of the "american spectator" magazine, author of nine books, and he will be our guest on "in depth" on "book tv." a lot going on today. so goo to c-span.org. go to the website. thanks for being with us. enjoy your day. . .

>> for the second day in a row, we are alive with the senate budget committee and yesterday focused on revision to tax policy. senator kent conrad is on your screen they will talk today about economic recovery. among the witnesses, they will hear from mark zandy and a representative, the executive director of the national governors' association. this is the u.s. senate gaveling in today on c-span. >> i want to welcome everyone today. today, we will focus on challenges that are facing the u.s. economic recovery. we will look specifically at challenges in the areas of

unemployment, housing, and state fiscal crises. we are really fortunate to have four outstanding witnesses with us today. dr. mark zandy, has been helpful to this committee and has testified several times in the past. we're grateful to have you back again today. dr. tilvan wachter and my daughter is getting a ph.d. at his university. i was up there a few weeks ago and he was teaching a great books class. that was very interesting. dr. ray shepback, the director of the national governors' association. after nearly 30 years, he is retiring but will go to uva. i commend you on your years of public service.

you are always somebody who has enjoyed credibility on both sides of the aisle for your professionalism and mr. chris edwards, good to have you back. thank you very much. let me begin by providing a brief overview of my own on the economic challenges that we currently confront. the federal response to the recession and a financial crisis successfully pull the economy back from the brink. in the fourth quarter of 2008, the economy was showing negative growth of 6.8%. economic growth has since returned although not as strong or as quickly as we would have liked. in the fourth quarter of 2010, we saw a positive growth of 3.2%. private sector job growth is all -- has also return but not as much as we would like. in january, 2009, it is

important for us to remember the economy was losing more than 800,000 private-sector jobs per month3. . december, 2010, the economy gained 213,000 private-sector jobs. we now have two consecutive months of private sector job growth. despite this improved picture, it is clear the economy is growing at a much slower pace than in past recoveries. when measured against the nine previous recoveries of the past 60 years, we see the current recovery lags considerably the typical recovery. i personally believe a key reason for that is the damage done to the financial sector. the unemployment rate has remained stubbornly high, a little over three years ago, it stood at 5%. it nearly doubled within one year's time and has fluctuated in a 9% range ever since.

congressional budget office now projects the on plummet rate will fall only slightly to 9.2% in the fourth quarter of this year and still remain stubbornly above 8% in the fourth quarter of 2012. another concern is the number of long-term unemployed. those unemployed for 27 weeks or longer, which is extraordinarily high. the average rate of long-term unemployment over 1948-2007, was 8/10 of 1%. the rate was very similar at 9/10 up 1%. the rate of long-term unemployed has surged to 4.2%. this is a clear sign of the persistent economic weakness experienced by americans across a broad front. we also continue to face a

crisis in housing market, a sector of the economy that sparked the recession. one out of five mortgages remains under water which means the home was worth less than the remaining amount on the mortgage. in some markets, that number is higher. in addition, one in eight mortgages is delinquent or in foreclosure. home prices have fallen 31% from their peak in 2006 and are expected to continue falling in the near term. we can see that new home building has fallen dramatically and remains low. january, 2006, we had 2.3 million housing starts in december, we had just 529,000. finally, the nation's economic recovery also faces a challenge from the fiscal crises occurring at the state and local level. a recent headline from the "new york times" says mounting debts

stoke fears and costs remain hidden. since most states have balanced budget requirement, they are forced to close budget gaps with layoffs and cuts in social services. and tax increases. such cuts have a ripple effect through state and local economies. this undercuts the of recovery efforts under way nationally. i think it is very clear there is little appetite in congress for providing further help to states. we need to consider what else can be done to help states get through this challenging. . i hope this hearing can shed light on all these issues. senator sessions is not here yet. we will go right to the witnesses. we would ask you to limit your stated remarks to 5 minutes or

