at the c-span library. we take c-span on the road with our local bus. we bring our resources to your community. it is washington your way, the c-span network. >> and a few moments, former ambassador chris hill on the political situation in iraq. in about 40 minutes, a discussion with former secretaries of state madeleine albright and george shultz. after that, a forum on housing finance included remarks from timothy geithner and housing secretary sean donovan. later, the heritage foundation report on the economy, but it, and foreign policy. -- the budget, and foreign policy. a couple of live events to tell you about tomorrow on c-span. the national business group on health will report on how large companies urge employer

provided health benefit programs to prepare for the new health care law. that is it 10:00 eastern. the funeral service for ted stevens who was killed in a recent plane crash. speakers include vice president joe biden. talks between the two leading political parties in iraq have broken down. next, former ambassador to iraq chris hill on the plant will situation there. this is 14 minutes. -- 40 minutes. >> could afternoon and welcome to the state department. it is my great pleasure to introduce a man who literally needs no introduction. ambassador christopher hill who is just out of his 60 amount to or in iraq and to answer questions about his time there and the transaction and looking

forward. thank you for coming. >> thank you. there was supposed to be one year but i went into extra time. and it is a pleasure to be here. i left iraq a few days ago to say goodbye to people at the embassy. it was quite a time of transition. we have a whole new cast of characters coming in. i think anybody who deals with iraq is very much aware of the fact that the problems of that country are severe but the potential is very great. i think those of us who were there for the time that we were there did our best to make things better and make things better for our successors and i hope i have done that for jim jeffreys who i understand leaves tonight. we have talked on many occasions about the transition there. there is a lot coburn on.

one of the main things that we do is to help be helpful on government formation. they have had a very close election we have tried to be very helpful and we will continue to track because the rocknes a government. in the meantime, we have worked very hard with our military colleagues to make this a year of transition from military-led operations to civilian-led operations. there have been numerous challenges that continued to exist. i am sure you all saw the news this morning about the suicide bombing in front of a military installation where scores of

people were killed. as i have so offers -- often said, it requires you to stay at. i do believe there is some real progress there. as we speak, major oil companies are beginning to put to drill bits into the ground. iraq will emerge as one of the major oil producers of the world and that will have significant for the rest of the world. that is a part of the picture that is coming in focus and i think the iraqis are making progress. having done what i can do with my team in terms of making it a little better from where i left it, i know that jim jeffreys approaches it with great enthusiasm. i certainly wish him the best.

>> i would like to ask you about how tight and iraq. -- altai that and i roth. -- al qaeda in iraq. once u.s. forces are gone. >> 140,000 u.s. forces are now around 55,000 going down to 50,000 by the end of august. the key issue is not the number of forces but what the mission has been. indeed, june 30, 2009 turned out to be a very important date because that was the date that u.s. forces were out of the cities and towns and municipalities. the consequence of that was there were challenged a by wereqi attacks. the iraqi forces rebounded and

did a very credible job of continuing to ensure a reduction in the level of violence. when that silence gets to 0, which we would all like, is a proposition that is not going to be filled in the next couple of weeks. i think it is going to take a while. to some extent, it is a function of developing the institutions in the country. to some extent, it is developing the political consensus necessary to deal with security issues while at the same time preserving the human rights gains the country has made. it is going to take some time. the question you posed is what is the role of u.s. troops. it is now appropriately shifted from combat operations to an advise and assist role to help iraqi forces and i think they

are doing that and will continue to do that. i am confident that what can be done will be done in terms of dealing with these insurgents with the understanding that it will not go to 0. >> my question is intended to be more about al qaeda. are they still connected in some significant way? >> we have had great -- they have had great difficulty communicating outside the country and with each other. they have funding problems that have cropped up. i know you have heard many people from many podiums say they are in iran and i did not want to get into that. i can tell you what can be done against them is being done against them. is the problem getting worse? no. it is getting better. that is a testimony to a couple of things, one is what our

forces had done. also, what the iraqi forces are doing. the attacks against these al qaeda forces are planned and executed by iraqi forces. a lot is being done. what is frustrating to all of us to wake up and hear about a bomb blast killing scores of people. the understandably, everybody wants to know about that. >> how is the local support for allocated as compared to several years ago? >> it is a very important factor. there is no local support. that is why we monitor very closely this issue to make sure that payments are being received and issued like that. we have not seen any uptick in support for insurgents.

the participation in the election in the voting patterns marked tremendous advancement. al qaeda it is not able to hold on to a city block on like in the past where they could take over entire buildings with insurgents. i do not think there is much support at all. on the contrary, there is a general revulsion. what is important and what -- why we stress the need to bring an different ethnic groups and to build institutions is precisely how to install and the reverse of the pattern. >> about the iraqi oil well. you just struggled along with the un to have these packs.

>> the law, i have to tell you, i got there in april of 2009. everybody talked about the hydrocarbon law. i sought a virtual stalemate in the council of representatives. i supported the approach of just going ahead and doing contracts, that is, these are not ownership contracts. um these are oil service contracts. the iraqi government has made a very credible effort on that. they have also reached over to the kurds and address some of the issues there where they had wanted to export some of the oil directly. a lot of the problems and issues that were seen as requiring an oil law actually got done.

there is a need for an oil law and i hope they take that up on the council of representatives finally sits and starts contemplating laws. the main issue was to stimulate investment. investment is now there. they need an oil law for a number of tactical matters but in terms of stimulating investment, i think they have found a very reasonable work around and i think you will see iraqi oil production in the next five or 10 years becoming very significant. if things go well, in seven or 10 years, we will be looking at 8 million barrels or higher. >> to follow up on that. >> they basically worked out the revenue sharing issue which is about 17% on the oil for the

kurdish regional government. they have reached an agreement with the contracts that were assigned with the kurdish regional government had been accepted in baghdad. to the extent that oil revenue can come about and reconciliation. i think there are other issues that need to be addressed involving the relationship of the provinces oil is not one of these issues. they're taking a very practical approach which is to go in and get going with contracts. some of the companies will find some problems for which an overall framework will law would be helpful but i think it has been worth while moving this sort of overall issue of an old log.

>> today's attack targeted the new recruits. are you concerned or worried [unintelligible] now they will shift their tactics to attack the iraqi military forces, not to just civilians. do you want to see some kind of military base after the final withdrawal in 2011 in agreement with the new iraqi government when it is formed? >> with regard to future forces, we have a status of forces agreement now. it has certain benchmarks, one of which is to be the withdrawal of u.s. forces from the municipalities. that was achieved. that is important. it told the iraqi people that the u.s. mean that that -- means it when it signs an agreement.

any future forces, any speculation about that would have to depend on a new agreement. there is no agreement right now. the agreement that people are focusing on is the agreement that ends in 2011. i'm not going to stand here and speculate on what will happen to a year-and-a-half from now other than that there needs to be a new iraqi government. the need to look at what is necessary in the future after the expiration. >> i understand that. would you like to see some military forces -- military forces base there? >> this never has anything to do with what you would like. [laughter] i am not going to speculate on which should be done later on. i have not been paid to speculate. i have been paid to make sure that we implement and that we

were together with of the military to implement the agreement that was laid out that is the status forces agreement agreed upon on december 2008. >> as an informed observer, do you expect now really maliki to be the new head of the government? >> i am not going to speculate on that. nouriel maliki won 89 seats, one of the largest. the other coalition won 91 seats. the others are much smaller. there is a certain logic to having the state of law and the group's work in coalition.

i would be careful of drawing any heavy-duty conclusions from when you hear negotiations break down in that country. it seems that people do not like each other until they like each other. people disagree until they agree. >> coming from iraq, news says that there will be a new federal post in iraq that will balance the formation of a new government. what can you tell us? >> we have not been importing ideas from washington. there are a number of ideas out there in iraq. one of the ideas being discussed among the political parties was the notion of taking something called the political committee for national security and seeing in fits -- and seeing if

that political committee, like in national security council, could somehow be revived in a new government. there has been a lot of discussion on what to do with that, how to run it. would you, for example, have a chairman that would only be in charge of having this political committee or this national security council? with the chairman of that council be -- would the chairman of the council be someone wholly has that job? would they have another position as well? i would say it is an ongoing issue. right now, you have a prime minister position. in this concept, you would also have some sort of secretary general of the national security council.

but whether that ultimately is part of a solution found among a coalition that can come up with 363 seats is the issue. no one has near three and 63 seats. that is why this has gone on for so long. because they have to work this out. they are obviously looking at different models to resolve this. one of the issues is, if you create this thing, what would be the powers of the prime minister? some people said that the prime minister has too much authority

and that that is a constitutional flaw. there are different opinions about this. but it is an ongoing negotiation. >> is iran playing in this? >> whatever role they play is never helpful. they do not understand that, in the long run, if they want a good relationship with iraq, they will have to do a better job of respecting iraq's sovereignty. when you look at iraq today, where it is, when you look at all the interest of the neighbors, it is not just iran that is interested in iraq. there is criticism within iraq and that other countries are expressing to much interest in

the future of their country. everyone should understand that these problems, when they are solved, they will be solved with made-in-iraq solutions. >> this question is not based on any kind of future. it is based on your experience. the equation between shia, sunnis, and the third group, how do you see it today? >> sometimes politics in iraq is overstated. it is an identity issue in politics and to have an affiliation with a certain kurdish party. then she a party is definitely portia. -- the the shia party is definitely shia.

i would say that it is an identity issue. it is a reality there. but i would argue that sectarianism is not on the rise in iraq. if you look at some of the very clerical type parties, they have not done well in iraq. more's a tendency toward secular parties. they aim to be more secular than sectarian. i think it is a question of how the political process will develop in the coming years. overall, you will see iraq to do what it has often done in history, which is to be more secular than sectarian. >> how did you see the political process developing?

you used the [unintelligible] >> my personal view is that the tendency in iraq is toward more secular parties. whether you see a more identity issues emerge, whether you see people from the south feeling different from people from the center, as opposed to shia feeling different from the sunnis, i am not really ready to predict precisely how it develops in iraq except to say that it will be less a religious identity and more of a secular identity.

