increase in the deficit. >> is there a number we can pin to the text? on page 18, shows changes from august and gives a split to legislative and economic and technical changes? >> for fiscal year 2011, the deficit we estimate to be $14 414 billion worse than we had in august. you can see the breakdown of that. >> [inaudible] >> so you can see, there's a minus 390 in the box on page nine, -$390 billion.

that is part of the legislative box on table 1-5, almost all the legislative box. >> are you saying you have not done any of the analysis of the republican proposals to bring this year's spending down to 2008 levels? is there any number we can give of what it would look like? you can do homeland, security, plus defense? >> there is a question about exactly the policy that is being proposed, and i do not know what proposals the chairman ryan will introduce or that the house will adopt. we had to look up a couple of numbers that we thought would interest you. and this is for the -- let me start with a number for 2008

regular operations acts, this excludes defense, hall and security, and military construction, which are categories that are often discussed -- homeland security and military construction. $378 billion. in regular, non emergency preparations. on an annualized basis for 2011, for the same category would be $461 billion, a difference of $82 billion. if one proposed to go back to 2008 levels, that would be in $82 billion reduction. >> you talk about congress may want to do some of these policies gradually.

are you saying that cuts such as this could injure the economic recovery? >> i think policy makers face a difficult tradeoff. the longer they wait to address the fiscal imbalance, the worse the consequences of the rising debt are. on the other hand, moving tax and spending policies very quickly can be disruptive to the overall economy and to the households and businesses and governments whose individual situations would be affected by those changes. and that is a difficult tradeoff. how to balance those considerations in s for policymakers to decide, not for analysts. we have found, as you know from reading our work in the past few years, our analysis is that production -- reduction in taxes, increases in government

spending provide short-term boost to the economy, even though over time, the extra debt that is incurred represent a drain on the economy. you can see that in the testimony that we did for the senate budget committee in september about the effective ways of dealing with expiring tax rates. you can see that in the analysis of many other contexts. but the amount of effect of any given change in policy depends on the magnitude, the timing, and the nature of the change. we try not to make any -- too many generalizations about the effects of different policies. >> is there must change in the outlay for social security?

>> there it is some change. i do not think it is particularly large. the payroll tax cut by itself reduces the flow of money into the trust fund, but that is offset in the legislation by money from direct revenue, money for non-dedicated revenue sources. the revisions we make to the technical assumptions and to reflect the flow of money into the trust fund. the change was so little adverse to the trust fund this time. the most important thing happening in the decade, and a sense, in social security is that we expect the disability insurance trust fund will run on of money in 2017, i believe -- run out of money in 2017. under the rules we follow, we assume those payments continue to be made to disability beneficiaries after that, but there is no legal authority for that to happen. the last time the disability

trust fund was running out of money, money was moved over from the old age survivors insurance trust fund. >> so that requires congress to act, right? >> yes. yes? >> 1.5 questions. one technical, one more over arching. the score was 374 last year on the tax bill. it picked up $16 billion in cost. also, we've had at least two stimulus packages in 2008 and turned up -- 2009 and a third one with a tax cut program. what, if anything, have you guys learned about what works and does not work? >> for the technical question, i believe the answer is that the changes in the payroll tax withholding happened a little bit more quickly than the staff

of the joint tax committee had assumed, and forming their estimate. it is more revenue debt is lost in 2011 than in 2012. that is a tiny shift, not a more fundamental reassessment. it's a very good question what we have learned. and i think the right answer is we have not learned much yet. when you look at the path of an economy, it's very dangerous to attribute any particular movement to some single factor affecting the economy, because there are a lot of factors affecting the economy at the same time. and i think the best -- -some of the best evidence about the effects of fiscal policy have come not from individual episode, an aggregate data, it comes either from looking at the

data from individual households. for example, a careful analysis of how individual households the received text changes at different times in the previous recession does inform the estimate we made. but that was a granular look. there has been some work of some sort and some of the recent fiscal policy. is not as fully developed as it will be. the other research that is important is research that looks at cycles in which one can try to control the various other factors that affect the economy, and for that sort of work, every extra recession is one more important set of data points, but won't overturn the results based on some large number of previous recessions. we are watching closely what happens. there are people that have looked at the timing of the

economic recovery and the composition of it and concluded that supports the view that the recovery legislation was important. another coup quote -- other people have looked at the overall slow recovery of the economy and slower recovery of employment and concluded that that shows the recovery act did not work. are consistent view has been that we do not want to draw too much conclusion from that source reallylook, that we rely on the economic research that takes some time and alters course slowly. if you look at the back of the report that we release of the effects of the recovery act, you can see a list and a tiny bit of discussion that the letter sure that we are reading.

that list is longer than it was two years ago, because there is work that is being done that we are following closely that has not changed our view is fundamentally. next question. yes? >> on the production of 2.7% of real gdp growth this year. and not rapid growth until 2014- 2015, how does that compare to private-sector economists? certainly well within the range of private-sector economists. it is a little bit less optimistic in the near term. it is a good lesson and the difficulty of economic forecasting. if we could today, we would change our estimate of economic growth in 2010, because the fourth quarter turned out a little stronger than we and most analysts were expecting in early december. part of what has happened is we

had better economic news in the past month and a half, and that led other forecasters to mark up their forecasts. if we were doing this again today, we would slightly increase the near-term growth and project. i would add that when i sat here in august and said, we closed our forecast in early june, the economic news since then has been worse than we were expecting. a reminder that this is a complicated business and that, especially in the economy and which we and most private forecasters think is of a slow recovery, there will be pure eriods when things will look stronger and times when it will look like things have level the. we will try to track the signal from that and not get caught up in the regular volatility of high-frequency economic data. ough,oad terms, through

our view the recovery will take some time, is widely shared. we are about 10 million jobs short of and what it. the increase of unemployment that we have -- 2.5 million jobs on average -- is about 200,000 jobs a month. that is a lot better than we have been seen so far. we are looking for a pickup, but to make up for those 10 million jobs take some time. moreover, the population is growing. the labor force would be growing. so one has to find -- jobs have to be created for those people as well. that is why it takes until 2016 until we have the labor market on normal conditions. on inflation, our forecast is a little below the consensus of private forecasters. we have been below that

consensus for the past couple of years, and that has turned out so far to be correct. i think those are the crucial aspects. again, we certainly pay attention to what other forecasters are thinking. we watch carefully what outside experts are doing. and i think we are -- have the same qualitative features, although certainly different numbers in in some of the details. >> have you factor in anything from the states in terms of state budget deficits and problems that could come from recovery? >> yes. so our economic forecast includes the effects of state behavior. as you know, the decline in incomes, the sharp drop in house prices, paced on -- based on

property tax receipts, together with the extra demand put those governments in a tremendous financial squeeze. and they are required, as you know, to take action, to move back toward budget balance in certain ways. by doing that, their actions are essentially undoing some of the automatic stabilizing effect at the federal level. so we incorporate our anticipation of that behavior in the forecast. i would also direct your attention, we rode a nice issue december about the fiscal problems of local governments. i think it is an interesting brief about a large and very serious problem. >> labor market issues. you note there's a mismatch of skills and jobs available.

as part of the problem. there is some dispute among other economists who disagree. i am wondering how much of the unemployment difficulties you ascribe to the mismatch and where you fall in that debate. >> we think that most of the elevation in the unemployment rate is due to the shortfall in demand for goods and services in the economy and, thus, the employer's need for fewer workers. but in addition to that cyclical sector, we think there is some role being played by structural factors. we talk in the report about some structural mismatch. in other words, certain sorts of jobs, construction would be a good example -- are not there in the numbers they were, and workers who have experience and skills for those jobs will not necessarily move quickly to other jobs if they open up.

we also talk in the report about the possible hindrance to equilibrium in the labor market that comes from the difficulty in moving. people who are under water in their mortgages. there were some disagreements in the professional literature about whether being underwater of sex once propensity to move. we talked about that -- about being other water affects one's propensity to move. the extension of unemployment benefits is important. again, to emphasize, we think -- and this is consistent with most analysts -- that most of the shortfall in jobs comes from the shortfall in demand for goods and services from firms forthe firms's demand workers. a principal reason we have slowed recovery and employment is because we have a slow

recovery in output. >> can you give me a ratio? >> i am not sure we quantify that precisely in the report. theid you factor in at alal possibility of shocks from abroad, dramatic changes, the usual culprits. do you account for that in any way? and what is the order of magnitude? >> i do not think i can quantify it. in speaking to all the pieces of the forecast, we bring a probablisitic perspective. we are trying to pick underproducbudget projections. we tried to take account of the possibility of low probability

but consequential events. but i do not think we do it in a way that we can readily quantify for you. i would say, just highlight one of those issues, if you think about the problems in europe, the financial system problems, the problems of sovereign debt, there are a number of channels that we thought about and discussed with our panel of economic advisers through which a further unraveling might affect the u.s. economy. one obvious one it is fairly small is to the trade balance, in terms of net exports. probably a more important one would be spillover to the financial system. as best we can tell from the conversations we have had with experts, the most u.s. financial institutions do not have a lot of direct liability to some of

the country debt and some of the bank debt that has been the source of greatest concern in europe, but one thing we learned and the crisis is there are a lot of indirect connections that are hard to keep track of in the financial system. how are our institutions may have liabilities to some firms that do have liabilities related to those problems. so we think it is a risk, but i would not say that it is a very large risk at this point in time. yeah? >> just on interest rates. you assume that interest rates rise to 5.5%. is that where they normally would be? you are not assuming -- they are sue -- you are assuming they will go back to normal rather than raise rates. >> that is a good question. our interest rate forecast comes from a combination of our reading of the financial markets

prices and our own modeling of what interest rates we think what it equilibrate. in fact, our own modeling suggested interest rates should be somewhat higher than current market interest rates for the second half of the decade. in other words, you can look at the term structure -- i can't, but skilled people can look at the term structure for interest rates and can back out on some assumptions when financial markets expect to prevail in 2016, 2017, 2020, 2021. those rates currently are somewhat below the rates that our own modeling suggests would be the likely outcome. our own modeling takes account of the federal fiscal policy. so we have picked a forecast

that put some weight on the current financial market quotes and some onou our own modeling. but the patterns we are showing in the report are not particularly unusual by historical standards. interpreting history is a little tricky, though. we had much higher nominal rates in the late 1970's when inflation was very high. we do not think that is the right benchmark for our projection of nominal rates. most people expect inflation to be much lower. if one looks at inflation- adjusted rates, what we are looking for is not dramatically different from the past, but again, our own model in does have high rates from the growing level of federal debt. there are other factors. one of the changes we made in the forecast we noted in the report is to put a little more weight where we expect to be

foreigners' willingness to buy u.s. assets, and in particular to buy and hold u.s. treasury securities. that is a very difficult piece of behavior for us to get a clear fix on. there is a lot of treasury debt and ad overseas, lot of wealth owned by people overseas. treasury debt would be a big part of that. we think we have a reasonable forecast, but there is a piece of uncertainty. i think it is a piece that is the subject to disruption in financial crises, and fiscal crises. that is what we have seen and other countries. investors's willingness to hold the debt of certain countries can shift very quickly and unexpectedly. yes? >> do you have a point estimate in terms of when the statutory debt ceiling will be reached? >> what we said in the report, appendix "c."

on page 124. we talk about debt subject to limit. we note here that we think, did we note it? we say this spring is when we expect the debt ceiling will be reached. and we do not try to pin it down. in the middle of the right hand column on page 124, the ceiling will probably be reached in the spring. we will not try to pin it down more carefully than that. as we say here, by reached, we mean reached under the treasury's normal behavior. as you know, there are a set of things that previous and treasury secretaries have done and that secretary geithner indiana noted in his letter to the congress he could do involving pulling bonds out of

various government accounts that would put off the day of reckoning a little, recognizing that the government is running a deficit this year of $1.50 trillion. on average that is more than $100 billion. the months are not all equal. some have cash inflows. and some outflows. even if there are a set of actions the treasury could take that could open up a few hundred billion dollars under the debt ceiling, that is just buying a fairly short amount of extra time. >> is there in law right now any prioritization of how funds get paid out? would congress have to act in order for treasury to prioritize interest on the debt? >> we have had conversations about that. i think there is not existing

prioritization. the policy of the treasury is to honor all of the government legal obligations. and that includes payments to holders of debt, payments to people who have delivered goods or services under contract to the federal government, and so on. so the bills get paid when they come up. i think it is possible for the treasury secretary to decide which obligations would not be honored if there was not enough money available to honor all of them. that is the fault. it may not be default to debt holders. it would be default to the suppliers of goods and services to the government. and i do not know -- and we are not the experts in the mechanics of how that works and how reliably that could be done or what the consequences would be in terms of the operation of the government, but it would be default if the government could not meet all of the legal

obligations that it faces. >> another technical question. what a the most important assumptions that we do to conclude the deficit will start to shrink dramatically after 2012? >> there are a number of factors there. part is the improvement in the economy. but a very important part, also, is the expiration of certain provisions under current law. if one turns to chapter four where we talk about revenues, page 85. on the top right column, we say multiple provisions of tax law are scheduled to expire over the next two years. in addition, the new tax provisions are scheduled to take effect. the net effect is to boost

revenues as a share of gdp above the 2011 level by about one percentage point in 2012. another 2 percentage points in 2013. so comparing 2014 to 2011, there is nearly four percentage points in increase in revenues relative to gdp, and that is narrowing the deficit by those provisions of law. if you look at the difference in the deficit between 2011-2014, that is about 6.5% in gdp. so nearly 4% of that 6.5% is the special provisions in the changes in provisions scheduled incurr current tax law. the medicare payments to physicians would fall back, and so on. in addition to that, and importantly, is the improvement in the economy that will

increase the tax base or the individual income tax, the corporate income tax, payroll tax, and so on, and an improvement that will start to pull in on some spending programs. >> you are assuming the middle- class tax cuts do not get extended in an election year? >> our baseline follows certain assumptions set in law in 1985. that law has expired. those roles are for us to follow current law. it is not appropriate for us, as an agency of the congress, to predict what the congress will do. what we do try to do, in this report and others, is to illustrate the consequences of alternative policies. that is why in this report we talk about what would happen if certain policies were extended. i mentioned a few that were on the table, page 22, which is the

budgetary effects of the selected policy alternatives and not included in our baseline. we run through your alternative assumptions about defense spending, about non-defense appropriation, about medicare payments and a number of alternatives in tax policy. none of those or the baseline projections are intended as a prediction of what congress will do. they are just there -- the alternatives are there to illustrate the effects of changing policies. the current law is the natural benchmark for considering actions that congress might take, which is to say what happens if actions are not taken. yes? >> let me follow up. i was trying to check on table 1-4 on page 15, the mandatory spending line, which ends up in the same place at the end of the 10 years as where it will be this year -- about 40% of gdp.

there is a sharp falloff. does that have to do with -- social security? >> if you look at mandatory spending in the near term to the end of the decade, there are forces are pushing in different directions. so social security, medicare, medicaid are growing over time relative to gdp. but other programs, especially those that are larger because of the weak economy, shrink relative to gdp over time. and if you read to chapter 3, where we talk about the different components of spending in some length of mandatory spending, you can see some of those defec effects. if you go to page 58, there is a table that summarizes our projections of mandatory l.a.

outlays. a better table would be page 56, 3-2. these are annual rates of growth, and if you look over 2- 2021, you can see the growth of medicare and medicaid is much faster than the nominal gdp number at the bottom. the other mandatory spending is changing very little over most of the coming decade. and that basically reflects improving economic conditions. so i think the fact that overall mandatory spending does not change that much as the share of gdp. it is the net effect of two different factors that are pushing in different directions. once the economy is back to full employment, and the effects of

the other programs have stabilized in a way, then it really is a the patterns of social security and the health programs that drive the longer- term outlook. so it is that growth rate that has been the most important factor in our longer-term projections in the past and will be again this year. >> on the discretionary spending line, where it is basically cut by 1/3 between now and 2021, from 9.3% of gdp to 6.7%. is your assumption the continuing resolution of freezing spending? >> no. i don't think so. our baseline assumptions for discretionary spending take the latest level superb greeted by the congress and inflates those with growth in the employment cost index for the parts of the budget that and all payments to federal workers and so on. and with the gdp price index for the parts of the budget that are

purchases of outside goods and services. so we always grow the latest level of operations with those inflation rates. but those inflation rates are below the growth rate of gdp because they are capturing, really, mostly just price changes not capturing a group of real output. if you looked cbo projections, discretionary spending tends to decline as its share of gdp. in this particular case, the starting point is the continuing resolution. we did not freeze it at that nominal level. that is just a starting point for the growth rate, if that makes sense. >> on the legal level, of the continuing resolution is current law, in other words? >> yes. that is a from which we are starting. often as we note -- i said this in my opening remarks.

we note in the report that the history of discretionary spending over the decade or more leading up to the recession, leaving aside what happened in the last two years, but the decade or so leading up to the point is that discretionary spending has kept pace with gdp on average, not just with inflation. so that the pattern in the baseline projection is a shrinkage of discretionary spending relative to gdp would be different from what we observed in the two decades leading up to the recession. >> a decade ago, did you project it would keep pace with the gdp? >> no. we follow the same rules governing a slide projections we follow not. is not our place to guess what congress will do with the preparations. starting with at least the 1985 law, and maybe before that, we projected congressional responded to keep pace with inflation, not a higher or lower

number. if one wants to look at the effects of alternatives, the table i referred to shows what happens discretionary appropriations grew with gdp if there were frozen in nominal terms. thank you. other questions? >> is there an updadteted tarp final expenditure number or expectation given some of the paybacks? >> we have not updated our estimate since the one we published in november, in which we thought the overall cost of tarp would be $25 billion. we have not read on that analysis since then. we are required by law to report on the tarp after omb does, later in the spring -- may? >> [inaudible] >> hi looks like stimulus stayed

about the same. -- it looks like stimulus stayed about the same. >> the biggest source of change before was the economic picture had not turned out quite what we expected. especially the unemployment benefits turned out to be of little more expensive than we thought. but that changed last this time, yes. -- changed less this time, yes. any other questions? ok. thank you very much. if you have further questions, you should give us all ring, ok? -- a ring, ok? [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> on thursday, cbo director doug elmendorf went before the senate budget committee to answer questions from lawmakers. kent conrad chairs the panel. this portion is two hours.