thereabouts. and then we will have a chance to get to questions. again, thank you very much for participating. this is an important day. for the budget committee because we are trying to deal with a series of challenges that the country faces all in one hearing. i cannot think of a better account of witnesses to do that. mr. zandy, why don't you proceed? >> thank you for the opportunity to participate in the hearing today. the views i expressed are my own and not those of the moody's corporation. i will be speaking about the housing mortgage market and i am a director of mgic, the largest housing insurer in the nation. i am optimistic with regard to the economy's prospects. after three very lean economic

years, one year and out of recession, one year of economic recovery, i think we will experience a much stronger growth this year and in 2012. in terms of gdp, that fell 2.6% in 2009. becker 3% in 2010. i expect gdp growth to be near four% this year and roughly the same in 2012. in jobs, we greeted 1.3 million private-sector jobs in 2010. i expect double that in 2011 and roughly the same in 2012. i agree with the cbo projections on unemployment. the rate should end closer to 9% by the end of the year. it is a pretty deep hole. it will be a number of years when we will get back to

anything anyone considers good. businesses are very profitable. big companies, midsize companies in particular, their balance sheets are very strong. i don't think it is any longer a question of if they can invest aggressively, it is a question of willingness. they will become more willing. sentiment is approving robillard. -- is improving rapidly. i think the policy response by the federal reserve and by you in congress and the demonstration has been excellent. it has made all the difference. without your policy response, the downturn would add immeasurably worse and it would have cost the taxpayers more. i think you did the right thing. we can take a section with individual aspects of the response but the totality was

quite impressive. despite my optimism, there are challenges and risks. i clearly could be wrong. we will talk about a few of those today. state and local governments face very big challenges. the european debt situation remains very unsettled and policy makers there need to do more. until they do, that is a concern. the events in egypt and the middle east reminders of the risks posed by higher oil and energy prices. that is worthy of concern. at the top of my list of concerns, at least for the near term, is the ongoing problem in the housing market, the foreclosure crisis. let me turn to a few slides. the foreclosure crisis continues on. you can see the number of first mortgage loans that are in default. or headed in that direction. they are seriously delinquent

and likely to go into default. that is close to 4 million lots. there are roughly 50 million home owners with first mortgage loans. 4 million is a lot. the good news here is that the problems appear to have peaked. the concern is that there are many, many loans now coming to the end of the foreclosure process. reo is the last stage in foreclosure before a sale and that is building again. the number of properties in reo, i have broken that down for you. it stands for other real estate owned. it is when the lender takes back title from the owner. that is the last point before they sell it into the marketplace as a foreclosure sale you can see it is building.

this is important because these distressed sale will put further downward pressure on the housing values. >> let me stop you. we will run this hearing differently than we typically do. you are wondering why i am the only one here. the prayer breakfast was this morning. it is running long. because of the events. our colleague gaby, her husband is giving the final prayer and the president is at the prayer breakfast. we were informed it would be concluded by this time so that is what we scheduled this hearing. because of the unusual circumstances, the prayer breakfast is running quite long. i apologize to you that we don't have the typical turnout we would but people will be here. let me just say this -- i have been watching the question of

short sales and it is very clear that short sales, where the property is under water and they owe more than the property is worth, requires a two-level negotiations. you first negotiate with the homeowner and then goes to the bag for approval. -- it goes to the bank for approval. i am told by people in the real- estate industry that the gap in time is losing a lot of sales. that is, that the inability to turn around the decision at the lending institution leaves a lot of people to get frustrated and they need a house and a bail out and ago in another direction. is that an accurate assessment

of part of the problem here? can anything be done about short sales? >> yes, that has been a problem. that is in part because the lending institutions are very nervous of being defrauded and a to make sure that the short sale is an arm's-length transaction. many institutions did not really have the infrastructure necessary to engage in a significant number of short sales. they had not done many in the past and to ramp up has been difficult. it is not an easy thing to do well. my sense is that the impediments to short sales are abating. we are seeing more short sales as far as the magnitude. if you go back to 2007, 200008 at the start of a crisis, we were getting 25,000, 50,000 short sales per annum and we are running closer to 250,000 -