>> how much of the dragon the political formation process -- how much of a spike in the recent violence is related to that? there seems to be a loss for an ancient towards a loss in the trust of the iraqi people in this government to take care of their needs. >> i do not have a metric for you on that. the process has dragged on for too long. there is impatience among the public with of the politicians. certainly, the fact that you have gone since january that a law has been passed in the council of representatives, that is that this lead to long. -- that is obviously too long.

i have no doubt that this has gone on too long. -- the question is how to fix it. i am not sure that anybody could lay the security issues at the doorstep of government formation. i am not sure there's a causal relationship there that is obvious to me. very clearly, iraqi people want to see their politicians pick up the pace. we were hopeful in the last few weeks as we saw the two leading parties work together on this. they have been working on some very useful ideas, in terms of power sharing.

you heard the press conference between the real morality and -- between nouriel maliki and [unintelligible] there were up 8 to the degree for -- they talked about the degree to which the kurds were comfortable. how that works out today is hard to say. i would say that things that are impossible become possible and things that are possible become impossible. i would not that too much money on some of these reflections. >> [unintelligible] >> it is really hard to say. we know that he is following

this issue on a daily basis. he obviously has a lot of wisdom about the political process. he knows it very well been he knows the players very well. i suspect any role he is playing, he is playing and doing it in the best way he can to ensure that there is a positive outcome. he believes, and everybody agrees, that when the government is finally form, you will cease zuni's, shia, and kurds in that government together. -- you will see sunnis, shia, and kurds in that government together. you will see substantial offers of important positions there.

i think everyone understands the need to bring all of the iraq components together. i think society has made very clear his view on that and how he is conveying that view is probably best left to him. >> what did you see happen in the year-and-a-half that you were there that you did not expect you might see? and what do not see happen that you expected to see? >> first thing was -- when i arrived there over 140,000 troops, how was not sure how that was going to work. and that work very well. i was concerned by the june 30 date on u.s. forces pulling out of the city. i think that has worked very well.

it worked well in a couple of ways. the iraqi forces stood up. notwithstanding these horrific events that will shutter about, nonetheless, overall, the trend lines toward violence in the cities has continued. when you go up said of the green zone nbc plate glass windows being installed in iraqi shock -- the green zone and you see plate glass windows being installed in iraqis shops, you see something has changed. i was pleasantly surprised to see how that has developed. i was unpleasantly surprised to see the declassification -- debasification happening.

it sends the sunnis back on their heels, questioning their ability to play in the political process. that was extremely worrisome. i think they got through it. i was struck by that case and other cases where iraqis often take things to the brink, where you're not really sure what maneuver there is except to jump into an abyss. yet, they find a solution. it is a place where you have a new constitution that does not have a lot of -- has not been tested through a lot of presidents. it is a country with the democratic institutions that are functioning that have not had the kind of strain put on them that they have had since the very close election. yet there is a very -- there is an understanding of the rule of law and that solutions need to be found within the

constitution. certainly, when you are an american diplomat there, your consulate talking to people and getting a sense for how they feel -- you are consulate talking to people and getting a sense for how they feel. thatl hear from people they want to see fewer u.s. forces and then you will hear the same person say they want to see more u.s. forces. they can have conflicting views simultaneously and that is an acquired taste. >> what does the government of direct still rely on the u.s. ford? -- what does the government of iraq still rely on the u.s. for?

>> i think you want to direct a question for the pentagon. i am not prepared to tell you what i for platforms are. we also talk about the military transition, but there's also a u.s.-iraq transition. they're looking at ways to turn over equipment to the iraqis and capabilities to the iraqis. that is going on at a rapid pace. i can also tell you that the military -- the embassy, we work on something called the joint campaign plan.

we worked weeks, months on this manhattan-sized phone book plan. what you see are areas in green, meaning the transfers that have happened, amber, meaning that they are in progress, red, meaning that they need more work. all of these various issues, whether it is readiness for their forces, the state of the equipment, procurement of equipment, training for their forces, all of these issues are monitored very quickly on a regular basis by our u.s. forces to determine where the effort should be. it is quite the comprehensive transition package. when general odierno says that it is a proper that we get to 50,000, he is not just saying that because that is what the president laid out. it is because, due to the presidential laying out to that

figure back in the june speech, the military has worked to make sure that, when we get to 50,000, we will have done these transitions. >> can you say that iraq is stable today? [unintelligible] what lessons can we learn from iraq as far as security and terrorism in afghanistan is concerned? >> i think iraq is increasingly stable. i think the security problems are not ones that have broad political significance.

they have several -- they have terrible cigna as part -- they have terrible significance for people involved in them, of course. but they are not shaping the political structures. i take from that a sense of stability in the country. iraq has been around a long time. i think we can take heart from their direction and there. in terms of the legacy, someone else should answer that question. what i like to say is that we have been able to establish a relationship with iraq with an appropriate amount of the engagement on the u.s. civilian side, an amount of soot -- an amount of engagement that is appropriate to building a long- term relationship. but you cannot be handoff in iraq. you can i go there and said that that is an iraqi problem, not my problem. frankly, it is everybody's

problem. i like to think that, over the course of the time that i was there, we built an appropriate relationship, that we engaged the iraqis across the board. for example, i was the first ambassador to be able to visit all the provinces. the went to visit the provinces before because security did not permit it. it does now. the u.s. relationship with iraq is in a position to grow and to be self sustaining and to be long-term. that is what we sought. we did not want a situation where we would be considered an occupier and, as soon as we leave, we do what we want to do. i think the iraqis really want

that long-term relationship. i like to think that, during the time i was there, there was an increasing trend in that direction. with regard to afghanistan, i understand why you are asking. everybody in washington talks about afghanistan and iraq, almost inflating them as two different countries with the same situation. it is a very different situation. afghanistan has been around for a long time. it will be around again. it is amazing some times to meet people, for example, we have someone working at the embassy who used to be a peace corps volunteer 30 years ago. afghanistan does not have to be violent all the time. when you look at the mineral

wealth of iraq, the fact that iraq now has all the major countries, including all the current members of the un security council with the enormous investments in iraq's mineral sector, i need you concede there is potential there that will be more problematic for afghanistan. one has to be really careful of these kind of cartoon comparisons. certainly, we have the right strategy in iraq. it is clearly going in the right direction. i would be much happier today if there was a new government formed. i would be much happier if they were arguing with each other and the council of representatives. that day will come. >> at the risk of raising

afghanistan and iraq in the same sentence again -- the question of resources and high- level attention, as the situation in afghanistan gets more and more difficult, do you leave fearing that iraq could wind up, just by virtue of limited bandwidth, not getting the sustained high level of attention and resources that it needs and the policy engagement that you described? >> this is the charlie wilson's war scenario where we forget about afghanistan and the rest is history. i have never liked for senior level attention from washington. -- i have never lacked for senior level attention from washington. there have been well informed and engaged. i never had a problem.

i never lacked for the washington bureaucracy offering me tips on how to do my job. i appreciated everyone of them. [laughter] i think the issue would be more on the resource side. people need to understand that the overall national security outlays in iraq is plummeting. the overall outlay of funds we are putting in iraq are coming down, yet we are having trouble getting some things funded better so much cheaper than what we have been finding. funding for peace is a lot less costly than funding for war.

there are a lot of malaise that are needed, not just in iraq, not just in afghanistan, but west virginia and places like that. i think we have to be respectful of what our congress has to look at every day. i'd like to think that people will understand that, if we can stay at it for a few more years -- and that is what we're talking about. we're not talking about an on it -- an open-ended commitment to that will go on for 30 years. we're talking about a few years during which the iraqis will have the potential to get up and running and will not require assistance from us. but if we create gap, if we fail to do with now on the assumption that they will have their own oil -- they do not have their own oil now. they will, but they do not now. it is going to take a little more time. it will take a few more years. at the end of which, we will

have done the job and we will not have to be funding iraqi products for the rest of history. thank you very much. this is probably my last time here. it is a funny feeling. i will go off to denver, colorado. i will be the dean of the core bell school of international studies at the university of denver. i will retire on the 31st of august. that is after 33 years and two years in the peace corps. >> [unintelligible] >> will i be in washington on the 31st? probably not. but i will come through in september and have a proper farewell. i will invite some of you. [laughter] great to see you all. thank you very much.

c-span2 c-spa >> in a dozen more than an hour, a forum on housing finance including remarks by timothy geithner and housing secretary sean donovan. after that, a heritage foundation proposal about the economy, budget, and foreign policy. later, we will be air of the briefing with former iraq embassador crystal. on washington journal tomorrow morning, will focus on the future of fannie mae and freddie mac with barry zigas. the chairman of state and works talks about his article on the relationship between the tea party and republicans. our series on the financial

regulation law and tell it may affect consumers. washington journal is live on c- span every day at 7:00 eastern. >> after nixon lost the 1962 california governor's race, the owners offered the former vice- president the job of commissioner of baseball. nixon was flattered but declined telling the owners don't tell pat, she would kill me for turning you down. >> whether it is baseball and the presidency with the cia and the korean war, find all of the c-span's american television online anytime at d.c.'s ban library. it is washington your way. watch what you want, when you want. now former secretaries of state

madeleine albright and george shultz. they are interviewed by former state department correspondent margaret kalb for more than an hour. >> i am pleased to introduce the program moderator for the evening. marvin has had a distinguished 30-year broadcast career. he served as chief diplomatic correspondent. he was also the moscow bureau chief and moderator of meet the press. he was the founding director of the center for policy at the kennedy school of government at harvard university. he is a writer in residence at the u.s. institute of peace.

he is a presidential fellow at the george washington university as well as edward r. murrow professor emeritus at harvard kennedy school of government. please welcome kalb. [applause] >> thank you. thank you and good evening and welcome to this special event with two very special people. madeleine albright and george shultz. both having served eds -- as secretary of state, albright with president clinton and shultz with president reagan our conversation will focus on war and peace building. rarely in american history have we been confronted with some many daunting challenges not only the economic challenges which are daunting enough but in addition, two wars in iraq and afghanistan, the threat of global terrorism, the threat of

nuclear proliferation and climate change. there are flickering of good news. the communications revolution inspiring political hope around the world we will all remember what happened in iran last year. there are organizations such as the yet states institute of peace which is actually trying to turn these folks -- these hopes into reality. what is realistic? what is possible? what should our priorities be at this crucial moment in our history? who better to ask then secretary of state george shultz and madeleine albright? secretary shultz served in both the nixon and reagan administrations with nixon and secretary of labor and reagan as secretary of state. he played a key role in framing of foreign policy that led ultimately to the end of the cold war. a ph.d. in industrial economics, he has taught at mit, chicago and its stanford.

secretary of bread served in the carter and clinton administrations with carter on his national security council staff and with clinton as his un ambassador and van as the first woman to serve as secretary of state. a ph.d. in public law and government, she teaches at georgetown and chairs a global strategy investment firm. you have noticed no doubt that shultz worked for a republican president and albright for a democrat. we are balancing the ticket or at least trying to. >> you do not know something. there is a little club of former secretaries of state. >> i will start by assuming that you are both back in government and therefore back in power although that does not necessarily follow.

