrowed from the discount window twice in the last six months and just did it again. you use this information potentially, and it could be that a large institutional borrower did not pay them back each time. one could draw the inference, rational or not, that they are in trouble. i am now going to take my money out of there. i am going to make y instead of x -- bank y instead of bank x. >> the action of making a loan contributes no new information

about what comes from the fed. all it is the drawing down of previously arranged terms, is that correct? >> it does not necessarily apply to other forms of lending or licenses. >> explain to me what goes into the making of the initial decision, the decision under which the terms are set under which a bank will be able to walk under a window and sap its vendors and say that i am here by drawing down under a previously arranged terms, x amount of money. >> the requirements for that are all on the web site of the board and the banks. they say, here are the collateral requirements. here are the securities they you

need a pledge. here the rates in the duration of the loans, the maximum duration of the loans you can get. all of that information is revealed. so is the aggregate information broken down by district. they say how much money each district loan for in -- any period of time -- >> you're saying that anybody that cares to look at publicly available information will allow, is entitled to take down under any of these programs and what -- all they would know is what date they decide to do it and how much they take? >> the specific banks and eligibility requirement is not revealed. at what is revealed is the requirements for the collateral

and the eligibility requirements. >> one doesn't know the eligibility of what banks have what eligibility of drawdown? >> right. >> that is not information that comes from the banks. that is information that comes from the fed. >> that is not -- >> i thought you were saying to us that a person that requires the information about what a bank drew down on a particular day was learning nothing that came from the fed. was learning only about when the bank decided to draw down -- it was entitled to drawdown under the credit agreement. >> i am saying that the specific information is more akin to a lot application or credit card

transaction. it does come from the board. i am far exceeding my time, i hope that i can correct any misstatements i have made and continue on with the discussion. i am willing to answer any more questions. >> we are going to play that by year, your honor. just one of us will argue. >> your honor, may it please the court, i am representing the federal reserve board. the issues -- there is a second alternative reason for this court to affirm the district was ruling in fox and blumberg. it granted summary judgment for the board on the alternative

exemption. information is exempt, the disclosure of financial information would impair the ability to perform important statutory functions. i have evidence provided by the board at that the very same evidence we submitted to the bloomberg court, that the public disclosure and emergency landing in formation would impair the statutory monetary policy functions under section -- >> other than what we export moments ago, which is that banks would be hesitant to go to the discount window? >> this is exactly the reason. we show and our declarations that the discount window is also used by the federal reserve board to exert downward pressure

on interest rates. the banking community lands and the interest rates go down. this is a critical source by which the board conducts monetary policy. the institution's access -- and by jerry policy function -- the monetary policy function -- >> how does that happen? >> the interest rates are going up and up as banks are less willing to lend. then they have less liquidity when they go to the discount window. it exerts downward pressure, and is direct for the board of monetary affairs. he is responsible for the board on matters of interest rates and the controlling that. it is considered judgment that this would make it much more difficult to control the short-

term interest rate. >> you are saying that the reason that there would be -- that banks would be hesitant to come to the window is that they would acquire a bad image, that the world what question their solvency if they came to the window. you're telling us that banks don't come to the window except when they need to. their terms are disadvantages. where banks need to come to the window in order to get over the liquidity problem, they just wouldn't do a whether it be samurai style or fall on their swords rather than come to the window? >> it comes from the fact that the federal reserve is a backup. it is not the ordinary source of liquidity.

>> if the collapse are start laying off people -- what is the government arguing? government arguing? @@@@@@@@@ @ @ @ @ @ @ @ @ @ @ @ backstop. >> they are not a last resort if

they're going to the private market and paying more for the money. >> they are definitely paying more for the money in the private market. there were no other sources of liquidity. the federal reserve was the only source to go what would be -- >> why would people go to the discount window if they have no choice? >> these are extraordinary economic times. >> they're going to go to the discount window. they have the stigma of going to the discount window or going to other sources of borrowing. people, banks, everybody does it all the time. >> we don't want to banks to be paying more than they have to in

the outside markets selling assets and laying off work. they specifically put in place in 1930. it is in the national interest for banks always to be lending, the advantageous effect on the economy -- we don't want to discourage them. >> the point you're making now is not one that is covered by the exemption specified by congress. >> congress did not do that. exemption no. 4 speaks of confidential information obtained from our worst. >> under the program effectiveness, it is adopted -- in a 9-5 revelation of

continental commercial and financial information from a person with in paris -- are >> why haven't you got a congress and asked congress to modify statue to provide an exemption that you say is so important? is even vaguely suggested by the terms -- >> is comfortably within the exemption. we did show substantial injury to the borrower should be revealed. >> i would like to ask you to continue with the question i was asking your colleague before, it focuses more directly on this issue of confidential information received from the client. i had apparently misunderstood your colleague to be saying that when a borrowing is made,

when a bank says it wants to take down some much money overnight or in 10 days, there is no information revealed by that, no information that is not already in public hands because all of the information as to the banks entitlement is already known. the only thing that is not known is that what point they would decide drawdown. the colleague corrected me and said no, that is not exactly correct because it is not known what banks have agreements that permit them to draw down certain amounts. that is information which is information of an action of the fed, not of a bank.

the information of how much a bank is entitled to draw down and on what terms. that is information that is of an action of the fed. is that right? >> that is not correct. every institution is eligible to go to the discount window and a bar when they need liquidity. there is a slight distinction between primary credit available to generally financially sound institutions and secondary credit which is available to institutions, not eligible to primary credit. we don't disclose that information because it says something about the financial condition of the institution to go to go -- >> who says [unintelligible] >> the bank determines the amount it may borrow by the amount of its request and the amount of eligible -- >> under the pre-existing

agreement, who sets how much the bank is eligible to borrow? >> is determined by the amount of collateral they have the pledge. there is no upper limit on the amount of discount window. banks are only going to have a certain amount of eligible collateral. if you reveal the amount of the loan, you're showing that they had a certain amount of collateral and the liquidity needs at that institution in the bank needs a million dollars. it might be less serious than $10 million. it says a great deal about the privileged information at that institution when you look at the actual amount of the request. and the federal reserve does not determine the amount of these loans. it is determined by the eligibility set of the institution. and you may have sufficient

high-grade collateral. that is what determines the amount of these loans. >> the collateral given with respect each loan is information that lies in the hands of regional banks? >> the collateral given as determined by the borrower. >> the board has disclaimed any duty to seek that information from the regional banks? >> the board is not obligated to obtain records that it does not already have. >> i am looking at the code of federal regulations. it says that the records include --

>> the language says that it includes the regional reserve bank, activities for or on behalf of the board. >> you are saying that when regional bank loans to a borrower in the region, it is not acting for or on behalf of the board itself? >> that is correct, your honor. your honor, the regional reserve bank service depository has institutions in their district. they also conduct open market operations buying and selling securities on the market. the funding by the federal reserve generates a -- >> the regional federal reserve bank science without consulting n.y. for the board, to a lone

$500 million on a certain amount of collateral and the moderate comes -- the money comes from their pockets? >> that they supervise the activities, and they do act -- >> it would be strange not to have some sort of supervision over the loans. >> certainly, your honor. >> when they do that, they consult with the federal reserve board. >> not with individual loans. the overall programs by the reserves banks we review and determine interest rates. they did a lot activities are under the federal reserve bakes under the supervision. >> let me go back to my question. they want $500 million. you're saying that the person behind that discount window

wearing a shade says, here's your $500, million. >> to make individual loan determinations. the actual direction of the day- to-day business of lending will be carried out by the regional federal reserve bank. >> the business of lending, -- >> it must be authorized by -- with respect to the emergency facilities, they were authorized an advanced by the board. the day-to-day operations are conducted by the regional federal reserve bank. >> i am confused once again.

i had understood from your colleagues that there is nothing revealed by the making of the loan other than the fact that the individual bank decided, for whatever reasons, that it should come and drawdown, putting up collateral and draw down to an extent that it has entitlement to do it under a previously made agreement. you are talking about discretionary decisions made by the local federal reserve banks. what is the nature of those decisions? >> is not a discretionary decision of the federal reserve bank. they determine whether or not the collateral fits within guidelines. once that is determined, usually it is pre-determined. it needs liquidity and it will take about -- to get a lot about.

-- to get the loan amount. >> the eligibility of the borrower based on past performance is one that is set by the board. >> and regulations specify overall terms, but the day-to- day operations are conducted by the federal reserve banks. they are banks, and they land. >> they are their own agency, then. >> they are not agencies, they are persons under -- each federal reserve bank is owned by member banks in the district. [unintelligible] a majority of those boards are reported by the independent private banks in the district. they are not agencies with rulemaking authority. they don't have to go -- >> they describe the regional banks as agencies.

>> we do not describe them as agencies. earlier in the industry's case, it is not necessary to claim exemption. you may have to agencies. you may have an outside party acting as a consultant to the agency in extension -- >> i don't understand that at all. didn't you evoke exemption 5? >> yes. >> of the one that exempts disclosure of communication between agencies? >> in addition to communications between agencies, it encompasses any information that as part of the deliberative process, even if that information is supplied a a personal consultant, your honor. in effect, assisting the agency in the collaborative process. dodge the board put the conception is that the local

regional banks are consultants? >> simply for purposes that the exemption 5 is in this case. >> i know of someone can be an agency or not for the purpose of this or that. -- i don't know if someone can be an agency or not for the purpose of this or that. >> we go back to the history of the federal reserve bank -- >> i want to go back to the indication of exemption 5. >> of the fact that we evoked exemption 5 does not make the agency's -- make them agencies because of the function we were speaking of. they were acting as consultants to the board. we note that the supreme court held that exemption 5 was applicable to sensitive commercial information not otherwise available if it would impair the government's monetary functions.

