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] but critics it remarks from tim geithner and he. and a heritage foundation

report. president obama meets with small-business owners in seattle. deflator, a forum on u.s. and iraq relations. -- and later, a form on u.s. and iraq relations. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] the national business group on health report on how large companies are adjusting their employer provided health benefits program to prepare for the new health-care law. that is at 10:00 a.m. eastern. at 6:00 p.m. eastern, a funeral service for ted stevens who was killed in a recent plane crash. speakers will include vice- president joe biden. the obama administration is scheduled to deliver a finance plan to congress early next year. up next, a conference with treasury secretary tim geithner

and others. this is 2.5 hours. >> plans for joining us today. we are very pleased to have selected a great group of experts from all the various businesses involved for this. i want to welcome those of you that are joining us via internet and hope this will be a good way of reaching people more broadly. we need to thank the treasury department and the department of housing and urban development for sponsoring this event. and we think the treasury secretary who is hosting this today.

we could not have everybody here, but everyone a to have as many people as possible to represent the various thoughts in the group. we of looking forward to hearing the perspective and hope we can move to get everyone's understanding of the different aspects of this market. this is an opportunity for all of us to keep in our collective understanding of a complex set of issues. we want to be comprehensive in our approach to it. we very much look forward to this session. this is neither the beginning of the process or the end. we have had ongoing discussions with many of you. this will take place over the next couple of weeks. let me welcome you again and welcome our treasury secretary tim geithner and secretary head.

they are cochairing the conference today and will be opening tomorrow before we move to the panel sessions. thanks again. shaun donovanhank and his colleagues at the urban development. i wanted think others and jeffrey goldstein, all of home work together to put together this conference. they will carry this burden of designing proposals for reforming the housing finance system. i want to thank all of you who came to participate today.

you bring a lot of experience and i diversity of opinions and perspectives. we appreciate that you wanted to spend the day with us and to hear it buys. we are looking at building a more stable housing finance system. fixing this system is one of the most complicated economic policy problems we face as a nation. it is worth stepping back and asking basic questions. what went wrong over the past few years? what are the most important problems in the system that we have to fix? along side the many broader failures that contributed to this crisis, there are several that directly involve the covered -- government sponsored fannie mae and freddie mac. they lowered their ratings

standards, providing guarantees for increasingly risky types of mortgages without charging enough to cover the risks. fannie mae and freddie mac were allowed to build up substantial portfolios of mortgage-backed securities, which peaked more than 1.6 trillion dollars without the financial resources to cover potential losses. these strategies were pursued to maximize short-term returns to shareholders and senior management. they were made profitable only because of the toxic combination of perceived a government guarantee and the absence with effective oversight. these strategies were not the full cost of the financial crisis. they made it worse and resulted in huge losses for the tax payer. they were avoidable failures. it is our responsibility to make sure we created a system that is

not role marble to the same failures happening again. we have proposed earlier this year a series of questions for public comment. we received more than 300 responses covering a full range of opinions and options. some propose getting the government completely out of the business housing finance and others would leave the current system largely in place. some suggested as a government, our mistake was providing too much support for housing. others suggested we provided to little support to promote affordable access to housing for low-income americans. from these comments, there is no clear consensus on how to best design a new system. this administration will side with those that want fundamental change. it is not tenable to leave in place the system we have today. we will not support returning fannie and freddie to the role

they played before conservatorship, where they sought 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. we need to look at the public policy goals on how to promote reasonably priced and stable mortgage costs for most americans from the policy objection of how to promote access to affordable housing for low-income americans. this challenge of reform has many different dimensions. i want to start today by presenting the four key policy questions we face and the challenge in the reform. we have some key choices in response to those. the first is the most fundamental. what role should the government play to provide stability to the housing finance system both in times of prosperity and during economic downturns? this question is really about

whether the government in order to make sure americans can borrow at reasonable interest rates to buy a house, even in a deep recession, can provide insurance against losses. many countries around the world do this, but in different ways. some do it through the banking system with a traditional right of the instruments designed to protect banks. some do with specialized mortgage finance with backing the government. some have bonds issued by banks backed by individual mortgage loans. some make insurance with a guarantee that is explicit. many leave them implicit or hidden. governments do this, because without that support, the risk is the future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale.

declines would be more acute with greater damage to financial wealth and economic security. to what extent the private market can provide that form of insurance or guarantee on its own or whether this is fundamentally a role the government has to play. in this crisis, we sought a full retreat by a private financial institution for many forms of mortgage and consumer lending and this crisis provides a compelling illustration of why private markets left, their own devices are hard to resolve financial crisis. as a said in the past, i believe there is a strong case to be made for a carefully designed guarantee 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 and its structured to

minimize taxpayer exposure. the second question is what role the government should play in providing financial support to improve access to affordable housing? shaun will touch on these remarks -- on this question in his remarks later. whether we should realign for owning or renting the house and how we delineate cover support for former housing. the mechanisms we used to support housing finance more generally in economic downturns. third question is what do we do about the security rise asian markets? -- securitization markets. risks migrated away from banks and nonbanks that would not have supervision.

markets are so important to how we finance things in america. these reforms require a level playing field in terms of constraint on risk-taking. they require stronger consumer protections, new disclosure requirements, credit rating agency forms and other things. we hope the discussion today will help shape the rules required to shape the reforms. this fourth and final question is how best to manage the transition to a new housing finance system. here we faced several different and competing imperatives. we need to begin the process of winning the markets away from the government programs and make room for the private sector to

get back to the business of providing mortgages. we need to continue to keep overall mortgage rates low. as we go through the transition, it is important that consumers maintain access to credit at reasonable rates. this must be done in a careful way. we will make it clear that we they have thee resources to meet their financial commitments. before i conclude, i want to take a few minutes to address some of the misperceptions about fannie mae and freddie mac. this process of housing finance reform did not begin today. it began in the fall of 2008. the necessary critical step was the action taken place to put fannie and freddie in conservatorship. that step was taken by a republican president with the majority of congress with the

intention to break the model it helped produce this crisis. without that action, house prices would have fallen further in the recession would have been dramatically worse. another myth is that by taking time to get reform right, taxpayers are exposed to even greater losses in fannie and freddie. that is not true. the losses they face is the result of mistakes made in years leading up to the crisis, the result of loans purchased in guarantees in the years before the crisis. they are not the consequence of actions taken by s since 2008. there is nothing we can do to decrease the sit in losses that fannie and freddie incurred ahead of the crisis. all we can do is minimize the risks that they get worse. we have acted to raise underwriting standards so there are lower risks and higher credit qualities and the fees

charged for the guarantees they provide provide adequate income to cover future losses. it is important to note that reform is more than just designing and elegant funeral for fannie and freddie. it requires a much broader assessment of how much support the government should provide for housing finance. failures that produced this crisis and produced the system today were bipartisan. the solution must be as well. this is a test for washington. the housing industry supports millions of jobs. we hope we can use the opportunity today to build a consensus on the matters. a look forward to the discussion. thanks for coming. here is shaun donovan. [applause]

>> and thanks for your kind words about my team. i want to thank you as well and my team for the work you have done today and the work ahead of us. thanks for your partnership in leadership during this enormously critical time. it is a pleasure to be with all of you today as we take this step toward rebuilding our housing market, our community, and our country. by having each of you here today as part of our ongoing dialogue on the future of housing finance, let there be no doubt that the obama administration is committed to carry the best ideas from all sides of the discussion. as the start of this important conference, i want to share brief thoughts on what i think this conference means. to the families and businesses outside of washington.

we will hear a lot about capital markets, risk-based capital, and make no mistake, each of these things and getting them right will be essential to having a healthier financial system and building a stronger economy. of what to take a step back so that we focus on what is really at stake. what all of these decisions are in the end about. to build on what timid just said, we know housing finance runs through the core of our entire economy for better and for worse. our resident housing market is one of the largest sectors in our economy. housing finance is important as an economy on the whole and the global economy. the u.s. mortgage market remains the second-largest securities market in the world. two-thirds of americans live in their own home and that remains

the largest asset for roughly half of those families. home ownership has helped millions of families climbed the ladder into middle-class and this can be a credible means to build wealth. when they have a mortgage they can afford with terms they understand. in the last several years, we saw that latter become a slide out of the middle class as families struggled with unmanageable mortgage payments and declining home prices. that is why today's discussion is about so much more than finance. when you choose a home, 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 ensure we have a balance national housing policy. americans should have real choices about where they want to live. choices for responsible home ownership.