>> what would be our overriding priority? what problem must use of today and how would you go about doing it? >> the first thing i would do is say to be effective for around the world, we must be strong at home. we must get our house in order. for decades, we have been spending more than we earn and it has gotten totally out of control. we are losing respect. we have to get control of ourselves. that is number one. number 2, we have to do better on the energy problem. we have to learn how to use alternatives to oil and coal, deal with the carbon problem,

and get control of ourselves on that basis. with that kind of stance and strength, then we would like to see hard work in trying to get ourselves to a world free of nuclear weapons. i might say that president obama is doing a very important and strong drop in that regard. i am very impressed with what he is doing. >> you mentioned a couple of very important issues. how would you go about doing that? on the economic front, many people have talked about the need to do this. very few people have done it and what i am asking is how would you do it? >> it has been done before. i hate to say it but we inherited an economic mess when president reagan took over. it got straightened out.

it can get straightened out. the key is economic growth. adopt policies that give you economic growth. and that is what will generate revenue. combine that with controlled spending. we have to get our social security system back on track. conceptually, it is easy. it is clear what the problem is and how to deal with it. we need to get the political gumption to do it. the biggest problem is out of control spending and that is the health area. it is it harder problem but i think very doable. >> secretary albright, you're burning issue of the day and how would you go about handling it? >> what i find interesting is that we presume we turn as secretary of state is they are addressed as issues of foreign

or domestic policy. that is one of the major aspects of what we are dealing with. it is very hard to separate the foreign from the domestic policy which means that if i were there, i would think that we would have to do a better job of explaining to the american people the combination of these problems. the other part, if you look at the issues that were mentioned, the plethora of them. what i think is the biggest problem is we do not have the international institutional structure to deal with it. in fact, there is not confidence in any of the institutions that are out there including domestic institutions and the foreign institutions. i am a great advocate of the usa. does it really work? there is a row question on that. i was just asked to head a group of experts looking at a new strategic concept for nato. i believe in nato. is it really the alliance that

is going to take this into the future? to the international financial institutions work? for me, one of the biggest problems is who does this? what are the institutional structures? i think those are individual issues. if it were a lottery every day about the biggest problem in the world, i would say pakistan. it has everything that gives you an international migraine. all the issues are collected there. i would spend a lot of time on that. any one of the issues that you mentioned or george mentioned, and the worst issue is looking at how the worst weapons, nuclear weapons, that they did not get into the hands of the worst people, the terrorists. >> if i think most of us listening to both of you would agree with everything that you have said. but it seems to me that nothing is really going to happen unless

there is a presidential leadership merit to congressional cooperation. at the moment in washington, where i live, there is however you define it political paralysis, political warfare. how are we going to make any progress in this climate? what needs to be done? >> come on out to california. the government is great out here. [laughter] >> stick in washington for a minute. [laughter] >> i do not know the answer to your question. i have a sense that sometimes divided government works better when one party or the other has it its way. i thought the second clinton term was very good. the reason why it may work

better is that everybody knows that you cannot get anywhere unless you find solutions that are broadly agreeable. it tends to push consensus and tells people that is the way they have to work. maybe we will get something like that if the congress is a little more balance after the next election. >> i definitely cannot go along with that. [laughter] >> you wanted all republican? question no. i think that is part of the government -- part of the problem. i have been in the opposition. i know what it is like. it is more fun when you are not. the bottom line is there is not a sense of trying to find a bipartisan solution. george mentioned we have this small club. the truth is, most of the former

secretaries of state are republican. we have spent a great deal of time together looking at joint solutions because in fact we have faced similar problems together. i think that is the kind of thing that needs to be seen. it is not a matter of if you are a democrat or a republican if he did not have the best interest of the country really in mind and heart. it is not happening. it goes to the point that i made which is i did not think there is confidence in institutions. if you look at the polling numbers, congress and numbers are very far down. there is this anti-incumbency feeling that is unfortunate. >> there is this question i have just been given. do you ever want to give up because it is so hard? it is offered by alyssa who is aged nine. she already got the message. >> i think that is overstating it. i think it will get rated.

i think the fact of the matter is people broadly see, never mind the people in washington, regardless of party, there is a general perception that it is not working. we are going to have to do better. we will get that point through to the people who are in charge. >> we have known that for the past two presidential elections and it has not gotten through. what has to happen? there are many people who genuinely feel that some other catastrophe must first happen to galvanize the american people into recognizing a serious -- how serious the problem is and doing something about it. >> there is an utter catastrophe had to guess right now. it is the runaway spending. not only at the federal level but at the state and local level. i think people are perceiving it

and saying we have to get control of ourselves. that is why i said at the beginning that getting control of ourselves is the key. they have to have a strong pace to work on the problems. >> i think the chances of us returning to office are zero. bottom line, there is something magical about public service. and the possibility of trying to make a difference in these issues. the assumption is that people in various offices. we need to turn the attention to where it belongs, the media.

[laughter] >> that is the -- the first time i heard that was during the nixon administration. >> what i think is very important to solve the issues is to have an educated and informed citizenship. that is what democracy is about. unless we figure out some way for people to use this bountiful amount of information in some way to understand things rather than to be riled up by it, i think that is one of the major problems. i usually get there at the end of the discussion but i thought since you, i think it is a genuine issue. [applause] what is so interesting as we have more information than we have ever had. this may surprise you but i actually listen to right-wing radio when i tried and it is amazing that i have not to run over somebody. [laughter] it basically elises anger from a

certain group. i do think that there is a genuine responsibility that the media is not selling and since this is co-sponsored, i think it is a very important point we need to deal with. >> it may surprise you but i agree with everything you say. [applause] >> moving on. [laughter] >> a key thing would be how to strengthen our diplomacy? i am reminded that secretary of defense gates was the one who said he would give some of the pentagon budget to the state department to strengthen its role in problem-solving around the world. we have heard about diplomacy being a kind of soft art or smart way of accomplishing your aim. why is diplomacy, why does it

seem so inadequate to the tasks before us? >> first of all, because we have not devoted the resources that are needed. to support the state department and the building up the resources there. secondly, we should do a better job of seeing to it that the senior people stay. we have experienced foreign service officers retiring at the age of 50 and so on. that is when they are at the top of their game. we should keep them there because we have to conduct global diplomacy. we need first class people and many of them to do it. that should be an easy thing. as secretary paul gradually

moves the budget up, the secretary of when you have an important post, very qualified foreign service officer does not necessarily get to do that job. in a sense, you are taking the people who have made a profession out of dealing with these issues somewhat out of the action. i think we need to keep him in the action. not just analyze and report, but do the work of diplomacy that is necessary. >> am i listening to criticism of president obama decision to

place special envoy is and keep troublespots around the world's -- around the world? is that what you are saying to us? >> to a certain extent. it is something that is -- that has grown ever time. it is also true of ambassadorial posts. it is important that some of these posts be open to foreign service officers so that you have the chance for the professional people to move up in two important roles. >> let me remind our audience that you are listening to the commonwealth club of california radio program whose speakers today are former secretary of state madeleine albright, george shultz. we are discussing the challenges facing in the nation. i would like to ask you both,

starting with secretary albright's, up we are old enough to and remember that there was this great phrase about politics stopping at the water's edge. we always live with an assumption that when it came to foreign-policy, we are all in it together. now it seems that there is a republican foreign policy and a democratic foreign-policy and there is even a joke in washington that it would be good for president obama and his foreign-policy if -- in afghanistan if the democrats lose a great deal in november and the republicans when. what is this business about to foreign-policy is? it is in a dangerous for the country? >> i do believe that we need to have a bipartisan foreign policy. i worked on that. a lot of people might of been surprised that i was very good friends and work with jesse helms. he was chairman of the foreign relations committee.

there were a series of issues that we had to deal with and i believe in that. but it goes to the point that we have made a couple of times, which is a lack of sense of what we can do to help the country instead of helping ourselves. i do think that there has to be -- i believe that president obama has done more to reach out to the other party in order to try to develop this kind of a policy. in washington, i am trying not to be overly partisan in stating this, senator mcconnell basically it is mr. no. that does not help. it through a number of organizations, we have been trying to figure out how to get to a bipartisan foreign policy. it is very confusing to our friends and enemies what exactly is going on. i think this is a moment.

can i go back to something? on the issue -- i teach a course. foreign policy is trying to get some countries to do you watch. i teach a course called the national security toward us. we are still the most powerful country in -- national security toolbox. we're still the most powerful country in the world. you look in the toolbox and there is not a lot in there. you have the threats of the use of force, the use of force, intelligence, and law enforcement. that is it. if you look at problems, you have to pick out the tools and mix and match. one of the most interesting things that i teach about is the relationship that secretary shultz had over the question of -- it is something that has been

going on a very long time. we are at war. the have two doors. at the moment, it seems that it is easy enough to say that the pentagon -- it is hard to get some of the back for the state department. look at the budget. the bid to gun has something like $85 billion. the state department -- the pentagon has something like $85 billion. the state department has less. there has to be that we calibration. i fully agree with secretary shultz in terms of having the diplomat to have more power. i am not sure i fully agree about eliminating political diplomats. not the special interests. we were political appointees. >> i am thinking about -- >> this is a very practical issue. it has to do with a divided

government. i can tell you that it is hard to get confirmation for a variety of people in the post of ambassadors. secretary clinton and president obama need to get started on what was going on in the middle east. >> secretary schulz, the appearance of the united states in afghanistan, for example, is very much khaki in color. the top man is now a general petraeus, a very admired, experienced. he is the boss. even the american ambassador is a former general. the question that comes up as, -- comes up is, the generals tell us that in afghanistan, the

ultimate compromise is a political one. you can put tons of additional troops in afghanistan and you will not win the war. what is holding -- why is it that we appear to be so linked to a military appearance and therefore a military outlook? or so 8 scenes? what would be your judgment on that? >> in afghanistan, we have to get the concept right. i do not think we're there yet. we went into afghanistan in 2001 and we had a brilliant success. we made common cause with local tribal groups and they wanted the savings we did. we were able to use our

comparative [inaudible] effectively. we got what we wanted. we got control. our mission morphed into trying to create and afghanistan that had never been there before. a country with a central government, democratically elected, that has an army that can keep stability. that is not afghanistan. we've got to get back to the notion that -- general petraeus understands that. i have the feeling that as the policies in afghanistan were going to look something like that. now we have a huge problem that we have not thought through strategically. we are looking at it tactically.