350,000 per annum. it is moving in the right direction and some of the major institutions have established within their organizations groups that are focused solely on the short sale process. the administration in its hamp efforts to facilitate loan modifications and short sales have provided incentives to the various parties involved to engage in more short sales. this is more preferable to everyone involved. this has not been as successful as hoped for but it is helping. we are moving in the right direction with regard to what else can be done in this regard, i think the best thing that can be done is vigilant oversight. i would ask strong questions of the lending institutions.

where are we? where do you think you will be? what are you doing to facilitate this? this is just to make sure they understand everyone is watching this carefully. all the tools are in place. policy tools are in place to work this better but it needs a little more oversight pushed to make sure it works in a reasonably orderly way. as you can see, the reo inventory is rising. there has been a reasonable effort to try to forestall foreclosures and short sales per la modification efforts. i think it is now widely understood and properly so that the modification efforts have been inadequate. they have not lived up to anyone's expectations. you get a sense of the modification efforts here. they have improved from 2007 at

the start of the foreclosure crisis. we had to under 50,000 in long modifications. -- we had 250,000 in loan modifications. we have 2 million per annum. known view is that i don't that policymakers should do anything else with regard to the hamp program to facilitate loan modifications. one of the problems has been that they hamp plan has changed so much. it is difficult for lenders to implement it. we have got where it is but they need to use it as they can. having said that, the modifications will not solve the

problem. we will see many loans go for the foreclosure process or short sales and i would anticipate more house prices to decline. house press growth per annum, somehow we are not getting this on the screen -- we have a little technical issue here. i will just describe it. house prices as you pointed out are down from the peak, over 30%. i would anticipate this year another 5% decline in national housing values. if that is all it is, i think we will be okay in my script for the economy. this is where the risk lies. we have 14 million homeowners under water. if house prices declined more -- >> 14 million?

they owe more than the house is worth? >> the value of their home is less than the mortgage debt they owe on that home. to flesh that out more -- of the 40 million, four million are -- of the 14 million, 4 million are under water by more than 50%3. . that is deeply under water. if homeowners want to, to their home, if you spring a leak in your group and you are told you have to put $4,000 in your home, does that make any sense to anybody for them to do that? maybe their air-conditioning breaks and it is another $3,000. with house prices falling, more people will be under water. that is a fodder for more defaults. you get more downward pressure on prices and you can construct a scenario where you get into a vicious cycle. it is the same cycle we were in

back in 2008 before the policy response. it is not clear how you would respond to this. this is not the most likely scenario but certainly, it is a significant threat and at risk and a challenge to the economic recovery. at the top of the list of concerns is the ongoing foreclosure crisis. i don't think the coast is clear. what can policy-makers due to mitigate this potential threat? we talked about some policy but let me mention a few things. i will focus -- and i taking too much time? >> no. >> i would focus on three things. there are things that can be done to facilitate the loan modification foreclosure process. let me mention a few aspects. first, i think it would be very important if mortgage servicing

companies would appoint one person as a point of contact for the homeowners. if you are a distressed, and you call a mortgage bank, you get different people. they have no idea who you are. it is a nightmare and very frustrating for everybody involved. you get documents lost. the loan officer asks for information and you send it and you hear nothing and you call back and you get a different person and they don't know what you are talking about. he might ascended to the wrong department. the process is elongated and very cumbersome i think it would be prudent -- this is a regulatory point of contact -- to require servicers to have one person in charge of each loan file. another aspect is the dual tracking. there is a great deal of confusion in the foreclosure process. when you are a distressed homeowner, you are considered

for a loan modification but you are put in the foreclosure process at the same time. you could be talking to one person and they say you are in default and they will take you to court for it this becomes incredibly nerve wracking and frustrated. i would suggest to end of the dual tracking. go through the modification and if you don't make it, then you go for the foreclosure process. that gives everyone enough time to get their minds around what is happening. the other thing i would suggest is third party review. some states, connecticut, i believe new york, new jersey, florida are now asking mortgage companies to work with a third party and of this third party