homes that people can afford with easy to understand mortgage products. choices that allow broad access to home ownership, including options for those families that have been shut out of the market. choices for affordable rental housing, which gives those access to quality housing without an undue financial burden. it is also about our ability to compete in the 21st century, so people can move to where jobs are in innovators can attract the best clients to their businesses. it is about where families can move to where the best schools are, so their children are not stuck in isolated neighborhoods with no choice, opportunity, or hope. indeed for the next generation, this discussion is about whether their future will be determined by talent and a will to succeed, or by the zip code that they grow up in. a healthy and robust housing

finance system is key to providing americans with these choices. a healthy and robust financial system means many different things. insuring people can't own their home and have the capital they need to take the important step. housing is usually the most expensive and important purchase a family will ever make. running on average five times the homeowners annual income. few will be able to take that step without a strong finance system there to provide the capital. it means making sure families are not set up to fail with mortgages they cannot afford. it means ensuring that financing is available for those with a rental housing they need so they have that when home ownership is not the best option. the question is whether we need a healthier system but how we get there. in answering that question, we

have to ask ourselves what role the government should be playing in the market. the government's footprint in the housing market needs to be smaller than where it is today. we need to work to make sure we have a strong and healthy market to harness the vitality, in addition -- innovation, creativity so consumers gain real benefits with out the race to the bottom in recent years. that is exactly what wall street reform has done. it has provided an important foundation to build with increasing oversight on the mortgage industry and helping close loopholes led to the housing crisis and establishing strong consumer protection in the history of our country.

we consider all that is at stake in housing finance not only for wall street but for the families and businesses on main street. by engaging each of you stakeholders and experts with broad knowledge and many perspectives, i know that we will. thank you for joining us. i look forward to our discussion. [applause] >> we will talk about the role the government should play to

provide a more stable housing finance system. i will start with susan, who is a professor at university and served at hud from 1998-2001. she will be followed by alice pollack who has written extensively from a different perspective on these things as questions. she is a professor at nyu and a co-director for urban policy. she has written extensively on mortgage finance, segregation, and other issues. mark is president of the urban league in a national champion for sustainable housing programs. barbara runs bank of america's

mortgage business, which is a major player in the mortgage finance system in the 90 states, servicing nearly one in five mortgages in the country. we will close with phil who who has vasts knowledge on mortgage-backed securities. we will ask each panelist to speak for about 10 minuttwo minn what would you change and what would you preserve? to keep it to this time in focused on what you are for and not against, you do not need to say you are in favor of a more stable housing finance system.

you do not need to say our system is broken. you do not need to explain precisely how it is broken. say what you are for in terms of change. with that definition and encouragement [laughter] i will begin with susan. give us a quick prescription, and then we will debate about the choices that separate us. susan? >> 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 new conforming mortgage in this brave new world -- would you want to have underwriting

standards in terms of, for example, the scaleddownpayment -- scaled down payment over the cycle? what about this basic question of designing a system where there is discretionary counter- cyclical and underwriting standards? does anyone want to >> i think it has some merits. it would be difficult to enforce this down payment. there has to be some six locality in terms of the amount going for word -- some cyclical ity. >> you want to have some flexibility and some discretion, but also some baseline. >> it is asking a lot of the market and regulators in the

middle of a housing boom, there are issues of affordability. especially at that point where the private sector will be allowed to lower down payments. that is what they will do. it will be viewed as a market where housing prices are increasing. the collateral is increasing. even keeping the rules so they are not pro-cyclical so that we have standards maintained over the cycle is a critical place we need to be. >> you look like you may want to weigh in on this. >> there was the timothy geithner interpretation of polllack. the fact that markets and

regulatory systems are caught up in the boom -- everyone makes the same mistakes at the same time. that is why we want to try to design these elements, but but i don't view this primarily as government discretion. i've you ever buddy's foresight as exceptionally limited -- everybody's foresight. i would like to see me sorts of standards -- how do you define a prime loan? you can work into the definition of what it shelby to be securitized and it would have this countercyclical element and if i could add this.

a prime loan would have to have a mortgage information form. >> are these the only loans that can beat securitized? >> i am giving an example of how you might build standards into a market. you might do it through defining. >> what is to stop over time the non-prime from taking more market share? >> we have to address that. >> how do we do that? >> i am yielding my time. [laughter] that with theo marketplace?

theoretically, these securitized loans -- therefore limit the participation. i am a market in vester. >> it did not happen. what will stop it from happening in the future? before this is a 20-year phenomena. luckily guarantees are [unintelligible] >> bill, i want to see if we can sharpen the distinction. there is concession to -- consensus on the broad elements. in your vision of a new realism

you would have a share of the mortgage market the government is providing support through capture a larger share of the market andy alternative universe? the government's role would-be below 30%. you were saying you would have to be larger than that. >> we note it is 95% now and bridging between now and the future. to suggest we return to the old days in which investors of securitized loans they were adequately covered is not realistic.

we are speaking not only to the liquidity, but the cost. we can go private, but the cost is 300 basis points. pimco buys mortgages at 8%. is that the market we want going forward? that excludes almost every new homeowner. recognizing we don't want government in the housing market, but it is a necessity in this day and age. >> i want to give you this last word. you said you want the guarantee only to cover catastrophic losses after the guarantee fee

and other forms of capital? why don't you elaborate on what they are doing? i know we will have a chance in the next session to talk about a broader range of issues. this question of design is going to be the most important thing to get right. we have to be focused on what incentives it creates and what it does for access to housing finance. you get the last word to say how you change the design structure. >> i think this is one of the most difficult elements of the redesign. i would reiterate i think that

even a limited it guaranteed that covers catastrophic losses could provide liquidity for the market bill is talking about. i think it is imperative to the design to make sure the private sector is taking the first losses and the guarantee would kick in to cover catastrophic events only after the reserve fund is exhausted. it could be through equity or requiring private mortgage- backed securities to stand in front of the guaranteed debt. that is a critical point. this issue of the guarantee is about balancing liquidity and protecting taxpayers.

reserving the government role in the event of these catastrophic losses and requiring the catastrophic losses to be there. >> my thanks to all of you who were substantive and thoughtful. i appreciate the excellent job, so i will give the floor to the second panel. [applause] thank you very much. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] >> thank you all, we will get started with the second panelist. i will introduce each of the panelists for a moment in the order i will ask them a first question. i will mix it up with a

different question and open it up to more of a back and forth. we are lucky to have a broad set of views with a lot of historical vantage points on this crisis, so i want to start to focus on the historical lessons and broaden it out to try to connect the discussion today to the future of housing finance. are important but they are one piece of a range of other ways the government intervenes in the mortgage market.

how should we be zero -- thinking about those goals? we will hear from the chief economist of moody's. i would say mark is a leading voice many people look to on the future of our economy. next we will hear from our co- president of wells fargo mortgage. then we will hear from lou, who is president of -- his bio, the father of the securitized mortgage market. would you agree with that? abraham is chief executive

officer of a global credit risk management company and one of the most significant mortgage insurers today. ellen is executive vice president at shorebank corporation. she was the director of the treasury's office of thrift supervision as well as the director of the fdic. finally, mike is the director of policy and housing and also brings a wealth of experience on the intersection of housing finance and housing policy, both as a professor, chairman of

public policy and founding director for community capitalism and served as assistant secretary for development and research mark, let me start with you. we have had a discussion about the gse's. we have seen enormous engagements of the government currently in this cyclical role. some debate about whether that role in guaranteeing mortgages should be pulled back, or expanded, but given your perspective, what would you say

about what that rule ought to look like. what should that role look like? >> i thought you were going to ask me if the phillies were going to win the world series. let me make two points. it is clear the government should play a larger role in the housing market. that involves two things. it is clear the government needs to provide a significant backstop to the housing market. the entry into the housing market after the great depression was motivated by that fact.