it comes because the nature of the warfare we were experiencing is different. our adversaries do not wear uniforms. to our adversaries -- our adversaries use inexpensive weapons to create chaos. our adversaries implant themselves in civilian places, like hospitals and schools, mosques and so on. they fire from there. if you fire back, you cause a lot of so-called collateral damage that you have a hard time with. so you meet that with the rules of engagement that take our comparative the advantage away from us. it is hard to use -- that is so we have to think through. >> maybe we can not win? >> may be that we have to have

some different strategies and tactics to deal with a different kind of warfare. i might say that this problem is pervasive and we will face it everywhere. we go to afghanistan and we go to iraq, what we do in yemen and somalian? and so on and so on. >> secretary albright, the believe that winning is tactical in net debt -- possible in afghanistan? the president did say that we would have to win. >> first of all, i think that someday i will teach a course of the unintended consequences of foreign policy decision. the afghan story is a very long one that actually began several centuries ago. but i can track it from the current administration reaction to the soviet invasion to be

rated administration providing stinger missiles and a variety of issues. it has been going on for a while. he talked about the spending -- the initial victory. the bush had been station took their eye off the ball and went to iraq. there are many reasons for what is going on. this is why i said that pakistan was so important. we can win in terms of trying to limit to the extent of the terrorist activity if we deal with pakistan. i think see it as a regional issue. what lending has been defined as is trying to get rid about qaeda. according to things that one has heard, we're doing pretty well and getting ourselves read of al qaeda. it has to be a bottom alt. i think that general petraeus' approach to insurgency is

something that has great validity in the afghan issue, but the only way we will be able to deal with afghanistan is there a regional solution, which means dealing with pakistan and india and trying to see it as a regional issue. >> we have not talked out all -- talked at all about israel and the arab states. there is a question from the audience -- is that possible to achieve peace in the middle east during the current rally of the obama administration? i think that the author of that question has a mind that there has been significant differences a pair between israel and the united states. but there has been the most recent efforts on the part of the two leaders to straighten things out. get to the main point. secretary shultz, you were there

in the 1980's. when things were very rough. >> i was there two weeks ago. [laughter] >> looking back over the last 30 years or so, and putting your own experience right there for us now, what do we have to do -- what can we do to actually make peace more achievable between the israelis and the arabs? >> i think we want to build on the good things that are taking place. there are two of them that are important. whatever you may think about the iraq war, we are where we are. where we are is said on this and is not there -- said jonassaint is not there and there is a reasonable chance that there will there will emerge in iraq a

government that is reasonably represented were shiites and kurds someone manage to get along so much. they are essentially a wealthy country. if they can get their act together, you will have something in the middle east in the arab world that has never been there before. i think that will be important. it will drive iran crazy. right next door will be a country that respected the will of the people and it is obvious that their own regime does not. that is one thing. the other thing that struck me when i was in israel recently -- i had the opportunity to meet with the prime minister of the palestinian authority. he is doing very interesting

work on the west bank. there is economic growth on the west bank. economic institutions, financial institutions, political institutions are forming. with the help of a brilliant three-star general, there are security institutions developing. i would try to nurse these two things -- nourished these two things and try to connect what is happening with the west bank with the negotiations that people are trying to get under way. it is interesting to me that the developments in the west bank are being supported by jordan. to the extent that you can keep jordan involved, you have a state to deal with that can help the palestinians.

so i would be nourishing that developments, which i think it's promising. >> secretary albright, how does one actually, when you are secretary and you're trying to do this, how do you nourish that kind of small growth, that seedling? how do you do it? i have been covering this for almost 50 years and every time he gets close to something, a couple of bad guys throw a few grenades here and there, they kill some people, governments have to defend themselves, suddenly, everything is thrown into a -- how do you manage these kinds of things? >> it goes back to your question about diplomacy. for instance, there is a story on the front page of "the new york times" today about living conditions in gaza. it does talk about what they are doing on the west bank and

saying that the people of god said do not like what is going on in the west bank. -- the people of god that saying they do not like what is going on the west bank -- gaza. working through -- encouraging the saudis and others to try to sort out some of the issues in gaza. we cannot do it all by ourselves. in the experiences that we had at camp david, i wish we had been able to spend more time getting the moderate arabs to be more supportive. some of the proposals that have been made. i think that the diplomatic subtext of this is very important. i actually would try to figure out some way -- one of the most interesting countries at the

moment is turkey. turkey is in a fight with israel at the moment. on the other hand, they had a very interesting influence in the whole region. there has to be more bite in by other countries in the region. by other countries in the region. how did get those in power to be able to get above that and criticized those that have done the grenade or whatever and keep going? that was the brilliance of its academe. he said we have to negotiate as that there was no terrorism and fight terrorism as if we were not trying to negotiate. you have to do both at the same time. >> let me go back. the reason why i think it is so worthwhile to try to build on --

i spoke to the people involved the day after the flotilla and sedans. -- incident. how do you think this will play in the west bank, i asked? they said, this will be a test. there will be protests carried -- there will be protests. they passed the test. they said they did not like it and so on, but they did not -- that is important. it seems to me not to -- seems to me that even when things looked bleak, it is important to stay engaged in keep working at it. people often tell you, you cannot reach a solution, so why get engaged? you have to keep engaged. i do have a cartoon left over

from my days in office. the cartoon appeared in the open " jerusalem post." there is an and raise the -- there is an end to israeli with a club of beating on me. and the caption says, at least they agree on something. [laughter] you have to have a thick skin and keep working at it. >> one of the questions that comes up -- when there is an islamic instigated our rage against islamic -- outrage against islamic people, why

aren't islamic leaders screaming against that? why is it that most of the time, there is be out rage, most of the time, it is against islamic people done by islamic -- islamic fanatics and islamic leaders say nothing about it? how do you deal with that? >> i think there has been some the that has allowed to be some action against al qaeda. we are making some progress. >> which arab leaders? >> they have spoken out against violence against muslims. that has happened. the king of jordan has done that. >> the king of jordan has, on a number of kate occasions. in pakistan, for example, where this happens repeatedly. a couple of times a week, we are reading about it. where is the leadership in

opposition to this kind of violence? >> dealing with the muslim world is one of the big issues that has to be dealt with. what has happened is that president obama has worked -- he has followed up on the cairo suggestions that he has made. we have to learn how to understand what islam is about. we cannot lump them all together. even the terminology we have is wrong. we talk about moderate muslims. moderate muslims believe in moderation passionately. we do not have the right term. we have to find those leaders and support them. he is one of the people -- there are people in pakistan that speak out. we need to somehow not isolate

them and try to figure out who they are and how to proceed. >> secretary shultz? >> in saudi arabia, the government has done a very effective job in cleaning out to the al qaeda that was starting to get them at -- give them a lot of trouble. a very impressive set of development has taken place in indonesia, which has become a country with a democratic government, which has had its uprising. they have managed to get a hold of it. they are reaching into the schools. they're going about it in a rather impressive way. there are some good spots. >> let's take another moment to remind our audience that you are listening to the commonwealth club of california radio

program. our speakers today are former secretaries of state madeleine albright and george shultz. we are discussing the challenges facing the nation. we have another question from the audience concerning u.s.- russian relations. there has been this exchange of spies a few weeks ago. why did the spy exchange signify? is it a return to the cold war? >> no, it signifies practically nothing. [laughter] these characters did not have the intelligence to know they could get whatever they wanted off the internet. [laughter] it was a layover. i thought it was handled quickly without a lot of cough awful.

-- >> what are they looking for? what is this all about? our relationship with russia is fascinating. there are those in russia who would like to see us as an enemy, but the majority realize that is not the wave of the future. it behooves us to push that is a very good idea to see what relationships we can develop. what i love is one of our colleagues has a great line that there are two camps in russia. but can -- we have not quite sorted out how the relationships are evolving and what it is that the russian feel will bring

them into a responsible role in terms of managing the global system? >> let's talk for a little bit about iran. we have been reading for years now that the iranian regime is developing the capacity to have nuclear weapons. do you agree with that judgment? >> i do not think there is the slightest doubt that they have nuclear weapons and are getting fairly close to getting them. >> that being the case, and the president of the united states and the secretary of state having said repeatedly that this is something we cannot allow to happen -- >> iowa agree with that. >> -- i agree with that. >> we are trying to do something through the united nations by

virtue of sanctions, to do something that is not outright military force. do you think the sanction regime can succeed in heading off a war? >> it can be effective. but i noticed when the director of the c.i.a. was asked about that, he was skeptical that sanctions would be much. i think it is a very hard problem. i do not know that some all-out assault is what is needed. let me give an example of something going back to the reagan period. the iranians were playing games with kuwaiti shipping, trying to prevent it. the reflagged the ships.