>> there are other members on their way, but they had other business. this is the day the committee assignments are determined, and so there are members who will be here are involved in that process. today's hearings will focus on cbo'ss new budget and economic outlook. our witness is the cbo director doug elmendorf. director, welcome back to the committee. i want to take a moment to congratulate you on the your reappointment that was made yesterday, as cbo director. that is a well deserved recognition for your extraordinarily professional work. i just want to say the confidence you enjoy on both sides of the aisle is a testimony to you and to the entire team at cbo. over and over you have demonstrated your independence,

i might add, even when i had a proposal that was very important to me, you did not give it a very good marks. and i think that demonstrates pretty clearly your independence. but that is healthy. that is what we need. we need an independent scorekeeper who is going to give us their best assessment of the effect of the policies that are enacted by congress. you have demonstrated, i believe, a very high degree of professionalism as has your entire team at the congressional budget office. you have been unbiased and a fair umpire, calling it like to see it. your reappointment by democratically controlled senate and a republican controlled house speaks volumes of the trust and respect you and your team have earned on both sides of the aisle. we look forward to your testimony here today. cbo's report should be a red

light flashing to the nation. our fiscal situation is serious and becoming more so. we are at a critical juncture. 40 cents ofoinowing our dollar we spend. spending it as high as level in more than 60 years. and revenue is at its lowest level as a share of the economy in more than 60 years. that me just repeat that -- spending as a share of our national income is at the highest level in six years. revenue, as a share of our national income, is at its lowest level in 60 years. no wonder we are headed for the largest deficit ever. this is utterly unsustainable, and the sooner we address it,

the sooner we come to grips with it, the better. this next chart depicts the new 10 year baseline projections with additional policies. it shows that do to passes of the tax extension package, cbo is now expecting to see deficits of more than $1 trillion a year continuing threat least 2012. shows the deficits will then briefly fall before rising as the bulk of the baby boom generation begins to retire and health care costs continue to climb. under the same scenario, gross federal debt is expected to reach 100% of gdp this year and continue rising. it is important to remember that many economists regard anything above the 90% threshold is a danger zone. and, as disturbing as those

nearterm deficits and debt are, the long-term outlook is even more dire. it is the deteriorating long- term outlook that is the biggest threat to the countries long- term economic security. the warning signs are as clear as they can be. earlier this month, two of the world's leading credit agencies, moody's and s&p, warned again that rising u.s. debt could lead to america losing its triple a credit rating. such a thing -- is such a thing were to happen, it would be a very serious blow and could set off continuing tensions in the global financial markets. in his recent testimony before the senate budget committee, federal reserve chairman ben bernanke call for a demonstration of political will to address the long-term fiscal imbalances. he stated and i quote, "nobody doubts the united states has the economic capacity to pay its bills. it is really a question -- do we have the political will to do

that? and demonstration of political will, that is what the markets are watching. is the administration, are they able to demonstrate they are serious and they have enough willingness to work together to make progress? at the point where confidence is lost, you can see a relatively quick deterioration in financial conditions." that from the chairman of the federal reserve. i hope people are listening. we cannot afford to wait until the markets lose confidence in the conduct of our financial affairs. we need to act, and we need to act this year that does not mean that we need to make steep cuts immediately. all of the bipartisan commissions that have come back with recommendations and have recommended that we begin modestly, because of the continuing economic weakness,

but that we put in place a credible plan that convinces markets that we are going to get the result that is required. enacting such a plan now, according to the chairman of the federal reserve and others, would reassure markets and help boost our near-term economy. i believe the deficit and debt reduction plan assembled by the president's fiscal commission provides one way forward. i want to emphasize, i supported the commission report. i did so proudly. things in it i do not like. but that is really not the point. the fiscal commission came back with a plan that 11 of the 18 commissioners supported. five democrats, five republicans, one report -- independent. it is not very popular, certainly by the phone calls i have received and the letters i

received. we understand that, but it is necessary. it would reduce the debt by some $4 trillion over the next 10 years and it would get us on a path that would take us back from the brink. and to do so in a very important way. the commission plan was also important because it showed how to reduce the deficit and debt and a balanced way. it included substantial cuts in discretionary spending. included entitlement reform. it included tax reform. tax reform that broaden the base and lower rates to help america be more competitive. if you focus only on non-defense discretionary spending, the cuts would have to be so draconian that they would simply not be sustainable. that is my judgment. tax reform that raises revenue also, i believe, must be part of the plan. the results of this balanced approach was to get the deficit

and debt first stabilized and then, over time, to bring it down quite sharply. to solve long-term challenge, it will require real compromise and a great deal of political will. we need everyone at the table, and that includes the president of the united states. and we need to have both sides, a democrat and republican, willing to move off their fixed positions and find common ground. we cannot continue to put this off. we need to reach an agreement this year. it is time for the administration and members on both sides and congress to come together to get this done. with that, we will turn to senator crabo who is going to do the opening statement for the republican side. i want to welcome senator crapo. he served on the fiscal commission. he was one of the love and

support its conclusions, as did i.. thank you for that. please make whatever statement he would choose a. then we will go to our witness and open it for questions. >> thank you very much, mr. chairman. >> if he would withhold, i want to welcome. we have not formally recognized the new members to the committee. that will happen in the process all little later today, but we now know who members are going want to welcomed we them here today. senator cornyn, a senator to me, senator johnson. -- senator portman, senator toumey, senator johnson. we will extend the courtesy of allowing you to ask questions as well. >> thank you very much, mr. chairman, and we also welcome our new members. we look forward to working with them. they bring a high level of new

talent to this committee, and we appreciate their willingness to support us. i also wanted to give senator sessions apologies. he had a conflict that was unavoidable. he asked that i sit in it until he would get here. he will be the ranking member on our side this year. we look forward to his solid leadership as well. i agree very strongly with the concerns that you have raised, as we move forward to deal with america's fiscal dilemma. and dr. doug elmendorf, i appreciate it working with you in the past and look forward to working with you very closely as congress moves forward to develop a proposal that we can, that is credible and that will get us out of this difficult problem. i just want to highlight a couple points, most of which, senator conrad, you of already made. first, the time for delay or

gridlock or for debate is over. and we must take action. one of the strongest messages that the economists and experts who testified to the president's fiscal commission gave, one of the strongest message is they gave was that the single act of the united states government, congress and the president coming together and developing a credible plan that had a realistic expectation of being followed would be one of the most significant things we could do to strengthen our economy to give confidence to investors and to help rebuild the revenue side of the equation that we are dealing with as we try to build a solution to this problem. we must act and we must act now. we must demonstrate the political will that will require us to make a lot of tough decisions. the chairman was correct. those of us who voted in favor

of this plan, i do not think a single one of us like everything in the plan. but i do believe that every one of us was faced very -- faced serious criticism because of the ability to pick apart a proposal to get out of this difficult fiscal situation we find ourselves in, in the fact that there are going to be plenty to will pick it apart, what ever choose to do. and we must be prepared to move forward aggressively, and i give my commitment. i know on our side and your side there is the well to engage in this issue. we have to move it forward now. i also believe that the president must be heavily in guidengaged. to his credit, he established a fiscal commission to deal with the issue. commission has now issued a report.

the president has an opportunity to either accept or modify the report or proposed some other report and give us a detailed plan. it will not necessarily be the report that congress adopts, but we need to engage. we need to get past the politics of the past and make the hard decisions that need to be made. as we move forward in that context, i personally, very strongly believe that all aspects of the spending and revenue side of the equation must be on the table. they were in the president's fiscal commission's approach. i thought some were too lightly traded and some were too heavily treated, but there were all on the table. as a part of that, i strongly believe that we must have tax reform. one of the, i believe, most

beneficial development of the presidential commissions activities was the elevation of the understanding that our tax code today is so complicated, so so expensive to comply with, and puts us in such an anticompetitive position with the rest of the world, that we have tremendous difficulties on the revenue side of the solution achieving a solution. we must eliminate those problems and create a tax code in which americans can thrive in powerful economic activity. and i know, dr. doug elmendorf, your side may be more focused on the budget numbers, but ultimately i believe as a committee we need, mr. chairman, to guide as we engage and put

our approach together, we need to guide this nation in a comprehensive path toward a solution, a credible plan that can be put into place and implemented today. literally, this year, we have to act. the last thing i will say is this. any plan for us to get out of this difficult fiscal hole and was we have put yourselves, must be a plan that will be implemented over a period of time. a period of years. and that will require them more than just this congress participate and more than just this president participate in implementing this plan. because of that, i believe that process reforms are as critical as the substance reforms in dealing with spending and tax policy. and process reforms are going to have to be strong. what i mean by that is we need

to not only create the plan we have been talking about and pass the plan and make it law, but also make it law that congress must follow that plan. and that supermajorities of votes must be achieved in order to change it. so that we can send a strong message to our people and to the world that we not only have put a plan on the table, but that we will implement it. so there are a lot of tough parts of the task that we have before us. dr. doug elmendorf, we will be relying on you for the numbers and analysis. we have done that on difficult issues before. i look forward to doing it as we move for. but nothing could be more important. this is the most critical threat to our nation, in my opinion, and i include the threats we have received from external sources. in fact, the head of the joints chiefs of staff has said that

the greatest threat to our security is the debt. and i believe we've got to get the numbers right, the policy right, and the process right. and i hope we will be able to build a strong bipartisan -- to move forward and achieve that. >> thank you for your strong statement here this morning and thank you for your service on the fiscal commission. thanks, too, to the other members of the senate that supported that effort . that effo. senator gregg, senator coburn -- five of the six supported the commission report, even though i think all of us believe that if we would have done it, we would've done a

different and perhaps a better job, but at the end of the day, we have to get a result. at the end of the day, we have got to find a way to get a result. >> can i interject? >> certainly. >> i think everyone in america knows that the commissions report failed to get the 14 votes that would force a vote in congress. it is important note that it did get more than 60% of the votes, which is what was sufficient in the senate to pass legislation. >> that is a very important point -- 11 of 18. five democrats, five republicans, one independent supported the recommendations of the report. with that, we will turn to director doug elmendorf. welcome back to the committee and please proceed with your testimony. please proceed with your testimony.

>> i appreciate your confidence in me and be confident in the analysis that my colleagues and i at cbo have been doing and will continue to do. i want to a knowledge one of my colleagues, who has ne a good job for many years. he is retiring at the end of the month. [unintelligible] [laughter] [applause] >> mr. chairman, i also want to pass on on behalf of me and my colleagues your plans to retire -- my sadnes about your plans to retire.

we look forward to working with the other members of the committee thrghout this congress. >> i am not going to retire. i am just not going to run again. >> i understand. the united states faces daunting budgetary challenges. the economy has struggled to recover from the recession. the pace of growth and output has been anemic. the unemployment rate has remained quite high. federal budget deficits and debt have surged. . because of policies implemented in response to the economic problems and an imbalance in revenues than predate the recession -- a return to normal economic conditions will take years. even after the economy has ful

recovered, a return to sustainable budget conditions will require significant changes in the tax and spending policies. let me discuss the economic outlook first and turned to the budget outlook. projects that real gdp will increase by about 3% this year and next year, reflecting continued strong growth in business investment and improvement in business investments, net exports, and consumer spending. we have a long way to go on the emplment front. next slide. next one after that, please. again. let's focus on this.

payroll employment rose only by 70,000 jobs between june 2009 and december 2010. the recovery in the unemployment has been slowed by structural changes in the labor market such as mismatches in the available jobs and available skills of workers. we expect the unemployment rate will fall only to 9.2% in the fourth quarter of this year and 8.2% in the fourth quarter of 2012. only by 2016 does the unemployment rate reach 5%.

economic development and the government's responses to them have had a big impact on the budget. we estimate that if current laws remain unchanged, the budget deficiwill be close to $1.20 trillion, or 9.8% of gdp. that is the large dicit relative to t economy since 1945. debt held by the public will jump to nearly 70% at the end of fiscal year 2011.

if current laws remain unchanged, as we assume for cbo's baseline projection, budget deficits will drop as a share of output. the darker line shows our current law. as a result, dealt held by the public will keep rising, -- backed -- debt held by the public will keep rising. rather than expire under current law.

proposing the debt of major aspect policy continuing during the coming decade. first, as indexed for inflation, the other major provisions in tax legislation affects individual income taxes and state and gift taxes being extended rather than being allowed to expire. january of 2013. third, that medicare's payment rate for positions were held constant rather than dropping under current law. all of those policies have recently been extended by the congress. if they were extended permanently, that this is from 2012 through 2021 would average 6% of gdp rather than 3.6%.

cumulative deficits over the coming decade would total nearly $12 trillion. go to the next slide, please. debt by the public would rise to the highest level since 1946. beyond the 10th year projection. , spending on social security and the government's major mandatory health care programs and insurance subsidies to be provided to exchanges will increase to 10% of gdp over the next five years. to prevent that from becoming unsupportable, congress would have to restrain the rate of spending or pursue a combination

of approaches. the longer the necessary adjustments are made, the greater will be the negative consequences of the mounting debt, more on certain businesses will be and the more drastic the ultimate policy changes will need to be. changes of the magnitude that will ultimately -- that will ultimately be required will be disrupted. congress may wish to implement them gradually to avoid a negative impact on the economy to give businesses and state and local governments time to adjust. remedying the nation's fiscal imbalance would take longer and a major policy changes would need to be enacted soon to limit a further increase in federal

debt. thank you. >> thank you. one of the things we say a lot on this committee is that the current trajectory in our deficit and debt is unsustainable. you have used that language as well. what do you mean by that? >> as the debt rises relative to the size of the economy, so does the burden on the american citizens on making the payments on baghdad -- on that debt. has that burden rises, it becomes more and difficult to prevent a further -- as that burden rises, it becomes more ethical to prevent further ris in ways that are difficult for the country to absorb.

rising debt payments can snowball. one sees that in our projections where the pathf debt-gdp can rise sharply. the government needs to find investors willing to purchase government securities, to roll over the existing debt as it matures and to acquire the new debt necessary to finance ongoing budget deficits. investors are likely to become increasingly nervous about whether the government can manage its budget. that is what we and others have called a fiscal crisis. we have seen other countries encountered a crisis of that sort in which it becomes impossible for the government to

finance secret factory of debt it has in mind at affordable interest rates. we have been clear that we do not have and analytical capability of predicting what a tipping point might be and when it might happen. as the debt rises relative to be deeply and the trajectory continues to be upward, the risk of that sort of crisis increases. >> part of your analysis, the reason for the introductory of our debt being unstainable -- the trajectory of our debt being unsustainable is that it puts pressure on interest rates in order to satisfy those who loaned us money to take on greater risk. that has been a fact of slowing the economy. is that your analysis? >> yes. as the government needs to work

harder to find buyers for its debt, it has to pay higher interest rates over time. more importantly, from an economic point of view, the government's borrowing is crowded out the borrowing a household might do to support investment equipment, our new housing. it is the crowding out of that investment that makes future incomes lower than they would otherwise be. >> i think that analysis is in line with what every economist hasold this committee. and what the chairman of the federal reserve has told this committee. let me go a bit further. part of your analysis of the trajectory of deficits and debt is tied to the question of interest rate levels. you hav a projection of what

interest rates are likely to be during the term of this forecast. what would happen if the interest rates were 1% higher than you project. i think you did a sensitivity analysis to determine what would happen to our that if interest rates were just 1% higher than what you project currently. can you tl us what you found? >> yes, mr. chairman. this is in the appendix b. if interest rates are 1% higher than we project for short-term and long-term rates, we estimate the budget deficit would be $1.25 trillion larger over the coming decade that our projection. >> so you would add another

$1.25 trillion if interest rates were just one percentage rate higher than in your forecast? >> yes. that is right. >> the chairman of the federal reserve testified before this committee in recent days. basically, his advice to us on deficit and debt reduction was start modestly and then rode the effort in a determined way onc the economy is on strong ground. his arguments to the committee was that this recovery was still fragile. one in every 6 americans is still unemployed or underemployed. he said we ought to begin the

process, but begin fiscal discipline in a modest way, but put in place a plan that goes beyond modest to get the debt stabilize, and then bring it down to more manageable levels. is that your advice to this committee? what is your advice? >> i will not make policy recommendations to you and your colleagues. judging the speed of policy changes you are considering, you and your colleagues face a difficult trade off. on the one hand, the longer you it to make the poly changes, the more the debt will amount, the greater the negative consequences of that will be, including the crowding out of other investments, the loss of flexibility to respond to future emergencies that we cannot foresee now, the greater the

burden of interest payments, and the greater risk of a fiscal crisis. at the same tim the faster you make policy changes, especially those of the magnitude required to fix a fiscal imbalance of this time -- of this size, those changes can be disptive to the households that are planning for certain services -- certain sorts of benefits to state and local governments who are depending on the federal government to continue the relationship they have had in the past. but let me ask you this question. the analysis you have given is in line with what other economists have told this committee.