millions of people lost their homes as a result. the government entered into provide that backstop. the necessity is evident in recent avevents. had the fha not stepped in, the housing crisis would have been much worse. it is on the gun, house prices are down 30%, but it is easy to say the price declines and hit to the economy would have been greater. now the government has 50% of

the purchase market. there are two things that the government should do in its role. it has to provide access to affordable housing. this will be more important going forward because lower income houses are under more stress than they have ever been. it will probably get worse. they will not have access to housing which is a necessity. that does not mean a single- family home. we have not paid close enough attention to rental housing. not everyone should have a single-family home. government has to play a large

role going forward. the government's role in housing needs to be pulled back significantly compared to where it is today, but also compared to where it was prior to the crisis. the boy is still quite large. the private market is dormant and cannot step in unless the government steps out. the crisis is still ongoing. house prices are down 30%. we will see more price declines. the reo -- the share of total sales will rise significantly. when housing values are falling, nothing works that well in our

economy. the home is still the largest asset on most people's balance sheet. it affects small businesses to get a loan to hire. when i got my first business loan i put up my home for collateral. the government cannot >> it out now, but it is important for the government to reduce its place in the housing market. it is over subsidized. we are not getting our money's worth. the home ownership rate is no higher to similar countries like the u.k. and australia. we are not getting our money's

worth. we are redirecting bible resources to housing. that means it will not go to -- we are redirecting other resources to housing. we cannot afford it. we have huge fiscal problems. we will have to scale back the subsidy provided. and no industry will benefit more than housing if we successfully address our fiscal problem. i think it is key for us to scale back the subsidies that we provide to housing. >> thank you. you had a front-row seat before the crisis and through the crisis on making mortgages, the

effects of that. give us a sense of how you would change policy to avoid the kind of crisis we have been. >> to prevent a crisis, history can give a useful guide in terms of mistakes that have been made, but also further back in time. there is a solid group to draw from. we think about four key policy areas that require attention to ensure the future health of the housing market. lenders need to have an interest in the quality of every mortgage

they make. we need to revisit all aspects of the business model that encourages -- in terms of how to do that, the risk retention requirements as well as qualified loan provisions -- if they are implemented well will go a long way towards making this happen. there needs to be a level playing field for all parties across the entire mortgage business. regulations need to be consistent across all parts of the mortgage market wit capital requirements applied to comparable loans. we need to ensure we have consistent enforcement of the rules for all market participants.

they cannot operate in areas where regulators don't have the caliber of resource needed to do the job effectively. as history has shown, landing will flow to the lowest common denominator. this can serve as a solid guy. third, the roles of all the various parties involved need to be clearly defined and very well understood throughout the entire life of the mortgage loan. servicers need to understand obligations to the bar were and investor in the act without the threat of litigation.

if not come on when things go bad -- if not, various parties will need to forge solutions on the fly. fourth, in a government guarantee made available to the gse's should be explicit. opinions differ as to whether the government should continue in supporting a conventional mortgage market. given the size and nature of the housing market, wells fargo believes -- we believe an explicit government guarantee will be required to ensure there is sufficient credit. i want to emphasize the guarantee should only apply to

the performance of the mortgage market. where appropriate, we also believe the government should provide financing subsidies or direct credit risk based on transparent policy choices. one of the challenges in front of us this how best to mary together state government guarantee with private capital that minimizes risk to the taxpayer. i know you received 300 letters in that, we laid out what the framework is to move the discussion forward. there is a wide range of ideas, but we have to get this right.

i look forward to the discussion. >> with the unique perspective you have and the role of the of whative us a sense the key moments were where they gse's got off track that led us to where we are. >> i would like to give you a minute -- i feel like mark anthony. i think it may be important to know what it was we were supposed to do. the market i came to in the 70's -- i was not there at the beginning.

when i came in the 1970 cost the homeowner would have -- smaller communities did not have access to 30-year loans at fair prices. there was little standardization and that was true for underwriting documentation. the most important contribution was to standardize the securitization process. they allowed equal access and lower rates for many years. they also determine the level of acceptable credit risk. you could not get anything done without agency underwriting or standards.

you could not create an rmbs that was not agency standard. the agencies for three decades did their job. they provided standardization and liquidity. there was the critical fall that the secretary talked about, the implicit government guarantee. it gave them the force to create the modern market. since the government guaranteed was provided free and with less oversight, the moral hazard was always there.

the privatization of profits -- the answer to the question is in 2000 to the non-agency market started to experience with traditional mortgage forms. fha has a brilliant history of doing this, but we started to -- we expanded the definition of all data to include almost anything. at the same time the private level market began challenging the norms for down payment. it was still rated aaa and still oversubscribed. we just kept pushing the envelope further.

the inherent weakness came alive. i agree, people sometimes say a need to expand homeownership, that is true, but it was much more a profit motive. they lowered their standards to further exacerbate this. and they bought $500 billion of the loans that created the problem. i would also tell you the dodd- frank bill addresses many of these issues.

we always had regulations but the part was those that never got enforced. what the bill does not deal with is the second mortgage issue. it is totally silent on second mortgage. -- thisn't resolve this was built not on a revolving credit account. i think we should remember freddie mac was part of the bank system. we should remember what the agencies brought to it and make sure what the new structure is can still provide access

standardization and the other benefits and a -- they only failed when the achilles heel, the profit motive came in. who will make institutions driven by profit behave differently than two agencies which used to say they were public service entities? >> thank you, lou about what dodd-frank could accomplish with the need for risk management.

we are moving towards more careful risk-management on an institutional basis. how can we ensure we have responsible innovation. how do we make sure we don't lose the benefit of -- and market that benefits consumers while protecting them of the excesses'? >> we can address that by saying innovation is usually a good thing. it has been one of the hallmarks of the american success story. there have been many good innovations that requests unmet needs and reduce costs and created best -- better risk-

management tools, but problems arose when it certain innovations stretched beyond their original purpose. two examples come to mind, the first is the [unintelligible] created for the good bar workers who could not meet credit standards. but otherwise were creditworthy. these were compensated by other large factors like large down payments, but these products were offered to a broader spectrum of our worst with weaker credit and without strong compensating factors.

the next example were piggyback loans. initially they could work well for the tiny niche they were designed. as the secondary market started buying these loans and treating first loans as low-risk loans, without requiring the originator to retain slin in the game -- hopefully the check contained in the reform -- it will provide

[unintelligible] i think the marketplace and the competitive nature [unintelligible] equally as important is to incentivize the right type of innovation and speaking here with the benefit of what is a failure and success. we need to think about their regulatory framework that questions, scrutinizes and monetarist products more vigorously, and treats them

differently. prudent limits on [unintelligible] even in the most well- intentioned analytical tools. [unintelligible] more so than the introduction of the new products themselves. rewards for innovation stretched out on lack of rest so there is an opportunity to reap handsome rewards, but only based on -- i would like to share something. our short-term incentive program is now a medium-term program with half of the payment delayed by a year.

finally, direct risk retention that result in more skin in the game and achieve the benefits of checks and balances for risk sharing. [inaudible] to share the risk and assume some can be as effective as retention and a way to get an additional perspective from someone willing to put scan in the game. the challenge -- skin in the game.

the art of progress is to preserve order amid change. discipline can only work if it is [inaudible] even during periods of destruction is critical. it requires both public and private sector is working together. they should provide only a layer of guarantee and setting standards [inaudible] layers of capital at whatever future entity plays this limited role. participation can be paid for through fees and sound underwriting and appraisals, but limiting the government guarantees to a safer gap of

70%. i recognize the need of boris with less down payment, but my industry has met the needs of borrowers [inaudible] the fha has a continued role in terms of meeting needs of borrowers who are capable of becoming homeowners. leslie, there is no perfect solution. there was a serpent even in the garden of eden. we have to make sure we watch out for those serpents. >> thank you. ellen, you spent a lot of your career working on innovation as it relates to underserved

communities. i wonder if you could give us a sense about whether we should continue to try to target those underserved populations and how to do that. >> an answer to the first part of the question, at these statistics are telling. with house prices lower, we had 18.6 million households spending more than half on housing. that includes one in 4 renters. it is undoubtedly worse now. only one-quarter of the households eligible get it.

more than two full-time minimum- wage jobs are needed to rent eight two-bedroom apartment. there has been devastation in a small rental market. and as these situations are, they are worse in low-income areas. the federal government has many different ways of performing its role, direct action and guarantees. i know mike will talk about everyone's favorite deduction. regulatory context.

i don't think you can lead it to the fha alone. what kind of support is needed? in the current situation in which 95% of home mortgage originations are -- the private sector will not do it on its own. we should just stop having that debate. there is no mortgage finance communities of color. this suggests that federal support this not sufficient.

the welcomed reforms may exacerbate this problem. because their rigging the market up of loans -- ridding the market. we have to pay more attention to access to credit because it will be good credits, but it's is absurdly expensive and we will tell the system -- kill this system we want to protect. they need support from the federal government in order to be able to be available in low interest rate environments. there was a brief mention of the experience of other countries.

other countries have done without as much over government support -- the underwriting standards are much more conservative than we have in this country. i think there are variations on but those stains that are important, but that is not the direction this country wants to go and. fannie and freddie support has been critical and multifamily markets. >> [inaudible] >> more of that subsidy will

probably go to rehab and protecting existing subsidized properties. that is harder to do. there is insufficient financing available for small rental housing structures. this was a product of the savings and loan industry. and it has been the province of no one and unless we pay attention we will lose huge amounts of affordable housing stock. i will not talk about guarantees. i will talk about regulatory context. i will talk about what will be needed to bring back affordable

housing in the underserved market. the community reinvestment act surfaced. this is very encouraging bank regulators are working hard to make fair -- [inaudible] one element of making it work better regulators cannot do is the primary market will originate certain loans unless there is a secondary market. just make it applicable to the market does not work.