we were relying on a monetary policy exemption created by -- they did not decide whether it was an agency. >> it will be a c&@@@@ d@ @ n @ something that this court can

take into account. it is something the should consider. no other central bank discloses loan by loan, bank by bank, emergency landing information. the terms of the -- >> they have a freedom of information act. >> what we do is beyond what other central banks do. what they are seeking here is to have this court do something that goes beyond it. they want this information bank by bank and should go to congress. >> it seems to me that is the other way around. if the fed takes the position, and it might be a very valid position, that very bad things would happen if it were

observed, then the fed and the banks and all the other interested persons should go to congress and say, look, you have messed up because you have exposed us to something that could be very harmful to the economy. >> the standard that this court and other courts have adopted in looking at the exemptions is the likelihood of competitive harm. not the eminence or certainty of competitive,, the likelihood of competitive harm. >> where is it in the statute? dodge the statute just says confidential. >> the courts and the parts case have interpreted the issue, but the banks clearly treat this information as confidential. there is not a single disclosure where i have seen that the bank has said they will

take out one man dollars. they have said in an aggregate basis, hundreds of banks have gone to the discount window. no bank has never disclosed this information. >> how does that fact relate to the standard law with respect to what must be revealed in sec filings. isn't the standard for that roughly what investors would be interested in knowing? >> the information has to be material. no bank has made the judgment has -- that it is material. >> are you saying that if this case were before us, if the question were a different question involving an sec filing, we should really care

whether the bank was in an emergency distress situation requiring funds on disadvantaged terms to get over its crisis? dodge that is exactly the point, that there might be a situation where the bank would have to disclose the discount window and we are not aware of the situation. the problem here is that the press will likely have a blanket rule to change hundreds of years of policy in this country. that would like this court to second-guess the affidavits of some of the most senior people talking about the risks of providing this information. from the situation in the u.k., we know what happens when this sort of information gets out. you do run the risk of a bank run. we have seen situations in the past few years with in the mac

where there have been bank problems. banks operate not only in terms of their confidence, but their confidence is critical. >> when a congress messes up, courts to fill the gap and say, we think congress did something stupid here. we think that congress failed to understand the risks that they were exposing in the fact -- that they were exposing the financial system to. the court should fill the gap rather than congress? they should change the law that congress passed so that bad things don't happen? >> no. in 1913, -- foya was adopted in 1966. this information was treated confidential by the borrowers

and the reserve banks. there was an unguarded declaration that explained why this information is repetitively sensitive. the circumstance that we now -- >> i understand all that. my only point is that the statute does not talk about that. >> the statute says privileged and confidential. it is likely to cause substantial competitive harm to someone that provides information -- >> it is certainly not an obvious reading of that term to cover loans made by the federal government or actions taken by the federal government. one that naturally interprets information obtained from the bar were baby to the extent that -- from the borrower. it would become census

information. there are lots of things. ordinarily, one does not think of actions taken by the federal government as being information obtained from the bar or just because you can discern from the fact the federal agency the other person must have asked for it. >> there are numerous cases where it has been applied to protect information provided by someone interfacing with the federal government because the information was competitively sensitive. there can be no question that we are dealing with banks. banks are subject to losses of confidence. we have had financial panics starting in 1907 that gaudy federal reserve in the first place. if a bank goes to a discount window, -- that information is

coming from the bank. chief judge press got agree that the fact that the bank was seeking the loan from the fed was information coming from the bank. there are numerous cases where that has deemed to be information from a borrower. the problem is that banks will now use the discount window if it will be made available in 20 days. perhaps they come available within a year. are there any examples you have deduced, certain examples where it becomes known that it banquette a liquidity crisis a year earlier or 18 months earlier? >> there have not been examples that are telling where the information has been disclosed. >> you're describing examples where the information leaps out somehow and people panicked.

>> the point of staleness depends on the particular bank. it may be the fact that they go to the discount window a year ago. for another bank, it could be relevant. they might be able to get there will have that categorization that one bank is strong and one bank is weak it is clearly confidential information. companies don't go and banks don't go and disclose -- >> is the relative strength of banks something commented on regularly in the financial press? people either panic or they don't. >> we have seen through history that confidence can be lost in banks. .

. >> clearly, disclosure of this information will deter future borrowers. >> what is the cutoff? >> what i think the court should do -- >> katyusha make up that

date -- >> who should make up that day? >> the alternative would be to reverse the ruling and they could file another request and ask for the separation back in 2008 and the fed would have to be done away whether the information was stale or not stale and then they could get the information that was not stale and then make the judgment as to whether the information was still for a particular bank >> are you saying that still cannot be about awaited on the present application -- >> are you saying that still cannot be awaited dutch evaluated on the present application -- be evaluated on the present application? >> you can obviously remanded back to the district court -- remand it back to the district

court. i would suggest that they pile another request and evaluate it is still stale or not. >> thank you. >> good afternoon. it may it please the court. i represent bloomberg. the board's position appears to be that we are the experts when it comes to central banking. we have been doing it this way since 1913. but the rules changed since 1913 and the agency's

determination is entitled to know deference. there is a good reason for that. the agency's natural inclination to work away from the public gaze, and others say it should be subject to scrutiny. indeed, i would submit that we have seen news reports concerning the fed's position that suggests that their expertise -- >> we have enough of a directive here. >> thank you, your honor. i would like to address the staleness issue. bloomberg is requesting a role in regards to its request. it is not about the disclosure of documents within 20 days or

30 days of a request. hear, the record suggests that bloomberg sued seven months after its request when the board had not even responded to it one way or the other. this is the passage of seven months between the request and the lawsuit that is currently before the court. >> what ever rule we handout, will accommodate that? >> the board should have produced these documents on the 21st day and bloomberg would be delighted. that is not the case before the court. i think that the court need not make that determination. >> if we ruled in your favor and all the appeals stop, when such a ruling took affect, what would you get in terms of the date coverage? ñiwhat information would you ge? >> we would get the remaining reports that were prepared

between november of 20007 and may of 2008. @@@@@@@@@ @ @ @ @ @ @ @ @ @ @ @

the board would have the court the discount window and say how much they want and get the money. ñithe record in this case, and i am referring toñi the doctors affidavit, he says thatñi when a borrower comes to the discount window, the bank must determine that the borrower is unable to obtain reasonable credit accommodations from other banking institutions. that is the first step. dr. ratigan also says that when there is a request, -- the doctor also says that when there is a request, we have another step where the reserve bank is making the decision whether this

borrowing should be approved. >> that should be only when the collateral offera confirms to the requirements. >> indeed, that is not simply an automatic request. >> it sounds as if it could be pretty automatic if you present collateral that comes within the guidelines, then you get the money. >> it may be, but we do not know. to take the example of the ilu, someone comes to the bank and says that if you paid me $10 today, i will pay you $11 next month. the bank makes a notation in its own records. that is the bank's own records of its business dealings. this is not a case where a

private business has generated information or data in connection with its own business activities and then subsequently submitted it to the government. this is a case where the information comes in at the time of government action -- >> which seems to me, a stronger argument, but these are not normal -- not ordinarily understood. those are actions. anything that is described includes information about the fact that it happened, but if you shoot somebody, there is information about you having shot somebody. we would not disclose that you shot somebody who was information. you shot somebody. it was an action.

that does not fit comfortably under the statutory term of information obtained from the borrower. çóthat is somethingçó differentm an action. >> i agree that that is a better argument. ok>> unless, of course, the person is the federal reserve rate that supplied the information to the board, which i take it to be. >> correct, and we would argue that the regional bank is an agency for foia purposes. the agency would look at whether it isñi performing the governmet will function and it is subject to governmental control. in this case, it discharges its

obligations and it acts as the central banker through the activities of the rebel serbs -- of the reserve bank. if you order disclosure, that will adversely impact the reserve bank's ability to land and will prevent us from discharging our public duties as a governmental agency. -- ability to lend and will prevent us from discharging our public duties as a governmental agency. therefore, they are performing a governmental function, they are under governmental control, and they are agency and the affirmation shared between the two is not subject. >> how are they under government control? >> in respect to the makeup of

the reserve banks and in respect to these lending programs because the record reflects that the lending programs take place under the supervision of the board. >> i think one of your opponents has said that the board actually sets the standards by which the banks are evaluated. they said the collateral amounts. >> yes sir. >> -- a base that the collateral amounts -- they set the collateral amounts. >> yes sir. particularly with respect to these particular lending programs in which the board has stated that these are the programs by which we act as a central banker. >> i don't know if you know the

answer to this question. i do not know if this is publicly available information. does the amount of collateral required, the collateral ratio, barry from bank to bank? >> i do not know that. i do not know if it would be revealed in the reports that are at issue. >> if you look at this information, could you calculate it? >> i do not know what is in this information other than the names of the bouras and the amounts borrowed. >> if it could be calculated, would that be a problem? >> knott at this point, considering it wasñi borrowing that took place in 2007 and 2008. if they requested came in on day 21, falling foia request -- all in the foia request, --

following the foia request kahlah there would be sub zntial harm if it were released today. that is not the case before this court. that is not the case that bloomberg brought. >> what is the cut off that you would recommend that we look at? 20 days is what congress said, but you seem to suggest that 20 days may cause an appreciable prejudice or accommodation. why should we makeñi that up? >> i do not think that the court has to make that up. ñ2r guess that is the point thai am trying to make. whatever may have been the case

on may 21, when mr. pittman requested this information. >> which we do not know. >> i guess your honor could conclude that it is different today. çóbut in 2010, whether it is january 12 or february 13, with the passage of almost two years, the board's arguments do not withstand scrutiny. the boards have the responsibility. at one point, they suggested that the burden shifts to bloomberg. it does not. with respect to the applicability of an exemption, the burden of proof, at all ñitimes, rest with the board. the boardñr has começó upxd witt

they say are two examples. the first is in respect to citibank. rumors that citibank may be borrowing at the discount window in the early 1990's reportedly sparked runs as some up -- at some of its offices in asia. xdit is interesting that there s not a run in the united states. you could take the boards representation and say that it did not spark a run in the united states. the clearing house, having lost out of the public record instead of the record on appeal, comes up with one other example, in northern iraq.

-- northern rock. and then there is a news leak. >> you are saying that these examples show that the claim of prejudice, based on the possible run of a bank is speculative. >> indeed. >> i am looking at exemption 8 and it is discussing the exemption of banks. you can deduce that congress recognizes that the soundness of the banking system should be brought to bear on the disclosure obligation. this kind of concern is not speculative. >> i have a couple of responses to that. the easiest is that theym board did not invoke section 8.

the record makes clear that these are not -- >> i am not saying that they are. the danger of a run on a bank i. but exemption 8 says that congress recognized that this wasxd its cousin and could be damaging to the banking system. >> i am not sure that that exemption is really a cousin. it talks about a very specific report concerning investigations as opposed to the mere fact of barley at a discount. we are not getting into the nitty gritty details, but rather the fact that they avail

themselves of public money. >> one wonders why exemption 8 was necessary. it seems to be talking about information obtained from the banks. the only thing that is added to it is some government official's appraisal of that information. it almost seems superfluous since it is talking about the information obtained from the bank as to its financial condition. >> i would suggest that congress made a deliberate decision in enacting -- >> it is showing that it is concerned. -- it decision in enacting --

>> it is showing that is concerned. >> congress concluded that there is certain types of informations that we are going to exempt from foia. ñigiven that exemptions are to e read narrowly, i think it would be at this -- a mistake to grab some overarching concern about information about banks in general from section 8. i am well over my time. >> the question i was an as didn't was if section 8 -- i was asking was of section 8 -- two line >> with a run on the