we try to provide a broad range of philosophical input. some are telling us that tax cuts are so beneficial that if we enact tax cuts, they really will not lead to additional deficits because the cost is offset by the economic growth they encourage. what is your analysis with respect to the effect of tax cuts on the budget? >> so the answer depends, to some extent, on the specific tax cuts one has in mind. reductions in marginal tax rates can encourage work and saving and boost the economy. through that, they can provide

some offset to the direct loss in tax revenue from the reduction in rates. from broadbad reductions in taxes, the consensus in the economic professions is that the offset provided through the extra work and savings is significantly smaller than the direct revenue loss. effect is a reduction in revenues. that is the professional consensus. >> give us an understanding. i supported extending the tax cuts. i supported extending all of them. i believe the economy was in such weak condition that we needed some certainty and we needed the additional lift those tax cuts can get in the short term. isn't the cbo analysis that the

tax cuts have a different effect short-term and long-term? >> yes. that is not unique to us either. the report we presented to you about the affects of different ways of extending expiring tax provisions that you and your colleagues were considering, we look at the effects from the next few years and in future decades. in the short term, we think reductions in tax receipts that put more money in the hands of taxpayers that they can spend can stimulate economic activity. the demand for goods, and employment. that is especially true under current economic contions where there is unused labor and unused industrial capacity and where the federal reserve has pushed the interest rates that

it controls down to their lower rate. as we show in september, reductions in tax revenue that are not matched by reductions in government spending and lead to wider budget deficits tend to reduce the flow of economic activity. the lower tax rates to spur work and saving. we a corporate that in our estimate. at the same time, the larger deficit -- we used a variety to illustrate the uncertainties. most of the approaches we have taken showed the loss of future output and income out way - outweigh the boost from the tax

rate. >> and the tax cuts do add to the deficit and debt? >> yes. that legislation increase budget deficits this year and next and over the entire decade by around $800 billion, i believe. >> let me go to senator crapo. and then we will go to members or questions in the order of our arrival. we use the early bird rule. given the number of senators, we will do seven minute rounds. senator crapo. >> i describe what the chairman of you were talking about as dynamic scoring of tax policy. i do not know if that is an

accurateescription of it. do you take into consideration the dynamic impact of tax policy as you provide your numbers? when you do your analysis and come up with the a hundred dollars billion number for the deficit impact, are you calculating the dynamic impact of tax policy on revenues? >> let me distinguish two sets of words and tell you what i mean by them. dynamic scoring, a full range micro economic and macro economic responses. the estimat you get are done by the staff of the joint committee on taxation. those estimates incorporate a vast array of micro economic

response that do not include dvd. we and our colleagues at the tax committee do dynamic analyses of various sorts, analyses where we allow the macro economic aggregates to change to these behavioral changes. we report that the dynamic analysis. we do this every year. we have done this forhe arizona recovery an investment tax. we do a variety -- we do it for a variety of circumstances. we only do it for particular pieces of legislation for which we have weeks or months of lead time according to your interests. >> what kind of revenue growth estimates are you using

throughout the decade in your projections? >> revenue grows slowly poured this year. >> you are at 3.8% for this year. >> for this year, we have total revenue growing by 3.1%. much faster on average for the remainder of the decade. much of that is from the expiration of a set of these tax provisions at the end of this year or next year. over the next few years between now and 201 tax revenue rises by about five percentage points of gdp. 3/4 of that is from the expiring tax provisions. >> do you use projections as to

what rate of inflation you expect in the economy? >> yes. the nominal growth rate depends on our level of inflation. we expect inflation to remain low in the next few years and then to move up tard federal reserve's implicit target, which is 2% or a little under. if there were faster reflation, that would lead to more revenue and more spending and higher interest payments on the debt. in appdix c, one of the experiments we did was to look at what happens -- appendix b -- we look at what happens when interest rates are higher.

this will when burden of interest payments would grow evenaster. >> i am shifting gears a little bit. are you familiar with the studies comparing debt to gdp of different nations? >> the author is a member of our committee of economic advisers. >> you indicated the debt to gdp will be approaching the 90% mark at the end of the decade. can you comment on using debt owed to the public as opposed to gross debt, we are rapidly approaching those markers? what do you expect to be the consequences of our failure to change that dynamics of growth

and death? -- and debt? >> u.s. debt is already in unfamiliar territory for our country. if the current policies are pushes up and tdebt to 100%, we will be in different territory for all developed countries. some countries have gone there, but they have been poor. the u.s. is different in a variety of ways that affect how far we can push up debt before we encounter negative consequences. people view the u.s. economy as a viable one. that gives us a little more

ro. on the other hand, we have a low private savings rates compared to other countries. our government debt cannot be absorbed as much in u.s. savings. it has to rely on the savings of others. >> let me interrupt and moved to this next question. i want to follow up on that in a future round. there are four major housing and banking activities that affect the federal budget to varying degrees, the federal government obligations to fannie mae and freddie mac, premiums paid by share payments and the federal paymentss emissions of to the treasury. can you explain to me what the budget aociated with each of the entities -- these entities

actually reflect? are we treating these different aspects differently in our budget analysis? >> the answer to the last part of the question is yes. they are treated differently. the federal budget is primarily a cash flow accounting. money coming in and going out. 20 years ago, there were some changes made to try to better reflect the true cost of some of the government postal financial activities. in fact, that methodology -- 20 years ago, there were some changes made to try to reflect the true cost of some of the government's financial actities. the particular part of the government's activities you mentioned were put in place by different budgetary treatment.

t.a.r.p. was put in place to treat it not with government reform basis. we have done that. fannie mae and freddie mac were brought into the government through the conservatorship and the ownership and control the government has demonstrated. there is nothing in the l tha specifies how they should be treated in the budget. we are treating them on the same risk adjusted basis that we are treating tarp. the government still sees them as being outside the government. they've record cash payments to those entities as if ey were -- they record cash payments to those entities as if they were outside entities.

it is a complicated business. we are in oning discussion with budget committees here and in the house to try to think through if there are better ways to communicate to you and your colleagues what is going on. >> i think it is important f members of the committee to know that cbo, when they have a question about how to do these things, consults th chairman and the ranking memb of the house and the senate budget committees. they did consult us on the question of treating fannie mae and freddie mae off the books or on the books. we insisted it be included because we think that is the most accurate reflection of the

effect on the federal books. we were unanimous in that deal -- in fact view. congressman ryan was ranking in the house. four of us were consulted and agreed unanimously that it ought to be included. >> thank you. >> i still believe that was the correct decision. cbo wanted to do it tt way and we believe it was the proper way. >> hopefully, omb will follow that lead. >> thank you, doug elmendorf, or your service.

i agree that we need a credible plan. the support and enactment of a credible plan would have an incredible impact on our economy. all actors need to be part of the solution. the difficulty is that congress will normally takep issues on a specific matter and then the discipline seems to break down. we will have a true emergency or a natural disaster, a katrina. we will have a security issue that we have to respond to. we say we will take care of that. we do it in a different manner. we understand that. other matters it characterized as emergencies or urgent issues and we make separate exceptions. i agree that we need to do this in a balanced way. it seems like domestic discretionary spending is the one that takes the brunt of this type of discussion. i was pleased that the president

mentioned discretionary spending first. i will try to get the relative impact of what the president said. in your baseline, what projections are you making with regard to discretionary domestic spending? procedures we followed we have followed for years. we take the measures that ngress has approved an increase that for inflation. >> and the president mentioned 3 years. would that be different from what you had in your baseline? >> yes,t would. >> can you tell us wha would

happen if we did a freeze on discretionary spending over the next five years? >> i do not know precisely what the president is proposing. we did a calculation freezing all non-defense discretionary spending except that that was directed by the appropriations committee. if one reason is that by five years and at the end of the five years, increases it with inflation, the savings ovethe decade arebout $400 billion. >> thank you. you mentioned three policy issues that are not in your baseline, but are actively being considered by congress. the alternative minimum tax, the extension of the tax issues passed in december, and the physician reimbursement under medicare. let me te them if i could --

let me take them, if i could, separately. can you tell me what a negative impact each of those policies would have on your projections? >> there is a table in our outlook on page 122 that gives the budget it facts of a variety of alternatives. the effect of extending the income tax and the state and give tax provisions is about $2.50 trillion over the decade. the effect of indexing the amt our inflation is about $700 billion over the decade. -- amt for inflation is about $700 billion over the decade. one es the extension and in texas the -- does the

extension and indexes the amt, it at $3 trillion over 10 years. the effect of maintaining medicare payment rates for positions is about $200.- 1539607552. -- $250 billion. >> part of bringing the budget into balance is that we are going to have to make sacrifices. if we do that, we will bring about savings in the budget. if w talk about the tax issues and say, taxes are different, it

pales in comparison to the extra deficits. i have not got into the military at. your baseline assumes what for military spending -- i have not gotten to the military gets -- military yet. you a baseline assumes what for military spending? >> that level would not be a good representation of what your colleagues would expect for baseline spending. we also provided some alternatives that involve different paths toward defense spending. >> so you are taking a lower projection for the future than using the current. you believe there will be some savings in the next 10 years. >> i am just saying that you and

yo colleagues have often asked us the question. you think this is hired and what you anticipate. >> so your base line starts with the current level of mitary action we are participating in? if we bring down military action and do not he to spend as much on our soldiers overseas, we can bring some back, that would give us some savings that are not in our baseline. i understand there will be trade-offs. >> when secretary gates has talk about savings he would like to implement, the savings he is discussing are from a higher level from our baseline. he is discussing savings relative to the budget plan the defense department has put out. those savings bring down that budget plan in the direction.

part of the problem is, depending on where in the year we have done the protection, whether the congress has enacted supplemental appropriations that have gone for overseas contingency operations. it has been and a pingpong. >> my time is up. i did not have time to go through the analysis, but my point is this -- all of the major areas need to be on the table. i think all of us were proud that the recommendation was balanced. we do have problems with the provisions, but you have to have all at the table. let's not just pick and

discretionary domestic spending. >> thank you. i want to welcome senator thune to the committee. i look forward to working with you. let me indicate to members that i try not to interrupt senators when they are questioning, even though they may not -- even though they may be at the end of their time. when i hold up the gavel, i know don't want to tap it on members, but if you try to stick close to the time in fairness to others. >> thank you, mr. chairman. dr. elmendorf, welcome,nd of start out by saying how much i and other members of congress and committee appreciate the professionalism and integrity of your office. i know the numbers you report are often battered around and spun in different ways which

must be a source of tremendous frustration to you, but you always seem to keep your cool despite that. it's important we get good numbers and thank you for that. >> thank you, senator, that means a lot. >> unfortunately, we talk about the budget and economic outlook, i feel like mark twain when he said everyone talks about the weather but nobody ever does anything about it. i think congress is guilty of that. that's why i was pleasantly surprised, mr. chairman, when you and other members of the presidt's fiscal commission came out with what i thought was a bold and dramatic and a sobering report. i hope we will take the opportunity to deal with this crisis and i do believe it is approaching a crisis. we do not know when the tipping

point will come, but we are almost there. we can't just talk about the economic outlook and the budget, we have to do something about it. i believe there is a window for us to do it. i heard you say we have to be carel about the pace of some of the austerity measures because it could further depress the economy. i hear y loud and clear i think the political reality is we have a short time to do this. if we do not do this within the six-nine months, the opportunity will be lost. i am anxiously awaiting the president's budget, which will come a week of february 13th, to see whether the president himself is serious about the crisis that was so well documented and explained by his own fiscal commission. i hope that opportunity is not squandered by the same old, same

mold sort of thing that seems to happen time and time again. i know we talked a lot about the need to cut, but you alluded to the crowding out effect of more federal govement borrowing on private access to private credit. i would like to talk about the importance of not just cutting, but growing the economy because i know when senator portman was the office of management and budget director at the beginning of 2007, the budget deficit was 1.2%. now is around 10%. one reason it was low is not because we were speing money, because we were. but the economy was booming. jobs were being created. the federal treasury was getting a lot of money. but for the reasons the chairman mentioned, not only are we

continuing our bad habits in terms of spending the amount of money coming in because the economy is hurting, because people are out of work, losing their homes, it is a double clammy. let me ask you -- is a double whammy. you have some economic projtions in terms of growth of our gross domestic product. i believe i heard you say, and this appears to say on page1, in 2011, you are protect -- you are projecting the gross domestic product to grow at 3.1%. is that rrect? >> yes. >> can you tell us how much growth in gross domestic product is required to see a net increase in employment? i assume with new people entering the workforce that there is a level -- i cannot recall the specific number, is

it a range of growth we need to see before we see the unemployment rate come down? >> at that pace, we think the unemployment rate will come down, but slowly. we think the potential growth rate of the economy -- i should explain what i mean -- apart from the cyclical issues, as the labor force for almost fully employed and productive capital were fully in use, economic output would grow by up to 2.5% per year. if economic growth exceeds that rate,e are in the process of closing the gap between the potential level of output and the actual lel of output. that means putting equipmentnd people and plants back to work again. >> ben bernanke testified that 2012 we would still see

unemployment stubbornly high in the 8% range. do you agree with that? >> i do. think the unemployment rate ll be down to about 8.2% by 2012. at's better than today but still well above a level we have seen in strong economic conditions in the past. since time is so short, let me conclude on some matters that are of grave concern to me. that has to do with energy costs and some of our policies emanating from washington having to do with our domestic energy supply. i don't think it's any secret that the moratorium imposed on drilling for oil in the gulf of mexico, and now that the formal moratorium is lifted, what is -ometimes called the permit

orium, that is having a dramatic negative impact on employment, particularly in the gulf states, but the ripple effect throughout the economy. we have discovered in the last couple of years as a result of modern technology, a huge amount of natural gas here in america available from shale formations. as i heard the president talk about green jobs, which sounds very good and certainly we are all for conservation and looking for ways to protect the environment as we develop energy sources, i was concerned and there wasn't a lot of talk about what i would call red, white, and blue jobs -- jobs created from domestic energy sources.

let me conclude on this and say what do you see in terms of energy costs, particularly gasoline costs? if we see for dollar and got -- $4 a gallon gasoline costs, will the rising cost o energy due to our economy? >> i don't know offhand what the projection is. for oil prices, which are a very important economic factor, we look to the futures market as our starting point and follow the path of people buying and selling the right to have oil in the future -- i don't think that calls for further large increases on the price of oil. i am not sure about gasoline prices. oil prices, we have rising -- they are about $90 a barrel. we have them rising to $100 a

barrel by 2017 and $110 a barrel by 2020. the price of oil can easily shoot up will be on that and fall well short of that. so you should picture having a very large range around these numbers. but we think this is consistent with what's in the futures market. >> if a conflict broke out in the middle east and people became concerned, those numbers could skyrocket almost immediately. >> yes. >> thank you dr. elmendorf for all your good work. in the 1980's, democrats and ronald reagan got together on taxes, cut taxes, cap productivity and grew the economy. we found a startling number in the two years at all that bi- partisan work. the economy created 6.3 million

non-farm jobs. that's twice as many jobs as were created between 2001 and 2008, when tax policy was partisan. in your analysis, you assume that between now and 2012 there will be n changes and after 2012 we will see what happens. what cou you tell us -- and this is a very rough analysis -- what would your fiscal outlook be if in the next two years, democrats and republicans picked up on the kind of work done in the '80s and grew the economy? can you give any sense of how your fiscal outlook could change? obviously it would change because you e not making any calculations basedn anything else be dead -- being done.

what would you suggest would be part of a changed fiscal outlook if a tax reform along the lines of what was done in the '80s was enacted? >> mike capacity of analysis usually falls well short of your questions. as a general matter, it's a widely held view among experts that a tax code that had a broader base with fewer special exemptions, deductions, credits and so on, and there by could have lower tax rates to raise the same revenue, would be more effective tax code in terms of raising revenue while producing less distortion to private economic behavior. all else equal, and there's a lot being swept in to that phrase, a tax cut with a broader base and low rate is one we would expect to be more conducive to economic growth.

>> which would mean the fiscal picture you have painted today would nobe quite the bleak when you have offered. >>ot quite as bleak. as you understand, the gap between spending and revenue under the extension of these policies has been very large. that's not a gap the economy can grow its way out of, even with e world's best tax system. >> let's talk about the international implications of tax law if we can. i am very interested in seeing the corporate rate cut considerably and have proposed cutting it from 35% to 24% to encourage manufacturing in the united states. in effect, that would provide us an opportunity to repatriate some of the money that is parked overseas back here in the diet states again to grow the

economy. have you all done any analysis with respect to an approach that would promote that kind of repatriation through a tax code that incentivizes job growth in approaches on different corporations in work we hope to present to the congress in a few months. i don't think we studied that particular proposal as of yet. >> i will follow-up with your staff on that. i think we know that billions and billions of dollars are parked offshore right now and we ought to make it more attractive to repatriate that money through tax law and in sent private sector job growth in the country. i'm going to ask you the same question i asked ben bernanke with respect to tax law. the effect of doing just corporate tax law changesather than individual tax law changes

at the same time. my sense is because most businesses pay taxes and is -- as individuals and not as citicorp corporations, -- and c- corp. >> from the perspective of an analyst, tackling all the aspects of a general problem that once seems most effective. it is up to you and your colleagues to judge how many changes you can think through and agree upon in a finite time. as you understand, both the corporate tax reform and individual tax reform agendas are incredibly long and compcated. from an analytic perspective, trying t think about all the pieces of the tax could together

would be most effective and appropriate. >> i think the interactions between what individuals pay and what businesses pay is now so intertwined with se ,roprietorships, llc's partnerships, to say you're going to split off one piece of the tax code and say you're going to reform there is a vastly oversimplify it and create a lot of distortions. what are the growth implications of doing taxes on a temporary basis? let me read you a sentence from the "wall street journal." the united states has no permanent tax regime for leverages on capitol gains or family breaks for students and others. in effect, what america has done is to put the tax system on a permanently temporary basis. we are facing things in, taking

things out, we have a permanently temporary tax code. what are the growth implications of having something that is now a jury-belt system rather than a look at those 1986 numbers, which are eye-popping. to think when ronald reagan and democrats got together, in two years, they created more jobs than y saw in eight years of partisan tax policy. what would be the benefits of looking beyond a tax approach. >> the current nature of our tax system is damaging to the economy. we hope and expect businesses and families are planning ahead in making decisions and investments for the future and it's very difficult for them to make those sorts of decisions in an informed and thoughtful way

if the tax rates that will apply to them a year or two down the road are so uncertain. resoing that uncertainty would encourage and support household decisions, business decisions, and investment and hiring, probably. >> my time has expired, but because we will be workg closely under your leadership under the next two years, i want to touch on a lastoint that dr. elmendorf made about the nature of a temporary set of tax policies. if we have the same debate in the lame-duck session of 2012 where we are once again talking about extending the tax law today for two more years, dr. elmendorf has told us that will be damaging for the economy and the country. with your leadership, i hope is that this time over the next two years, we can make permanent,

pro-growth changes to tax law, get it done in this congress, and not just real litigate another set of temrary tax law changes in the lame-duck session of the 2012 congress, which dr. elmendorf has just told us would be very damaging. i think the point dr. elmendorf made is especially important. >> senator sessions is now back. he was at another hearing. i think it is most important we get to him for any additional or opening statement he would wa to make and then we will resume questions. >> thank you. [audio difficulties]

that is better. fundamentally, you are absolutely correct. a permanent tax policy is better than uncertainty and we have too much uncertainty in our economy and we need more stability and you have come forward with some proposals and ideas i think are worth serious considerati and i look forward to working with you on it. i truly believe you are attempting to accomplish something in an efftive w. i'd like to congratulate you, mr. elmendorf for your real important. you have carried out your duties with honesty and integrity. you have some rather specific controls on how you score and evaluate matters. it is not your fault, they have

been established and you follow them, i think objectively, whether we like that are not. the les are set up mostly by congress. we have the new baseline and the news was not good. the deficit is expected to reach $1.5 trillion this fiscal year as of september 30th as, well above what we were projecting not long ago. our gross debt is expected to reach 100% of gdp, mning the amount of all the money our nation as wil soon be equal to the vae of everything are nation produces. that is above the 90% level that could be calculated in the analysis of nation to default on their debts. the 90% rate is significant.