[unintelligible] it is the secondary market national -- [unintelligible] it is useful in the secondary market. i suggested a more fruitful framework for building a regulatory context, particularly for any entity taking advantage of a guarantee it is focused on market needs were the support is important for the ability for the regulator to modify the concept.

i think small rental ought to be added but it is flexible. the secondary market is primarily an outlet. this leads to the -- a useful measure is to make sure the secondary market mirrors the primary rather than ignoring difficult segments. there also needs to be regulatory support for innovation. this can be a research and development that will more effectively serving public

market for more risk. this can work my husband has been part of the national security crowd. this administration picked it up in a special innovation fund. innovation sponsored by the government can have a print -- tremendous impact. there is a small fee on each issuance can fund such a fund. airline ticket fees also charge. this is not a new idea. i think the government needs to help the secondary market meet

goals for underserved populations. they have lots of tools to do it. thank you. >> mike, let me give you a little more space. you heard a broad range of issues that touch many ways the government interacts. what are we missing here? what has not been said that needs to be said? >> as i look over the historic arc of housing finance, i think the housing finance system has become over the last 25 years in a much more dominant shaper of housing policies than it was in the past.

i will elaborate on that more later. this is not without consequence. we have gone from financing low-income rental housing through guaranty bonds at below market interest rates to assist them of blaring a variety of rental subsidies -- layering a variety of rental subsidies. any changes in the housing finance system or secondary markets that fail to take these realities of the injured dependency of housing policy

goals could easily derail progress of critically important housing programs. just a small example of this issue of the role of a gse's going forward, in the multifamily sector the gse's have outperformed the broader securities market. there are severe the faults they indeed delinquencies, but the reality is because of the customized needs of various investors, a substantial segment

is held in portfolio. there seems to be a broad sense -- a growing sense going forward, even if we have gse's we can -- don't need portfolio addresses -- how do you address the needs of affordable rental housing investors in various segments of the market in a standardized way where securities could wrap a guarantee around affordable multifamily debt? another thing to point out is so much of the challenges we face with assisted housing were the

causes of earlier policy decisions. federal policy created the need by making a deal with private investors that if we could attract them into the sector we would allow them to prepay their mortgages to take advantage of rising market opportunities. some of our most affordable rental housing is dropping out of this system. we need to make sure the secondary market will recognize the need to preserve this housing that is vital to low income citizens.

i was not sure i could say this, but allen said i would. we do have to deal with the issue that mark and others addressed, but we cannot rebalance national housing policies without addressing the market distortions caused by the disproportionate support of homeownership over renting. right now according to cbo the government spends $4 a supporting homeowners for every dollar it invests in low income rental housing in the benefits

to a tax. in the $250,000 category -- it is about 10 times greater for the higher income than the lower income. there is no explicit his public policy justification for a subsidy to the higher income conner -- higher in come home buyer. there are lots of ways of addressing this, but this discussion has to be part of it. it is also the case that we are doing a lot of work on fiscal challenges. i realize most of the home

ownership benefits come through the tax system, whereas 80% of rental comes through spending programs. this has implications for the issues we are talking about. 20% of rental subsidies we have seen what they collapse of the tax credit really means to our assisted housing suppliers. it has brought production to a hulalt. we really have to think about how the equity needs of rental housing investors will be provided. if you look over time you will see what the equity requirements

of rental investment are in the assisted housing sector our policy-determined. we have never had investors having to put heavy duty equity in front of a development of assisted housing. >> we have about 10 minutes left. we had a lot of discussion on the early panel about -- seemingly some consensus around the issue of explicit vs implicit guarantees. one of these central questions brought up around connecting

housing finance is the nature of the affordable housing goals and how that should change to be more explicit, more direct, some have called for a tax that would go directly to affordable housing, obverses a system that tried to in bed -- imbed affordable housing. i wonder if you want to comment about the nature of that discussion we will need to make going forward. >> you have to do both. i think he liked has made the point clear that particularly as

we are going into attempting to solve the fiscal crisis, relying on existing appropriations will not result in a positive housing policy so i think there is more money that needs to come into the system. i also think it is a matter of all parts of the system. and all parts of the systems use the government, as we managed to demonstrate over the course of the last two years. even if you just limit it to the parts of the system that have access to the guarantee, they need to take their role in making housing affordable. when we have a world in which, you know, a large portion of this population is paying a certain amount of money for

housing, we have to mainstream the issue of affordability. it cannot be off in the quarter. or else we will not have -- not only a three-tier system, but we will have a five-tier system. >> i want to make a remark. i am really constantly distressed by this crisis being used as an excuse to say we should change the nature of home ownership. we are as 69%. many say we should have 60%. it is not the borrowers. arkansas restructure loans occurred every day, i see lower middle income people who put whatever money they had in the house that they could never before have afforded it, because there were sold something that made no sense. they could have bought a house. it might have been more modest,

but it would then a house, and now they are in this position where they are facing foreclosure. we have a golden opportunity in front of us. we have millions of units. in the first instance, we should not be taking these people and by one form or another, second mortgage or another, forcing of foreclosure, even when the lender does not want to foreclose. but it is happening. we have always, in the past been into to turn the curisis an advantage. we have millions of units that are vacant. let's do or rent to own program. we know it works. we have seen it work over and over again -- let's do all rent program.t to own it would make sure that millions of units that are turning into abandoned properties, we make them work. this is a once-in-a-lifetime

opportunity to in franchise a whole class of people like we did in taxes. bill took -- we were selling houses in houston at $10,000. they said, this is crazy. we are selling these houses to speculator. he took all of the inventory from all the banks, because it was insured, and he created the fifth award program. it was one of the most depressed neighborhoods in houston, and we did all rent own program that turned around the fifth ward. it turned around the system for two decades in the country. we are not doing that. we are bemoaning our fate, and we are saying that poor people have to go to rental housing. i do not agree with the premise one bit, especially now in the most affordable period in our history with millions of units

going to waste. >> to frame this topic of affordable housing, you talked about the goal and you can talk about the broader need. what we have seen historically is that the structuring of goals as they were structured for fannie mae and freddie mac proves to be complex, very difficult, near impossible to administer in a national way. i think that goes without saying in terms of the look back. i think there is also clearly all role for the government to pay in a very explicit way to provide some support for housing in certain areas. what do you do in between? there is merit in creating a structure for housing that is a conduit -- conduit entities would pay a fixed fee, so it is a known up front. channel those funds into local markets.

i think that spectrum of possibilities will be more useful to pursue than to reinstitute a bowl structure as we saw in the past. -- reinstitute a goal structure as we saw in the past. >> by fall into a camp that supports imposing a duty to serve on the beneficiaries of mortgaged-backed security guarantees or whatever form the guarantee may take. i do not think personally that the affordable housing goals contributed significantly to the crisis. on the other hand, it is not at all clear how significantly they added to the net supply of affordable housing. the irony of the big debate in

my mind about zero rolthe role f goals is that the regulator has a low level data -- the loan level date that could inform this issue. secretary geithner has said we want to figure out what caused the problem. there is literature about the role of the goals and all of it is using data that is less than perfect in order to come to their conclusions, while the gse's have the data and it ought to be made public. i would favor a continuation of the duty to serve. >> mark, we begin with you. i will let you have the last word. >> the phillies will win the world series.

well, i think it's fair to say that what i hear is a great deal of consensus, that we have parties coming from different perspectives, but it seems that there are significant commonalities and one is that the government will have to continue to play as a deterrent role going forward. there is no way around a-- they will have to play a role going forward. the economy is too fragile, and real require that the government remains intimately involved in these markets for a long time to come. >> thank you very much. fascinating session. we look forward to the rest of the conversation today. [captioning perfge on c-span.