>> the record before this court is from one expert in respect to market activity. @@@@@@@ @ @ @ @ @ @ @ @ @ @ )@'r

talking about the dangers. you are asking the court to be the policy maker with respect to this. it seems to me that that is a function that a court is ill- prepared to serve and ought to be served by congress. congress ought to make clear the limits of disclosure of this sort of the information. >> i believe that congress has made it clear that this sort of information should be disclosed unless the agency could carry its burden of proof that disclosure would have real and immediate harm. >> that is not a standard that is provided in the statute. >> is not provided in the statute -- it is not provided in the statute. >> you are on their side, now. if they have shown that there

will be real harm, we should disregard what the statute is and will with them but they do not have to comply with the terms of the statute. now you are joining them. you are making my job easier. >> they have adopted the standard regarding what exemption for means. but i think that under that standard, the board falls short. thank you. thank you, judge. >> good afternoon, may it please the court. i represent the fox business network. the court has been at this for a little while and so i am going to put aside what i thought i was warned to stay and start with this conversation was ending a witch'which is to remak

by bank, to see who might be harmed. he just hit on the major error that occurred in below. that is the teachings from national parks. if we just go back to national parks one and two and a look at what happened, what we see is that after the remand from national parks one, all the concession is intervene and then there were days of hearings were the court took evidence to see if there was actually competitive farm. what the court did was decide, in some cases, there was. in some cases, there was not. what the banks have been pushing for is a blanket rule for exemption four.

it would apply to big banks and small banks and regional banks. no one would have to come forward and show what would be required, which is competitive harm. at the competitive harm that was argued about in national parks, the plaintiffs were pushing for level of proof to be required of antitrust arm and the court said no. they wanted to require specific, not generalized crews, and what could be more -- non-generalized proof. everybody knows what you borrowed. whether the world knows that you need to raise $35 billion, they

say that for this court,ñr lookg at exemption for, we do not have to come forward with any proof that is specific to any bank. i think we just heard that they would change their argument again. >> so, it is the request by the bank of request to make a borrowing? is that what it is? >> as your honor has been feeling throughout this whole thing, nothing this is obtained from the person. you were focusing on this quite a bit. what we do not know is all about underlying collateral information, which the board has shifted throughout the litigation from its very detailed process to a rubber- stamp.

çówhat we have is a result of government and what foia is designed to do is to allow the public to know what government is doing. this is not about the banks. this is about the federal reserve bank. it is a agency -- is an agency of the united states government. >> what about the bank's request for the money? is that information obtained from the borrower or is it a different thing? is it an application? >> it is simply an application. the facts in the record have changed from the argument will,

and i first thought that there was a detailed process where people would actually consider an application before they loaned millions of dollars. the argument has shifted and the guy behind the window which give them the money until the to have a nice day. i think that the -- and tell them to have a nice day. i think that we do not have individual banks acting as banks. they are not loaning $50,000, they are learning hundreds of millions of dollars. the terms have changed. where is this money coming from? it is not in a federal reserve bank out west, is backed by the united states treasury, so it is backed by all of us.

>> i asked that question. i was told that this money sets in the coffers -- sits in the coffers of the regional banks because they have collected over the years from the banks that they serve. >> all i can say to you is that i do not see that in the record. maybe she can show us where that affirmation is, but i didn't -- i don't see that. the board is saying that these individual banks will loan up this money without getting any real information and the reason that they are doing that is because they are trying to squeeze themselves around --

trying to squeeze their round peg through a square hole. this is not about trade secret information. this is not about customer lists. this is not about proprietary information and secret formulas. this is now about something called stigma. stigma has never been in the 30 + years -- has never been, in the 30 plus years, something that the corporate tax -- but the corporate tax. -- that the court protects.

again, i agree with my colleague. there was no developed record, here. the interesting thing about exemption eight is that those are condition reports. it is sort ofñr like what the federal reserve did. and they did stress tests, which i would have thought would be an exemption. in the report, they say that the decision to depart from the standard practice of keeping examination in formation confidential stemmed from the belief that greater clarity around the stress test process would make the exercise more effective on reducing -- more effective in restoring confidence. this is the same agency that is

doing both. they are the same people that said that it restores confidence. this whole thing goes back to congress. this is the examination of banks, not the lending process, and the law also tells us that it shields the opinions and recommendations, not the underlying facts. for the board to be correct, you have to grow national parks out the window and you have to throw this standard of a harm test -- standard of harm test out the window.

the harm has to be competitive harm. competitive harm should not be taken to be any injury to competitive position. isn't that what stigma is? somebody might choose to take their money from one bank and put it in another bank. why is that a bad thing? >> assuming that you prevail on the argument you're making, your plan raises conditions concerning information about collateral from the 12 regional federal reserve banks. i am wondering if that complicated issue would have been resolved if you just said

-- sent 12 identical letters which is easy these days, to the 12 regional banks and the 13th letter to the board. >> you've raised a good point. none of the bank's have foia regulations. if i hammered on the door with a freedom of information act request, that would take me away in cuffs and we would have a different case. late in 1991, you had a case with the federal reserve bank of new york, and in 1991, it was the federal reserve bank of new york's practice to comply with foia. they voluntarily complied.

clearly, we do not have that, now. but what we do have is the freedom of in formation act regulations -- automation act -- freedom of of permission act -- a freedom of -- freedom of informatioation act. ñrthis is not day-to-day lendin. this is the implementation of national policy at the direction of the board, to tell them to loan billions of dollars. if that is not being done, then i do not know what is.

if you just read the regulations, they say that those documents of collateral belong to the board of governors. but then the board says that what you cannot see in the words is that it meant to say only if it is a delegated function and lending is not a delegated function. a trust us,@@@@@@@ @ @ @ @ @ @ )

disinformation was not proprietary information. there can be no doubt that if a bank employee disclosed this information to a news reporter, that employee would be terminated and have the attorney's office prosecuting him. i feel that we are debating the pros and cons of disclosure rules. exemption for an exemption eight should be read together -- exemption 4 an exemption 8 should be read together. this is highly confidential

information. it is añr crime to miss use that information. -- to misuse that information. congress understood banks and that banks were different and that in formation on banks could hurt other banks. -- information on banks could hurt other banks. >> it says reformation, which is privileged and confidential -- information, which is privileged and confidential. xdit does not say request for a loan or for any other actionfáw. xdñiçóñ&r÷z[[ññióthe bank s0 million. >> it does not say that it wants $100 million, it says that it is

borrowing $100 million. >> correct, but the fact that the bank is engaged in activity, it is confidential. >> is it merely informational or is that a request? >> it is confidential information as well as a requestñrñixd. you are asking the fed to loan you some money. that is in permission from the bank. clearly, the disclosure of that information could call into question the soundness of a financial institution. this court, -- >> how do you deal with the question that i asked earlier in the argument when i said, "

suppose we are not talking about the fed but we're talking about government safety in petroleum drilling and someone comes and says that they request an exemption from certain state the standards -- is certain safety standards -- from certain safety standards. is this simply information that someone has come to the agency and asked for an exemption for these safety standards and the agency granted it? >> it could be. there are cases that talk about people making applications and seeking things from the government and the process of providing a permission to the government to get something is treated -- >> i am not talking about providing affirmation. i am talking about the

application providing information to get it ended arguably comes with them your definition -- comes within your definition. tell us all about the conditions of this oilwell. that is information. it is confidential. >> correct. >> is the fact of application nothing but emblidge -- information? that is it permission acquired from the applicant because the fact of the grant of the permanent -- of the permit? >> that is confidential information. if the u.s. attorney's office calls up a company and says that they are interested in in formation about their company. that is confidential information.

>> that is a request for information. that is different from somebody coming to the window of a government office and asking for government to take action on behalf of that person to give them some privilege or some benefit. that is an action of the government. >> is both. -- is both. -- it is both. >> there is nothing that happens in the world that cannot be described in terms of information. everything that happens, there is information that it happened. are you saying that everything that happens in the world is information? >> the key point is that it has to be confidential affirmation. that is -- confidential information. that is likely to cause

substantial competitive harm. the second circuit has had substantial information to show that there is not a stigma. they could not even get a law professor to say that there is not a stigma. it is something that has a recognized for nearly 100 years -- has been recognized for one -- has been recognized for nearly 100 years. if they run the risk of having that information disclosed, you would have to go to the discount window and you have to hire a team of lawyers issue out all the reasons that you went to the discount window. he would have to have your press team out there to make sure there was not a run on the bank. we think that this court should

not make this judgment. if they want to go to congress and say that the information becomes stale in a year, that is fine. but this court has nothing in the record to say whether the information in this stale now or not. there is nothing in the record. >> thank you. >> thank you, your honor. there have been a number of very detailed decisions cited in our brief. this has been generated within

the government. [unintelligible] >> i do not have any doubt that the information generated is information. am i just not getting it across? are you not understanding what i am saying? i say that there is an application of action, and that is something more than merely in formation. do you understand the point i am making? >> i do understand. in one case, the bond was given to a person. this is exempt under the same exemptions that we're calling

for here. >> what case was that? >> clark reverses the u.s. department of treasury -- clark raises the u.s. department of treasury. -- clark vs. the u.s. department of treasury. >> your describing the action that every nation has been requested and it is confidential in formation. >> yes, your honor. second, bloomberg has argued that they are entitled to this. this is based on years of experience and expertise in the banking system and in this area and is entitled to a resumption

of good faith. >> thank you. >> think you, your honor. -- thank you, your honor. >> ok, a few quick points here. the suggestion by banking council that we were manned and don't do it anything -- that we remand and don't do anything. the information is a few years old. on the next application, if the court continues to resistñi it, but -- the board continues to resist it, they can invoke the regulations. if they could invoke those regulations and prove to a court that there was some basis, we

are now up to 2.5 years, but let's not forget the bank's role. their role is to -- and their role heir -- their rule is never. the only way that never works is if this court about program the effectiveness and they say neverxd. this agency will stand up and say never, ever. >> hypothetically, suppose you had a government clinic and there was no protection for that and it crested wished to

know the people that applied a for a free treatment available at the clinic -- applied for a free treatment available at the clinic. if that person gave their name and said it wanted to participate in the program, wouldn't that be information supplied by a person and is that not really the argument that is being made by all of the lawyers at that table? >> a ultimately, what you are talking about is exemption six. that information would be withheld. so, exemption 6 is confidential personal affirmation that can be withheld -- information that can be withheld. but understand that there are -- >> i understand that there are rules to control this, but i am asking if there is information

supplied by a person went one goes to a government agency and someone says to give them the names of the people that went to the government and permit -- to the government agency. >> i could even agree with that. it may be that providing your name is information that came from a person. but we are talking about exemption for, and that information that is applied from a person has to cause competitive harm. >> that is a different point. >> we are doing square peg round hole. that does not apply.

that is prepared by the individual federal reserve banks and they are not going to be competitively arms. they passed the information along so that the board of governors knows what is going on. if there are no more questions -- to buy >> stake. >> becky. at this time -- a key. -- if there are no more questions -- >> thank you. >> you can watch this program again c-span.org. just click "america and the courts." join us next week at 7:00 p.m. eastern on c-span.