40 cents of every dollar we spend is borrowed. by the end of the decade, the interest on our debt is expected to rise to $750 billion in one year. thatrowds out -- people want spending, people want to spend more on a host of projects and i'd like to do that too, but we have $750 billion less because we have to pay interest on the surging debt we have. alan greenspan said recently that we have almost a 50/50 chance of a bond market crisis in the next two years. that was from a "wall street journal" intview. i thought that was something we should hear. this is a man of wisdom who has been around a long time and he says the only question is will this debt bond crisis be --

these kinds of budget numbers we need be passed before or after the crisis? it would be a lot better, i think we all agree, critical that we do of before the crisis. the path we are on is unsustainable, yet i have to say president obama in his state of the union address, announced fundamentally we would continue as we are. to hear the president's remarks, one would think his speech had been written 10 years ago. they were disconnected from the reality of the debt crisis we face. earlier this week, i said his state of the union address would be a defining moment for his presidency. i don't think he rose to the occasion. it was a timid speech, it squandered a historic opportunity to rally the american people behind true

spending reform. he had the opportunity to look them in the eye, say what the real dangers we are facing our and call on us to meet the challenges that americans will it properly called. it was far short of the standard set by gov. chris christie in new york and david cameron in the uk. no one forced the president to be the president. like my wife says, don't blame me, you asked for the job. he asked for the job and he has a real tough job now and i don't think he did lead effectively. he proposed instead we continue a five-year plan. this so-called freeze on domestic spending is not a plan to reduce deficits. it's a plan to preserve the deficits, locking in place the very spending levels that have been dramatically increased by president obama in the last two

years. the plan is remarkable, not for the strength, but for its weakness. in defense of his proposal, he argued the government spending is the engine of the economy, that the government is the engine of the economy, basically. he had this airplane metaphor backwards. the engine of our economy is the private sector, not the public sector. when the public -- and the private sector grows, it creates new jobs, new industries, new ideas and more tax revenue. but when the publicector grows, it simply consumes more of what the private sector produces. big government waste is funded on the back of small business thrift. the american people deserve candor and directness from the elected officials. the money to sustain the president's big government vision, the more investments he called for is simply not there. weon't have the money. meaningful spending reductions are not a choice. they are an obligation.

there is no serious alternative. we need to take a tougher road, the road that leads to prosperity. reducing the size and cost of government and not be easy, but is the only responsible course, the only one that will lead us to a better future. so i look forward to discussing the issues with you now and as we go forward through the next years. together, i believe we can make some progress. mr. chairman, there is nobody who has seen this and study this more carefully than you. i look for to seeking your advice as we go forward. >> thank you. it may turn out that it just falls to less in this committee to put forward a plan.

if the commission did not give 1418, it may just be that we have to go backed -- go back to a process that worked in this committee when i first came here, which is to have a real markup. "and for this committee to lead. frankly, i never thought on a problem with the dimensions of this one, where we typically do five-year budgets, in this circumstance, which requires a plan that extends beyond five years, that this was not the forum to sort it out, but i am not sure anymore. i'm not certain it is not going to fall to less to put a plan out there for our colleagues on the floor.

i am going to be having discussions with members of the committee on both sid to see what theeeling would be about our taking this on and laying a plan before our colleagues because this i the budget committee. even though we have typically been limited to five-year plans, maybe we are the only ones who are going to have the opportunity to lay out a comprehensive plan absent some kind of summit. i think the thing that makes the most sense is there is a summit between the white house, leaders in the house and the senate because of the end of theay, the white house has to be at the table. unfortunately, the budget process, the president is left out. the president gives us a budget and congress passes a budget but

it never goes to the president for his signature or veto. but if there's not going to be a summit, there's not going to be some kind of negotiation. maybe it's going to fall to us in this committee to put forward a plan. >> let me congratulate you on your reappointment. >> thank you. >> we're glad to see we all agree on something. on health care, you scored health care and you see where we are right now with the bill being sent over in repeal and i heard the $200 billion for on that. could you elaborate on that and a little bit on what the mandates would do if they were eliminated and from the state's perspective, the medicaid -- i'm

not sure if anybody really understood where the governors were coming from, most states do not cover 50% of the people qualify. we'd jump from 50% of l the way to 133, which we have a hard time swallowing. if you could talk about that, i will have one further question. >> you raise a lot of complicated questions. the original legislation enacted last march, a patient protection, affordable care and the reconciliation act set in place substantial expansion of federal entitlements for health care. it paid for that expansion by the setting in place new tax revenues and trimming money from existing health programs,

particularly medicare. by trimming the money for medicare in a way in which the gains to the government budget would increase over time, the rate of increase to payment providers. in our analysis, the combination of the extra tax revenue and the reductions in spending laid out in the legislation exceeded the cost of a new entitlement so the legislation had in our assessment last month -- last march, small positive effect on the federal budget. in the preliminary analysis, we prepared for the house vote that repealing that legislation would have a small negative affect on the federal budget. we are in the process of constructing a full pullback which we will make available as soon as we have completed it.

one of the many questions we were asked along the way during the health debate in addition to the federal budgetary effects was the affect on state budgets. the expansion of medicaid put additional burdens on states, the expansion was set in place in such a way that the federal government pays at -- pay a larger share of the cost of people made eligible for medicaid that it does under the current program. but nonetheless, it would not pay all of that bill and the share the federal government will pay for the newly eligible people declines overtime. our latest estimate is that the state share of the cos associat with the medicaid cover and much -- coverage expansion will be a little over $60 billion during the time covered by this latest outlook. > that is when th state's --

and that goes into effect? >> yes. we tend to report 10-year numbers. it is pncipally 2014 and beyond. it is not our place to judge how they can deal with that or whether it is appropriate, but the estimate incporates our expectation of changes in state behavior in response to the firebird and they will face. our estimates cannot incorpora changes in law that you and your colleagues might incorporate the federal level, but our estimates and corporate responses by family, businesses and state governments. >> give me, if you could score the reduction of 133 to 100 >> also, the mandates were removed. if there ian offset, we could talk about tha

i was very proud of the debt commission. in west virginia, every family sits down and work through their budget. th start a budget and stick with it. most states have a balanced budget amendment. i want to know what your thoughts would be for this federal government because it does not seem we are going to have the will to tackle the problems we have to and the votes that have to be made unless there is a balanced budget amendment that forces us and it would d it over time because ratification would take some time to do it. in give us a chance to get our financial house in order. the states are going through some very challenging and difficult times of making difficult cuts. they are looking at the federal government was saying why can't you do it? we are taking these cuts and making these tough votes but we don't see anything coming from

washington. if i could hear your response on a balanced budget amendment and a constitutional change of how we do business in washington. >> i don't think it's appropriate for me to make a recommendation for or against th sort of change. i will make a few observations. the set of budget rules set in place in 1990 regarding caps on discretionary spending and the pay-as-you-go system for mandatory spending and taxes seemed to have been effective at helping to guide decisions of the congress as long as there was thfocus in the congress on deficit reduction. once the budget improved, and a focus dissipated, those restrictions were no longer effective. >> the focus in the congress,

amending the constitution to require that sort of balance rages -- wages -- raises risks. the automatic stabilizers the government has, the fact taxes fall when the economy weakens and that spending programs increases when the economy weakens. existing law -- there's an important stabilizing force for the aggregate economy. state governments need to work against as a fax in their own budget and need to take action to raise taxes or cut spending. that undoes the automatic stabilizers that the state level. taking as a way at the federal level risks making the economy less stable, which is exacerbating the swings in the business cycles. >> but would you agree we are very unstable right now? >> yes. the automatic stabilizers are not purposefully stabilizing. but taking away would have cost

you and your colleagues would have to weigh. that amendment does not suggest how you or your colleagues would change taxes or spending. >> would you be asked to score a balanced budget amendment? >> we do not score amendments to the constituon. >> i would like to you -- like to talk to you further about that, is very important to me, every governor and household in west virginia. they can do it, they think we can do it also. >> i did not ask any questions and my first comment. can i have two minutes to ask a question? >> >> we have an unusual situation. it is a little unfair to do that. the your the ranking member, so we'll make an exception great >> you are a great chairman, and i thank you. magnanimous.

>> with regard to to this core of the health care bill, mr. elmendorf, the money that came in through this bill, with medicare trams and medicare cuts, tax increases, most of which were medicare tax increases, i believe, that money was used to fund the new program. but two things are important. mr. elmendorf has made it perfectly clear that you can't cut the money twice. cannot increase medicare and it fund the new program. this is a very serious matter we're talking about. thet it true that treasury, new health-care program is in

giving moneyo fund the program, but the money they got and the medicare cuts is borrowed by treasury and treasury oppose that money back when medicare continues to go into default and claims of money back? >> senator sessions is referring to a set of letters we cents in his request in january of 2009 and 2010. it is done on a unified basis, taking into account all spending and revenue. the net of fact with deficit spending as a whole. the cutbacks in medicare spending, to get with revenue increases mo than offset the extra spending on the new

health entitlement and expanded health entitlement. it is also the case that the savings in medicare, particularly the savings in the hospital insurance part of medicare then lead to a greater accumulation of bonds in a trust fund. those bonds have important legal meetings. there are real u.s. debt backed by the full faith and credit of the united states government, like the debt sold to the public. they do not have independent economic meaning in the sense that the trust fund has an accumulation of bonds. that does not give the trust fund a separate way to pay medicare benefits, except by coming back to treasury, redeeming those bonds, and getting that cash in the future. another way to say that is that paying medicare benefits in the future relies on tax revenue

that will be raised in the future or borrowing that will be done in the future cannot depend directly on the bonds in the trust fund. >> i think that's fair and all this need to understand that, but i would go a little further. it increased the internal debt of the u.s. treasury because the money extended for the health care program is borrowed from medicare, at least a substantial portion of it. when medicare, since we know is going into default, inevitably will call those bonds, the united states treasury will have to raise taxes or borrowing on the economy or deflate the currency, which is the three choices governments have, isn't that basically correct? >> the money is being borrowed from the medicare trust fund. >> it increases the internal debt, the gross debt of the united states. >> absolutely. >> i think the senator for

making the point because we have the same issue with social security. the hard reality is social security has trillions of dollars of assets. that is true. there is special purpose bonds backed by the full faith and credit of the united states are real assets. the problem is the only way those bonds are redeemed is out of current income. social security is going to go permanently cash-in five years. i have to say -- and i have received the lash from those who say you should not have to touch social security because there are trillions of dollars of assets. that's true. it is true that there backed by the full faith and credit of the united states, it is also true

that the only way those bonds get redeemed is out of the current income of the united states. we are about to see a dramatic shift in the budget circumstance when we go to having hundreds of billions of dollars of surplus and social security the general fund could borrow to having a circumstance in which there are hundreds of billions of dollars of debt that has to be serviced out of current income. senator, i apologize because you got delayed. >> that's okay. the important thing is getting some of these issues on the table. what you just talked about is of absolute critical impornce. you talked about the full faith and credit of the united states d that is what we are dealing with. the chairman held up about moody's and standard time -- moody's and standard and poor's, talking about the aaa rating of the united states. japan was just downgraded to aa.

what would downgrade from triple a to double a of the united states credit rating due to the ierest rates and your budget projections? your budget projections in my opinion, i know you try to be conservative, but as we have seen, i think this year you projected a $1.1 trillion deficit. for this year, it turned out to be a $1.5 trillion. some of that was because of the tax picy, but the bottom line these things can change radically very quickly. the full faith and credit ia, this idea of of the bond traders downgrade our bonds, if the fed is successful, and a lot of people think they're going to be successful in raising inflation because that's what they're trying to do with the

monetary supply, those all lead to higher interest rates, higher than you are projecting. that is the question -- if it goes out to double a, what does that do your projections? for the steps? >> if the federal government's credit rating or to lower, that would push up the interest rates the vernment would pay and push up thinterest rates would have to pay. we would not quantify how much it would affect interest rates, but would be an adverse affect. >> it would not be insignificant, it would be significant, would you agree? >> absolutely. >> you talked abt this -- the sooner we make these changes -- they are going to be painful, but the sooner we make them, maybe all less painful.

as alan greenspan talked about, we're going to have to make these changes, it's just do we do them in the middle of a crisis or do we do it to avoid thcrisis? that's a significant part of this. my colleagues mentioned we need presidential leadership right now. the chairman has talked about this committee doing its job. i could not agree more that the president needto lead right now. these issues we're talking about, and you have been around and seen this, dr. elmendorf, it's much easier to get reelected by giving money away. none of us want to make these tough political boats. but we have a democratic president -- these political votes. we of democratic president, democratic senate, and republican house. the president would lead come join the parties together, we could do what's right for the american people.

but it's up to him to lead. he's the president, he's the only one with the bully pulpit. our little microphones here don't echo through the country. i think he failed on the state of the union, but he has plenty of opportunities. we have the debt ceiling coming up. he has his budget coming up. there are plenty of opportities for the president to lead. forget our party labels, this is about the future of our country. the-you're talking aut, the interest on the debt, you say that's unsustainable. it is. it is unsustainable. dr. elmendorf, the reason you wereeappointed by republicans and democrats is you y to call a fair shot. we don't always agree, because what you do is unbelievably difficult to predict, but you play within the rules you are given and some of the rules aren't necessarily the best rules for making the most accurate deductions as well.

but the bottom line is all economists agree, our country is in serious trouble if we do not deal with the debt and deficit problems. $400 billion the president talked about the other night, what percentage is of the debt we are going to accumulate over the next 10 years based on your projections? >> under the based projections, we expect the governmenwill accumulate about $seven trillion in debt over the next decade. $400 billion is a little over 5%. -- about $7 trillion. >> especially the tk about the alternative minimum tax, and all those things we know are going to happen -- >> if we go into all those expiring provisions, we look for debt of $12 trillion over the next decade.

$400 billion is a few percent of that. >> as far as total projected spending during that time, what percentage? my back ofhe napkin calculations are less than 1%. the president has basically said we're going to ruce spending by less than a penny at of every dollar when this country, all economists say it is unsustainable. this country is headed for a financial crisis that we maybe have never seen. for us to sit here -- that's why it's so important to join together as republicans and democrats with the president to tackle this problem. mr. chairman, i'm willing to join whoever it is, but we have to me such a difficult -- these are going to be painful, politically pnful choices to make. we have to have the kind of tax

policy because you cannot just cut your way out ofhis. you have to cut and grow. you have to do them both at the same time. it's the only way you are going to solve this financial crisis that could be looming on our country. the last thing i hav this -- the last thing i have this state pensions. moody's is requiring states to put their pensions on their books. you talk about destabilizing factors, what does that do tentially to this whole economic projections going off into the future? >> we are in the process of completing an issue brief and state pensions which we will release very shortly. it's a very important topic. the issue of stabilization was in the context of year to year behavior during the recession, downturn and recovery. a very important long-term financial issue for states and

local governments is the commitments they have made to pay certain benefits to retired government workers and whether they have or have not put aside sufficient money to meet those. >> i realize my time has expired. my last comment is it's not in the future. my state is dealing with this right now. cities and states across the country are dealing with this problem right now. they know

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> we tell the finance committee in hamas made to raise. we don't tell them how to raise it. -- how much money to raise. we do not tell them how to raise it. i have never believed that the budget committee, the actual authority we had, if it's a very well to the past of the long-

term plan to get the debt under control. we do not have the requisite authority. but, you know, who else is going to do it? i know there are some press reports that i criticized. i am not criticizing the president. i am just working with reality. to me, " would be the most of effective is to have some kind of negotiation -- the third problem of the budget is the president never get the resolution. it is a congressional document. ultimately, the president has to be at the table because he can

veto legislation. maybe, with all of that said, -- you know, i have been really trying to think of a way to get for a the bodyy a plan debate that needs to occur. what is a way? that is why i made the comment that i did. i do not have a more formal plan. however imperfect the institutional boundaries are here for the budget committee to take this on, maybe we are just going to have to do it. >> a are you frustrated by a

lack of ideas? you wanted a budget summit, and you seem to be proposing this because nobody is a bleeding in it. biting it. >> yes, but this is not a criticism of the president. i think the president made a quite clear that working at it discretionary spending is now going to get us where we need to go. that the kind of comprehensive plan that was laid out by the fiscal commission is what is required, looking at both the spending side, and not just non- defense and discretionary spending, because that is such a small part of the budget. we have to look at all the spending of the federal government, and we have to look

at the revenue side of the equation. while the budget committee, because of the authoty of this committee is really not well positioned to come up with a comprehensive multi-year plan of the type that is needed,ho else is going to do it? that is the frustration i have. institutionally, of the way things are structured here, we do not have a mechanism, we do not have a place that really has the authority to deal with the kind of multi-year, long-term plan that is required. so, i am struggling with this myself. >> have you talked to oer congressional leaders about a solution to this? >> no, i have not.