>> for those of you here to me

in for our regularly scheduled bloggers briefing. we will take questions from the web anthose of you here today, and i want to remind all of you that you can e-mail us, and we will get questions and comments that way as well. for tse of you interested in a recording of today's events, we will have it available on heritage stock for later today. -- heritage.org later today. >> thank you. on behalf of our board of trustees and the entire staff of heritage, it is also my great pleasure to welcome you here today for a special event, the unveiling of our publication, "solutions for america." after a lot -- 19 months of liberal change, america is in really the new policies and real solutions.

liberal politicians have desperately been campaigning on the notion that the other side -- that is, we conservatives, are not offering anything new. that we have no policy ideas, no alternatives. i think solutions for america proved that that is false. "solutions for america" is a comprehensive guide to reforming government, instead of 128 conservative policy alternatives in 23 broad categories that define what a more conservative government would look like. "solutions for america" presents a powerful policy agenda that will resonate with mainseam america and that is a real alternative to the excesses of the overreach we currently see in washington. unprecedented power and control has been centralized in washington. the government has blown exponentially in size, scope, can reach. yes, we have opposed these bald

power grabs, and yes, we believe we should have opposed them. however, that is not to say that we do not have alternatives. we do have alternatives. one of the main concern is that we have, and we go into it in great detail, is what is happening in terms entitlement. i have three grandchildren, and it is unfa for my generation to be saddling each of those grandchildren with a $200,000 mortgage with no house attached to it because that is a share, individually, of the unfunded liabilities that our generation is psing on to impress from the big three in entitlement. what he the liberals given us? the economy is down. unemployment is up, and americans are more pessimistic about the future than at any time since the 1970's. that is why we answer these challenges in "solution for

america." the policies "solution for america within" have -- the policies within "solution for america" return power to the people and doubled in transformational ideas. they are not necessarily new ideas. some of them have been around for a fair length of time, but they are born, and they are transformational. one thing we have learned is massive government and its villages in areas as diverse of energy, health care, and education, have forced the government to do less well those things that it should actually be doing, such as providing for the common defense. fundamental elements of the american spirit, such as individual freedom, and since the dealership, federalism have been ravaged by the less radical agenda. we think america is at a tipping point. we want to make sure it gets back to its basic routes, to the

fundamentals aoutlined by our founders in the cotitution. we have to reigne that flame of liberty that made america the greatest nation on earth. "solution for america," we believe, provides the policy fuel for that agenda. some of the specifics that we lk about "solution for america in" include placing a cap on federal spending at 20% of gdp and limiting the future growth to inflation plus population, require the three entitlement programs i already mentioned to live within firm congressionally approved specific budgets. limit the unsustainable growth of welfare spending and its 71 categorical programs, and require recipients to give something back for what they are getting. pay for workers' wages and benefits comparable to what

their counterparts receive in the private sector. recommit to peace through strength, repeal obamacare, and on and on. revive federalism as one of the fundamental beliefs that we as conservatives believe in, where states are traditionally and typically the laborories of experimentation, where the federal government can learn so much as it did back in the 1990's on subjects like welfare reform from wisconsin, michigan, virginia, from other states that were experimenting. "solution for america" office something very new -- real reform based on ideas and principles. the counterpoint to thought was an expensive government programs is not different thought was an expensive government programs. members of congress and candidates for office nationwide now have a series of policy alternatives to the failed philosophy of bigger government, higher taxes,

greater control, and more spending. millions of americans have already stood up to demand a return to limited constitutional government, the timeless vision of our founding fathers. we believe that "solution for america" presents a way toake that vision a reality, to build an america where freedom, opportunity,rosperity, and civil society flourished. thank you for being here. >> thank you, and good afternoon. welcome to heritage. ed described the reans quite well of why we took the initiative and compiled these recommendations into this report. in a nutell, it is really no ordinary time in this country. we are at a tipping point. a lot of other serious people have looked at our trendline and said that we are on an unsustainable course. this report addresses that and

would seek to make arica a sustainable nation once again. two of the big ideas i want to emphasize relate to our entitlement state, and in a nutshell, i think if there's any take away i would ask from you today, it would be to realize that the era -- we are recommending that the era of unchecked and unlimited entitlement must come to an end. there are two big wins we propose doing that in this report. the first one relates to the big three -- medicare, medicaid, and social security -- the middle class entitlements everyone knows about. what we propose to do means and the entitlement status of those programs and require them to compete for funds the way all the other programs dand require congress to actually look at those programs every year, every few years of necessary, to figure out if they are on course for not in ways to make necessary changes instead of letng them go on automatic

pilo the other idea relates to the programs that comprise our modern welfare state. our welfare expert has looked at that, and he has calculated that the programs got up and scattered everywhere to read the budget. they are not in one place, no one knows how much we spend. it is $1 trillion per year and about $33,000 per family with kids who qualify for these benefits. if it reay work to alleviate poverty, and many experts say the party is as intractable today as it was when we first started this endeavor back in the 1960's, so we propose a couple of big ideas. -- poverty is as intraable today as it was when we first started this endeavor. you have a category of spending called welfare spending. cap the amount of money spent and let it grow only to be only according to the amount of inflation every year. again, and require congress to

look of these programs, determine which ones work to alleviate poverty, which ones do not, and do something about those programs that are failing, and believe me, there are quite a few of those. the other thing he proposes in our report of this quite exciting, is to turn a portion of the welfare received into a an that we repaid over time as the person surmounts poverty and becomes more self-sufficient. he also proposes putting in more work requirements for programs like food stamps and housing. there are other big ias in this report. another one relates to federalism. what we get at here is a sense that over e years, the relationship, the balance of power ifou would, but when the federal government and the 50 states' sovereign governments has been altered in such a way that the federal government now dominates. most of the state level organizations have come to washington to represent the state's actually spend most of their time here petitioning for more money.

they are basically rent-seeking entities, and they are not worried about the notion of a sovereign state governments that have their own ability to manage the affairs and health care for their citizens in local ways that reflect local initiatives and not the one-size-fits-all approach that has taken over areas like education, transportation, health care, law enforcement, homeland security, and some other areas. is report has a number of chapters in it, each of which goes through specific recommendations on how to dissolve those response abilities from the fed to the stes and give the state's once again the chance to be the lead in accessing these aspects of people's daily problems and lives. there is an ongoing debate in washington about how old we need to be. there are some who argue that the american people are not ready for bold solutions. they argue incrementalism --

gradual, slow change to try to wean the american people away from where they are, presumably supplicantsf the welfare mentality, into a more independent-favored mind so they can adopt good ideas. there are others who are ready for this. they believe the amecan people can actually sustain the sinking, bold ideas, turning the government upside down in ways that are going to get us sustainable once again. with those kinds of people on capitol hill -- is with those kinds of people we have cast our vote right now. it is not a time for a tepid thinking. it is not a time to be overly cautious because the base line out there of doing nothing is the worst possible outcome right now. that is what we see aoss the board. not just domestic policy experts, but also o national security experts. the recent review panel, including our distinguished

fellow senator, came to the conclusion that the trend line military personnel for a timid and force stcture are leading to a train wreck, so we are not just dealing with domestic meltdown. we're dealing with problems on the international security front as well, so we think this is a time for big sink and a bold proposals. i guess at the end -- i just want to say that there is a premise that doing things is somehow going to great sacrifice, and it will be the political equivant of a root canal. our argument is that the root canal cos by doing nothing. the root canal comes when you let these tramlines accelerate and go on their merry way. we have to change these programs. we have to get federal pay calibrated to be equal to that of a private sector counterparts. you have to get the entitlement program set and structured so the ople who are under the age of 50 once again can have a reasonable belief that they may get something out medicare and

medicaid and social security when they turn 65 average person of the 50 has discounted that. we think all these ideas are actually beneficial. it is a plus-plus. it will help this country get turned around, and we are aggressively marketing these ideas on capitol hill in the weeks and months ahead. thank you very much. we look forward to your questions. [applause] >> thanks. again, if you are watching online and would like to submit a question, please e-mail speaker@heritage.org. >> [inaudible] michael just said that the real root canal would be a way to do some of this stuff. in here, i do not see calculations for what economic effects might come in the next six months or year. a lot of what i see from republicans, things like privatizing fannie and freddie,