[inaudible conversations]

[inaudible conversations] >> i'll call the hearing to order. we meet today to consider and to receive testimony from directer elmendorf of the congressional budget office on the latest update on the economy and the budget. the number in the cbo report, our update released yesterday, is daunting to say the least. but to fully comprehend the implications of those numbers, the dire bottom line to the budget, it's important to

remain, to remember the context from which they emerge. a year ago the economy was in freefall. job loss was 714,000 per month in the month of january alone. retirement savings accounts had plunged by two trillion in the first quarter of 2009. the record budget surpluses had been converted to record deficits for as far as the eye could see. as president obama and this congress began 2009, this was the context, this was the economic and fiscal legacy of the previous administration. too many americans today still feel the pain of the recession. we received news today from the testimony from dr. elmendorf that the economy, we believe, is out of recession. but nevertheless, there is much work to be done to recover to full capacity. cbo's report today confirmed that the actions we have taken

over the last year have pulled the economy back from the brink. cbo's report confirms that gdp will grow in 2010 and beyond and that the recovery act has had a positive effect. the report also confirms that the recession has taken its toll on the budget's bottom line, that focus on rescuing the economy will show up on the bottom line. economists agree it is counterproductive to try to balance the budget in a midst of a deep and serious recession. rebuilding the economy provides a critical foundation for deficit reduction. nevertheless, the cyclical deficits we're now facing should not and cannot persist. the short-term deficits associated with this recession should not be confused with the long-term fiscal challenges we were facing even before the recession began because the long-term -- remains

unsustainable, we must turn our focus to make sure the economy recovers as well. reinstatement of the statutory pay code model, paygo model that helped us turn record deficits to surpluses in the 1990s. i was pleased to see the obama administration's recent announcement to be sent up next tuesday characterized by restraint in discretionary spending. clearly on both the economy and budget additional steps are needed. yesterday's report gives us data with which we can better understand the challenges which we face. our sole witness today is doug elmendorf, and i want to thank him and the entire staff at cbo for all of the work that they do for us on an ongoing basis. by us, i mean democrats and republicans. you serve in a neutral, nonpartisan way, and you do it well. the congress truly could not function without you.

i'd also like to invite all members to join me in congratulating the witness on an achievement of an anniversary this week, his one-year term as cbo directer. let me yield to mr. ryan for his opening statement. >> thank you, chairman. i also want to the welcome dr. elmendorf. you're a democratic appointee, but i gotta tell you, i can't tell what party you come from. you've been doing a very good job of being be nonpie whereased, objective, and that is the role of cbo directer, and you're doing that very, very well. so i just simply want to say to you, you take a lot of flak over there at cbo, there's lots of demands of your time, i don't think i've ever seen more demand, and you're handling it very, very well. i know the people over there are working, you know, long hours. we want you all to know that we, we respect that, we appreciate it, and we think you're handling yourself in a very professional

manner. might have some suggestions on how to model things differently -- [laughter] but i just simply want to say i think you're doing a fantastic job, and we appreciate it. let me turn to our fiscal crisis, now, if i might. when president obama took office, america was in the midst of a crisis that shook our financial situation to its core and eclipsed access to credit markets. the administration exploited this crisis to pursue a relentless increase in federal spending in size and reach of the government. heading in this direction has made manners much worse for our fiscal future. last year congress enacted a trillion dollar surplus, stimulus, excuse me. last year congress enacted a trillion dollar stimulus sold with the promise that it would hold unemployment below 8%, and yet the unemployment rate continues to rise and now stands at the 25-year high of 10%. we learned that much of this stimulus which was neither targeted, timely, nor temporary, in fact, it was just a down

payment on government programs. let's turn over to t.a.r.p.. t.a.r.p. was advertised as an emergency plan to heal financial markets, it has now become washington's latest slush fund. cbo's budget and economic outlook paints a startling picture of both the year we have left behind and the year we face and the time over the next decade. in 2009 congress delivered a $1.4 trillion deficit, the largest in our nation's history, and no doubt because of the recession that was made much worse. estimates for the current year, also, are very staggering, $1.35 trillion deficit. and it will, our debt will reach over 60% of gdp this year. under the current policies of our government, by 2020 cbo projects that our debt will soar to nearly 100% of gross domestic product. adding to that, yearly interest paid to finance this surge in spending will more than triple in nominal terms from $207 be in

2010 to $723 billion in 2020. more troubling than another over $1 trillion deficit is that there is more to come. cbo figures don't include what is likely to come down the pipeline from requests for the need of war funding to health care entitlement to all the other things that are going to happen. i'm encouraged by the news yesterday that the administration is considering a three-year freeze on certain discretionary spending programs. we need to see the details, and this freeze needs to be enforced with a statutory cap if we're going going to hold -- actually going to hold the line on spending. it is time to get serious about wednesdaying washington's in-- ending washington's insable appetite for the spending. although a step in the right direction is not enough to secure our financial future. as astounding as our current budget shortfalls are, long-term debt projections are profoundly worse.

the peterson pew commission warned that government spending driven by the growth in health care costs in an aging population will almost certainly bring the debt to crisis levels during the next few decades. what is once thought as a scenario that would unfold in the distant future has compounded and become a pressing issue that we must face today. we must reform our largest entitlement programs. we used to think we had ten or so years, but because of the financial crisis, because of the spending binge we've engaged in and because of the massive debts and deficits, this problem is here now, not in ten years. we need to do this. i propose a systemic way to reform our programs, my purpose in putting this legislation out there is not simply to say, you know, we have it all figured out, we have got all the ideas, our purpose is here's a plan to restore our fiscal future, to pay off our debt, to fulfill the mission of health and retirement

and security and make our economy grow so people can have good jobs. the purpose is to encourage others to do the same. bring us your plans to solve our entitlement crisis. bring us your ideas to actually pay off our debt. there is a unique legacy in this country that is about to be receiverred, and that -- severed, and that legacy is each generation takes on its challenges so that the next generation is better off. well, as cbo will tell you, as every objective statistic will tell you, we know for a fact we are consigning the next generation to an inferior standard of living. that is a fact. it's irrefutable. i encourage you to challenge that. we've got to act, and we've got to act now to turn this around so that we can give the next generation this american legacy of having a better future, which they will not unless we act. sorry for getting a little carried away, mr. chairman, but this is a serious time. we appreciate the work of cbo. we need to get to work. thank you. >> i couldn't agree more.

before proceeding, i would like to ask unanimous consent that all members be allowed to submit an opening statement for the record at this point. without objection, so ordered. dr. elmendorf, once again we welcome you to the hearing today. you have prefiled your testimony, and we'll make it part of the record so that you can summarize it, but you're the only witness, and unless you want to call some of your colleagues to answer questions, we may put -- you're the only witness today, and you should take as much time as you feel is necessary to thoroughly explain your testimony. and in that connection, i think it would be useful if you'd also walk through some of the graphs you brought with you. thank you very much for coming today, we look forward to your testimony. >> thank you, mr. chairman and congressman ryan, for your kind words about the work that we at cbo have been doing during the past year. we very much appreciate the support you both have shown for our work during this past year and in many previous years. to the two of you and all

members of the committee, i appreciate the invitation to talk with you about cbo's outlook for the budget and the economy. i will speak fairly briefly, and then i will take your questions with assistance from my colleagues behind me. under current law cbo projects that the budget deficit for this year, fiscal year 2010, will be about $1.35 trillion or more than 9% of the country's total output. that deficit would be only slightly smaller than last year's deficit which was the largest as a share of gdp since .ç pace of economic recovery. we expect that outlays will be about even with last year's level as a decline in federal aid to the financial sector is offset by increases in spending from the stimulus program and for other purposes. debt held by the public will reach $8.8 trillion by the end

of this fiscal year, or 60% of gdp, the largest burden of debt since the early 1950s. looking beyond this fiscal year can, the budget@@@@i(( taxpayers. if instead they extend all of

the 2001 and 2003 tax cuts, index the amt for inflation and made no other changes to revenue or spend, the deficit in 2020 would be twice the size of the deficit projected under current law. debts held by the public would equal 87% of gdp and be rising rapidly. the baseline projections also assume the annual appropriations will rise only with inflation. if the instead policymakers increased such spending in line with gdp which is about what actually happened during the past 20 years, the deficit in 2020 would be two-thirds again as large as projected under current law. in sum, the outlook for the federal budget is bleak. to be sure, forecasts of economic and budget outcomes are highly uncertain. actual deficits could be significantly smaller than we project or significantly larger. we believe that our projection

balances those risks. one set of factors contributing to the bleak budget outlook are the financial crisis and severe recession along with the policies implemented and response. analysts define the end of a recession as be point as which output begins to expand again. by that definition, the recession appears to have ended in mid 2009. however, payroll which has fallen by more than seven million, has not yet begun to rise again. and the unemployment rate, as you know, finished last year at 10%, twice its level of two years earlier. unfortunately, cbo expects that the pace of economic recovery will be slow in the next few years. household spending will be restrained by weak income growth, lost wealth and constraints on their ability to borrow. investment spending will be slowed by the large number of vacant homes and offices. in addition, although aggressive action by the federal reserve

and the fiscal stimulus package helped moderate the severity of the recession and shorten its duration, the support to the economy from those sources is expected to wane. employment will almost certainly increase this year can, but it will take considerable time for everyone looking for work to find jobs and project that the reemployment rate will not return to its sustainable level of 5% until 2014. thus, more of the pain of unemployment from this downturn lies ahead of us than behind us. the deep recession and protracted recovery mean under current law lower tax revenues and higher outlays for certain benefit programs. cbo estimates that those automatic stabilizers will increase the budget deficit by more than 2% of gdp in both 2010 and 2011. in addition, cbo projects that last year's fiscal stimulus package will increase the deficit by roughly 2% of gdp

this year and by a smaller amount next year. as the economy recovers and the effects of the automatic stabilizers and legislative policies fade away, the budget deficit will shrink relative to gdp. however, as i have noteed, the projected deficit remains large throughout the decade even under current law, and if the current law is changed in some way that more closely matches current policy -- as most people see it -- the amount of government borrowing relative to gdp would be unprecedented in the post-world war ii period. a large and persistent imbalance between federal spending and revenues is apparent in cbo's projections for the next ten years and will be exacerbated in coming decades by the aging of the population and the rising costs of health care. that imbalance stems from policy choices made over many years. as a result of those choices, u.s. fiscal policy is on an unsustainable path to an extent that it cannot be solved by

minor tic thering. the country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older americans, and the tax revenues that people are prepared to send to the government to finance those services. that disconnect will will have e addressed if the nation is to avoid serious long-term damage to the economy and to the well being of the population. the chairman asked me to, also, specifically refer to some of the charts in the testimony that we submitted. of course, we've written an outlook of almost 200 pages that i'm sure you're taking home and pouring over in your spare time. but we did have several charts in the testimony that i brought today that i think are worth attention. if one looks at summary figure 1, if you have that in front of you, there's a picture of debt held by the public and net interest. it's a slightly complicated

picture. the amounts are expressed as shares, excuse me -- >> [inaudible] >> very good. the solid line is debt held by the public, the picture ranges from 2005 up through the 2009 the left of that vertical line labeled actual, and then the next 11 years of our projection. debt held by the public, which was running about 40% of gdp before the financial crisis and recession, will jump from that 40% at the end of fiscal year 2008 to basically 60% at the end of this fiscal year, 2010. so in two years we will have increased the size of the debt relative to the economy by one-half. under our projection it then continues to rise a little further and is roughly stable around 65%, ending at 67% of