>> can you talk about the legislation you are working on? you guys are very close to introducing this. >> no, i do not think that would be fair. getting distracted a -- getting this drafted and scored is a large undertaking. we are a long ways off. >> [unintelligible] >> and different people might be talking about different things. one track is to get the commission report and a legislative forum so it could be considered. that is one track. there is another track to have a feel safe trigger that would be pulled that would have automatic effects if congress is

not putting in place a plan that gets us back on firmer ground. that is something that can be prepared more quickly. that is not nearly as involved. >> can you explain that a bit more? >> it is not agreed to. >> would that be in tandem [unintelligible] >> i am workshopping ideas. ok, i got to go. >> can you talk about the consequences [unintelligible] y >> of the federal government -- the rest of the budget which has been getting in flows from show so security -- from social

security, that has stopped. that is a cash drag on the rest of the budget. i have to go. thank you. >> thank you, sir. >> "on newsmakers," patrick henry discusses the possibility of state's filing bankruptcy and other issues. "newsmakers," today at 6:00 p.m.

eastern on c-span. >> a look at the streets of cairo coming to us live from the aljazeera news network. aljazeera news network. the anti-government protests continue. the associated press reports that president obama has been making calls to four leaders over the weekend and says that any future egyptian government must respect the will of the people. the president also called for restraint and an orderly transition to a more responsive government in egypt. police were withdrawn after the army was sent in to restore order. the u.s. embassy in egypt says it is making arrangements to begin flying americans out of the country. these protests are centered on dissatisfaction with the government who disbanded his cabinet and began the new members, including a new vice president and prime minister. as aljazeera reports, he is

expected to make more points as the new day begins in egypt. meanwhile, his possible replacement has been talking with the estimated 1 million protesters in cairo's liberation square. he tells cnn that, it the people of egypt requested his leadership, he would serve. in the u.s. this morning, secretary of state hillary clinton spoke on a number of the morning talk shows, urging an orderly transition to democracy and free and fair elections. let's take a look at a portion of her remarks on nbc possible " meet the press." >> we have been urging free and fair elections for many years. it is important to recognize that, through democratic and republican administrations alike, we want to receive free and fair elections. we expect that that will be one of the outcomes of what is going on in egypt right now.

so we have been sending that message over and over again, publicly and privately, and we continue to do so. >> is the only way the current president stays in power now is if he calls for free and fair elections and he will not run? >> the egyptian people have to make these decisions. but our position is very clear. we have urged for 30 years that there be vice-president. finally, a vice president was announced just a day or two days ago. in our partnership with egypt, we have tried to make a point over and over again about what will create a better pathway for the egyptian people in terms of greater participation with political reforms and greater economic opportunity. i spoke about this very clearly in doha. just about two weeks ago, i outlined that whatever was

possible in the 20th-century is no longer possible for regimes in the 21st century. the world is moving too fast. there is too much information. people's aspirations and the rise of the middle class is throughout the world demand responsive anticipatory government and that is what we expect to see happen. >> as events continue to unfold in egypt, you can track them online at c-span.org where you will find twitter feeds and latest video coming of the country and continuing live coverage from egypt from aljazeera. >> tonight, we will talk with former president bush about his life and his new book "decision point." this is a portion appeared >> you are through with politics? >> yes. >> the fine that. >> i do not want to campaign for candidates. i do not want to be a money raiser. and do not want to be on the talk shows and giving my opinions and second-guessing.

i think it is bad for the country, frankly, to have a former president criticized his successor. it is tough enough being a president without a former president undermining the current president. plus, i do not want to do that. the fact that i am now on tv, i do not want to be on tv. i tell people that, one of the interesting things -- sacrifice, as president, you lose your anonymity. i liked the idea trying to regain anonymity to a certain extent. this is somewhat liberating, frankly. >> see the entire interview tonight at 8:00 p.m. eastern and pacific. >> the financial crisis inquiry

commission report was released on friday. angeledis saysand levy' that the crisis was preventable. this is one hour and 10 minutes. >> good morning and welcome. i am pleased to be here with my colleagues. today, we present to the president, to the congress, and to the american people this commission's report and our conclusions about the causes of the worst financial and economic crisis since the great depression.

the task of this commission was to first determine what happened and how it happened so we can understand why it happened. this official report about the causes of the financial crisis and our conclusions are based on our exhaustive and fact-based investigation which we pursued for more than a year. we hope that the american people will read this valuable report because it is our belief that, if we do not learn from history, we are likely to not recover fully from it. some on wall street and in washington with a stake in the status quo may be tempted to what from memory this crisis or to suggest once again that no one could have foreseen or prevented it. this report exposes facts. it identifies responsibility, and rumbles myths, and helps us understand how this crisis could

have been avoided. it is our best attempt to record history, not to rewrite it, nor to allow it to be rewritten. this crisis has been of no small consequence to this nation. all of us are eager to see signs of recovery. but we cannot forget that this financial upheaval will likely impact our economy for a generation. it has wreaked havoc on the businesses, entire communities, and households across the country. more than 26 million americans are out of work, cannot find full-time work, or have given up looking for work. 4 million families have lost their homes to foreclosure as a direct result of this crisis. people who followed all the

rules fear for their future while our country faces no easy path to renewed economic strength. all along our investigative journey, we met many people from all walks of life who have seen their aspirations crushed by this crisis. there is much anger in this country about what transpired and justifiably so. many of these people look to the commission for answers and perhaps some encouragement that the country's political and financial leaders and, indeed, all of us will choose a better path than the road to this contrast a free -- than the road to this catastrophe. over the past two years, there has been no shortage of debate and discussion about the government's decision to provide unprecedented and

massive financial assistance to rescue large financial firms deemed too important to fail. but our mission and the central question we addressed was this. how did it come to pass that, in 2008, our nation was forced to choose between two starts and painful alternatives, either risley told collapse of our financial system and economy -- either risks total collapse of our financial system and economy or save systemically risky companies even while many americans lost their jobs and their homes. we concluded first and foremost that this crisis was avoidable.

despite the expressed a view of many in the circles of financial power that the crisis could not have been foreseen, there were many, many warning signs that were ignored or discounted. second, we found widespread failures in financial regulation. third, our report describes a man since of breakdown in governance and management. fourth, we detail how excessive borrowing, risky investments, and lack of transparency put our financial system on a collision course toward crisis. fifth, we concluded that key policy makers, our government, was not prepared for this crisis. they're inconsistent response added to uncertainty and panic. finally, this report explains how breaches in accountability and ethics became widespread at all levels during the run-up to the crisis. this morning, each of us will take a few minutes to summarize our findings. i will start by focusing a few

remarks on our first conclusion. this financial crisis could have been avoided. let us be clear. this calamity was the result of human action, in action, and misjudgment, not a mother nature or computer models gone haywire. the captains of finance and the public stewards of our financial system ignored warnings and importantly failed to question, to understand, and to manage the involving risk in a financial system that is so essential to the well-being of our country. theirs was a big miss, not a stumble. there was an explosion in risky subprime lending and securitization, and sustainable increases in housing prices and mortgage debt. by 2004, the fbi was publicly warning that a surge in mortgage fraud had the potential to become an epidemic that could

have as much impact as the savings-and-loan crisis. and there were other red flags, risky trading activities grew exponentially, the unregulated market for derivatives exploded, and financial firms reliance on short-term borrowing. there was, however, and unfortunately, a pervasive per submissiveness -- a pervasive permissiveness. regulators did not take action to stamp out smoldering areas. the evidence is replete with failures. the federal reserve failed to act as our financial system was involved in the wake of toxic mortgages. financial firms made, bought, and sold mortgage securities they never examined, did not care to examine, and knew to be defective. even as the housing market was

in freefall, wall street created more than $1.60 trillion in new mortgage-related securities. from 2000 to 2007, moody's rated 45,000 mortgage securities as aaa. at the beginning of this year, there were six u.s. companies with that rating. in 2006, it gave its stamp of approval to some 30 such securities every working day. the results were disastrous. none of what happened was an act of god. the greatest tragedy would be to accept the idea that no one could have seen this crisis coming and, thus, nothing could have been done. if we accept this notion, it will happen again. let me now turn to my colleague, the chairman of the board and forbes 500 firm0 symantec.

>> one important conclusion from our kids that widespread failures proved -- from our investigation was that widespread failures proved to be critical. there was the widely accepted belief in the self-correcting nature of the markets and the belief of financial firms to police themselves. the dealer regulation of a highly competitive -- the deregulation of a highly competitive sector was encouraged by alan greenspan. our report describes how this laissez-faire approach opened wide gaps in our financial system in which trillions of dollars were at risk. these included the huge trading market in overlooked-the-counter derivatives.

then there was the shadow banking system. in some areas where vote -- or federal oversight existed, the government allowed financial firms to select their regulators. we, however, do not accept the view that regulators lack power to protect the financial system. they had ample power in many arenas and they chose not to use it. and where regulators thought they lacked authority, they could have sought new powers to fulfill their mission of protecting our country's financial system. let me highlight four examples from our report where strong and effective regulatory intervention would have made it unnecessary for all of us to begin this morning. first, the federal reserve was the only entity in power to stop out of control mortgage lending by sending prudent lending standards. it had the ability and the responsibility to stepped-up as well as avoid this crisis.

but it did not. the securities and exchange commission could have required more capital and halted risky business practices at the big investment banks. but, again, it did not. the federal reserve bank of new york and other regulators could have clamped down on excesses at banks it oversaw, such as citigroup, as it dangerously increased its exposures to subprime securities. but, again, it did not. and policy makers and regulators could have stopped the runaway subprime mortgage securitization train as danger signs emerged. but, yet again, they did not. this report also describes how regulators continued to rate the institutions they oversaw as safe and sound, despite evidence to the contrary. and in case after case, downgraded these firms just as they veered toward collapse. it did not surprise the

commission that the powerful financial industry would push for weaker or lighter regulation. but what troubles us where the failures of the overseers to intervene and enforce the regulations they did have. these actions or inactions deprived our nation of strong and independent scrutiny of such a critical sector of our economy. the public leaders charged with protecting our financial system sought and except in positions of responsibility and, with that, comes the obligation to act. tone at the top does matter. let me turn the microphone over to the chair of the commodities futures trading commission from 1996 to 1999 and early on to identify critical risk to our financial system. >> thank you, john. as john noted, 30 years of deregulation and weakened oversight changed our financial

system and help financial firms do business. some believe firms would naturally shield themselves from fatal risk-taking as a form of self preservation. however, the commission concluded that dramatic failures of corporate governance and risk management at many systemically significant financial firms were critical causes of the crisis. our examination revealed stunning instances of government governance of breakdowns and irresponsibility. this report details, case after case, where top executives and their financial companies that they led acted in prudently, including a id, bear stearns, fannie mae, lehman brothers,

merrill lynch, only to name a few. s offovernment's handof philosophy went hand-in-hand. to many of these firms acted recklessly, taking on too much risk with too little capital and with too much dependence on short-term funding. over time, there was a fundamental change as these institutions -- at these institutions, particularly at the large investment banks and bank holding companies. they focused their activities increasingly on risky trading activities that produced hefty profits. many of these companies took on enormous exposures by acquiring and supporting subprime lenders and creating, packaging, and

repackaging and selling trillions of dollars in mortgage-related securities. some financial institutions expanded in ways that left them too big to manage, let alone to big to fail. too many firms set aside their judgment by embracing mathematical models as reliable predictors of risk. too often, risk-management became risk justification. compensation systems in an environment of intense competition and like regulation rewarded the big bets where the payoff on the upside could be huge and the down side ignored. the biggest financial institutions drove the market and over that -- and over the counter derivatives after these

instruments were fully deregulated in 2000. in the wake of that action, the market for these derivatives spiraled out of control and out of sight, growing to $673 trillion by 2008. we concluded that over-the- counter operatives contributed significantly to the crisis. the report explains the zero limited leverage, the lack of transparency, the lack of capital requirements, and the concentrations of risk that proved so disastrous. it also lays out how credit derivatives fuelled mortgage securitization and amplified losses from the collapse of the housing bubble.

after that collapse, derivatives were in the center of the storm. millions of derivatives of all types, between systemically important financial firms, were unseen and unknown when the financial system nearly collapsed. the obligations hidden from view added to the market uncertainty and escalated the panic we saw in the fall of 2008, leading to government rescues of financial firms. let me now turn to my colleague byron giorgio. he is a nevada entrepreneur whose career spans government service, businesse and the law.

he has spent much of the last decade protecting investors from securities fraud. byron is also a member of the advisory board of the harvard law school program on corporate governance. >> think you very much. -- thank you very much. this commission concluded that a combination of inadequate capital, risky investments, and lack of transparency were critical vulnerabilities and important enough to warrant separate attention by this panel. in the years before 2008, to many financial institutions are extraordinary sums by operating with insufficient capital and left themselves susceptible to financial distress or ruin if the value of their assets declined even modestly. from banks with excessive leverage to participants in the deeply flawed mortgage securitization chain, nobody had enough skin in the game.

for example, the major investment banks, bear stearns, goldman sacks, lehman brothers, merrill lynch, and morgan stanley were operating with extraordinarily thin capital. by one measure, as of 2007, their leverage ratios were as high as 40 to one, meaning that, for every $40 in assets, there was only $1 in capital to cover losses. so immodest 3% market moves against them could consume their entire capital reserve. to make matters worse, much of their borrowing was short term in the overnight market. that meant that the borrowing of tens of billions of dollars had to be renewed each and every day. the kings of leverage or fannie mae and freddie mac. they were the two behemoths government-sponsored leveraged banks. their leverage grew 75 to one. it was often hidden in derivatives positions in off- balance sheet entities and

through what is called window dressing, financial reports made available to the public. our report in detail instances in which lehman brothers and bear stearns worthy true leverage was masked. the heavy debt taken on by some of these financial restitutions was exacerbated by the nature of the assets they were acquiring with that debt. as the mortgage and real-estate markets turned out riskier and riskier loans and securities, many financial firms loaded up on them. but these firms were not alone. households took on more debt as well. from 2001 to 2007, national mortgage debt almost doubled. the amount of mortgage debt from 2001 through 2007, national mortgage debt almost doubled. the amount of mortgage debt per household rose 63%. even while wages were

essentially stagnant. within the financial system the dangers of this debt grew more ominous because transparency was not required or desired. massive short-term borrowing combined with the liabilities on seen by others in the market tightened the chances that the system could rapidly unravel. the shadow banking system that had evolved did not have the protections built in the early part of the 20th-century. by 2008 the 13 trillion shadow banking network had become larger than our nation's traditional banking system. as it turned out, we had a 21st century financial system with 19th century safeguards. when the housing and mortgage market was created, the lack of transparency, the extraordinary

debt load, the inadequate capital, and the risky assets all came home to roost. what happened was panic and for some, we had reaped what we had some. we will hear from senator bob gramm. after spending 38 consecutive years in public office, he let the office in 2005. senator, it has been a distinct honor and personal privilege to share with you on this commission. >> as part of are charged, it was a corporate for the commission to review the actions taken by government in response to the developing crisis and to determine if any

of those responses contributed or worsen the crisis. we concluded that the government was ill-prepared for this disaster. it is inconsistent responses added to the uncertainty and panic we saw during the course of the crisis. this report describes how the treasury department, the federal reserve board, and the federal reserve bank of new york, which were best positioned to watch over financial markets, were caught off guard by the events of 2007 and 2008. other agencies were also behind the curve. they were hampered because they did not have a clearer grasp of the financial system they were

charged with overseeing, particularly as it had evolved in the years before the crisis. the lack of transparency in key markets was an impediment. policymakers believe risk had been diversified when, in fact, it had been concentrated. time and time again, from the spring of 2007 onward, policy makers and regulators had to scramble as the contagion spread. they responded on an ad hoc basis, with sprint civic programs to put the figures in the by -- what specific programs of the fingers in the dice. they had no specific plan for containment because they did not understand the risk and the interconnections of the financial markets. even some of the regulators now concede to these errors. the commission concluded that senior public officials failed to recognize that a bursting of the housing bubble could threaten the entire financial system.

the evidence that that was a possibility was clear. for example, in june 2007, when bear stearns had funds that were heavily invested in mortgage securities imploded, they were thought to be relatively unique, although many other funds were exposed to exactly the same risk. in another example, the federal reserve bank of new york was still seeking information about the exposures created by lehman brothers more than 900,000 beretta contracts just a month before the firm collapsed. -- 900,000 derivative contracts just a month before the from collapse. they made the decision to let lehman collapse into bankruptcy

while aig receive government assistance. this inconsistent approach stoked uncertainty and panic in the markets at the heat of the crisis. it is now my pleasure to turn the microphone over to heather marin. she retired in 2002 as one of the most respected equity analysts in the nation. >> thank you, bob. as we have witnessed, the integrity of our financial markets and the public's trust in those markets are essential to the economic well-being of our country. the soundness and sustain prosperity of the financial system and our economy rely on notions of fair dealing, responsibility, and transparency. americans expect businesses and individuals to pursue profit

and, at the same time, to produce quality products and services and to conduct themselves well. but after careful research, we concluded that this crisis was fuelled by a systemic breakdown in accountability and ethics. these failures were not universal. but the breaches stretched from the living room to the board room. they resulted not only in significant financial consequences, but also in a loss of confidence on the part of investors, businesses, and the public. examples of these breaches included borrowers who defaulted on their mortgages so rapidly after taking a loan that it suggested that they never had the capacity or the intention to pay them off. mortgage brokers worked with lenders to put many qualified borrowers into higher cost loans so that these same brokers could reap greater fees. lenders such as countrywide wrote loans that borrowers could not afford.

mortgage fraud flourished in the collapse of lending standards and lax regulation. one estimate shows that losses due to fraud and loans climbed to above $100 billion. and when financial firms package risky mortgages and then sold them off to investors, our investigation found that critical information was not disclosed. yet we believe that the commission's conclusions must not only be viewed analytically, but also in the context of human nature and individual and societal responsibility. it would be simplistic to pin this on human failings, such as greed and hubris. but rather, the failure to account for human and weakness -- for human weakness proved devastating. the breadth of the crisis does not mean that everyone is at fault. in fact, many firms and

individuals did not participate in the excesses that we chronicle in this report. we do place special responsibility with the public leaders who were charged with protecting our financial system, those entrusted to run our regulatory agencies, and the chief executives of companies whose failures and drove us to crisis. but we believe that we must also, as a nation, except responsibility for what we permitted to occur. collectively, although certainly not unanimously, we acquiesced and embraced a system, a set of policies and actions that gave rise to serious crisis. while we were not charged with making policy recommendations, the very purpose of our report has been to take stock of what

happened so we can plot a new course. based on our report and the work of others who have investigated the crisis, it now falls to us, to each of us to make different choices if we want different results. thank you. i would like to turn it back over to our chairman phil angeles's. >> thank you. before we go to questioned, i would like to make some closing remarks. i want to thank my nine colleagues, especially vice chairman. i know i speak for all of us when i say how fortunate we have been to have won the albert as our executive director and the extraordinary staff who has -- to have wendy adelberg. the report and many materials sighted in it are available online at our website. before the commission officially disbands on february 13, will post additional materials gathered during our investigation. as of this morning, there are about 1200 documents already placed on this website. many are associated with the

book. we expect to place approximately 700 plus additional documents and about 300 audio transcriptions summaries of an abused so there is an historical record beyond this to send to the national archives. this report should not be viewed as the end of this nation's examination of this meltdown. in many respects, our financial system is still unchanged from what existed on the eve of this crisis. we believe there's still much to learn, investigate, and to fix. and now i do want to know that, if senator graham please before we're done, it is because he has to catch a plane.