when the president of iran was making a speech saying that the last thing iran would do was to put a mine in the persian gulf, our navy was taking pictures of them doing it. we boarded the ship, took the sailors off, sank the ship, took the sailors to dubai and said to iran, come and get your sailors. it turned out to be reasonably effective communication. iran has done all kinds of outrageous things and nobody called their bluff. they have a boat's going around our capital shifts in the gulf. we should take them out. -- capital ships in the gulf. you have a right under self- defense. these little balls can grant you

and cause a lot of damage -- diesel boats -- and these little boats can ram you. the iranians had a huge burst of protests. it was sparked by the phony election. the reason for the protest was only partly the election. the iranian government has run their government terribly from the standpoint of the people. inflation is the way up to 40 or 50%. unemployment is high. they're obviously not doing a good job for the people. we should be supporting the people who are expressing that point of view. i think we should be broadcasting to them things like, your government is so preoccupied with the nuclear weapons program, that all of the

engineers are working on that now. your refinery, you do not have the refining capacity to supply your own product. there are plenty of -- there is plenty of crude, but no product. we should be banging away. >> after the united states moved into afghanistan in 2001, after the united states moved into iraq in 2003, do you believe that the united states is in a position in that part of the world to take military action against another muslim state? >> i think going back to the dates that you mentioned to, it was interesting. those were times when we seem to

be riding high. all of a sudden, the iranians got very reasonable. maybe we should have moved in very hard and then to try to construct something. >> i agree. i think we missed the time when we could have worked with them on dealing with some of the issues on the taliban and the variety of ways of working. nevertheless, that is what happened. i think that the idea about the ships is a very good one. there have been discussions about what a military option might be. we cannot bomb our way out of the nuclear installations that we have. we do not really know where everything is. some of it is underground, some

of it is among civilian population. to go back to my toolbox, we need to keep all the tools and play. -- in play. the sanctions need to be pushed and worked because their economic situation -- the story today says some of the merchants in the bazaars are striking because they do not like the idea that there is some new tax coming on. it is quite a democratic society in terms of what is going on there. i agree that we need to be supportive of those who are disquietude by what the regime is doing. even the most liberal people are for iran having the right to have a nuclear program, a peaceful one. they like the idea that the

persians are going to be treated in a way of respect. >> you envision a world where we will have a nuclear iran and we will have to learn to live with that. >> i think that world would be a catastrophe. you would have iran with nuclear weapons, but other states. there would be april of frustration -- there would be a proliferation. you are going in the wrong direction with them. as more countries have these weapons, as countries who are clearly affiliated, and it is a big sponsor of terrorism, you are going to wind up with a nuclear weapon going off somewhere. maybe more than one. once that happens, people are going to say, why don't we do

something about this? those of us who have been working on this say, why did we do that before it that happens whether it -- rather than waiting for it to happen? [applause] really push to get nuclear weapons under control. that means that you don't start by having another country get nuclear weapons. he stopped them from doing it. >> stop them by taking military action? >> i do not claim to know all the ins and outs, but i would not be so confident that a military strike would not have much of an impact? i think it could have a major impact. i do not know that you have to say, that or nothing. in working with this nuclear issue, you say, what are the

steps that you need to take to get there? one of them very clearly is to get control of the nuclear fuel cycle. people are building a nuclear power plants around the world. if you can enrich the uranium for a power plant, that is the iranian situation. you can reprocess your fuel and plutonium. on a world scale, if you are going to have more nuclear power plants, we need to get control of the fuel cycle. there has been considerable headway. warren buffett put up $50

million to set up a fuel bank and to try to work toward a situation where there is international control of all enrichment facilities. did you have something like that in place, you could -- if you have something like that in place, you could put it in the international set up. you are going to have people in the operation of the plant so we would know that it is not in richmond going on. -- there is not in richmond going on. this is the kind of thing that should be worked on. >> there are obviously many different ways of handling this problem. secretary shultz appears to be saying that one of those has to be recognized as the u.s. using

military force to stop that from happening. do you bite into that view? >> first of all, i would not take the auction off the table. having it off the table has a psychological impact. i am not privy to intelligence material that would indicate that a strike would actually accomplished what is supposed to. what is terrifying is that the iranians have possibilities have more terrorist organizations. if one would set them back and would not create this unintended consequence, -- we are in a very difficult position. i fully agree with george. if we could get control of the nuclear fuel cycle, that would be the solution. in the meantime, there are more countries that are working on

nuclear programs. we just happen to have a crisis over oil. there are people that are building peaceful nuclear plants. go back and listen to president eisenhower. how do you think all of this -- what is the process here? we have to figure out a way to live with nuclear power. i believe that. whether it is by getting control over the nuclear fuel cycle, that is the way to go. we're in a very tough situation. we're not clear whether a military option in the rump woodwork without unleashing something that we cannot control. >> you guys keep on wearing. -- worrying. we are going to take action.

would you, secretary shultz, try to stop them? >> look at israel's position. their arms by iran. u.n. security council -- they said they want to wipe out israel. iran says the same thing repeatedly. hamas and gaza said the same thing. they want weapons to fire at

israel. iran supplies them. if i did not know how much they can do with hezbollah. they do everything. they give the money and so on. they are ready for some sort of assault without any doubt. the only reason it has held that is that the last time they did it, israel went back at them so hard that the population said wait a minute, you are bad news for us. there is a certain deterrent there. there is a threat to israel's existence out there. if you say it is real should

just lie down and die, i do not think that is a good posture. i am not in favor of that. >> secretary albright, on that same issue, do you feel the united states should be leaning on israel to stop thinking about taking a unilateral military action against iran? >> israel is a sovereign independent country that is under threat. i did not think the united states is in a position to tell them what to do. i do think that it goes back to one of the original questions you're asking here, which is, how does this all go together? therefore, pushing in terms of trying to get solution on the israeli-palestinian issue is absolutely essential. try to figure out some way to have a containment of iran. i am not sure what the effects of the bombing iraq -- iran is.

i we prepared to have a third war with a muslim country? -- are we prepared to have a third war with a muslim country? people have to consider what the effects of all this is going to be and whether there are other ways to go about dealing with that. there might be some momentary satisfaction in bombing. the question is, where does it get you. -- where does it get you? israel is living in a terrible neighborhood. you have to work on these various other aspects of it. i think that we did not have a right to count israel -- tell israel, a few is under an existential threat, they would see the issue that would not threaten them more. >> we only have a few minutes left.

secretary shultz, looking back on your time as secretary of state, was there a big moment that passed, that you wish you had grabbed a because once it was passed, it ended at being a blunder for the u.s.? [laughter] >> we did everything just right. [laughter] you are not going to track me that way. >> no blunders at all. >> no blunders. secretary albright's? >> no blunders. obviously, no blunders. [laughter] >> was there a time when it was less of the six sides then you hope? -- less of a success than you hoped? >> during the reagan

administration -- i am a marine. when the marine barracks in beirut were blown up by a suicide bomber. that is one that i look back on and say, what could have been done? military look at it and say the marines did not do a decent job of protecting themselves. on the other hand, maybe there is the diplomacy there. >> you know very well at that time, we could have, because we knew exactly who did it, we knew exactly where they were, president reagan was thinking about a retaliatory strike, it never happened. >> the secretary of defense would not do it. >> he stopped the president? >> he did.

here is what i would have done. we had the plo -- this is going to take a moment. >> we do not have the moment. >> i have the solution, but you don't have time. [laughter] >> that is television for you. we could probably go on. maybe we should. [applause] my instinct tells me that i should get off when i can trade we do have only three minutes left. you have both watched presidents at work during intense times of national security crisis when there was a war or there was one at hand.

what is the characteristic of the president that you say, that was absolutely essential? >> i think it is the capability of allowing people to disagree in front of him. to state their views very clearly and listening to them without a preconception and then being able to make up his mind. people that bill in not knowing what they do not even out -- people that go en not knowing what they do not even know do not have that capability. presidents i have worked for have allowed that to have that kind of discussion and have not felt threatened by it. >> secretary schulz? >> i agree with that. i also liked it when they are the cold hands. a lesson, they do not to panic.

they try to think it threw ed had a strategy. you always want to look for a strategy -- think it through and had a strategy. you always want to look for a strategy. if i do this, there will be reactions to its. to have a strategic and that i am looking for. so that you do not get drawn into the business of some of the media response to a particular thing without thinking for the repercussions -- some sort of response to a particular thing. >> the next time we did this program, we will start with you giving us the answer to the essential question. but our time is up. i would like to thank the secretaries of state. [applause] our wonderful audience here, all

of those on radio, television, and the internet. this program has been co- sponsored by the commonwealth club of california. good night, and good luck. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> in a few moments, may a forum on housing finance, including comments from tim geithner. in about to play five hours, the heritage foundation proposal for the economy, the budget, and for a policy. after that, a former ambassador

chris hill on the political situation in iraq. a couple of live events to tell you about tomorrow and c-span. the national business group on health will report on how large companies are adjusting their employer provided health benefits programs to prepare for the new health care lot. this is at 10:00. at 6:00, the funeral service for former alaska senator ted stevens. he was killed in a recent plane crash. speakers include joe biden. the obama administration is scheduled to deliver a house and finance plan to congress early next year. up next, a conference on the future of housing finance with treasury secretary tim

geithner, housing secretary shaun donovan, and others. this is 2.5 hours. >> thank you for joining us today. we're very pleased to have collected such a great group of experts from all the various stakeholders involved in this. i also want to welcome those of you who are joining us via internet and hope this will be a good way to reach people more broadly. we need to think the treasury department and the department of housing and urban development. they are doing is sponsoring this event. and, of course, secretary tim geithner. as you know, we could not have everyone here that we wanted to. but we certainly have given a lot of thought to having a broader array of folks here trying to represent all the viewpoints that these think are essential to have in the dialogue.

citizens, a consumer at a steep -- advocacy groups, investors, market researchers, and many others. we really are looking forward to hearing your perspectives. we want to be judicious, thoughtful, and a comprehensive and our approach. we very much look forward to this as a productive session. this is not the beginning of the process nor the beginning -- nor the end of the process. we are committed to an ongoing dialogue. with that, let me welcome you again and very much welcome secretary tim geithner and secretary shaun donovan.

they are cochairing this conference today and they will be opening would remarks before removed to the panel sessions. thank you again. >> nice to see you all here. i want to start with some acknowledgement. i want to thank and complex shaun donovan and his colleagues at the department of housing and urban development. mary good men from the nec and austin) and others. all to work together to put together this conference. they sort of carry this burden of designing proposals for reforming the housing finance system. i want to thank all of you as well do came to participate today.