gdp. again, this is under current law which assumes that tax kutz expire as -- cuts expire as scheduled. the bars are net interest on the debt. again, expressed as a share of gdp. that net interest was quite low last year despite the large debt because interest rates were quite low. but we and essentially all analysts expect interest rates to rise considerably as the economy recovers, and the combination of rising debt and rising interest rates will push debt payments up in nominal dollars. we expect them to triple over the next ten years as a share of gdp to roughly double. the next picture we included in my testimony today is figure 2 shows revenues and outlays of the government. this picture goes back 40 years into the past and then ten years into the future with our projection. you can see that outlays have

spiked up clearly in the last couple of years, are now at their highest level relative to gdp we have seen, are projected to fall back but to remain well above the average noted by that horizontal dashed line. revenues have fall then very sharply -- fallen very sharply, the lowest share of gdp seen in many decades, and are projected to rise again. again, this is under current law which assumes the expiration of the tax cut cans. under that current law, revenues move up above their historical level. however, if all of the tax provisions that are set to expire under current law were allowed to expire, that's 2001 and 2003 tax cuts, that's the extension of the amt and also the extense of other expiring provisions, then revenues would remain below their historical

average. it would be inching up close to it by the end of the ten years. and i think there's a third picture which is the picture of the unemployment rate. oh. picture of the unemployment rate which i'm not sure where that -- there's -- yeah. that picture. you can see the very sharp rise, of course, the last several years, you can see the decline. this picture of the decline looks fairly steep, the line comes down, but, of course, it is now so far above the sustainable level that even at that pace of decline it takes a number of years to come down. and you can see in that sense that more of the bulk of that peak actually lies in front of us than behind us, to the right side of that projected line. and that's the sense in which i think the pain of unemployment going ahead is likely to be greater notwithstanding the fact that we, again and essentially all over analysts, will expect gdp to the grow. thank you, mr. chairman.

i'm happy to take your questions. >> thank you mr. chairman. last week in preparation we had a panel of witnesses most of whom differentiated between the short-term cyclical debt and the long-term structural deficit. one who was particularly outspoken, as you might imagine, was bob greenstein. and he said, in effect, that the short-term deficits were a necessary encumbrance that had to be undertaken in order to respond to the cyclical downturn in the economy. but the real concern was that these were necessary provisions for the most part, and the real concern had to be the long-term structural deficit as opposed to the short-term countercyclical measures we had taken. would you agree with that, generally speaking? >> mr. chairman, cbo does not recommend fiscal policies in the way bob greenstein and others do, but i think it is a widely

held view among analysts that the danger from the budget deficit arises from its persistent large size, not particularly from having large deficit during this downturn. i've said on a number of occasions that fiscal policy poses two central challenges to macroeconomic stability now, a short-run challenge and a long-run challenge. the short-run challenge is that fiscal stimulus will be withdrawn very rapidly over the next few years under current law. as the stimulus package be, as its effects wane, as tax rates increase under current law, as the automatic stabilizers diminish in importance, deficit falls very sharply in the next few years and that is a withdrawal that private demand will have to overcome to continue to move the economy ahead. the other challenge that fiscal policy poses in the long run is the fact that fiscal stimulus doesn't really ever go away, that the budget remains very much out of balance for many

years to come. so i think it is how one resolves that tension is, of course, a matter for you and your colleagues. i think it is a widely-held view that the principle damage comes from there being large periods when the economy is at full employment and when they really are crowding out investment in plants and equipment. >> let me go back to three points i made in my opening statement and ask you to comment on policies we've taken. a year ago at the end of the fourth quarter 2008, the economy was in deep recession. i think we'd all agree. and that month alone the economy shrank by 5.4% beneath the previous quarter. by contrast, the economy in the third quarter of 2009 grew by 2.2%. nothing to cheer over, but that's some movement in the right direction, for sure, a swing of 7.6 percentage points out of recession into growth in less than a year. secondly, a year ago end of

january 2009, the job market registered a loss of 741,000 jobs in the previous quarter averaged about a job loss of about 600,000. also just from one indication of how all this was impacting individual households, a year ago at the end of the fourth quarter retirement accounts had lost 1.8 trillion, nearly $2 trillion over the previous year. retirement accounts had fallen in value from 8 trillion in the first quarter to 6.2 trillion in the fourth quarter, a fall of 1.8 trillion in one year alone. by contrast, looking over the past year, 2009, retirement the savings have risen from 5.9 trillion to 7.7 trillion at the end of the fourth quarter. all of those are dire developments that have turned into positive be developments over the last year. one factor in this turn around,

surely, to what extent i know is debatable, one factor was the recovery act. $787 billion of countercyclical effort by the government, and it is being shown and appears now from the bottom line of the budget because those outlays had to be made in the previous fiscal year and to some extent the current fiscal year, you say looking at the recovery act, i'm quoting from your testimony, it moderated the severity of the recession and shortened it duration. can you quantify that? can you tell us to what extent the recovery act stimulated this growth in gdp and jobs in this recovery and retirement phase? >> so, mr. chairman, i'm happy to offer our estimate of the effects. as you know, it is a difficult business to judge the effects of a particular piece of legislation or the entire federal budget. because of that, we have reported a range of estimates, of effects. but we do believe and have said this on a number of occasions, including today's testimony,

that as you said the stimulus package did moderate the severity and shorten the duration of the downturn. we estimate that the legislation raised real gdp by 1.3% to 3.5% be, somewhere within that range during the second half of 2009 relative to what it would have been without the stimulus. i think the last estimate that we provided of i think the last estimate we providedw3 of the employment effects was in a report we issued required by law in november. this was based on the effect of the third quarter. estimate through the third quarter was that it was boosted by 600,000 to 1.6 million jobs. >> so it has had a positive impact? >> in our judgment, yes, mr. ñr chairman.

you warned it is likely to be a slow slog from here to recovery. i think you said it was 2014, some time away. would you comment on whyç that is? moderate in the next few years. in the wake of some past deep recessions, the federal reserve has cut interest rates sharply, and there has been pent-up demand for housing and for other consumer durable goods and for business investment that has propelled the economy on a fast upward trajectory. given the nature of this particular downturn and something in common with some past downturns due to financial cry cease in our country and others is that that pent-up demand is not there in the same way. we have more houses than there

is current demand for. so we think that the economy's likely to grow more slowly, and one direct effect of that is a smaller increase in employment. a second factor is that hours worked for people who have jobs has been on a downward trend for decades, but it declined fairly sharply in this recession, and thus we think as firms need more labor to produce product as demand starts to rise, the first thing they will do is start to increase the hours of people who are already employed rather than to employ new people. that will come later. a third factor is recessions often accelerate restructuring in the economy, it pushes companies that were struggling to the brink or over the brink, pushes companies that were doing well, perhaps, into a dangerous territory, and one way that our economy tends to grow and to create jobs is if people move. they move to other parts of the

country. they, that kind of regional migration has been an important feature in the past, but we think it will be harder to accomplish in this recovery because of the problems in the housing sector. though a significant minority, but a significant minority of people be underwater in their homes, owing more on mortgages than the houses are currently worth, we think they'll have more difficulty going to other locations where jobs are more available. we think that will hamper growth a little bit. but the biggest factor, again, is the first one which is just the slow economic growth. we think there'll be slow growth in employment, and that's a pattern we've mentioned. the past four recessions have had fast employment growth. >> despite the growth in the debt, we've not had what you would normally expect in the way of an increase in debt service, not yet, because of the low rate of interest, historically low

rate of interest. but as that rate rises with the resurgence of the economy, the costs of debt service will go up, and you've got a frightening number, frankly, in your testimony namely that today we're spending -- last year we spent $207 billion for debt service, by 2020 that'll be $723 billion, and that, too, is an entitlement. we tend to think about social security and medicare, medicaid as being the entitlements of great concern to us. interest on the national debt is truly obligatory, it has to be paid, it's an entitlement in the strongest sense of the word. our witnesses last week suggested we need some target thes. we don't need to be out there doing ad hoc things, we need some target to shoot at, and they were suggesting we try to bring the deficit down to 3% of gdp and bring the debt or at least hold it to no more than 6%

of gdp. are those reasonable goals? do you think they're too level, too high, too tight, too strict? >> so, again, mr. chairman, it's not our place at cbo to suggest what your goals should be. economists don't have any analytic basis for saying, this is the crucial point in terms of debts or deficits. it is true that as we push in this country to 60%gdp at the end of this year and beyond that over the next few years, we're moving into territory that most developed countries stay out of. we are moving into territory the that is unusual in our historical experience and in the experience of other countries that we think of with solid economic situations. that raises the risk every step that we go. but what precise point you should stop at is not something that has an analytic basis for answering. it is true that the numbers you

suggest have been discussed fairly widely. i think one thing to note is that our baseline projection is for deficits about 3% of gdp. and the interest payments that you point to are assuming that we have deficits of about 3% of gdp. not in the next couple of years, but beyond that for the rest of the ten-year period -- >> but your baseline is not the worst case scenario by be any means. >> no, and as i said in my opening remarks, many members have discussed making changes that would increase deficits relative to our baseline and in particular extending the expiring tax provisions and indexing the alternative minimum tax. so in some ways relative to what many people, i think, would think of as current policy, sort of policies we have in place, the tax rates we have now, the deficit would be much larger than our official baseline. and to get to 3% from there would require a good deal of policy change.