>> mr. chairman. >> thank you. >> ok. >> thank you so much for your time. obviously, wheat, in the press, have noticed the absence of the republican appointed members of this commission. is the fact that their descent is likely to undermine how port and play this can be taken? >> let me make a brief comment and then i will ask one of my colleagues to comment.

first of all, we're here to present the report today. there are two separate the sense that have been filed. the public and the media will have a chance to view the dissents. we can find areas of agreement in the conclusion. the seriousness of mortgage fraud. but i would say this, there are fundamental differences. we believe that this crisis was avoidable. we believe that it was the result of human action and inaction. i believe that the report speaks for itself. would you like to add to that? >> i think it would be useful for the record for the questioners to say their name and their affiliation. >> thank you. >> i apologize. [inaudible] >> and i might mention also, on

this one point, that in this report -- almost the entirety of this report, 490 pages of report and footnotes is dedicated to the backs of what happened to this country upon which we based our conclusion. i believe the report speaks for itself. i will let the might be handed over. >> hello. can you elaborate more on the responsibility of the household factor, the borrower, and elaborate on the policy implications. it does not seem that a lot of the households were rescued and they carried the brunt of this crisis. >> the report itself does not make prescriptions for policy. it does add an awful lot to the

evaluation of responsibility within the whole system, natalie failures that occurred by our regulatory -- not only failures that occurred by our regulatory agencies, corporations, and households themselves. i think that the use of this report for those who are making those decisions is to come back to a treasure trove of information that is inside of it and also on our website that relates specifically to the underlying investigation analysis and research that we did. >> next question. i encourage my colleagues, if you have something you want to note on this, please just weigh in. let me know. >> i am a reporter with cnbc. you talk a lot in the report about was to blame for various aspects of the financial crisis. but there are key players that are still in power and making

decisions about the recovery. what do you say about the roles of ben bernanke and timothy geithner? >> first of all, mr. bernanke himself admitted to us that it was a very serious failure of the federal reserve not to stem the flow of toxic mortgages. i think mr. geithner himself could have done more to curb the excesses of citigroup. i think the report speaks for itself. the fax are on the table. there were failures and there was a government that was ill-

prepared for this crisis. >> i think we should acknowledge those who were power at the moment of the crisis dealt with anomaly vote -- dealt with it in an unbelievable manner. in fact, our country is better off because of the actions that were taken there. our look is what -- i look his that would cause the crisis. the federal reserve was the stewart of lending standards in this country and -- was the steward of lending standards in this country and did not do anything about it. on and on, regulator after regulator, they either chose not to act or turned a blind eye to what was actually going on. it is less about a particular individual that a systemic sense of deregulation and inaction by those who were in power to take action. >> have they learned the lessons of the financial crisis? >> that would be a better question posed of them than me. >> both chairman bernanke and

secretary geithner, during the course of their interviews with us and their testimony, themselves upon reflection, have noted that there were certain decisions they had made that perhaps they wished they had made differently. i think it is very admirable for them to articulate that. it certainly was a rarity among all those who came before us to actually talk a little bit about their role in the financial crisis and to talk about how they may have changed the actions they took. i think that is something that reflects on their character. >> really, i would like to add is that i do want to emphasize that -- i think it is very clear from our report that this

government was very ill prepared for this crisis. when you read our report can you see that only a month out from the crisis the government is trying to figure out the exposure created by almost 1 million derivative contracts that lehman had, that is very sobering. when they go in to try to find out, they are afraid by even asking the question it will spread a panic. the federal reserve, the open market committee discussed this and they thought bear stearns was unique. so there were big misses along the way. we hope that lessons can be learned. >> i think it is important not to focus just on those who are currently still in leadership positions. our commission was exceedingly nonpartisans in his criticism. mr. greenspan received plenty of attention in the book for

the judgments that they made in the course of the time when they were at the helm of the responsible agencies. i think this is something that has been pervasive for quite some time. >> thank you. next question. >> cnn. i have two questions. number one, have you referred anything to law enforcement authorities for further investigation? if so, can you share as much detail as you're willing to? it snows here that all the sex received a bailout money from a id. -- it shows here that goldman sacks received a bailout money from a id. -- from aig. >> one was to examine the major institutions that would have failed if it were not for government assistance. we were asked to refer to the attorney general of the united states and any appropriate state attorney general that the commission may have found had

violated the laws in relation to the crisis. where the commission found potential violations, it referred to those matters to the proper authorities. we will not comment on any specific referrals. secondly, let's talk about goldman sachs. >> [unintelligible] >> i said, where we found potential obligations, we refer them to the appropriate authority. i will not spend a lot of time on this. on pages 377 and 30778, many people know that goldman sacks receive about $14 billion that it passed through to many other clients. but we found that goldman received another $3.4 billion from aig and retained two-thirds of it. unlike what might have been understood broadly, it was

passed on to others. >> corporate crime reporter. listening to you, flipping through the report, we hear words to describe the c o's of these companies, such as risky, reckless, imprudent, irresponsible. we do not hear the word "criminal." did you find corporate criminal activity or individuals and corporations who committed crimes? if you did, why have you not made that conclusion in this

report? >> as the chairman said, our mandate was to refer to the attorney general or to the state authority any individual that our investigation may have violated u.s. laws, whether civil or criminal. we made several of those referrals, but we will not talk about any of those details. >> are the public and the financial system better protected because congress gave the sec and the cftc the regulation without the money to do it to? >> i hope that the statutory

powers of the two agencies are fully implemented and financed. >> [unintelligible] >> i think a great deal of rule making is going on now. they have some resources and they may well need additional resources for their additional

responsibility. >> i am being told now that we will go to the phones. there are apparently a number of members of the media on the telephone. it is a snow day for those in washington and some remote. >> kevin hall, your line is open. excuse me, kevin hall? is open. ask your question. -- your line is open. ask your question. >> you had a very specific case where warren buffett was in front of you and you ask him to specifically whether or not he had been told by mühe these employees -- by moody's employees that there were problems with structured finance and the there was a crisis ready to happen. he denied ever receiving that. you had documents and e-mail in

your position, showing that he had reached out to them. can you talk a little bit about mr. buffett who'd showed to be pretty indifferent to the workings of moody's? >> what was the end of that question? >> whether or not how much you touch on mr. buffett's testimony in new york in which you showed him during questioning to be a major shareholder who seem to divorced of the workings of the company and the earlier part of the question, whether or not you had in your position e-mail that shows he had been reached out to

all from the structured finance division. >> first, i will have to ask the staff to get back to you. that is about the e-mail exchange. i do not have that at my fingertips. we do talk about moody's extensively. we do talk about berkshire hathaway's large ownership in that company. i will have staff get back to you to point out where it is in the book and what we have. let's get to the next question. >> dave clarke with reuters. your mandate was not to make recommendations for policy changes, but congress obviously already made those. do you think that the dodd- frank law is adequate? >> we hope that this will be a guidepost to policy makers as our financial system is reformed. that journey has just begun. it has by no means added. there are major rules and procedures that have to happen. the jury is still out. would you like to comment on this? >> not particularly.

[laughter] >> i just want to make sure that any other commissioners have any comment. >> i do not think we chose to take their work and shape it for dodd-frank at all. our task was to identify the causes of the financial crisis, not necessarily to safeguard investigation into a piece of legislation that might have involved. it is a circumstance that it did so during our investigation. i would hope that what we have outlined in our report does become a guidepost for what legislators or regulators will do as they move forward. but it was not, by any stretch

of imagination, intended to reinforce or support any particular piece of legislation. >> unaccustomed as i am to avoid or to pass up the opportunity to comment, i have changed my mind. i think it is important to recognize a couple of things. our financial system is really not very different today in 2011 than it was to the run-up to the crisis in 2006 and 2007. in fact, the concentration of financial assets in the largest commercial and investment banks is really significantly higher today than it was in the run-up to the crisis. as a result of the evisceration of certain of the institutions and the consolidation and merger of others into larger institutions. i think it -- i think we would be remiss to suggest that whatever feelings we have uncovered in this report have all been addressed by dodd- frank or any of the legislation.

it is our hope it will inform the debate going forward, not just to do with the implementation of the legislation that has been passed, but the need for of the regulatory modifications that may be addressed in the future. >> let's go to the next question. >> your line is open. >> i would just like to press you a bit further on possible violations of laws and the united states. can you tell us how many cases you have referred to a corporate authorities? and if you cannot give me a number, is it more than 10, less than 10? can you tell us also -- >> more than one, less than 1,000. we made our statement on this. we are not a prosecutorial body. we were given an obligation by

congress where we found potential violations to refer this to the appropriate authorities. as a matter of fairness, those have been sent to the proper authorities to examine. and that is all we are going to say on that, and that is the right and fair thing to say because we have that obligation. we're not prosecutors. and i think that is all we will have to say on this matter. but we respect your efforts to continue to try to press us. yes, let's go back into the room. >> i am with mortgage banking magazine. to what extent were collateralized debt obligations a key factor in creating the crisis and secondarily, to what extent was the reliance on repo's which professor gary gordon has estimated as the market as large as $12 trillion, up and shooting factor? >> i think gary gordon was talking about the shadow banking system, because the lending

market, which is in on regulator landed market grew to $2.20 trillion. not expect the chump change. i will ask ms. born to comment, and mr. georgeo to comment if they choose. >> well, we certainly discussed at great lengthth the role that cdo's played in the housing bubble, in the inflation of mortgage-related securities, and in the later years, in the use whichnthetic cdo's, essentially consisted of credit default swaps or over the counter, unregulated over-the-

counter derivatives. they continued the securitization process for a longer period of time and inflated securitization as the mortgage market itself was beginning to flatten and then decline. and they certainly played all rolled in the enormous impact that the collapse of the housing bubble had on financial institutions. >> i mean, you will certainly, if you read the report in fall, you'll end up knowing more than most people would ever want to know about collateralized debt obligations. but we found them to be central in a variety of respects. the most significant of which, i think, is that if you examine the structure of collateralized debt obligations, they were an attempt to convert the lowest rated traunches of the

underlying mortgage-backed securities into higher rated instruments. they took the triple b rated traunches of other mortgage- backed securities, which were the ones most likely to fail above equity, and by slicing and dicing them and putting them into another instrument called collateralized debt obligations, they were rated as a super senior and receive aaa ratings from the agencies. this is a conundrum that we variously labeled as alchemy or pejoratively and a variety of respects, but the point to be made is that this went on really without anybody questioning at the fundamentals of how you could essentially turn very risky securities into super safe securities simply by amalgamating them together. in fact, what those cdo's did is create layers of correlated

risk when the notion was that by somehow putting them together they were diversifying risks and making them stronger. we now know from the downgrade of those institutions, and the failures of the securities, that they were not safe at all, but nobody really, fundamentally question them. the process went on. lots of people earned a significant fees and the creation of them and reading them and so forth. and there was very little questioning of them. more than anything else, they are emblematic of the type of head in the sand attitude that some people approach these issues with. touched one also of the most important aspects of the crisis, and that is the housing bubble. and one of the things that our report does extremely well as to lay out analytically the

sequencing of the events. if you look in particular at page 70, it walks throw some mortgage-backed securities from beginning to end, looking at ways those markets were able to continue to fan the flames of the housing bubble even perhaps after the national demand by real money buyers had began to evaporate. so it certainly is relevant in a variety of different ways, threaded throughout the report. >> mr. georgiou mentioned, of had beens by 2008, 990% doubt -- 90% had been downgraded. near the end of the crisis, firms like merrill lynch are creating cdo's. this is one of the areas where people ask, what is new about this book? what is new is this is the first official government report on this crisis. what is also new is that we have

tied things together in a way that has not been done before, but there is also in here, based on millions of pages of documents, 700 interviews that we did, the bank examination reports, there is a very substantial amounts of data on questions like, what really happened in the marketplace that has not been in the public realm before? let's go to. i want to take new people, if it is ok. i want to go to the microphone. >> "newsweek." the nature of the crisis began to come clear and the spring and summer of 2007 when subprime loans began to default. what if anything could the government have done after that introduction to present the crisis that exploded in the fall crisis and a, oof 2008, or wase

preordained by 2007? >> i will make a quick comment. much of the damage had been done by that point. let's keep in mind, that from the third quarter, i believe of housing prices were already in decline, wall street created another $1.70 trillion in mortgage-backed securities and cdo's. i think it is a very good question because as mr. thompson said earlier, the federal reserve had a chance to act on of controlled lending even in 2001. if adopted some rules that they thought recover between 9% and 38% of subprime loans. it covered 1%. they had information in 2004- 2005 about at the federal open market -- federal reserve open

market committee about the fact that subprime lending was an accident waiting to happen. but i think what is also striking is that after it the contagion started to spread, there was a lack of understanding about the interconnections. of the federal reserve in july, 2007, when bear stearns block. they think they are relatively unique. they actually say, they think they are relatively unique because not many other funds have these positions. so the fact is the response was a very slow flooded, and it is hard to do wahat-if's. there was inconsistent and slow response. >> let me just mention that in the time period you were talking about people like chairman bernanke and secretary paulson were assuring congress and the

public that there would be little stomacystemic impact of e mortgage and housing decline. i think that if the regulators had more fully understood the markets they were dealing with and their regulated institutions exposures to them, they might have taken earlier steps, but i do not think they did understand that. >> mr. thomas? >> is really to follow-up on -- it is follow up that one would have hoped that there could have been more critical examination of the variety of financial companies that held assets related to that. for example, the banks, the

investment banks, fannie mae and freddie mac, to have the examiner go and and at least understand more thoroughly what exactly was on the balance sheets at that time. >> and i might add, i think it is also symptomatic of a lack of accountability in the system that we discovered in our investigation that a number of financial institutions, even though these particular instruments were being downgraded, continued to pile them on because they had the opportunity to do so and have very little consequence, they believe, a leased from the people who were originating them for the consequences of their failure. and that is a problem that we have seen throughout the system and it is imperiled the number of major financial institutions. if you look at the section on movies in the book, you'll find that at the same time-- on moody's, you'll find at the same

time they are downgrading previously aaa securities, they were in the current pipeline raiding the same types of securities as aaa at the same time there were downgrading those they had raided before. of course, if you are compensated at the front end of the process, at the front end of the origination process and mortgage brokering process, without regard to the actual performance of the instruments that you are cost to create, that is an incentive to continue the process and not to step back and modify them. >> let me pick up on- as secretary paulson said to us that the toothpaste was out of the tube. let's be clear. goldman sachs and other companies, from 2006 and 2007, were squeezing a lot of toothpaste out of that tube.

certainly, much of what created this crisis happened by 2006, but the uptick was very slow and the actions continued. for example, goldman sachs continued for example as one company after december, 2006, to create tens of billions of securities and put them in the marketplace. in terms of governor response, it is not until august 15, secretary paulson is the report from the federal reserve about what dire conditions fannie mae and freddie mac are in. august 15, only about three weeks before conservatorship. then it takes a three weeks, according to our investigation, for him to convince mr. a la carte, the head of the overseer-- mr. lockhart -- to move on a conservatorship. first, a lot of toothpaste being squeezed out of the two, and secondly, slow response. next question?

>> i would like to see if we can do a little variation. >> i wanted to find out more about the extent of the accounting fraud. we know about repo 105 and 108 -- lehman brothers and their pending lawsuits against ernst and young. do you think accounting fraud is bigger? >> that is a publicly known case. the attorney general of new york has filed an action, and we do account the transactions. i will say we have built on the work of many other examiners, and particularly of the bankruptcy examiner. we do look at off-balance sheet and hidden positions. that is what i have to say. i do not want -- not know if anyone wants to add anything. ok. going to the phone? >> there was a provision in the dodd-frank legislation that

would have kept leverage at 15 to one. it was removed, i guess the argument was that this would discourage the u.s.'s ability to compete globally again. i just wanted to get your sense, based on your research, are you disappointed that there is not a cap on leverage? do you feel it would have been enforced properly if there was a cab, and your thoughts generally on the leverage the situation of large financial institutions. >> i will have a one sentence response. regulators hand and have the -- had and have the authority to control levers. the sec could of had control. citigroup, when you count their off-balance sheet exposures it grew to 48 to one -- crazy stuff. the power is there and as was it was there. discussions are

addressing some of these questions as to what the capital standards and permissible levels ought to be an international financial institutions. the argument is commonly made that if you constrain american constitution is that they will not be able to compete internationally, or if you constrain regulated institutions, they will not be able to compete with unregulated institutions, hedge funds and others. the problem is not, if somebody operates a business with what turns out to be an adequate capital, in that a modest reduction in the asset base limits their capital, in the normal course, people are permitted to fail. that is part of what the economic system allows. and they would go bankrupt and they would go out of assistance and others stepped up to the plate. the problem here is with institutions that have systemic importance in our society and to

what extent we ought to permit them to operate with in capital such that if and when they are threatened with failure, they come to the taxpayers for relief. and that is the conundrum that i think we face generally. >> go ahead. >> ultimately, decisions about leverage, whether they are made by regulators or by corporations, individually or individual households, ultimately, they fall into the spectrum of human action and inaction. as a central focus and central point of what we report upon in this book, it is the notion that that this crisis was in be preventable as a result of the fact that surly human action and inaction could have been changed. and leverage falls into that category. >> i will take one more question. i did not give the signal right. i just promise that. we will take one more, which by

the way is always a mistake. we want to identify one last questioner. then we will wrap this up. >> greg gordon. mr. chairman, did you look at secretary paulson's inaction while his former firm exited the subprime market and is this a conflict of interest? >> in that regard, you could look at the book. we have detail about what secretary paulson did and what tghehhe firm did. i would advise you to draw your own conclusions as to what occurred. certainly the book, details, in specific terms, what goldman sachs did and it certainly

details also, we believe in very ms, what treasury gedid during that same period. i want to thank everyone and i want to one more time remind everyone in this room that this record is available. it is available through public affairs, a publisher and the stores and online in both book and e-book version. it is available to the government printing office. and if you go to our website, what you will see is how you can get the report. you can download the report for free. you can also see on there that what we have posted is a there are thousands of foot knows in this extensive report, and what we have posted -- there are thousands of footnotes in this extensive report. what has not yet been posted are the audios or transfers.