you bring a lot of experience. you bring a diversity of opinion and perspective and we appreciate the fact you are willing to spend the day with us, giving us advice. we consider the challenge of how to build a more stable financial system. this in the system is one of the most consequential -- fixing this system is one of the complicated problems we face as a nation. is for the stepping back and asking the basic questions. what went wrong over the past several years? what do we have to fix? alongside the many broader failures that contribute to this financial crisis, there are several that directly involves the government sponsored entities fannie mae and freddie mac. amended general race to the bottom in credit standards across the private sector, fannie mae and freddie mac lowered their underwriting standards, without charging

enough to cover the risks. they were allowed to build up a very substantial portfolios of mortgage-backed securities, which rose at their peak to a level of more than $1.60 trillion without the financial resources to cover potential losses. these two strategies or pursued to maximize short-term returns to shareholders and senior management. they were made possible only because of the talks a combination of perceived government guarantees and the absence of effective oversight. the strategies were not the sole cause of the financial crisis, but they made the crisis worse and they resulted in huge losses for the taxpayer. these were avoidable failures. it is our responsibility to make sure that we traded system that is not vulnerable to the same

failures happening again. towards that end, we proposed earlier this year a series of questions for public comment and we received more than 300 responses covering a full range of opinion and options. some proposed getting the government completely out of the business of supporting housing finance while others propose reforms that would leave the current system largely in place. some suggest that as a government, our mistake was in providing too much support for housing. others have suggested that we provided too little support. just from these comments, there is no clear consensus on how best to design a new system. this administration will side with those who want a fundamental change. it is not tenable to leave in place the system we have today. we will not support returning fannie mae and freddie mac to the role it played before

conservatorship where they fought to take market share from private competitors while enjoying the privilege of government support. we will not support a return to a system where private gains are subsidized by taxpayer losses. this challenge of reform has many different dimensions and i want to start the conference today by presenting what i think i before key policy questions reface an outline -- we face. the first question is the most fundamental question. what role -- what role should the government pledged to provide stability to the housing finance system in times of prosperity and economic downturns? this question is about whether

the government has to provide a form of guarantees or insurance against losses? many countries around the world do this, but they do so in many different ways. some do it to the banking system with the traditional right of instruments. some do it with specialized mortgage finance companies with backing from the government. some do it would cover the bonds. some make the insurance and guarantees explicit. many leave them implicit or hidden. governments do this because without that support, the risk is the future recessions to be more severe because the financial system and not have the capital to support mortgage lending on an adequate scale. house price declines would be more acute with even greater

damage to the financial wealth and economic security. what extent the policy -- the private market could provide that form of insurance on its own or whether this is fundamentally a role the government has to play? in this crisis, we saw a full retreat by private financial institutions from many forms of mortgage and consumer lending. this crisis provides a compelling illustration of why private markets and find it hard to resolve financial crises. i believe there is a strong case to be made for a carefully designed guaranteed in a reformed system with the objective of providing a measure of stability and access to mortgage finance even in future economic downturns. the challenge is to make sure that any government guarantee is priced to cover the risk of losses in the structured to minimize taxpayer exposure.

this second question is what role should the government play in providing supports and improved access to affordable housing? this is a question that shaun donovan will touch on in his remarks the choice is whether we should provide more support or less support, whether we should realize incentives or owning and renting, and how we delineate our support for affordable housing from the mechanisms we used to support housing finance more generally in economic downturns. the third question is more generally about the securitization markets. we saw a fundamental break down in incentives under -- in underwriting. many firms in the mortgage business were not required to hold capital against their risks and they took. credit rating agencies did not adequately capture the risks of

a significant fall in housing prices. the dog-franc reforms require substantial -- dodd-frank reform requires substantial change, including a level playing field in terms of constraints on risk taking across firms, banks and nonbanks better operating in the housing financial market. the require stronger financial projections, new disclosure requirements, and knew the thresholds for specified mortgage products. we hope this discussion will help shape the rules required to implement those reforms. this final question is, how best do we manage the transition to a new housing finance system? here, we face several different and competing imperatives. we need to begin the process of winning the market's -- and winning -- weaning markets.

we need to keep overall mortgage interest rates low. as a transition, it is important that we maintain access to credit at attractive rates. the planned to wind down should be done in a careful way -- planned winddown should be done in a careful way. we will make sure they have the financial resources to meet their commitments. now, before i conclude, i want to address some of the persistent misperceptions about fannie mae and freddie mac in this debate. the process of housing finance reform is not beginning today. it began in the fall of 2008. the first step in reform -- the necessary and critical step -- was the action taken to place them into conservatorship. that step, taken by a republican president with the authority of the congress, was essential to break the model that helped

produce this crisis. without that action -- this is important to recognize -- housing prices would have fallen even further and the recession would have been dramatically worse. by taking time to get this right, the taxpayers are being exposed to even greater losses. that is not true. the losses that fannie and freddie face are the result of mistakes made in the years leading up to the crisis. the are the results loans, purchases, and guarantees -- they of the results of loans, purchases, and guarantees taken before the crisis. there is nothing we can do to decrease the significant losses that were incurred before the crisis. we can minimize the risk that they get worse. the fha has acted to raise underwriting standards so that these loans have lower risk, higher-credit quality, and that

the fees charged provide adequate income to cover future losses. it is important to note, as barney frank has said, that reform is more than just designing an elegant funeral for fannie and freddie. it requires a much broader reassessment of how much support the government should provide for housing finance. the failures that produced this crisis in the system that we have today were bipartisan. the solutions must be as well. this is a test. the stakes are high. many americans -- for many americans, homes are their largest asset. we hope we can use the opportunity today to begin the process of building consensus. i look forward to the discussion. thank you all for coming. i give you all shaun donovan. [applause]

>> thank you, tim, for your kind words about me and my team. thank you to you and your team as well. thank you to our colleagues who have been part of the work that we have done and the work that is still ahead of us. thank you for your partnership and your leadership during this enormously critical time for our economy. it is a pleasure to be with you today as we step toward rebuilding our housing market, our communities, and our country. by being here today to be involved in our public dialogue, let there be no doubt that the obama administration is committed to hearing the best ideas from all sides of this discussion. as we start this conference, i would like to share some thoughts about what i believe this means. not to those of us in washington among but the families and businesses outside.

-- in washington, among the families and businesses outside. make no mistake, getting visas -- these things right is essential to a healthier financial system and building a healthier economy. let's focus on what is really at stake. these decisions are about -- as we know all too well, housing finance runs through the core of our economy, for better and for worse. our residential housing market is one of the largest sectors in our economy, making it important not just to housing, but to the economy as of old -- a whole. even after all we have been through, the u.s. mortgage market is the second-largest securities market in the world. 2/3 of americans live in their own homes. that home remains the largest

asset for roughly 1/2 of those families. homeownership has helped millions climb the ladder into the middle class as it can be a critical means to build wealth. when the have a mortgage they can afford -- and they have a mortgage they can afford with terms they have been able to understand. families have struggled with unmanageable mortgage payments, declining house prices, and this is why the discussion is about more than finance. when you choose a home, you do not just choose a home. you choose a community. schools for your children. public safety. access to jobs. you choose access to opportunity. today's discussion is critical to ensuring that we have a balanced in national housing policy -- balance in national housing policy. we need to have homes people can

afford with easy-to-understand mortgage products that make good economic sense, addresses that allow broad access, including options -- choices that allow broad access, including options for people who have been shut out, choices for affordable renting -- rental options. it is also about our ability to compete. people will move to where the jobs are. america's entrepreneurs and innovators will attract the best minds to their businesses. families will be able to move to the best schools so their children are not isolated and marked by disinvestment without choice, opportunity, or hope. for the next generation, this discussion is about whether their future will be determined by talent and the will to succeed, or by the code they grow up in. a healthy and robust housing

system -- by the zip code they grow up in. a healthy and robust housing system means many different things. it means ensuring that people who can own their own home have a access to the capital they need. housing is usually the most expensive and imports and purchased a family will make, running on average five times the homeowners average income. few would be able to take that step without a strong housing finance system to provide capital. it means making sure that families are not set up to fail with mortgages that enabled to buy homes -- enable them to buy homes but cannot afford. -- buy homes they cannot afford.

-- need to gst' harness the vitality and creation in our system in a responsible way, the consumers and communities gain real benefits. as tim said, that is what wall street perform has done. it has provided an important foundation from which to build increasing oversight for the industry, requiring more skin in the game for originators, helping close loopholes, and establishing the strongest consumer financial pressures -- protections in our cost -- in our country's history. we stand on that firmer foundation.

not only for wall street, but for the families and businesses on main street. by engaging you stakeholders and experts with broad knowledge and many perspectives, i know we can do this. thank you for joining us. i look forward to our discussion. [applause] >> what role should the

government play in providing a more stable housing finance system? i will introduce them in the order i want them to speak. i will start with susan walker who served as the assistant secretary for policy development and research at hud -- susan wachter, whoker -- what yoususn served as the assistant secretary for policy development and research at hud. ingrid gould ellen is a professor and co-director of the center for urban policy. she has written extensively on housing policy and urban growth issues. the legendary marc morial is president of the urban league and a national champion for sustainable housing programs. barbara desoer runs bank of

america's mortgage business. that is a major player in the mortgage finance system of the united states. it overseas accounts for about 20% of the mortgage origination market in the united states. we will close with bill gross, who runs pimco,. we're going to begin -- i will ask each of the panelists to speak for just two minutes on the stark, simple question. what would you change and what would you preserve? to keep it to two minutes and what you're for and against, you do not need to say you are in

favor of a more stable housing finance system. [laughter] you do not need to say that our system was broken or explain precisely how it was broken. just say what you are for in terms of change. with that admonition and encouragement, i will begin with susan. give us a quick prescription. we will then debate the choices that separate us. >> thank you for convening this important discussion for the nation. it is, in fact, inspiring to begin this important consideration with the discussion that will be ongoing. you have asked me to focus on one or two changes. there are many things to be done as we we envision the framework

for housing finance. the key factor is information. the lack of information -- you ask us not to point to the past. let me mention the failure briefly. the markets to congress that they did not understand. they failed to price risk, to control it, to recognize that. we had a surfeit of the instruments that were complex and heterogenous. we must undo that through standardization. correcting the information will require disclosure, transparency, and standardization. disclosure will not happen by itself. we need to have standardization of underwriting.