>> thank you very much for your testimony and for the good work cbo does for us continually. >> thank you, mr. chairman. >> mr. ryan. >> the health care bill is very complex, has a lot of moving parts. you and your staff have done a very good job of working over time to give us estimates, but you're currently scoring the bill on last year's baseline, and we now have a new baseline, so i think it's just for the sake of accuracy so we know what we're doing have this scored on this year's baseline. so i would like to request that you score the health care bill on this year's baseline. when do you think you could produce a score so that we know what it will cost using the current baseline? >> that's a quite reasonable request, congressman. i don't think i have a very good answer. cbo's traditional practice across a range of pieces of legislation is to continue when legislation is in process, to

continue scoring it on the baseline with which we started that process. in particular, congress adopted a budget resolution last spring based on our march 2009 baseline projections. we've used that for legislation since then even though we updated our outlook for the economy and the budget last august, and we as a general matter continue to estimate based on that baseline until there is a new budget resolution. now, it is also true that we in response to requests like yours try to provide a parallel estimate, if you would, based on a more recent baseline, and we do that particularly when we have reason to believe that the change in the baseline is consequential for the estimate and that an estimate based on the earlier baseline might be misleading in some way. we have not actually updated the health, the details of the health baseline, so the baseline

forecast that we released, of course, but the details we need for recalibration of our models to do estimates off this new baseline is a project itself of several weeks 'duration that we have not had time to undertake. so maybe after doing that we could then proceed to try to estimate some particular bill, and i'm not sure at that point which health bill you would find most interesting. >> i'm not sure exactly what the timeline of the health bill is. i don't even know if the majority knows. you just rescored the stimulus which is an act of law, i understand, but that went up to 862 billion. so you're telling us several weeks meaning we probably won't see a score using the new baseline until after this is done, if this is done within less than several weeks? >> so that's right. again, it takes us several weeks to recalibrate the models, and these are the same people, i'm afraid -- >> i understand. let me, yeah, we've got a lot coming down the pike.

let me ask you this, it's cbo's normal practice to provide estimates of authorization of appropriations. you haven't been able to provide those yet. i think mr. lewis has requested this information, particularly in view of, you know, a freeze when are we going to get the estimates of the appropriations authorized and required in the health care bill? that, i think, is probably easier to achieve before we vote on this. what are the appropriations we're talking about here? can you get that estimate? >> so that is, so we received that request, and we talked with chairman stack, ranking member stack. in our estimate of the health bills, we've included a section that offers a range of what we believe to be the appropriations necessary to finance particular parts of the government that would be responsible for running the insurance exchanges or making changes in medicare and so son, those ranges so on.

ranges from 5-10 billion in some categories. to do a complete estimate of the appropriations that might be required would be, doesn't require doing a new baseline, so it avoids that complexity, but it is itself very complicated. there are a lot of provisions, a couple thousand pages of legislation. that would also take us several weeks. it's a completely legitimate -- >> right. this is the creation of a new -- we haven't created a program like this in a generation, so it would, i think, be helpful if we know the cost of all the government that's being created here. and of all things that i would think would be easier to do is just the discretionary spending. how many new people we have to hire, how many new agencies, what's all this new government which is the biggest in a generation going to cost? that estimate, i would like to think, you could probably get, hopefully, before we vote on it. >> would the gentleman yield? >> yeah. >> there's a question about whether or not in parts b and c

of the house bill is a lot of money that is authorized, but not appropriated. it is subject to appropriation. so it's not an indication what's going to be spent, it's an indication of ideally what we would spend to serve a particular purpose if the funds were available. but we don't want to confuse the number with the -- >> right. >> which are more or less an entitlement. >> yes, mr. chairman. i was going to say, congressman, that we tried in our letter to give, again, these ranges. not very precise, but ranges of the parts that would be critical to implementing the legislation, the things without the mandatory spending that is correct ready occur. >> right. i want to be, i want to be mindful of time. okay. so we're at 60% of gdp now, we're heading north, you know, if you use the alternate fiscal scenario, i think we're at 85% at the end of the window which i think is a more realistic measure of what's going to

happen. we get about half our debt from foreigners. is there a tipping point in your mind using your, you know, your background act dem canically whereby foreign investors start losing confidence in our ability to turn this thing around? i mean, greece is having a problem floating their bonds because of their debt to gdp ratios. where in your mind do we start hitting that nexus, that tipping point? and then just one quick final question i'll have for your. you. >> so, so i don't know. i mean, of all the things economists have trouble predicting, which is almost everything, swings of investor confidence must be pretty high on that list. it is true we sell almost half of our debt as is held now from overseas, that's a large increase from a decade ago. we've benefited during this financial crisis for all the problems here in this country by investors here and around the

world thinking of u.s. treasury securities -- >> yeah, but we were in the high 30s at the time. on our debt to gdp ratio. >> yes, that's right. oh, absolutely. so at the moment during that crisis money came in, interest rates have been quite low, as we said. wide spread view among analysts that that is ending now, that as investors become more willing to take risks again in other investments and as they focus more on the trajectory of u.s. fiscal policy that there will be much less willingness to buy treasury security securities at current low interest rates. but -- so i think analysts so, i think they agree there's an increase over time of some flight from treasury securities or dollar assets. how large that risk is or what would trigger it is just beyond. >> if theç trajectory shows we don't have the fiscal situation under control it gets much worse

andsinvestorsç flee. if we get it under control by reforming the trajectory is going in the right direction. i think that kind of answers itself. one lastñr thing. lots of economists are telling usç 2011 will be a slowdown ye. i see that in a lot of forecasts. i notice you have it in yours with the new baseline.ç you are saying we are goingç t have 2.2% this year and slow down next year. why is that and to what extent is the expirationç of the 2001 and 2003ç tax cuts of 2011 a contributing factor to the slowdown in our economy that you are projecting for 2011? >> the number i focused on are the fourth quarter to fourth quarter changes. we expect g.d.p. to grow 2.1% this year and 2.4% next year.

you will be looking at a year over year average. >> it depends on what you look at. >> in terms of -- the reason i prefer this is because the tax cuts will expire and we think thatç on a calendar date we thk that will then press economic growth in the first part of 2 1 2011. relative to what otherwise would occur. >> how much do you shave off growth because of expiring tax cuts? >> if we were to take them out of the projection we would raise g.d.p. growth the next couple of years by about ç1.5%? ç >> 1.5%? >> accumulate actively. if they were extended we have done a different on the release a week or two ago. we looked at a set of temporary policies including a temporary

extension. it has less effect on çgrowth. >> for an income effect applies if it is permanently extended? >> these are effects for 2010 and 2011. over a longer term the extraç borrowing of several trillion dollars that would ensue from that change would crowd out investment and tend to damp growth over the backç half of e 10-year window. questions i want to ask you about the freeze proposal, questions dealing with unobligated balances and things like that, can i just, in the interest of time the, give you some stuff in writing that you can work back with us? >> even better. >> all right. >> thank you, congressman. >> i yield. >> ms. schwartz. >> thank you, mr. chairman, and thank you for the hearing, and i was going to say welcome to dr. elmendorf, but -- and you are welcome, but it is, i think, both good news and bad news. i appreciate your comments on

where we stand right now and some of the actions that we've taken in the last year that have helped stabilize the financial situation and is beginning to turn the economy around. that is good news to the american people, although as all of us know until we start to see new jobs, expansion of the economy here at home they are really just numbers to people, and we can be more hopeful that we are beginning to regrow this economy, and that is good news. but it is daunting. the numbers that you present in terms of the deficit. again, i think some of this is good news on our part because we're taking it seriously, and i want to just ask a couple questions about, one, you know, how we got here. i think that we, we don't want to go over a lot of history, but i think it does help for us to understand what we inherited in the situation and how we got here. you did -- and we know that president obama inherited a $1.3 trillion deficit this year. it's just about that now, even

with the additional recovery act, the additional 700, $800 billion. that's good news, right? that it's stable at least? didn't go up, there was some anticipation -- >> [inaudible] >> again, i'm not looking to paint a rosy picture here, i want to say we're trying to keep things somewhat stable. but you mentioned quickly that the revenues were down. i mean, when you sort of say that, it makes it sound like how did that hand? that we didn't know that? we actually know why revenues were down in the last 8-10 years, that's because there were dramatic tax cuts for the wealthiest americans, is that right? >> certainly there were very substantial tax cuts, and that is a feature that is holding down revenues relative to what they would have been other side, absolutely. >> right. and if we do maintain the tax cuts for americans below $200,000 family income but not for the wealthiest americans,

would that help in the, to be able to bring some more revenue into the government over the next number of years? >> again, our current law baseline -- >> i understand -- >> tax cuts expire, relative to all of them expiring extending, well, extending all of them costs much more, makes the deficit much worse, as i said. extending only some of them will have a partial effect. >> right. >> i think the lion's share of the money from extend thing those expiring tax provisions would go to people below the income threshold that you suggest, although certainly a significant amount would go to people above those thresholds. >> we, obviously, are looking at that. the other piece of what got us here partly, also, is the extension, the biggest extension under medicare since its beginnings which was part d. which was the prescription drug benefit. i wasn't here at the time, but certainly as democrats we

believe you should extend prescription drug benefits to seniors, but we also believe it should be paid for. so the notion of how we budget this new health care bill is really very important going forward, and appreciate your comments on how we are. you have to look very clearly at the cost to the health care bill, but you in the analysis you've already done in both the house bill and the senate bill and, again, you can't predict exactly what it's going to look like, but in both cases you anticipated a reduction in the deficit if we enact health care reform, comprehensive health care reform. and it may not be going as far as you might like or might expect and, again, you don't create policy, i understand, but in we terms of bringing down the deficit, it actually is a very clear reduction of over $100 billion in your estimates. so would you say that enacting health care reform would have a positive effect on the deficit? >> yes, congresswoman. we estimated both the bill that passed the house and the bill that passed the senate would

reduce deficits over the next ten years by $130 some billion if they unfolded as written and would reduce the budget deficits in the subsequent decade, again, if they unfold as written. these reductions are, as you say, in the direction of reducing deficits. they are, as you understand, a small step in that direction. >> but, again, i think that appropriately you're very conservative in the way you anticipate savings, and that is a good thing. we don't want to overanticipate savings, but there are some of us who feel like if done well and done right, we will see potentially even more savings. again, could be very helpful. i'll just end by saying we're taking very seriously the issue of the deficit. the commission that if not done statutorily will be done by executive order to focus on the debt and the deficit and on all aspects of the budget, both spending and tax revenue is all really very important as well as

paygo which, of course, we have pushed actively in the house, and i assume you also think those are, again, you have to be careful about policy, but could you comment or might want to on how important it is for us to take it seriously by us enacting paygo in both the senate and house and commission? >> i think analysts believe, including those at cbo, that the paygo rules and discretionary spending caps in the 1990s did help to restrain policy arcs that might -- actions that might otherwise have worsened the budget deficit. and they did so particularly during the period when attention of policymakers in both parties was focused on the deficit problem. at the end of the decade as the deficit problem was temporarily going away, then those restraints were widely ignored. but when attention was focused on that problem, those restraints helped. of course, all they can do is prevent or discourage policy

action that would make the deficit worse, they don't create actions to make the deficit better. those actions require difficult decisions, and commission doesn't implement the need for those difficult decisions, it may provide a mechanism for encouraging those decisions to be made. don't have all the evidence about that and, as you say, cbo doesn't have a position on whether that should be pursued or not. >> we are taking it seriously. thank you. >> thank you, congresswoman. >> mr. hander is ring. >> thank you, mr. chairman. first, with all due respect to our vice chairman, i'm find thing it challenging to find any context by which i can call a $1.3 trillion deficit good news. having said that, dr. elmendorf, i thought i awoke to good news yesterday when i read "the washington post," obama to reduce spending, obama to seek spending freeze to trim the

deficits. frankly, i was overwhelmed by the headlines, and then i read the article, and i became underwhelmed. first, do you have an understanding of have you studied the president's proposal? >> i only know what i read in the newspapers, congressman. as you know, the president will release a budget next week, and then we will complete and report -- >> well, dr. elmendorf, let's see if we're reading the same newspapers. the newspapers i read say the president's proposal will exempt 83% of the budget. do the newspapers you read say the same thing? >> so i didn't take notes, congressman. i am loathe to do the instant the analysis of things you're telling me i should remember from reading yesterday's newspaper. what is true, as you know, most spend anything the government is now in these mandatory programs is smaller and one excepts the defense and security-related pieces -- >> when you have the details of the proposal, i would appreciate your analysis.