or revealing tarp, and it seems like the trap the democrats fell into. promising a lot and not living up to the expeations that this would turn the economy around. >> a couple of things -- one is that the baseline includes a big round of tax increases. one of our top recommendations is to do no harm. it is never a bad idea to raise taxes. it is an especially dumb idea to do that during a recession. one of our top recommendations is to keep the rates and the level of taxation where it is today, but you can go beyond that. because we are in a recession, weave included a couple of policy ideas that would be especially beneficial for economic activity and job creation. one of them is to take the top corporate tax rate down. what we recommend is put it down to the level that is about the average of outhree largest trading partners, which believe it or not, would take it down about 10 with 12 points. the other thing that we argue

for is letting businesses write off thcost of investing in plants and equipment as soon as possle, hopefully immediately. that will in turn hopefully get some confidence of businesses to do those kinds of investments. right now, there's an uncertainty preventing them from doing it. there are some ideas we have put in here, so we have a very short term effect. in a lot of the rest of it has a long-term effect because the trend lines are so negative, that once you start seeing changes come from the retirements of the baby boomer generation, for example, so it is a short and long term benefit. also, giving a lot of responsibility back to the states along with the revenue that would go with that in those areas believe will help -- really will help to improve the quality of those kinds of services when the states are the ones in charge of desning and delivering them. [no audio]

investment decisions and what kind of risks they take, makes it easier for them to make basic growth, grow tir firm, so that is a short-term benefit that starts showing up in other ques? yes, sir? >> i see we do have a couple of pages on holding terrorists accountable. hastert taken a stand as yet on

the proposed cordova initiative? islamic center and/or mosque named after the city in spain that was convert in the name of islam? i see you do not address that directly in this booklet. >> no, we do not address it directly in this booklet. a couple of fundamental principles -- one, at the heritage foundation, we strongly believe in federalism. there should be local control, local autonomy in questions such as zoning, etc. we also very strongly obviously believe in freedom of religion. nobody questions that. but what i think in our but we feel, we believe there is

strongly is that that respect for other faith traditions have to be neual. we do respect of theaith traditions, but we expect other states additions to expect allah's and others as well. it seems to me that of the organizers of a cordoba scheme in new york really want to bring people together, there are plenty of alternative sites in the women have that this is something that is splitting it community apart. it is not a very sensible way to act in terms of showing concern were bringing us together. they should consider whether there are less controversial ways to bring about that religious harmony they say they want. this is not just a random site in lower manhatt. i have been to grod zero a number of times with france, with officials in new york. i know how it is considered

sacred ground, and i think it is a very, very bad call on their part. >> we will take a question from one of our emailers. "how do you possibly get america back on track when the president and those who contr congress are off track?" [laughter] >> we are very optimistic at heritage, and we also believe that the american people, if you look at the polls the last 18 months or so, have had a chance to look at and i just a lot of the ideas and policies that have been forced adonis by this administration and the leadership in the house and senate. if you look at the polls, this is a rightward tilt to the american people. on a whole range of issues. america has always been somewhat right of center, and it was even right of center on election day

20, believe it or not. whatas happened since then is 7-degree more rightward tilt as people have seen reports about spending and debt. they have seen the way the stimulus plan has worked or not work. the intervention in private firms putting unions ahead of creditors into bankruptcy situations like they did with chrysler. a whole range of these exposures these kinds of policies has made america a more receptive to the kinds of ideas that are in our report. our optimism is unfounded. my expectation is that come january, the peoe that will be congress with the congressional voting card will look a lot different and vote in lot differently than the ones there today, and my guess is we will see a lot of in pulling this up, asking for some briefings and explanations of how to take these ideas and develop an even more. >> two additional comments --

mike is absolutely right when he stresses what the basic american political fan -- tradition is, and dallas has been asking the same questio for david. there are twice as many self identified conservatives as there are liberals in united states. that h been identified most recently within the last two months. two, is simple for is that all of you know well -- tea parties. -- a simple phrase for all of you know well. >> social security,he bush administration tried to go towards the idea of privatizing it, and the campaign essentially fell flat. what is the way to improve the whole issue of saving social security without having to divide seniors between people who are young? >> one challenge their is to

dr a direct link between the kinds of ideas you talk about with respect to social severity and the intergenerational effects that not doing anything will have on our kids and grandkids. what we have found over the years is that even the and the folks see how the numbers play out, and they understand what the implications onn terms of taxation on their children and grandchildren, the kind of taxes that wld have to be levied in owed to pay for all the promises being made to the current generation of retirees and near retirees. they start to realize that they do not want to do that to their kids and grandkids, and i think there is a political bond that one can create for that kind of education. in a report, we have an idea that is very new and will be fleshed out more in the future, but it is a very exciting one, which is if they were criticized after the age of 65 they want to stay in the workforce, to liberate them from having to pay

payroll taxes, and do the same on the employee taxes , af so theica -- so the fica tax would go away. it would also free up some money back to be used to keep them in private health plans and out of medicare. you could keep people basically living and working in the private sphere for a long time, and there is ways in which we calculate the benefits that would be given to somebody, so you could end up helping the trust fund as well without hurting the workers. it is a very exciting way to put more money on the table, and that will hopefully be some of the so-called detail, may be convincing people on the hill that this is the way to go. >> question for you from facebook on entitlements -- he says, "how do we stop the entitlement and talent -- mentality, be and still the glory of the american ideal, and

encourage people to pull themselves?" >> i think -- i read a lot of polls, and i take heart from this news, one that all state, the insurance company did about a year ago at the height of the financial meltdown, looking at how people view self-reliance in terms of financial issues. the bottom line is americans are a very self-reliant people, and they do not like feeling as if they are part of some kind of handout arrangement with the government. they want to do things on their own. they trust themselves in the decisions that they make much more and at a much higher level than they trust agencies and government regulation to do things for them. i think the most important aspect to remember is that the american spirit is with us on this. the american people are calibrated to be receptive to these ideas, and i think they are going to embrace them when they are put out there in a way that is not to be distorted by

special interest groups and that sort of thing. when is a fair shot, and fair debate, we win, and i fully expect that the resources will be there to have the debate in the years ahead. one section that seemed to be missing that i think is pretty important is campaign finance law. how can campaign finance laws be reform better ensure american prosperity and freedom. >> full an instant disclosure i think is the best way to reform campaign finance, and getting down in the month the m-- muck is doing exactly the wrong way. every regulation gets another regulation and the violations of the hillary clinton as a campaign from two and a half years ago or john mccain was a primary is now being fined for

something that allegedly happened before. let's just have full, is to disclose on the internet, let people know who is supporting whom and for how much. >> [inaudible] >> i would personally favor it. i'm not sure that we have taken a public position. >> i think because we got to go in with is the disclosure and full disclosure is that there is no limit. part of the idea is if someone gives an awful lot of money to one campaign, and that becomes public right away, then there is an accountability that is created by the way, and you have a public discussion for the candidate to have received and accepted such a large amount of money may have an ax to grind, and that creates something in of itself, i think, a discipline as we afford, so we are libertarian on that.

>> any other questions? >> i see you do have a section on making federal policy marriage-friendly. have you define marriage? >> yes, we have. >> and it is the traditional definition of marriage. >> one man and one woman. >> for either one of you -- michael, you said the american spirit is with us on these issues. and a lot of these proposals have been floated in various forms before. how confident are you that the spirit on capitol hill is with you? how many of these do you have

allies with and sponsors for on capitol hill? is it substantial, or are you still working on that? >> we have a number of them. we believe that welfare reform proposal is going to be introduced by eight congressmen named jim jordan from ohio in the months ahead, and some of the other ideas have been developed over time. for example, one senator actually offered a number of these tax ideas into hamilton did stimulus plan that got 36 or 37 votes, and some of the federalists, we're working with a group of interested members on the house side, and my guess is we will have four or five pieces of legislation they will introduce in the months ahead to reflect that kind of thinking. and there is more work that has to be done. the other thing that is important is the reform plus

maybe in the mid-1990's in a lot of these areas, as much as we can foresee this and sustainability coming, it was still in the minds of most lawmakers, very theoretical and far off in the future. today, is that much closer. social security now is actually in the red, six or seven years i had a projections, and it could make it in about one two more years, but it will be in the red pretty much for the rest of our lifetimes. 15 years earlier, people would talk in an abstract way that things would happen in two or three decades. that time is now, and that will force the people of on the hill to look at things in a different way than it might have in the past. it allows members to shake things up a little bit and redefine what the baseline should be. am i want to remind everyone of

you can remind everyone at -- you can find this @ heritage.org/solutions. there are copies in the hallway if you do not have one already. i want to thank everyone for coming today. i thank all of you for joining us. take care. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010] [captions copyright national cable satellite corp. 2010] "washington journa [captioning y national captioning institute] [captions copyright national cable satellite corp. 2010]

quite fit offered him the job as commissioner of baseball. nixon was flattered but declined comment telling the owners "do not tell pat. she would kill me for turning you down pow." >> find all of the american history tv online anytime at the c-span video library. it is washington, your way. watch what you want when you wind. >> president obama has repeated his call for senate action on a business. he said it should be the first item on the agenda. he spoke with reporters in seattle. this is less than 10 minutes from t.