there were many layers in this space. as the critical piece -- that is the critical piece of this. we need to have transparent information and data bases that investors and regulators can track in real time. in short, i do think we should preserve securitization. securitization has delivered four decades and affordable and robust home ownership market -- for decades an affordable and robust home ownership market. we have seen what happens without standardization. this must be undone. the taxpayer do own the rest. -- the taxpayers do own the rest. isk. must have better information.

to my mind, that will ensure stability going forward. >> thank you. that was clear and crisp. i appreciate it. alex? >> thank you to the treasury for inviting me here. >> i will say this to save you the trouble. if you do not use your time to thank us, we will not penalize you. [laughter] we will stipulate thanks and then you can save your two minutes for your convictions. >> that was my total thanks. >> do you want to elaborate further, you can go ahead. >> i will try to make three quick points with one quick commend them -- quick and addendum. there need to be countercyclical loan-to-value

ratios moving in the opposite direction as inflating house prices in a boom. secondly, there need to be bigger loan-loss reserves in good times to avoid that which feeds the bones and bubbles. we need a private, secondary market for the bulk of mortgage loans. the financial system of the future should have withdrawn all large -- a large part of the distortion of the market caused by the bulk of the activity of the tse's -- gsc's. such a market could in clear the bonds and have -- could include the bonds and could avoid the

subsidies which drive up house prices and make houses less affordable third, and ultimately, we should not have any fannie and freddie. you can be a private company or government agency. one or the other, but not both. i think everyone agrees with this now. you can be private or a government agency. both are right. part of fannie and freddie should be private. the part which is actually a business. part of it should turn into a full-fledged government agency providing subsidies and non- market transitions -- transactions, which could be merged into hud, subject to normal government disciplines and appropriations.

there has to be a third part, which is the liquidating trust to run off the remaining government-guaranteed debt with a significant loss to the taxpayers did this could be legally modeled on the structures used in the privatization of sallie mae. i call this the julius caesar strategy. as in his time, we divide fannie and freddie into three parts. my addendum is that, counter my recommendations, if the gse does survive, we must make sure the -- leveraging is -- double- leveraging is fixed. they should own preferred stock. this ran up the leverage.

-- the real leverage of the system of the biggest fault of the system -- the real average of the system. the real fault is that these were key in using excessive leverage. we need to use the banks to finance these, should they form -- should they somehow survive. thank you. >> thank you. >> i have one overarching thank you. that covers all of you. i want to focus on one point -- the nature of the federal guarantee. i have been grappling with this question of the future of the gse. we concluded that a carefully designed government guarantee is critical in maintaining and creating a stable, liquid system that provides long-term, safe financing for borrowers.

that said, guarantees are tricky business. it is pretty clear that the implicit guarantee that was provided by the government in the past to gse-debt encourage excessive risk-taking and an overbuilding of the portfolio. the key challenge is how to do this careful design. how do we structure the guarantee so that liquidity is andntained, but moral hazard i taxpayer risk are minimized? we could talk about that all morning. i want to offer a few ideas for things that are simple. the guarantee could be structured to minimize the risk to taxpayers. first, limit the scope of the guarantee. i seen no policy reason that it should be provided for the corporate debt of any entity, as

it was in the past. we ought to, going forward, limit the guarantee to the mortgage-backed securities themselves, or perhaps the underlying mortgages. any guarantee should be explicit and the government should charge a fee to create a reserve fund to cover potential losses and to offset any budgetary impact -- perhaps neutralize the budgetary impact. the government should place limits on the types of mortgages that can go into the guaranteed securities. it might, for instance, limit the mortgages that can go into the securities to the plane, bonilla -- bonilla -- vanilla mortgages that are easily understood and that are run under ridden -- are under

written according to the specified guidelines. the guarantee should undertake in to cover catastrophic loss. this may be the most difficult. even then, only when it is the reserve fund that is exhausted. in other words, the private market insurers, as secured kaiser's -- the security securitizers -- they would cover the losses. they would provide a further cushion.- - even with those changes to the guarantee, there is still an important role for regulation and oversight. i think regulation needs to

cover not only whatever the alsore gse looks like, but th all mortgage-origination channels to prevent the carter trust that we had in the past which exacerbated his crisis. >> thank you. marc. >> good morning. can you hear me? i think that hud should move into this building and treasury should move to seventh street. [laughter] i have five key points to make. >> i do not accept. >> it is great to see you working together. it is great to see hud and treasury in the same room, talking about an important issue facing the nation. first, i believe that we should,

as a part of this, keep expand -- keep, expand, and strengthen our commitment to affordable housing, because the supply is not adequate, and not allow this discussion to be governed by the undertow and the undertone of what i called in 2008 "weapons of mass destruction." somehow, that commitment to affordable housing, the commitment to lending to communities of color, the commitment to the community reinvestment act -- it caused this meltdown. that is not true. it is not supported by the data. as we go forward, there should be a commitment to allow that -- not to allow that to in fact

this very important issue -- in fact -- infect this very important issue. third, we must preserve the dynamic role of the government in the private sector. it is not acceptable in 21st century america for something so critical that a key component of our economy for decision making to be concentrated exclusively in the private sector or in the public sector. the tension should play between both. not only in -- that not only engenders public trust, but it is the way we have to do business in 21st century america. the market, as it exists today, is not what adam smith had in mind. it is quite different. power is more concentrated.

we have 36 financial-services institutions that have more than $50 billion in assets. we need a dynamic role. the backdrop is that, for a long time, the gse's did well by this nation. they helped create the middle- class. they help people become homeowners for the first time. in the old days of the 1920's and 1930's, if you wanted to buy a home, you had to have 100% cash or you had to put 50% down. that is not what we want in 21st-century america. no. four, any discussion about what we do has to weigh the impact of decision-making and the structure on main street america and on back street america. there has to be an analysis which looks at how we structure the financial markets and how it

will impact consumers, communities, cities, and people who will be affected by this decision-making. it is critical. we not only have wall street and main street. we have a back street. the people who have been pushed down because of the recession because of the crisis, who have bad credit, who are struggling to get their lives together. helping them is essential to the future of the american economy. fifthly, i think we learned from -- the data is clear. housing counseling and homebuyer education works. where people are informed and educated and they understand their risk -- sometimes they will walk away from the decision to buy a home. sometimes they will walk away from a product which is beyond

their ability to pay. i think that any system going forward should look at how we structure the demand side of the equation. housing counseling and homebuyer education should be preferred and it may need to be mandatory. also, we need to look at some sort of system to help people clear their credit records, help people turn the corner and move forward. this discussion is important. this discussion is meaningful. this discussion has to be a broad discussion, looking at the supply, the demand, wall street, main street, and back street. you could hypothetically designed a system with service to a limited number of americans and which is profitable to wall street, but does not do the

country justice in terms of housing the nation. as part of it i believe we should -- as part of it, i believe we should look at what the housing needs of the nation are over the next 10, 20, 30 years. how many housing units do we need? we need a market analysis. we need to know what our objectives and goals are if we are to intelligently designed a system. this is a a chance for a reset for our generation -- a chance for a reset for our generation. we do not want it to be like it was before, but we also do not want to throw away the things that may have worked for the 20th century. we have to learn the lessons of the past, not throw the baby out with the bath water.

fix what is broken. utilize those things that worked. that requires something we do not like. we need more than a present- since an ounce. we need to look at how we got to where we are. this is crucial to the nation. it is crucial to eliminating the wealth gap. i'm glad to be part of this discussion. i look forward to more. thank you. >> thank you. we end with a banker and investor, barbara. >> we appreciate the remarks. in particular, the council to take a gradual and deliberate approach to support the recovery and ensure that we have a stronger system going forward -- we support the government role to promote liquidity and to stay true the mission -- to the mission, which is to create access to credit.

their assets that we need to retain. in terms of changes -- and there are assets that we need to retain. in terms of changes, the role must be transparent and clear. institutions and products will need to be explicitly- guaranteed are not guaranteed at all. there is no long-term need for or gse's to hold mortgages mortgaged-backed securities. their mandate should be to provide mortgage guarantees to the marketplace. finally, prudent and consistent underwriting standards throughout this cycle must be clearly defined. the important role for the reform process and outcomes -- we believe there are responsible lending, greater transparency, clarity for consumers, and a level playing field for the participants. thank you. >> thank you.

bill. >> good morning. let me say that, hopefully, my remarks will represent the public and not the private interests. some policies may not favor my clients. this is washington posner day. tomorrow, when i report to -- return to -- this is washington's day. tomorrow, when i return to newport beach, it will be back to work. we need to recognize that america has been over house and over consumed, producing too many homes and too many low- quality mortgages. housing is part of our biggest challenge. policymakers -- both monetary and fiscal -- must make a secular shift from housing to the production of things that are important in a global

economy. to that end, rental housing plays an important part. americans should be well-housed, but not necessarily homeowners. second of all, in terms of gse- restructuring, pimco advocates 100% public finance with government guarantees that are protected by adequate down payments and by sufficient insurance premiums that have been discussed previously. we will never again permit american subsidized -- american taxpayers to subsidize a black hole. we should consolidate the agencies into one true govern ment national mortgage association -- one agency. we are skeptical of other public-private models that are being discussed. they are more expensive. the result in higher mortgage

rates -- they result in higher mortgage rates that favor wall street as opposed to main street. many have the potential to replicate the abuse of the past. it is like making clones of fannie and freddie. private-mortgage insurance is untrustworthy and comes at a very expensive cost. we need one national agency with sufficient backing, down payments, and guarantees. the conflict of guarantees is crucial -- concept of guarantees is crucial to liquidity and the cost of home financing. it is the ultimate liquidity provider and the lowest-cost provider. pimco would not by a private or privately-insured mortgage pool unless it was by a 30% down payment. that is too high to prevent -- permit new housing or secondary- market purchases. without government guarantees, mortgage rates would be hundreds