if you may or may not recall this from the articles. i understand this is not an immediate freeze, something that could take place today, a decision could take place today, but it is a freeze promised to take place in the future for fy-2011. is that your understanding from your reading of the proposal? >> yes, that's my understanding. >> okay. .. >> still has us mired in

double-digit unemployment, and so if you >> a little back of the envelope calculation. isn't the president saying after increasing spending 10% one year, 12% the next year, i'm going to freeze it the next three on a five-year budget window. isn't he really saying my idea of fiscal responsibility is i'm going to propose 5% spending growth a year in these accounts when i actually wanted to spend double digit? is that a fair assessment? >> i can't speak to the details of the proposal until we have numbers to analyze. your numbers may be right but we -- prs 10-year spending plan he prs submitted last year. starts out at almost $3.6 trillion in f.y. 2010.

it ends up in 2019 at $5.2 trillion. as i understand the plan he is proposing a $250 billion savings according to what i understand from the white house. i assume he will submit another 10-year budget plan. if you take $250 billionç savis over a 10-year çperiod, again this is using last year's bud t budget, if we apply his proposed so-called freeze to last year's budget, what it appears to me is it is a proposal to raise federal spending 44.3% as opposed to 45%. again we don't have his numbers, but do you at least recall that the spending trajectory was proposed to go from ç$3.6 trillion to $5.2 trillion? >> i don't remember the

specifics of that calculation. but if your point isç their $2 billion estimatet( is certainly small share of projections we project under the baseline which are a good deal smaller we projected for the president's budget last year. >> would that qualify as minor tinkering? >> i think it is a small step. and i doubt there is a single step that can accomplish the deficit reduction -- >> i think my time is running by. i certainly have high hopes for tonight but i fear the president's plan is more about trying to impact newspaper headlines and not budget baselines. i yield back the balance of my time. >> we will support fully our analysis of the president's budget when we have the details we need to do that. >>ç just to be clear on the la

line of questioning, during the eight years the republicans were in power did they enact a freeze on any kind of spending in any one of the eight years? >> not that i am of aware of earnings congressman. >> not that i'm aware of either but continuing is appropriate they scrutinize the president's recommendation but it needs to be scrutinized against real world history. one of my concerns is that as congress moves forward to try to encourage job growth that we may have the effect of producing few jobs and great deficits. and i think that is a potential problem with both -- some of the ideas that have been advanced by democrats and certainly the principal idea advanced byçç republicans to encourage job growth. you pointed out, i believe, that while spending was high relative toç gross domestic product, th

we have the lowest revenues, i believe you said, as a percentage of domestic product$c ofç output that we have had coming into the federal government inç decades? >> yes. >> and i thinkç thatç the pro is that most of the questions you have receivedç this mornin doctor, only addressçç half t budget. they focus on the direct spending but ignore the growth in tax expenditures. the use of the taxç code sometimes toi] advanceçt( poli that may be very similar to theç objectives, someç worthy, some not so worthy that occur through direct spending. not so worthy that occur through direct spending and in terms of our long term national debt, and all of the negative aspects associated with it with foreign bars and reduced standards of living, in terms of the national debt alone, it doesn't really make any difference whether the debt is affected by tax expenditures or direct expenditures, they have the same effect on the debt, do they not.

>> yes, that's correct. >> and as we look at some ideas that were considered last year bet me go to the democrats first. you have provided us an excellent analysis, this month, in the policies for increasing economic growth, cbo put out, one of the politically popular ideas was what is called bonus depreciation. and i believe your analysis is that if we use the tax code to do that, that for every dollar that we drain from the treasury we'll get back 20 cents to up to maybe the dollar itself. is that right? >> yes, congressman, i think that's correct. >> not really necessarily the best bang for the buck, to go that approach, though it may be politically popular, and, then, last year when we considered the stimulus, one of the popular ideas then was what is called "lost carry back" and your testimony last january was the effect of this provision on business spending would probably

be small. we limited it then to small businesses. but, then, the only way apparently we could get enacted an extension of unemployment and cobra benefits in december was to tell the treasury to write checks for 33 billion dollars this year to businesses, and what's called lost carry back and one of those was is a bond insurer that made bad bets on subprime mortgages and it got about a billion by itself. let me ask you, for the businesses, of various types got those, but, since a defunct business that didn't have a single employee could get lost carry back and a check written by the treasury, if the treasury writes a check to a company that has no employees, does that contribute any more than zero to growth and output? >> doesn't contribute much, congressman. i mean, there is a longstanding view in the -- not encouraging the tax changes for businesses, that encourage types of behavior, is much more effective

than simply changing cash flow. >> let me move in my final seconds to the principal republican idea which this is solution to all of our problems is to extend the bush tax cuts which added so much to our moving from surplus to debt shortly after the bush administration took over. in the final two pages of your report, you indicate that extending for one year the -- all of the bush tax cuts and the amt patch for two years, that that will get us, in output, about ten cents to 40 cents for every dollar that it cost the treasury. isn't that right on page 25? >> that's right, congressman. >> and if we did, since the republicans don't want to do that they want to do it permanently and the final sentence of your report, is that if there were a permanent extension of all of those tax cuts, we could get much less than the ten to 40 cents per dollar we'd get for doing it for one year, is that right. >> yes, that's right,

congressman. >> and that would cost us to do that about another $5 trillion, wouldn't it? >> i think extending -- i think $4.5 trillion is the number i have in my head, yes. >> thank you so much. >> thank you, mr. chairman. and thank you, dr. elmendorf, for your i think accurate and rational and sobering report. in the report you youused the t unsustainable, a number of people use that in terms of the budget deficit track and the term i've used myself. and i assume that is in reference to the cbo baseline which we admit the chairman admitted is actually taking into account political realities probably one of the more optimistic scenarios for the budget deficit going forward. i'm not sure that there is a complete understanding of the consequences of inaction here in

this town. we use the term unsustainable. can you be a little more specific? and describe to us what that -- what happens? we do nothing. we now look at deficits of $500 billion to a trillion-and-a-half dollars as far as the eye can see. what happens? >> i think the particular thing that is unsustainable is to have federal debt constantly rising as a share of gdp, because that requires a larger, ever larger share of investors' portfolios to be occupied by treasury securities and at some point they will refuse to hold them or will insist on much higher interest rates to do so. the thing that is particularly unsustainable, is expecting investors will constantly pile more and more of their portfolios, investors here and abroad and -- into securities and what can go wrong is interest rates can spike up when there is a crisis of confidence, and there is sentiment about

buying thez those securities changes and before you hit the crisis point, of course, what is going on in a more subtle, less obviouses but still very damaging way is that the more of those treasury securities that are being held, the less investors will be holding of shares, ownership of physical plants and equipment, the sorts of things that make our economy, workers more productive over time and raises incomes over time. >> what does that mean? does that mean, then we have much lower gdp growth? does that mean that we -- the federal government's debt rating gets reduced and we're actually in perhaps -- and perhaps physically unable to sell the debt. >> that is all upon. most observers expect that the government will act. the unsustainbilly waiting resolved through action, not witnessing some collapse done the road. literally, if nothing is done, eventually something very, very

bad happens. but i think the -- the widespread view is that you and your colleagues will take action. >> and i think... i wish it were not true, but i sense that that will not happen until people fully understand that very, very bad thing and how very, very bad it is. >> again -- >> and i know you don't like to alarm people but frankly i think we have to alarm people. so... >> i think we have given the -- an accurate, sobering view and again we are not trying to overly drama ties and not trying to sugar-coat, we are presenting the facts for you and for the american people and it is up to you all to make whatever decisions you choose to make. >> couple more questions if i can in the time i've got. if you said that -- all right. we'll let spending grow with gdp, stay where it is with gdp and balance the budget on tax increases, entirely, do you have any sense and throw the health

care bill in there as a tax increase as well. do you have any sense for what kind of tax increases that would require? in terms of -- >> i can give you one illustrative case. if you look at the budget in 2020, if your goal were to balance the budget in 2020 our baseline projections, a deficit of $700 billion and if you extended the 2001, 2003 tax cuts and index the amt it would be twice that size, as i said, $1.4 trillion. so by comparison, individual income tax revenues in our baseline before you take accounts of the fact the extra cut, are $2.5 trillion, so, if one wanted to narrow a gap of 1.4 trillion dollars by increasing a category, baseline size is $2.4 trillion, that requires a very substantial increases. and so it is very difficult with

those numbers -- can i say also, the number is quite large, doing all of those changes on the spending side. the -- the equivalentsly radical changes on the -- >> i understand that. but i think the point is, if we have -- if you keep spending where it is as a percent of gdp, forget the health care bill, without increasing it potentially it is a 50, 60% increase in every, single federal tax on e every, single human being in this country? >> it would take, i haven't done the percentage calculations, i have done it on some occasions, but it would take a very substantial increase in tax rates. >> thank you. >> thank you, mr. chairman around thank you, dr. elmendorf. this has a very important hearing and i -- if i could follow up on the remarks of ms. schwartz, i think it is important that we all understand how we got into this mess to begin with. and when i hear my republican friends talk about the importance of trying to rein in spending i would remind them that under the clinton administration, total spending

grew at an average annual rate of 3.5%, under the bush administration it grew at an average annual rate of 8.4%. fact is that president obama inherited a mess of an economy, as a result of what i believe are fiscally irresponsible policies, of the previous administration. and, there is no question, that we need to take some strong and bold action, and i will say also, that for all the whining about the reinvestment and recovery act, i can tell you that, from my experience, in massachusetts, that teachers' jobs have been saved, police officers' jobs have been saved, firefighters' jobs have been saved, there is more jobs created in the construction industry and some of the high-tech industries, so we have seen the benefit. has it created as many jobs as i would have liked to have seen? no. but without it i think we'd be in a much bigger mess than now. so i find it ironic that the

same people who drove this economy into a ditch are now complaining about the size of the tow truck, the fact of the matter is, you know, we are in a mess, and some tough measures have to be taken. i want to praise the president, for his announcement in the newspaper. trying to figure out a way to deal with the deficit. and with the debt. so that it's not thrust on the backs of our kids and our grand kids. but, one thing i worry about, is what we're spending on defense, but, specifically, war costs. i mean, we have been fighting wars since 2001. and, they have been expensive. and we have been paying for these wars, funding these wars through emergency supplemental appropriations where there are no offsets. i mean, hundreds of billions of dollars have been spent but not offset. and, you know, no matter what you think about the war in

afghanistan the president is making a mistake by trying to increase troops in afghanistan and we are told there will be another emergency supplemental, 33, $35 billion, and it goes on and on and on... and i think this notion of paying for wars with emergency supplementals are not offsetting, i think is the wrong way to do it but i think it has a devastating impact on our deficits and debt and i appreciate your comments on, you know -- that subject and i'm afraid the wars will bankrupt us. and i appreciates anything you have to add to that. >> well, the point you made earlier about the stimulus package, congressman we agree relative to what would have occurred without the package, there is more gdp and more employment. >> which is a good thing. >> even i'm allowed to say that is a good thing, yes. on the cost of the wars, again that is a policy choice. we, to date, congress has

appropriated $1.1 trillion for fighting in afghanistan and iraq and related activities. >> do you know how much of that was offset, how much did we pay for or all on the credit card. >> well, there's no specific linkage of particular spending decisions and revenue-raising decision and it's true the deficits over that period well exceeded $1.1 trillion. >> i guess my point is if you fight the wars you ought to pay for them. because there are impacts that -- impacts negatively on our deficits and our debts, and the notion we can fight these wars and not even have to talk about how we pay for them i think is a bad way >> again, that is really a policy choicew3ç. theç analytic point many economistsç would make is if o were undertaking a lasting stream of spending without paying for that there is aç lasting stream of deficits. for unusual spikes of spending there is a logic to not bumping

up tax rates an bumping they will down. >> the;eeç wars have gone on foa long time and will probably go on longer so the idea it is a sho short-term -- >> it is certainly not short term. >> when you do these and don't pay for them you are adding to our debt. and if we are talking about trying to control deficit spending then clearly this should be on the table because we have been there since ç2001 we will probably be there longer than anyone wants to admit and i think we need to deal with the issue up front. thank you. >> thank you, congressman. >> thank you, mr. mcgovern. >> thank you, mr. chairman. thank you for being with us today. i represent the largest agriculture andç manufacturing district in the state of ohio. our unemployment number just came out for the state.