before we wrap up our work on february 13, we will post additional documents, transcript, to provide what we hope will be a good historical record. i want to close by thinking again of 10 commissioners for their work. i want to thank my colleagues for being here today and thank you for your attention to what we believe is a critically important issue for this country. thank you so very much. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> today on c-span's road to the white house, a former minnesota governor tim pawlenty. he spoke at a politics event in bedford, new hampshire. just over a year from now, new hampshire will host the first of the nation's primaries. as the gop field begins to take shape, stay tuned in to "road to the white house." tonight we will talk to former president bush about his life and his book. >> a lot of the actions that harry truman took made my life easier as president, and therefore, many of the decisions i made your executive order --

or the most controversial orders i made your executive order, such as listening to phone calls of people who might do us harm or enhanced interrogation techniques became the law of the land. after the 2004 elections, and after the 2006 elections, i went to congress and said, we need to ratify through legislative action that which i had done within the constitution by executive order. and so, the congress in spite of the fact that we had been dumped, passed a law that now enable the president to have these certain tools. people said, why didn't you leave it under executive order? in some cases it might be too hard politically for president to put out an executive order that, for example, authorized enhance its -- interrogation techniques. if that were passed by a legislative body, it might be easier for that person to use that technique. >> see the entire interview

tonight at 8:00 p.m. eastern and pacific on c-span's "q&a". >> the republican controlled u.s. house voted last week to eliminate public financing of presidential campaigns. the vote was 239 to 160, split along party lines. republicans said the u.s. cannot afford the program in in era of deficits. the legislation would save $617 million over 10 years according to the congressional budget office. the bill still needs senate approval. here is some of the house floor debate on the measure. gentleman from maryland, mr. van hollen. the chair: the gentlan from maryland. mr. van hollen: thank yo mr. speaker. i thank my colleague. i rise in strong opposition to this measure which along with the supreme court's radical decision in citizens united takes our nation's campaign finance system in precisely the wrong direction. less transparency and less

informatiofor the voters. americans from across the political spectrum, democrats, republicans, independents, want less special interest money in politics, not more. they want clean, transparent and competitive elections and campaigns where candidates, those of us in this room, presidential candidates, rise and fall bas on the quality of their ideas, the strength of their arguments and their ability to attract support from the votes that are they seeko represent. what they don't want, what they don't want are campaigns decided by how much secret money flows into an election from secret outside groups. and they will no longer tolerate, i believe, those politicians tuing around and saying to those citizens, you have no right to know who's paying for what in our political campaigns. you have no right to know who is paying for those tv advertisements that you're watching. let's remember what we're talking about here.

the current presidential financing system that this bill would eliminate arose from public outrage in the post watergate period. rather than presidential candidates trafficking in secret slush funds, our nation decisions that -- decided that our democracy would be better served by a stem of public disclosure, contribution limits and emphasis on smaller dolr contributions matched by the presidential financing fund. the system is voluntary. one line on your tax code. not complicated. and while not perfect, formost of its 36 years in existence, it has served this nation well. candidates from across the political spectrum, from ronald reagan to jesse jackson, have voluntarily participated in the presidential financing system. now, as a colleague on the other side mentioned, there is no doubt that the current law needs to be modernized. it needs to be fixed. we saw that in the last presidential election, but rather than throw out something

that has served the country and the electorate well for 36 years, rather than throw it out let's fix it. and mr. price from north carolina and i and others have introduced legislation to do exactly that. so rather than shielding an avelampling of unlimited special interest money from puic view, we should shine a light on it, we should do it by modernizing the presidential system and also pass the disclose act which we could have brought up and voted on except for the previous question was just defeated. mr. speaker, at the end of the day our nation's democracy doesn't belong to presiden or members of congress. it belongs to the voters who send us here. and we have a solemn responsibility to safeguard it on their behalf and prect it for future generations, from the lessons of corruption in history, let's mend it, let's fix it, t's not throw it out. thank you, mr. speaker. the chair: the gentleman's time has expired. the committee will rise informally for the purposes of receiving a message. will the gentleman from nebraska

kindly take the chair? the speaker pro tempore: the house will be in order and the chair will receive a message. the messenger: mr. speaker, a message from the senate. the secretary: mr. speaker. the speaker pro tempore: madam secretary. the secretary: i have been directed by the senate to inform the house that the senate has agreed with s. 3, honoring the service and sacrifice of staff sergeant salvatore giunta, a tive of iowa, in the first living recipient of the medal of honor since the vietnam war. in which the conrrence of the house is requested. the speaker pro tempore: the committee will resume its sitting. choipt chair sees the gentleman from illinois on -- the chair: the chair sees the gentleman from illinois on his feet. are we going to go -- it will be the chair's inclination to

represent the gentleman from california at this moment in time if you're going to do it all at the same time but the gentleman from california, mr. lungren. mr. lungren: thank you very much, mr. chairman. if it hasn't been requested already, i would ask that all members have five legislative days to revise and extend their remarks. the chair: it's already been requested in the house. we can move on. mr. lungren: mr. chairman, i rise today in support of h.r. 359 which terminates the taxpayer financing of presidential election campaigns and party conventions. at the outset i want to mention in response to something that s said by the other side, this is absolutely nothing to do with the citizens united case decided by the supreme court. that changed not one eye oata campaign finance law. corporations still cannot make contributions to campaigns or candidates. it does not change that. citizens united had to do with the estion of whether or not one los his or her first amendment protections of free

speech, particularly with respect to expressions of litical nature, merely because ey associate with another person. the supreme court told us that you do not in fact lose your first amendment rights because you happen to say it jointly with someone else. so, as a matter of fact, they pointed out that some people with the least amount of influence in a society actually expand their influence in the political debate by joining with others. and then the question of the supreme court, that the supreme court answered was that if that association happens to be corporate in nature, happens to be a union, happens to be a for-profit, happens to be a not-for profit, whether that changes the dynamic of contemplated by the first amendment protections and they told us it did not. so let's g

of that canarrd rig abay. this has nothing to do with corporate contributions to campaigns or foreign contributions to campaigns both of which remain illegal with criminal sanctions under the law. let's get that out of the way so we don't have a lot of debate that doesn't have anything to do with the bill before us. mr. chairman, we find ourselves at a unique juncture in the long standing debate over this issue but the reality it's a juncture no longer. taxpayer financing of presidential elections and party conventions, the two major parties is simply no longer defensible. the first tax liabity contributions for american taxpayers to be diverted toward the funding of presidential elections began 35 years ago in 1976. is new practice was as we were told by the other side, supposed to raise the public stress of the government and increase the

number of candidates and thus electoral competition the financial footing between parties. i believe, mr. chairman, it has failed on all accounts. it did allow us to have lyndon larouche to be a participant in the presidential elections. i'm not sure when we've had someone who had been subjected to a criminal conviction and conducted part of his campaign while still incarcerated, but that was brought to us by way of this fine law. in 1976 approximately $1.5 billion -- since 1976 approximately $1.5 billion has been spent on this system. as we speak there is a balance of $195 million sitting in the presidential election campaign fund at the u.s. treasury department. and yet this system of leak torle subsidies has not changed the public's perception of our presidential elections or our politics. according to one survey after

another, americans continue to harbor deep distrust of elect officials. does anyone think our presidential elections have shown a virtual progression towards more accuracy and more honesty? mr. chairman, how many candidates, candidates who supposedly believe in the system, have opted out of this taayer financing scheme in recent ars? in 2004 and 2008 several candidates declined public financing for their primary campaigns. and as was mentioned by the gentleman from illinois, during the most recent presidential election for the first time the nominee of one of our two major political parties withdrew from the public financing during the general election and instead went on to rse record amounts of money for his campaign and i recall when i thought we hea a pledge to participate in this program, because of the virtuous nature of the program. somehow that was lost along the campaign trail.

in addition to presidential primaries -- one of the things i would like to point out is this -- there is this idea somehow we are going to be able to suppress money that goes into politics. the fact of the matter is it's like a balloon. a water balloon. if you squeezet on one side, it has -- comes out on the other side. the question is, how do we get it within the system? we suld be talking about the idea of this silly demarcation between our parties and our candidates, where we limit in extreme fashion the amount of money that can be transferred or coordinated, as if somehow that corrupts the candidate to have him or her identified with the very party they represent. we ought to be working towards those kinds of changes that will allow a greater responsibility on the party and the candidates to express their positions and to hold to the positions be responsible for their positions. but no, we talk about these ways

of how we're going to somehow reduce the impact of money in campaigns. it hasn't worked under >> last week, the senate considered changes to operating rules. they ranged from operation to the ability of senators to block legislation from coming to a vote. here is a portion of the debate. w.ble for a united states senator to engage in the unconscionable practice of secretly blocking a piece of legislation that affects millions and millions of americans. the fight for more sunshine in the way the senate does business feels like it has been the

longest running battle since the trojan war. today, after scores of battles, the cause of open government is going to prevail. over the years senator grassley and i and with the strong support of senator mccaskill, we've been able to secure leadership agreements to end secrecy. we've been able to pass amendments, send them to conference committees where they would then magically disappear in scre ski si. we one time got a watered down version of our law passed. in each case the defenders of secrecy have found a way to keep sunshine out and obstruct the public interest. when this proposal passes, we believe there will be real change. and there three reasons why we believe our bipartisan proposal

to end secret holds will be different from previous approaches. the first is that now with any hold here in the united states senate, there would be a public owner. every single hold would have a united states senator who was going to be held accountable for blocking a piece of legislation. second, there would be consequences. in the past there have never been any consequences for the senator who objected anonymously. in fact, the individual who objected would usually send somebody else to do their objecting for them and they would be completely anonymous. essentially the person would be doing the objecting would sort of say, i'm not really involved here, i'm doing it for somebody else, so the entire senate lacked transparency with respect to who was actually responsible.

and, third, the wyde wyden-grassley-mccaskill proposal would deal with all holds whether they reached a point of objection on the floor or objected to when hotline. our bill requires an objection to be public -- that never get called up on the floor. and this is a particularly important provision, mr. president, and my colleagues, senator grassley and senator mccaskill, feel very strongly about this as well. because most holds never reached the point that there is an objection on the floor. and that is something i think that has been lacking in this debate. they hear about discussions of people objecting on the floor. most holds never reach that point. typically what happens is that a united states senator who objects to a bill or nomination tells the senator -- the senator's leader that the matter

shouldn't be allowed to come up for a vote and then the leader objects to bringing up the bill when it is hotlined. because of that objection, the bill or nomination never actually gets called up on the floor. the bill -- that type of hold effectively kills the bill or nomination long before it gets to the point of an objection on the floor. so we want to make it clear that this is an important distinction and that for the first time we wouldn't just be talking about objection that's are made on the floor. i see my friend and colleague, senator mccaskill, who has crusaded relentlessly for this, senator grassley and i, i said senator mccaskill we sort of feel like we've been added as part of the longest running battle since the trojan war. your energy has been absolutely crucial in this fight. and i would also point out, mr. president, that i think we

know that the defenders of secrecy will always try to find a way around anything that passes. we think we have plugged the holes here. we think we've finally made the crucial differences, but the fact that you have been such a relentless watchdog for the public interest, an opponent of secrecy, has just been a tremendous contribution. i thank my colleague from missouri and welcome her remarks. mrs. mccaskill: mr. president? the presiding officer: the senator from missouri. mrs. mccaskill: prp mr. preside, i'm proud to join senator wyden and senator grassley on this issue. i'm giddy. i can't believe it. i really can't believe it that we are are this close to amending the senate rules by a wide margin. i will predict this will be a very lopsided vote, which is ironic. i don't think there is anything that has taken as long as this

has that will win by as much as this will win. people were stubborn to holding on to their secrecy. it's a lot easier to do business and get your deals if you don't have to be public about it. so there are very few things that you can grab a hold of in the united states senator and actually -- senate and actual see to the finish line. i believe this will be the finish line. let me say one warning. if anyone thinks they can figure out a way around this, all of us that have worked on this are not going to give up. so six month from now if something's not moving and no one knows why and we figure out that one person is just -- has just decided to own the holds, like the minority leader, i'll just own all the holds, that isn't going to work. because we'll come right back and we'll point out to the american public, believe it or not, they're trying to get around this rule. so a warning to everyone if we're going to amend this rule, be prepared to live by it. because it's the right thing to

do. and i think it will be -- our stock will raise with the american people. i think the transparency is essential, and i'm very proud that it appears -- i'll keep my fingers and toescrossed because it hasn't happened yet. it appears that we have bipartisan agreement that this nonsense is going to end. i want to thank my colleague from -- from tennessee, senator alexander, because i think he's been essential in if these negotiations as it's related to an amending of the rules as it relates to secret holds. thank you, mr. president. i yield the floor. mr. wyden: i thank my colleague, our invaluable ally in this fight, senator grassley, i believe is on his way. but the senator from tennessee has had many, many discussionings on this topic with me and other senators and i want to thank him for all the time and effort he's put into it and yield him whatever time he would like to pursue. mr. alexander: mr. president? the presiding officer: the senator from tennessee. mr. alexander: senator grassley

and senato senator wyden and moe recently senator mccaskill, as well as others, have pointed out the obvious fact that so-called holds that members of the senate place on nominations should be public. i think that's a good idea. that has bipartisan support and i believe today that we will change the rules to make that clear and i congratulate them for their perseverence and persistence in pushing this ahead. i've always been glad to be public with my holds. i remember when senator reid filibustered my t.v.a. nominee by putting a hold on it. so i filibustered one of his nevada citizens by putting a hold on it but we were able to work it out. but we did it out in public. i knew what he was doing and he knew what i was doing. so that's -- that's important to

build confidence in the senate. and i would say while i believe the senator from iowa is on his way over, he's been the partner with senator wyden on this for some time, but i would like to say senator wyden, mccaskill, and others as i've said to senator merkley and senator udall, that the efforts they have made to change the rules of the senate evening though they won't succeed in all of the changes they are seeking to make have created a window of opportunity which i believe on both sides of the aisle we believe will make the senate a better functioning forum with which to discuss serious issues. the majority leader and the republican leader earlier today said they were going to do their best to see that most bills came to the floor after first going

to committee and once they got here, we'd have amendments. i think that's what most of us want. we want a chance to -- to represent the views that we -- that we are elected to represent and that we have. and sometimes they're in the minority, sometimes we're very solitary with our views. maybe we're the only ones that have a view. we want a chance to be heard and offer that amendment. we're presenting in the senate a forum that can be done but at the same time make it a more effective place in which to do that and i congratulate senator wyden and his colleague, senator grassley, and others for their efforts. the presiding officer: the senator from oregon. mr. wyden: while we wait for senator grassley, who senator alexander has mentioned has just been relentlessly pursuing this with us for years again and again senator grassley would come -- come to the floor and make the point that the united

states senator -- united states senator ought to have the guts, just ought to have the guts to stand up and say, look, this is important to me. i'm the individual who ought to be held accountable. and senator grassley in that midwestern way just always manages to get these issues down to what they're really all about. it's about accountability. and, as senator grassley says, it's really about guts. i would also mention what's striking about the secret hold, mr. president, is that astounding power -- and i think it's only fair to describe it that way. i mean i know of few powers that an elected official has that resemble the ability to anonymously block a bill or a nomination that affects millions of people. it is an astounding power and

for years and years it has never been written down anywhere. now, as part of the ethics legislation that was passed a few years ago, we were able to get a watered-down version of secret holds reform in there. but literally to think that a power like this so sweeping, almost unrivaled in terms of the powers an elected official has could be exercised in secret is something worth reflecting about in and of itself. i will also tell -- tell colleagues that for those who want to get into the history of this, there are all kinds of holds. there was the revolving, you know, hold. there were a number of different ones, but my favorite over time was the may west hold which came

to also be known as the come look me over hold which was almost as if a united states senator was declaring that they weren't sure what they wanted to do with -- with their hold, but somebody ought to come up and see them sometime. and it just goes to -- to show you that these kinds of -- of practices -- and this is what has been good with the work done by senator schumer, senator alexander, my friend and colleague from oregon, senator merkley and senator udall have been so important because for the first time they have brought out into real debate what these rules are all about. and my hope is that this will just be beginning of the discussion, mr. president, about how in the days ahead it will be possible to bring more sunshine and more transparency to the

united states senate. but senator grassley, who has made this point in the past about doing business in public, that the principle at stake is accountability and transparency has made the case for a long time and has additionally told senators that since he -- and there have been a number of us have always put our holds in the congressional record. and i haven't used them very often. senator grassley has made the point that colleagues will find that when they do it, it doesn't hurt at all. that, in fact, not only do they not suffer any detrimental consequences, but they do it, the public thinks more of them. one final point, mr. president, as we wait for senator grassley is that i'm particularly

interested in having holds reform enacted as part of our work today because the secret hold is a huge bonanza for the lobbyists. the lobbyists can, as we've seen year after year, go to a united states senator, say, you know, it had be a big -- it would be a big favor to me if you put a hold on something so we'd get a little more time to have a chance to make our case. sometimes you have competing lobbyists asking for secret holds, so you have one united states senator putting a secret hold on a piece of legislation making a whole array of lobbyists happy. sunshine will be good for the united states senate. it will certainly be good because it will shine the hot light on some of these lobbyists' practices that we have been trying trdent?

the presiding officer: the senator from iowa. mr. grassley: i rise to support the wyden-grassley-mccaskill public holds proposal. i apologize to my two colleagues from oregon and missouri that i was not on the floor at the proper time. it's all my fault. i'm pleased to see this day come to where the senate will finally have the opportunity for an up or down vote on our freestanding senate resolution to require public disclosure of holds. senator wyden and i have been at this for a long, long time. we made progress at times and we have also had many disappointments where things didn't quite work out the way we hoped and what we thought the president -- or the senate had spoken on through even roll call votes. it's also been good to have senator mccaskill join us in helping push this issue to the forefront easily.

and she did that -- i shouldn't say easily, recently because it hasn't been easy. ending secret hodes seem holds a simple matter, doesn't it? that hasn't been the case. secret holds is an informal process. it is easier said than done to push them out into the open using formal senate procedures. it's kind of like trying to wrestle down a greased hog. however, after a lot of thought and effort and two committee hearings, i think this resolution does a pretty good job of accomplishing our goal. that goal is really just to bring some more transparency into how the senate does its business and with transparency more accountability. now, this isn't the only proposal that we're considering today related to senate procedure.