of basis points higher, resulting in a moribund housing market for years. lastly, let me suggest that policy makers should quickly reengineer a refinancing opportunity for all mortgagees that are current on payments. the american economy is approaching a cul-de-sac of stimulus, monetarily and fiscally, which will slow us to a snail's pace, incapable of providing sufficient job growth going forward. rates will approach and remain at double-digit and less a positive fiscal stimulus is provided in the next six months. this home financing -- to my way of thinking -- where you take 5%, 6% from a 7% mortgages and

turn them into 4% mortgages would provide a crucial stimulus of $50 billion to $60 billion of consumption, as well as a rise of 5% to 10% in housing prices. >> thank you. i want to start by talking more about this basic question. what role is there for the government in providing our role? what form of guarantee? what is the case for and against it? i want to start by asking alex to be more explicit about what role he would preserve. you laid out a framework to substantially reduce the scales of subsidies now provided. it sounds like you want to

retain some form of support. why don't you start and say more about what you would retain and how you would design it? >> since we have talked about guarantees, there is of first in the book of proverbs which addresses guarantees. "he who stands as surity for the debts of another shall smart for it." [laughter] this could also be known as the fdic verse. my notion is that the bulk of the mortgages -- those that we have thought of as the conforming mortgages -- we used to think it was about 70% of the market. in a normalized market, it still would be. they should be private. the way we get there is to start ratcheting down the limits for all the government

guarantees -- fannie, freddie, fha -- a step-by-step. at a minimum, should fannie and freddie survives, my view is they should get to a place where their maximum is based on the median house price by area every place in the country. by definition, they would operate in the bottom half of the income market and not the top half. i would go much further than that. i do think there is a role for government programs. we have had the fha since 1934. it would stay just as it is. if you go back to the 1940's and 1950's, it played a huge role in the market, as did the fha. ginnie mae became as

securitizer in the 1970's. those would stay. fannie and freddie, to the extent that they have similar programs, which i define as subsidy programs convening government subsidies, which is the same as doing non-market transactions, and they would move into hud and become part of the fha/engine e-mail complex -- ginnie mae complex and would be subject to congressional oversight. >> you would retain a role for the government in providing a guarantee for the set of conforming mortgage products, but you would limit the extent of those by limiting -- by setting a price limit at the median house price by area.

>> that is the transition idea. in my far future, there would as fannie and freddie. >> the fha, which your excellent the virtues of appropriately, would do what -- you are extolling the virtues of appropriately, would do what? >> i did say they were here since 1934. they would do what they have always done. they would focus on the soundness of its mutual portfolio. we would try to get them financial statements which people could actually understand. i would suggest that as a good project. >> you did not speak to the guarantee question up front. you're focused on the virtues of disclosure. do you want to add anything?

>> they're absolutely needs to be a continuation of fha. it has been a bulwark. going forward, we need to have the role of the federal government not only there, but also as the backer of all mortgages in terms of catastrophic risk. said in ageithner y, recession, the government will step in so that the recession does not become a depression. the government steps in to assure that borrowers can borrow at reasonable rates. that means that the government must actually be, in a sense, overseeing the risk and that ultimately it owns. i do agree absolutely with what

ingrid gould ellen has said. there is a role for the government guarantee being very limited, in a successor entity, such as fannie and freddie, which alex pollack has mentioned. it should not solely be in the government, but outside the government with a limited role for the government guarantee with private capital in the first-loss position. i agree with marc morial that we need both private entities and public entities. the private capital in the first loss. there being no need to guarantee debt, only to guarantee the and b.s. -- the mbs over time. this market will become smaller. we will get to the nirvana. a private, non-government guarantee.

we will have government framework to ensure that even the private sector does not take risk, does not replicate the abuse of the past. >> thank you. ingrid, why don't you speak about what separates you and your vision from what bill gross and alex laid out? >> i will start by saying there is some commonality here. i would say that -- i agree with alex. i think that' we certainly want to begin to ratchet down the public involvement and the limits on the government programs so that the guarantees

-- the catastrophic guarantee that i am suggesting would cover a smaller share of the market. i do not know exactly what share that would be. we all agree that there is a continuing an important role for fha. this market that i envision would cover the mortgages that -- not a very high-end mortgages. -- not the very high-end mortgages. they could choose to go to the fully private sector as well. >> ok. i think part of the debate, of course, goes to the question about what should the guarantee cover? what should be extended? how would you limit its scope and eligibility?

you raised the question -- i think bill did, too -- many of you have about whether it should be limited to mortgages that have a higher downpayment, lower home value -- why don't we just keep going? speak with more detail to what you would extend or design in new guarantees to cover this. >> in listening to the discussion about the guarantee, the first question i would have for alex or bill is, what impact does the design of the guarantee have on the objective of improving and increasing the flow of credit and home ownership in this country? it did it simply a philosophical conversation -- if it is simply a philosophical conversation about market-based bursas

government and we do not -- versus government and we do not carefully do the analysis of the impact, we risk designing a system that is going to break or that is going to be inadequate. it is thinking about the chance to do policy right, which is to look at various options and alternatives, and then to work through some scenarios. i would ask in the financial- services industry -- if you had alex's version, what would it do to your decision making? i think the community bankers need to come to the table and beat asked the same thing. asked the home builders. i do not want a system where home ownership is only available to a few. i do not want 35% required down

payments. i do not want to create a class of renters who are subsidized through various means including section 8 and low-income credits. we will create a broad system where most americans are renters. there needs to be a damned -- and dynamic rental market. there has to be an affirmation that what we did with home ownership in the 20th century helped create equity. it helped put people through college, helped create businesses, helped create equity to pass on to the next generation. we created wealth. there has to be an analysis versus these designs of what the guarantee might look for. the objective ought to be making credit available for broad segments of the american population on fair terms and to

retain a stable housing market. so, i believe that has to be part of it. i would ask alex and bill, barbara, the other panelists -- what is going to be the impact, pro and con, if you design a guarantee as you suggest? take me through the analysis in terms of what it means for underwriting, the flow of credit, sustainability of neighborhoods that have been locked out and left out. to me, that is an important component of anything we discuss here. >> are you giving us a sensible admonition against not over- correcting? not killing what has been important and good and worked well?

would you achieve your objective by making sure we preserve a strong, ongoing role for the fha in providing relatively generous financing to americans who want to buy a house of more modest size and proportion? >> that is certainly a possibility. it has to be looked at. one proposal floating around is to have multiple guarantees so that it is not centralized. you hear arguments for single guarantees versus multiple. if the guarantee is positioned in a single place, they will have great influence over underwriting, over product design. there may be some good sides to

that. we may say we're going to require housing counseling. we will support broad affordability. there could be benefits to that. it also centralizes control and power. that is a very important aspect and risk. it is important as an aspect of how we set this up. everyone would basically be at the altar of the fha, trying to influence them, or doing business with them. that is the possibility. we have a multiplicity of guarantees right now. that is another conversation. the common sense is to analyze the impact it will have on private decision-making and on the flow of capital. i approached this not with a closed mind about any specific model, but with a desire to make

sure that means street and back street -- main street and back street are affirmed and have long-term sustainability. i do not want to get dragged into a philosophical discussions where we never asked what happens when the other shoe drops. >> barbara, why don't you say a little bit more about what you think would be appropriate in designing a system that that your tests -- to preserve some role for the government in providing liquidity and access across the cycle, without regrading the basic incentive dynamics -- recreating the basic incentive problems and dynamics we have seen? >> staying true to the mission is what we have been talking about that the fha can provide that capability.

that entity should be retained with its focus of a different mix of affordable rental alternatives, versus housing alternatives. in the spirit of the secondary markets and liquidity, there has to be a robust secondary market providing that liquidity. the concept of ginnie mae or the government keeping the fha on its balance sheet should be in that spirit. the redevelopment of private markets, the private sector securitization -- it is dependent on the consistency and clarity of the underwriting standards and the quality of the production and all of those things we have considered in terms of down payments and standardization. it all needs to be considered. andlieve you can get there

have something like the fha staying true to the mission of affordable lending to accomplish those objectives. >> bill, could you spend more time addressing, in your pure model, what should be the extent and limits of the guarantees the government provides? where would you set the limits? how would they relate to the ones we have been living with? >> let me just point out to that, in terms of addressing reality, it is and $11 trillion secondary-mortgage market. agencies are about half of that. the other half were basically financed during the time when people thought houses could not go down in price. we know that isn't the case. to suggest there is a large

place for private financing in the future of american housing finance is not realistic. we have been dealt a significant blow. the only way to bring housing back and to create liquid, mortgages going forward is to provide the government guarantee. it involves the principle and the interest, payment at maturity. it would be provided for by adequate insurance, by sufficient downpayments, and an over-encompassing regulatory environment that, instead of provides no doc's, adequate supervision for any mortgage going forward. it would incorporate the necessity for lower down payments and lower requirements

in terms of meeting the mortgage. for the most part, the government -- i say this, unfortunately, the government is part of our future in terms of the mortgage market and housing market, but other markets as well. we need the government balance sheet. to suggest the private market could take the place and do the same thing they have done since -- for the last 20 or 30 years is not practical. it will not work. >> i thought you might like to respond to that, alex. >> i see you will be a strong bid for ginnie mae. [laughter] on guarantees and the price of guarantees and the related downpayments -- none of these should be thought of as constant rules. they all have to be seen as in a recursive set of feedback

relationships with the price of houses. i would generalize this to financial statements. any time assets are being financed, the financing means have to be responsive to the level of the asset price. when that asset price starkly takes off over its trendline, then all of these things, guarantees, down payments, financing structures, have to be responding and growing more conservative as the underlying house price or asset price rose more. wildly more if we do not -- rose more wildly optimistic -- grows more wildly optimistic. if we do not do that, we will have these same problems again. >> you started by talking about -- two-volume ratios -- the amount of down payment you have to provide -- the loan-to-value

ratios -- the amount of down payment you have to provide should vary over time. it is surprising to hear that from you. that's opposes a world in which we're relying on the use of discretion by -- that supposes a world in which we are relying on the use of discretion by people in washington, in government, the policy-makers, to act with the foresight and wisdom to tighten things up before they get away from us. i say that i was surprised to hear you say that because you come from a tradition of more skepticism about the capacity of government to do that. i wonder whether any of the rest of you would want to have a -- in terms of what qualifies for a ne