we are going up. we are upç to 10.9% in the sta. my districtç is even worse because of the manufacturing that we have. i have four of 16 counties at 14%. when you talk about a slow growth in job recovery, i can see it because every week i'm home i try to get out across my district and my manufacturers are hanging on by their will do for them and i can't tell them. it is tough because you talk about these plans that we are not going to see the recovery come quickly because you are right, a lot of plants are down to 32 hoursç to save their brother and sister next to them on each machine. they have said what do we do and cut down toçi] 32 hours in a lç them and you havew3ç plant mans cleaning bathrooms and outside contractors no longer working at the plants. so you have more unemployment. and you have more unemployment.

but, you know, when i look at your testimony today, and it is sobering, you know, the question when you look back, or look out to 2020 and look at this massive amount of interest on the debt, of $723 billion, quick math, $2 billion per day, and when you look into your definition of, is that sustainable, for this country to be able to $2 billion a day, in interest on that debt? >> we are a large and rich country. we can get away with a lot. for a while. what the -- at what point we can no longer gets away with it as i've said is difficult to judge analytically. >> well, in going along, i tell my kids this all the time, i'm not that old but started practicing law in 1981. and when i started practicing law, of course, we were looking at 21.5% interest rates in this

country and what was going on. and we were writing a lot of land contracts because people couldn't even go to the bank and get a loan. there wasn't any money to loan and looking at the massive amount of interest that will have to be paid by the federal government, are we looking at what we'll be stared at in the late '70s and early '80s, a lot of the businesses plan for the future and when you talk of jobs not being created, there is no way i'll buy the new machine or add more employees, because i'm looking down the road now, at the federal government, will be spending and how in the name of sense we'll go out and borrow money and now i have companies that cannot get any money now, and actually have no debt. and can't get a loan from a bank. >> as you know, interest rates were particularly elevated in the '80s because inflation was high and so, lenders demand -- want at least as much money back in real terms as they gave out and want real return on top of that and the nominal reported interest rates were high, because inflation was high.

we project that interest rates on the debt will -- government debt and other interest rates on the economy will rise over the next decade, not to anything like the levels in place then. the projection is uncertain but we think it blends the risks. -- balances the risks. so, the burden is growing of making the interest payments but is not impossible, it is just a matter of -- it is in this case analogies to individuals or families actually work pretty well, if you borrow a lot now, and when you payou pay it back it squeezes what you can do later on. as the economy recovers and the financial system strengthens, business as you are talk about should be more able to get credit. small businesses in particular, are having to -- are getting credit now and this is one of the things we describe in our outlook on economic growth the next few years, but, the healing of the financial system is

underway. there has been tremendous improvement over the past year. it's not -- has not yet affected a lot of small businesses but our expectation and that of e many analysts is it will over the next few years. >> and i hope, too, because the thing is, we try to give hope to the folks out there, that, you know, are right on the bubble right now. hopefully they'll be in business in six months. and just briefly, has already been toughed on by the chairman and mr. ryan. i look at these numbers every month, about the amount of foreign holdings out there, or debt and we have gone to $561 billion over the last year, alone and watching it go up, we have almost 3.6 trillion dollars out there owned by someplace outside of this u.s. that is pretty sobering. as the trend goes on, it is a big question. when are -- one of these other countries will say we will not just borrow the debt and it willful back on the american

taxpayer and -- fall back on the american taxpayer and the consumers and businesses and i worry about when the bubble might break we'll see folks finding out there is not -- where will they borrow this money, the federal government has to up the interest rates and we'll be staring at 1981, 1982 again and that is my fear. thank you, i yield back into thank you. >> ms. saunders. >> thank you, mr. chairman and thank you, dr. elmendorf, it is a very sobering testimony we are hearing today but also to look back at a year ago, when we were hearing yet again a very sobering story, from virtually every economist who recommended that the federal government had to act, the debate i felt was more, largely around what the size of the recovery package looked like and what the composition should be, and as a new member to congress i really took a lesson from a city i represent, the city of lowell, massachusetts, during -- when the industrial revolution began and the textile industry began

to move south it had a dramatic impact on the economy of the community, and, government failed to act. and because government failed to act, it took decades for that city to dig itself out from under the challenges it faced. so that very real example really did motivate me and drive my decision to support the recovery package and i think from your testimony today we have seen how important it was. we cannot imagine where we might have been without taking that very bold action and, again, also listening to the lessons from the great depression. so i think you would agree that we had to move and we had to move aggressively. >> and i can't suggest policy but we do believe that the economy would have lost more jobs and suffered larger declines in gdp without the stimulus package. >> it would have taken many more years and we'd be looking at a far different scenario in terms

of building ourselves back. >> it would have taken longer. >> i have another question and we understand the long term challenge of addressing the debt an deficit and when the president's budget is released, we have heard that he plans to propose a three-year freeze on nondefense discretionary spending and i, like my colleagues, am pleased that he is taking the question of deficit control seriously, and i recognize that we're going to have to make some very painful choices that include spending cuts, to our priorities. but, everything has to be on the table, since nondefense spending is the smallest piece of the spending pie. even if we were to cut nondefense discretionary spending down to zero, we would still face a deficit in the hundreds of billions of dollars. would you agree? >> yes. that's right. >> nondefense spending is also the primary way the government fulfills its responsibilities to the middle class. nondefense discretionary spending is really just jargon for public schools open to all,

affordable college education, save roads and bridges, poison and toxic-free food and toys and so on and as we have this very important debate, i think we in congress will be sure to protect the middle class understanding we do have to address nondiscretionary spending as well as all other forms of spending. but i have another question, that really has to do with the commission: in light of the senate's rejection of the commission yesterday, do you think we're going to see a negative reaction from the markets? >> i would rather not predict financial market reactions. i think among other things, markets tend to react fairly quickly and i think yesterday's -- the set of events over the last day or two, have not been entirely unexpected and some was built in all ready and some has already occurred and it is difficult to predict. if i could go back to your previous point about discretionary spending i think you are absolutely correct the

category of spending that people often object to in general terms but when it comes to specific aspects of it, there often are strong support for pieces of -- and in addition to the ones you mentioned is the category that funds health research and veterans benefits, and the court system, national parks, and specific elements that i think many people believe are an important part of what the government should be doing. and that is why in fact over time, it has proven difficult to reduce that substantially as share of gdp. because in the end, all of the general objections, there are a lot of specific things people want the government to do and that is why the choices that you face are difficult. >> but i agree we have to put everything on the table and be very -- you know, very careful about how we move forward and yet addressing the long term challenge we face, because it is obviously, as you have said,

unsustainable. >> thank you, congresswoman. >> mr. garrett. i have you next. who is next? >> and... thank you, director. for being here today, and, particularly, i also wanted to thank you for -- you and your office, for the work you have done, what i think is this is accurate account for accounting for the gses. government sponsored enterprises. in the latest long-term budget outlook. i'll spend a moment here, first, before i ask you a question, to lay out the history of how they came about and i think probably how you came to that conclusions. it was back in july of 2008 congress passed and the president signed the housing an economic recovery act of 2008. also known as paulson's bazooka. this legislation gave the treasury secretary the power to

buy an unlimited amount of securities, from fannie mae and freddie mac, if the treasury secretary determined a couple things, that such actions are necessary, a, to provide stability, to the financial markets and b, to prevent disruption in this availability of mortgage finance and, c, protect the taxpayer. ultimately, they allowed the government to effectively take control of those companies, if it deemed their losses to be a systemic risk to the u.s. financial system. then, in september, 2008, when the housing market continued to decline, secretary paulson, fired the bazooka and the federal housing finance agency placed fannie mae and freddie mac into a government conservatorship and then, beginning of last year, 2009, cbo concluded fannie mae and freddie mac should now be included -- this is the important point, they should now be included in the federal budget. and accord to a report, you arrive at the conclusion after considering the following questions, who owns the agency and who supplies the capital, and, who selects the managers, and, who has control over the

agency's programs and budget. and, ultimately, cbo, concluded this answer to those question, was... well, the federal government and each one of those. and since then, the treasury continued to purchase preferred shares in the gses, the means to provide them with enough capital to cover their losses. initially, congress put up $200 billion, as one -- 100 billion for each entity and last year the treasury raised the potential commitment to 400 billion and of course, on christmas eve lifted the cap altogether and now it is basically, unlimited. in the latest report, fannie mae said we expect for the foreseeable future the earnings of the company, if any will not be efficient to pay the dividends on the senior preferred stock. as a result, future dividend payments actually will be effectively refunded from the equity drawn from the treasury. which means -- seems to me is the treasury pours money in and they take the treasuries and send their own money back to us again as dividends. director, your counterparts, however at the office of

management and budget, omb and treasury, somehow disagree with you. and, your conclusions about fannie and feel the cost to the taxpayers equals the kots of the actual cash infusions pumped into the gses and do not as you do account for risk to the taxpayer. ness of the losses the gse will continue to sustain in the coming years and the "wall street journal" article, said the administration has no plans to alter how it accounts for fannie mae and freddie mac and the federal budget and i don't anticipate any changes, assistant treasury secretary -- said michael bar and they'll have the same appearance they had before the budget books. and my first question is, is there any possible interpretation of the current relationship between the federal government and the gses that would allow to you change your opinion or for that matter, any reasonable person to concluded that they should not >> congressman as you know we are open to new information. we are not susceptible to persuasion apart from