and i don't want there to be any confusion. this proposal is not about a lottering any balance of -- altering any balance of power between the minority power or majority power. neither does our resolution alter the rights of any of the 100 members of this senate. over the time i've been working on this issue, i have occasionally encountered arguments purporting that it -- to defend the need for secret holds. however, the arguments invariably focus on the legitimacy of holds not on the subject of secrecy. so i want to be very clear that secrecy is my only target and the only thing that this resolution eliminates. i fully support the fundamental right of individual senators to hold or withhold his or her consent when unanimous consent is requested.

senators are not obligated to give their consent to anything that they don't want to and no senator is entitled to get any other senator's consent to their motion. i think the best way to describe what we seek to do with this resolution is to explain historically how holds came into being as senators have heard me do before. in the old days when senators conducted much of their business in a daily way from this, their very desk right here on the senate floor, it was a simple matter to stand up and say, i object, when necessary. these days most senators spend most of their time off the senate floor. we're required to spend time in committee hearings, meeting with constituents and attending to other duties that keep us away from this chamber. as a result, we rely on our respective party's leaders here in the senate to protect our

rights and prerogatives as individual senators by asking them to object on our behalf. just as any senator has the right to stand up on the senate floor and publicly say, i object, it is perfectly legitimate to ask another senator to object on our behalf if we cannot make it to the floor when consent is requested. by the same token, senators have no inherent right to have others object on their behalf while keeping identity secret. if a senator has a legitimate reason to object to proceeding to bail or nominees, then he or -- to a nominee, then he or she should have the guts to do so publicly. we need to have no fear of our constituents if we're acting in their interest as we are elected to do. transparency is essential for accountability and accountability is an essential

component of our constitutional system. transparency and accountability are also vital for the public to have faith in their government. as i've always said many times, the people's business ought to be done in public. in my view that principle is at stake. madam president, i see my colleague from oregon here on the floor and if he would indulge me, i would ask unanimous consent for -- to engage in a colloquy with the senator from oregon to get his thoughts as well. the presiding officer: without objection. mr. wyden: madam president, as senator grassley has said, senator grassley and you, senator mccaskill, and i have always maintained that there is no legitimate reason for senators to keep holds they have placed with their leaders secret for any period of time. in fact, for quite some time we have made a practice of immediately disclosing any hold we place in the congressional record. and that has been at the heart

of our resolution in my judgment. with my colleague, my friend from iowa agree? mr. grassley: absolutely correct. one of the defects of the wate watered down secret holds provision in the ethics reform bill in the 110th congress is that a it allowed for large bills of secrecy for disclosure was required. ours states that the leaders shall recognize the holds placed with them only if two conditions are met, if the senator first submits the notice of intent to object in writing to the appropriate leader and grants in the notice of intent to object permission for the leader or designees to object in the senator's name. and, secondly, not later than two session days after submitting the notice of intent to object to appropriate -- to

the appropriate leader, submits a copy of the notice of intent to object to the congressional record and to the legislative clerk for inclusion in the applicable calendar section. mr. wyden: i thank the senator. i think that's an important point because the resolution, the bipartisan resolution, clearly establishes the responsibility of all senators to go public with their holds and the understanding that the leaders will not honor secret holds. in addition, a concern that has been expressed is the lack of an enforcement mechanism in case there is a breakdown in this process, that it doesn't work as intended. could the senator from iowa address that? because i believe our resolution addresses that concern as well. mr. grassley: it certainly does. even if the process that we've talked about isn't followed, once a hold comets to light in the form -- comes to light in the form of an objection, someone will be required to own

up to that hold. it will no longer be possible for a leader or their designee to object, but claim that it is not their objection. they can say on whose behalf they're objecting, and why not. we also require senators placing a hold to give their permission to object in their name. still if a senator objects and does not name another senator as having the objection and another senator does not promptly come forward claiming the objection, the senator making the objection will be listed in the relative section of the senate calendars having placed that hold. i would yield for final conclusion to the senator from oregon. mrmr. wyden: i thank the senator from oregon because with this -- i thank the senator from iowa because he lay it out very wevment it sometimes feels like it's bent longest-running battle sinlts trojan washings given the

fact that we have had leadership agreements, we've had amendments, we have the watered-down version of the law, and today we finally have an opportunity to ensure that the unconscionable practice of secrecy that keeps the american people, millions of americans, from learning about a billion or a nomination, that this practice is finally eliminated. and i thank my colleague t has been a long fight and a pleasure to work with my friend from iowa, to have the energy and enthusiasm of senator mccaskill, who has given this cause a huge push, and i ask unanimous consent, madam president, as part of this colloquy, to add senator merkley as a cosponsor to the bipartisan senate llings, eliminating secret holds, and include a further coul fee in the record. >> on newsmaker as ",",

representative patrick -- on "newsmakers," congressman patrick mchenry discusses the possibility of states filing for bankruptcy. now a look at the size of the federal government and the size of -- the salaries of federal employees. this is 30 minutes. shington journal" continues. host: this past week the president talking about the deficit and also looking at the size of the federal goverent and the workforce among federal employees. when you hear the president talk about reorganizing the government, what does that mean for civilian employees? >> for o.s this is not a -- for these organizations it is not a

federal term. i think it is important for federal employees as the actual functions that the government performs. and if they can be done more efficiently, we are all for it. i hope the president, changing poxes at the top is not that important. getting down to the mechanics of government, i think, is important. i didn't like the president's remark about salmon. i thought that was a gratuitous slam at federal employees. we don't really set up the way government runs. this is done by congress and the executive branch. and i really don't think h analogy was actually true. but there have been many good examples of reorganization. i would like to go into one with the d.a. if i could.

host: certainly. guest: back in the 1970's and 1980's the v.a. had not such a good reputation. they did an internal reorganization, which i think was quite remarkable. they put more accountability on their regions, they modernized, they really strengthened their service. now the v.a. by a recent harvard study as well as a "time" magazine" is way above private hospitals when it comes to quality, when it comes to the economy of providing that service, when it comes to providing wellness to our veterans. even though the number of veterans it serves has gone up, there are 10,000 less employees in the v.a., and that's the type of reorganization that is done within the agencies rather than on top of the agencies. that i think bears fruit. >> we'll get your phone calls.

we do have one line set aside. if you are a federal civilian employee, 202-628-0184. the republican study commission has come up with one plan that over the next 10 years would save $2.5 trillion. among the items freeze nondiscrentionri defense spending. second of all, rescind remaining stimulus funds. privatize fannie mae and fred fred and eliminate federal automatic pay increase. reduce the federal work force by 16% and cut or eliminate more than 100 federal programs. guest: that's slash and burn. i do wish the president would really lay out what o economic situation is and how we got there. it wasn't discretionary spending that got us into this mess.

president bush, with the faction cuts, and then the two wars, and the financial market, you know, president bush's plan and then prident obama's stimulus is what has led us to this federal deficit. it is not the employee salary. it is not the work of the agencies that constantly goes through this tightening effect. for people to say we are going to make up this deficit by slashing the 201, 2012 budget deficits, it is not serious. host:: it is 30% higher than a private sector employee, both salaries and benefits.

and the second is irrespective of the economy, federal employees are less likely to be fired. guest: certainly in the heritage and "u.s.a. today" study they are comparing the federal salary to the private sector. that is wrong. we have 10 million or so people on minimum wage. when y consider the function of what a federal employee does, say they are an electric tradition and -- electrician working on a guided missile system, when you find someone in the private system working on a comprareable -- comparae job, the federal employee is always under-paid. wh you compare the actual function to what they are doing

in the private sector, the federal employee is always under-paid. this has been proven out through the bureau of labor statistics, which are some of the searchers who figure this out d do it on a continual basis. so i think the heritage foundation and "u.s.a. today" are trying to skew the situation to prove what they want to prove. they are against government employees. they are against some federal programs. but i do think that with feder employees, even though we don't blow our own horn, at some place in this debate, you know, the facts have to come out. iaw a study about comparing federal employees to the private sector. i am hoping that the administration, our boss, will go a long way to getting the facts on the table so that the public caneally make an

intelligent decision. host:: our guest is john gge. a graduate of wheeling jesuit university. susana is joining us on the phone. good morning. caller: hello. it is nice to be on c-span. i work for the social security administration local 3369. i am realizing how they have cut a lot of people from social security, and they have done a big hire, but lot have retired, and social security has failed, in my view, to assist the new hires from learning. therefore i feel thathe

quality of the work is really diminishing, and i think that is going to affect a lot of people. guest: thank you for your support. first of all, on the quality of work, in a recession the workload of social security always goes up. i understand that there are -- that the increase of people filing for disability is going up 500,000 a year, which puts a tremendous strain on our social security offices. one thing i want to say about quality, i mean social security has made its reputation by getting the right check at the right time. and there have been some moves within the social security management to alter that. in other words, when the beneficiary comes in to seek social security benefit either

retirement, it is often these really qualified public servants who are in social security offices all over the country to give that person the benefit of the doubt. to make sure he gets every benefit under the law. and there has been a management initiative to try to change that. in other words, that the beneficiary has to right the question to get the right answer. and i think our people, the workers at social security are really rejecting that type much thing -- of thing. it is a cost-cutting measure, but i don't think it is part of the ethic of social security to look at claims that way. thanks for question. host: allen is next. caller: i appreciate yailt your comment about the -- i appreciate your comment about the under-pai government worker

. infrastructure for essential living is like power, electric. i would like to distinguish that between the other part of our government, which is giving out checks to people through disability and this parasitic load which is absoluty terrible. when you talk about curting the federal government, i would like toistinguish between those two factors. guest: i am glad you brought up government services are really infrastructure. the president the other night was talking about investments in infrastructure, and many of the programs that federal employees do are infrastructure. so when the president says invest in infrastructure and then freeze and cut federal programs, i scratch my head a little bit about that. federal employees don't make the

rules for eligibility. they simply try to administer in a pite, intelligent, and efficient way these programs. people have different views on social security, for instance. i happen to think it is one of the greatest programs in our government. the fact is, it also also has a disability program. you ask why is the government paying people who are disabled? and the question has always been, then what if you don't? when you go deeper into these programs, they call them p en-- them entitlement programs, i think there is a tremendous need there, and it is up to every city to address problems with the disabled people or just the chronically poor.

there is simply not a solution of doing nothing. >> chris jones on our twitter page has this comment -- criticism of government employees' salaries is a key element in the government war on the middle class. >> i do think that. i mean, when you criticize a v.a. nursing assistant who is making $28,000 a year or even our border patrol that come in, these are people making under $40,000 a year, and to say tha they are over-paid and that you are going to crack this deficit by lowering their salaries is -- it is not a serious solution to the deficit. think it is more that there are some people who are not just for less government. they seem to be for no government. and to say that federal employees have caused this deficit or lowering their salaries is a cure is

disingenuous. host:: federal employees do have the case, which is not always true in the private sector. guest: you look at the reductions in force that are routine in the -- in d.o.d. and in the federal government. i don't know what really to say about that. we have a program, like the v.a. or social security, and to have experienced people working in that program, i think that is a plus for the country. and to say that they don't have job insecurity like some others, i don't understand the idea of this race to the bottom. if i can, this canabalism that's going on, well, a federal

employee might make more than me, so cut his salary, or there are people out there who have health care or peopleho have -- on the job, or have a retirement benefit on the job and i don't, so cut those. i think workers across the country have to really get away from that type of thinking. cutting other people's wages is not the solution in this country. our wages have stagnated for 10 years. it is the first time i think in history that american wagesave stagnated. en though the stock market and the top 1% are making out very well. so i hope that workers don't tn on one another. we he to raise all wages in this country. we have to have better jobs. that's the problem we're in. it is a revenue, it is a jobs proble and cutting jobs, and attacking the jobs that we have is not a

solution. caller: good morning, i'm an employee of the national social security administration, local 316, cleveland, ohio. i wish people would bear in mind that federal employees are consumers. they cut our salaries, we don't consume as much. we don't buy a n ar, then the effect that can have on the economy as well. guest: thank you for your service as a t.s.o. that is a tough job. all it gets is criticism. i think help is on the way for our t.s.o. officers. you are right, cutting 340,000 federal jobs, what will that do for unploim and demand in this country? we pay taxes.

federal employees pay taxes, they are consumers like everyone else, and to think that we can put 340,000 people on the street and that will somehow help the economy, i don't get that type of thinking. host: we received this question, "how many parts of the government are in a.f.g., border, fema? what is the largest group? guest: we have aut 50 agencies in homeland security. border patrol, fema. pretty soon we'll have t.s.a. we also are probably -- probably our largest groupe represent are the department of defense. the group with the most members is certainly our v.a. we have social security, department of labo energy, education, e.p.a.

so we e pretty prevalent across the board in the government. host: what is a tougher job, being a nurse at the v.a. or being a bank c.e.o. guest: i can tell you what's better paid, sasha, and i think you know that. much of this deficit problem we're in was caused by, you know, speculation in the banking industry who were bailed out and now we see that bonuses, again, are up over $1 million for some of these bankers, and yet the shift has been ok the banks caused it, but now we're going to solve it by taking it out of the hide of federal workers. it is not right. also, it is not a solution to the problem.

host: jerome joining us on the democrat's lin thank you for calling. caller: i would like to say thank you for c-span, and i would also like to make a suggestion on a debt-solving. i think if there was an effort to create an account that would be a charitable account from any citizen through a postal mey order, and it would be directly applied to the national debt, i think it would help. the american people have always been generous, and if it was set up with the postal money order system, it would also help the postal service. guest: one thing i have been saying wn we talk about this

deficit, is we shouldn't be -- i think americans are ready to share sacrifice. but they are not willing to gratuitously share the pain when it is not really pointed at a cure. i think that's what's happening with federal employees. your suggestion, bob, everybody doing something to, you know, pay for the wars, get us out of this slump, is a good idea. trying to target a segment of the working glass is not a good idea. host: another question from our twitter followers. why is a.f.g. needed? is the federal government an unfair employer that abuses or mistreats its employees? guest: well the first government should be a model employer. unions and the federal government are a little different than the unions in the private sector. we can't strike, we can't take

aany type of work stoppage or work actions, and also, you don't have to be a union member. yet the union has to nonmembers as well as members in the federal government. and i think we do a lot of good business to assure that promotion is fair, to assur that people have some due process, that the civil svice remains fair and nonpartisan. i think we provide a voice of work that is very valuable in having an efficient federal government in hughes operations are fair. our diversity in the federal government, i think, in the unions has something to say about the success of that is outstanding. i believe, of course it's a bias opinion, that the unions do a

very nice job in the federal ctor, and i think that many employees appreciate it. host: daielle is next joining us from brooklyn, new york, and she is a federal worker. good morning. caller: good morning. i have a comment maybe. it is regarding what they call the no fear act. i understan by some training and conferences i've attended that the actual numbers of the no-fear act is not really reflected on the agencies web site. i believe the no-fear act is when people are being discriminated against within the federal government. and the numberare not reflecting what is actually going on. and i just wanted to know what john cage's opinion is on if the government did what president obama wants which is the union and the management to get together and talk, that we could

actually lower the actual amount of the discrimination and those issues that are going on, and then perhaps ty would be more effective in the quality of work . caller: i think you are right. president clinton had a pretty good set-up where the unions and employees would get together with management and really look at 34 some of these systemic problems in the government. president bush didn't like that idea, and sort of wiped it out in most agencies. the v.a. kept it up, though, by the way. now president obama has reinstituted it with his labor management forums. i think a lot of the discrimination in the federal government is because we really haveo take another look at the way jobs have been set up. many of our jobs are stand-alone

jobs. these jobs really had to be looked at in a modern way and put into career ladders so that employees really through -- they are not in a job that they may consider dead end and that they can really see a line fa that if they work hard, they can move up and even contribute more to public service. so i think that there is still more work to do on that. some agencies have stepped up very well, although they lag behind. host: an e-mail that says, "i don't know why federal employees do not believe they should bear some of the burden of cuts and try to help just as state and local employees have had to do. i voted for president obama and thought federal furloughs should

have been a high priority and wa disappointed they were not. your reaction please." guest: i think what's happening to federal employees is terrible. the states would have been i worse shape than they are without the stimulus package. states with balanced budgets that have to try to cure a fairly powerful resession and a drop in revenue in one year, and it is just these catastrophic cuts and state employees are bearing the brunt of it, i really think that's terrible. again i go back to this thing for federal employees to take furloughs or cuts is some kind of symbolic gesture. this is not going to help the state employees. i would just like you to keep that in mind. i think all of labor is very coerned about what's lapping

to very valuable employees in our state and local governments. host: gordon lives in florida. he says, "i am an american. i don't think the american people want to shut the v.a. down." guest: i don't think they do either, but especially with the reputation now and with the quality improvements on the v. a. host: is that even a possibility? guest: there are talks about doing a voucher program so that our veterans coming back from the war will be given a piece of paper and go find your health care. i don't think that's right at all. the v.a. has such a -- such an ethic of caring for the veterans. our nurses and our doctors and our people care for the v.a. like it is their own family. i don't think you relevant -- really get that anywhere else. i think the v.a. really shows how government can continually

improve on the inside of an agency and make its services better and better and more economical. the v.a. is the ly health interests -- institution that has allts medical records computerized. it is something the private sector is only now trying to get tohese innovations that come through government have been really outstandingnd novel in the health care industry. host: a call from florida. caller: you are not going to like what i have to say. we need to bring all federal, state, and municipal employees up into the 21st century and not left in the 19th century. who can work at a job for so few years, 20, 25 years, 30 years, and then get a pension?

i know people that worked 50 years aa house. they retired 10 men with 50 years of employment and they got nothing. you keep making the statement, your statement was the electric tradition in the private sector and yourlectric tradition working in the government did not make sense. host: thank you. we'll get a response. guest: if you are firefighter, say, in the federal government and a firefighter anywhere, should firefighters, you get to be 55 years old as a firefighter, that's a tough job, and when you work it for 25 years, i think you shod be getting a pension. but the question is not, you know, federal employees have a decent pension, it is why the rest of the -- it is why don't the rest of the workers in this country have a pension?

it has been a run-on pensions for maybe the last 25 years, this 401-k movement, of employees just putting the money into a 401-k, and we can see about the consistency and stability of that with the stock market these past few years. so i kind of think that instead of criticizing employees or organizations that give a pension, i think we ought to start really pushing organizations that don't have pension plans for their employees. host: quick question from annapolis, maryland. caller: he kind of tried to answer it about the state employees furloughs versus federal not taking them. i mean, jenny think he was being -- i think generally he was being over-sensitive about the salmon comments, and i didn't see that as criticism about the federal employees but of the federal regulations.