>> we would like to say that they built the business disliked a fake everything, from scratch. what began as a sandwich shop nearly 40 years ago is 8 cafes in seattle and portland that employee to under 50 people. they will open their ninth -- to produce 50 people. they will open their ninth cafe. they gave of the careers in teaching to open their own in on the coast. many banks have opened at the close to small businesses for the first time in four years. this is good news.

joe put everything on the line, savings, 401k and a second mortgage to open his first pizzeria. with a little hard work, it succeeded. he opened two more. business was good. bank after bank, and joe heard "no." the same big banks whose action nearly to down the economy told joe that he was too risky. finally, a community bank invested in the joe. his fourth restaurant has been the most accessible yet the . stories like this are at the core of the american experience. anyone with a good idea in the

get to see it through can succeed. it gives the worker the courage to leave her job become -- to become her boss. these are tough times for a lot of small-business owners. the financial crisis has made it difficult for them to get the loans they need. we have all got a stake in helping our small businesses succeed. because small-business creates two out of every three jobs, our economic recovery depends on it. we put in place an economic plan to help small businesses. we put forward these initiatives.

at the heart was a simple idea. well government cannot guarantee the success, government can knock down the barriers that stand in the way to help create the conditions to help small businesses grow and higher. that is why we passed a tax cut for america's small businesses for hiring unemployed workers, investing in new equipment, as part of health insurance reform. 4 million small-business owners recently received a postcard telling them that they could be eligible for a health care tax credit worth tens of thousands of dollars. tiffany and her husband are looking at the possibilities because of these incentives to made to provide health insurance to their workers. under the recovery act, we supported nearly 70,000 new loans to small businesses. we weighed fees on new loans so people like joe could save

money, up to $20,000 but o. the steps are making some difference. when you listen to these three business owners and you talk to small business owners across the country, it is clear that we have got to do more. that is why i am urging the senate to approve a jobs bill that will do to big things for small business, cut more taxes and make available more loans. that is folks like the three people standing behind me say would be helpful. that is what i've heard from small business owners across america. and tiffany could tell you how critical community banks are to helping small businesses grow and create jobs. this bill will help those banks act as more capital so they can offer more small businesses the moans -- the loans they need. it will increase deductions

small businesses can take for new equipment. it will finally do what i championed since i ran for president, eliminate capital gains taxes on investment in small businesses. the bottom line is this. america's small businesses are the backbone of our economy and cornerstones of our communities. the folks that work hard, and meet their responsibilities -- nobody here is getting too fat and happy. everybody here is operating on a very lean margins. they are constantly thing about their employees and obligations to them. in the same way that they are the feet out for their employees, who need to be looking out for -- they are looking out for their employees, we need to be looking out for them. and forcefully, a partisan minority in the senate has been

standing in the way. they will not even let it go to vote. every day, and this obstruction goes on. it is another day another small- business cannot get a loan for a tax cut that they need to grow. there will be plenty of time between now and november to play politics. the small-business owners beside me do not have times for political gains. they are interested in what is best for their employees and community. when congress reconvenes, the jobs bill will be the first business out of the gate. i asked senate republicans to drop their efforts to block it. i believe we can work together to get this done for the folks standing behind me and for small businesses. thank you very much, everybody.

>> in a few moments, and a discussion of the political situation in iraq posted by a center for the new american progress. "washington journal" is live. a couple of a live events to teddy about here on c-span. the national business group on health will report on how large companies are adjusting their

employer provided health benefit programs to prepare for the new health care law. that is at 10:00 a.m. eastern for the act as a clock p.m., the funeral service for former alaska senator ted stevens who is killed a recent plane crash. speakers will include vice- president joe biden. talks between the two major political parties is broken down. up next, a forum on u.s./iraq relations posted by the center for a new american security. panelists think you'd -- include michael corbin. this is 1.5 hours. >> it is an honor for me to be here to talk about something that is extremely important to the state department. it is an honor to be here with my partner who i have worked very closely with over the past

year and met in baghdad in may of 2009. we were in the early stages of talking about some of the tremendous development said we are working on every day as we deal with iraq. i am very honored get there is a large attended on iraq. this is a subject that deserves a lot of attention. i am gratified that you are here today. what i would like to do is give you some of the color and flavor as something that the state department is highly focused on. that is a transition from a military security dominated relationship that we've had with iraq to a traditional bilateral relationship based on many other areas besides security but which security will be a major part . month after taking office, president obama outlined our policy objectives for iraq.

he said the night states will pursue a new strategy to end the war in iraq during a transition to full iraqi responsibility. it is grounded in a clear and achievable goal founded -- shared by the iraqi and american people. there is the bilateral partnership with the people and government of iraq. as the president said last week, it marks the beginning of this transition in some way. it is also a midpoint of this transition when colin kahl

came, we talked about the fat said it is directed by the security agreement and by the obama policy that was laid out. we started off with almost 144,000 troops in iraq. we are on track to be down to 50,000 troops. the combat mission will end. this is a dividend for iraq just as the withdrawal last produce significant for iraq just as the withdrawal -- this is an advocate for iraq just as the withdrawal was. we are keeping the security agreement in the first place. we are keeping with our promise to build a partnership with the people of iraq as a drawdown our relationship. this is a key issue. it does not mean an end of our commitment it means we are

building a civilian partnership built on tools and means of engagement read it then one that has been -- a rather than one that has been built on a security relationship. this partnership between the military and the civilians extends to all the agencies that have been involved and is led by the white house. the vice president takes enormous interest in everything that goes on in iraq. he has visited five times. the state department is always in a cage. are two deputy secretaries -- engaged. our two dignity saturday's spoke on this -- deputy secretary spoke on this. our dedication is in tents. what the military has been doing is an enormous sacrifice.

we were in north carolina talking to the 18th airborne corps last week. they will be deploying to iraq under the general who was head of the training component when i was in iraq. the u.s. military has deployed to build something in iraq. the civilians are stepping into a collaborative transition process to build something different that rests firmly on the foundation the military has laid for us. this is only possible because of the termite take development we have seen in iraq, -- because of the political developments will have seen in iraq. i saw the provincial elections of january 2009 where people in

provinces went out and voted. they went out and voted for individuals. they went out and voted for people they wanted to see represent their interests and provide them services. we saw a lot of traditional party still bad. we saw governors turfed out. this is a testament to what the iraqi people are willing to push forward on. when you talk about the march 7 election that took place this year, you talk about an over 60% participation rate. iraqis choosing individuals, not voting for parties. the new expanded council of representatives, only 50 of the treuhand to 25 members are returning there is a groundswell of -- of the 325 members are

returning. there is a groundswell of support. when we look now, which causes me to turn to the discussion is the government process paralyzed? i make several points. the situation today in 2010 is vastly different than the situation in 2006 when the iraqi leaders gathered together to form a government. we did not have an interim government that was providing services in 2006. violence was manifest in the street. the spiral of sectarian approaches to solving issues was manifest in malicious and use of the security forces -- in mil itias and use of the security

forces. iraqis have chosen politics. the iraqi leaders and the rocky politicians have chosen politics as a means to -- and the iraqi pottspoliticians have chosen politics as a means. the ministries and the ministers were not chosen on the basis of their capabilities for their abilities to function in a new government but as a representation of the larger struggle going on throughout the country. in 2010, they face the issue of two blocks that were separated by an two seats in this 325 apartment. in the state of all -- parliament. the state of law was trying to

determine if there were mistakes that live feed it to change the result. where they need to negotiate, we are encouraged by the fact that all the political leaders have said they want a representative that includes the different trends and political forces in iraq today. that requires compromise and negotiation. we see a serious negotiation going on. there will be new break up of -- news of break up talks. we believe that this is a sign that the leaders are working together to form a government. they need to do this. they need to do this in a serious manner that reflects the brave boat that people exercise on march 7 -- votes that people

exercised on march 7. we have security agreements. security cannot be the basis of our new partnership. we are looking at a strategic framework agreement that brings together the traditional tools of diplomacy, development, cultural exchanges, educational exchanges, work in the health sector, agricultural sector, and we are looking at how we can flush out our partnership with the iraqis on the basis of its rocky priorities and iraq key objectives. -- rocki r iraqi priorities and iraqi objectives. both sides are bringing to the

table goals and priorities in order to flesh out how our pressure should be managed. as the go forward, the economy is key. i want to give examples of how we are fleshing the civilian partnership. when iraq had two successful corruption free rounds for the southern oilfields, it changed in iraqi policy. one of our provincial sipes will -- aitesits will be in basra. we are ready see -- we already see contracts for the oil in the south. u.s. oil firms have the best

technology in the world. our oil firms are already fully engaged in basra and we are engaged as embassies are round the world in supporting u.s. industry as it goes overseas. we are working with them to cut down on bureaucratic red tape to help on the security and logistical issues. the services that we provide to these type of contractors that are coming in part to help them deal with the local governments, to help them deal with issues. one in the issues is mines. iraq has a lot. this is an issue with the u.s.

government can engage with a private companies and helped set the stage for economic development. economics is just one example. culture, education, science are going to be other areas where we have of cooperative tools. more fundamentally, the iraqis share with us the understanding that the oil fields will not produce jobs necessary an advantage that iraq has -- necessary. an advantage said ththat iraq hs is knowledge. they see the importance of returning to farmers and agriculture. even in the last years of saddam's era, the drive was third the green irrigated

fields. they have enormous potential in agriculture. health and education are also important. we have a strong usaid program to bring in traditional development. as we move from a security dominated relationship, we need the tools to collaborate with the host government and come with tools that will allow education and employment for a rocky ridge for iraqis -- employment for iraqis. this transition is not starting now. some people think we are starting now. for me, when i was in baghdad, one and the significant days for both the rockies and for the u.s. was generally first 2009

when the u.n. security council mandates where iraq ended. this is a sign of a diplomatic facility. this was a true diplomatic facility where we began immediately to do the work of an embassy that we have around the world. in fighting iraq his over, using our facilities to reach to universities in these days, hosting visitors. this is extremely important for a platform. it is a platform for our diplomatic engagement. when the u.s. troops moved out of the city for the security

agreement last june, we stepped in to cover the security needs. some people say, how are we going to do without the presence of u.s. troops? u.s. forces cease to operate in cities, towns and localities. that meant there were dramatic changes as we went around. is it the side on the backs of suburban fed said "keep back 50 feet or risk danger to your live"side came up that says "this convoy is traveling in agreement with the civilian authority." this is a change that shows how civilians can operate within the confines of the iraqi system and an agreement that shows us working with them. they have been doing the work around the country since 2005.

we have gone down to 16. there is still an important contact the worse with the local authority. i talk to that decentralization in iraq. when you go get the support that -- when you look at the support they have sought, this is extremely important. the role of the prts something that brings me to a key part of our transition. how are we going to be placed around the country to interact with the rockies -- i rrawis? -- iraqies? we are working it in a way that is much more significance the may have in the region i am most familiar with. i was deeply distressed when i

arrived in cairo to find our consulate in alexandra had closed. if anyone knows egypt, they know alexandria is not cairo. consulate's serve important functions. we have not been able to maintain conflict -- consulates around the world that people expect. it to be answered the begin of take in our presence in the country and provide long-term -- it will begin a significant uptick in our presence in the country and provide long-term support. support for agricultural, ports. this conflict has been poor in significant in many ways.

-- important significance in many ways. one of the largest issues that we need to address and that all the parties are addressing at the mayfair -- as they make their, burma's -- it provides a platform for us to address these fundamental issues for the future of iraq. the other element that we have been planning for a long time is the police training presence. having served throughout the region, this is another area where i think we have a real it banned it in a partnership. they do not want to just see u.s. uniforms for do they want to see iraqi uniforms. they want to see where the police address crimes and the

police address disputes, where crimes are investigated. unlike most terrorism situations, there are investigations to determine who did what and why. as iraq faces organized crime, they want to see police. we have been working on a program that built on the program. we will not be doing the same thing the u.s. military was doing. we are not doing counter insurgency. we are now working on the basic skills that the military has imparted. we are working on community policing and anti-correcting techniques. these are the things that the regular police force focus on. we will start with a program that is closely worked out in

sync with the iraqi government that will give us a presence around the country. we designed this program not so iraqis come into classrooms, but so that we go out and see them to the extent possible. this is an important program that is not only going to give us a window into what is going on, but an opportunity to see things like to the local police are hiring. what are they doing at their borders? this is a cooperative process. we see enormous potential to work with the iraqis. the provincial prisons and police training program are two of the tools that we are going to use for our diplomatic presence. i just came from an infant hosted by the ambassador. jim jeffrey is one of pharmacies and diplomats who will fly to baghdad this afternoon. -- onhe will lead a staff of

different civilians which is not one to strain but is going to address this need of the civilian transition. some people thought as the present would draw, the civilian president should drawdown. we cannot do that if we avoid to build a diplomatic partnership that we are building with iraq. i think that is an important point that i would like to finish on. this is a tough challenge for the state department. i have not seen anything like this. i am challenged it is a tough task. what we are doing here is critical for the future of the state department.

if the state department can show they can take over and, for it or near conflict situations, we had a basis to address some of the challenges that we are going to face in the future. i think this is extremely important. this is an enormous challenge. we have probably not denison's the marshall plan after world war ii. -- we have probably not done this since the marshall plan after world war ii. i think we are launched on this task in a very successful and a very constructive way. >> thank you. i want to thank the staff for inviting michael and i to speak with you. it is great to be back.

i missed tuesday. in my former life, i was a senior fellow at cnas. there were very nice to me. i would be remiss if i did not think my a dean for approving an extension of my own need some might drawdown day now cohen says privately with our drawdown date in iraq. i will return to the confines of the ivory tower at the end of 2011. in the meantime, i am focused on the 14 countries and territories stretching between egypt and iraq. it is an area where we collaborate closely. i want to provide the transition issues and begin little bit about the current environment. i look forward to your question for duke -- question.

the u.s. is on track to meet the drawdown by september 1 of this year. when we came into office, if there were 144,000 american boot on the ground. at the second, there are approximately 56,000 forces on the ground. at the end of the month, that will be down to 50,000. to give you a sense for some of the other considerable efforts that have gone into this drawdown, consider the amount of equipment we have moved out. when the process started, we had 3.4 million pieces of equipment th. by the end of august, we will be down. we will be there before the end of august. consider the situation as a revel -- results to american

bases. u.s. forces of occupied 347 basis. the number will be reduced to 94 bases by the end of august. the drawdown is quite substantial. this marks a milestone in the changing nature in iraq. it will change our mission from combat to stability operations to th. also change the name of the mission t. -- name of the mission to "operation new dawn." i think i am the first one to have a mug with that. as michael explains, the u.s. interagency here in d.c. is

incredibly focused on transitioning to a civilian led a mission in iraq. this transition is not a strategic disengagement. it is not a strategic disengagement. it signals a transformation in the nation of our engagement and our bilateral engagement. at stake during this transition, which is not only insuring that they endure and that the iraqi government continues to build the capabilities, but that would make every effort to consolidate a joint goal. this administration is incredibly committed. every single time he goes to

iraq, his message is consistent united states desires a long- term partnership with iraq. no one should equate it -- deflate it with u.s. disengagement. we are looking forward to building that long-term partnership. let me say a few things about the current political environment. michael says some things about government information the as you all know, we will come up with reports of a bombing in baghdad that occurred outside a recruiting station. it killed approximately 40 individuals who were being recruited for the army. it is a reminder that there are still groups said are capable of horrific attacks. known to be confused about that.

there will still be bad days. there are many more days than there used to be. while we have seen high-profile attacks, live also seen the underlying trends remain positive and have remained so despite the drawdown, despite the transition in security relationships. and despite the political turbulence. the number of violent incidents is tracked by u.s. forces and they currently stand at their lowest levels of the war. the number of civilian casualties for the first five months of 2010 were the lowest on record. we should expect to see periodic spite of violence. spite of violence.