would help the homeowner to go through the process and make sure that the homeowner knows all of their rights and all the options open to them, help them get 11 intermission together and shepherd them through the process. they are an advocate for the homeowner. this is an incredibly complex thing. most homeowners really don't have the skill sets to do it well. i think they should be given resources to do this. it would not be very costly and i think it would make the entire process more efficient and get better results. finally, sheila bair at the fdic has made the proposal that i would advocate and that is establishing a fund financed by the mortgage servicers that would compensate homeowners that are shown to be wrong in the foreclosure process. there is a range of problems with affidavit citing issues and other issues. i think this would be a way to

light a fire under the industry and if they mess up, they have to compensate these individuals. these are foreclosure modification process changes that can be tweaked in the regulatory process that would make this a much better process. let me mention one other thing -- what other policy response which would be helpful in the next 6-12 bonds is to try to facilitate mortgage refinancing activities. a fixed mortgage rates are below 5%. the federal reserve is engaged in quantitative easing. they want to keep long-term fixed mortgage rates down. one of the key, the whisper with low rates help the economy is through refinancing. -- what the key aspects is the

low rates help the economy through refinancing. our workers don't get that interest rates. they get a harter interest rate. fannie mae and freddie mac, for example, charge much higher rates for people with lower credit scores even if they owned alone. the loan. they are still charging higher rates. i would suggest that there is a requirement on fannie mae and freddie mac not charge those higher loan level rates to facilitate more refinancing activity. it will cost fannie mae and freddie mac in interest income but will benefit them in the form of the work foreclosures. these home owners will have lower monthly payments and be less likely to go into default. i am only suggesting this or fannie mae and freddie mac. this would facilitate more

refinancing now when mortgage pool rates are low. they will rise by the end of the year. this will put money in their pockets prayed it is like a tax cut and costs the government nothing. this will help quickly. i will stop there. >> this has been very useful. you have given us a lot of good ideas in a very short period of time. senator sessions is now here. i was explaining that the national prayer breakfast was this morning and that was running long. do you want to make your statement at this point? >> i would greatly say thank you for the hearing and thank you for the witnesses for being here. we did have a good breakfast this morning. the president spoke eloquently as he usually does. i have given him a hard time lately about not leaving on the

budget and i think that was a valid criticism, but we all have some challenges. we have to be honest and see if we can work our way through this deficit cycled. i appreciate the. inside each of you bring to the key issues that face us. mr. chairman, we have had many hearings this week. this is the third one this week. i believe you are correct to push this because these are critical issues facing the country. we don't have time to put off decision. making. it is well that we are moving forward to support your strong leadership. >> thank you so much. i appreciate you being a partner in this effort to really get serious about our deficit and debt. this morning, we are focusing on the special areas, state debt, housing crunch, long-term

unemployment, these special challenges to the economy and what could be done. we will now go to dr. von wachter for your testimony, economics professor at columbia. >> it is a great honor to be with you today. i will read my testimony but be free to ask any questions. unless we see an unprecedented job growth, our best available estimates suggest a process of reintegrating a large number of unemployed. the unemployment will be long- lasting and gradual. many individuals are at rest of permanently leaving the labor force. those most likely to drop out are older, partially disabled, and less educated workers. this is potentially costly for society. they are more likely to draw social security benefits of

early or draw federal disability insurance. in the process of searching for jobs, many workers are likely to exhaust unemployment benefits. family consumption falls and the incidence of poverty rises. only a limited fraction of individuals actually find a job. . .

>> similarly, evidence of the last recession suggest that entering the labour force in a large recession can lead to reduced earnings for young workers for 10 years to 15 years. the rest of my comments will focus on government policies that i think can reduce the impact of extended affected indd possibly government finances. i recommend the following four areas. first, and this is not news, to extend unemployment insurance benefits. on the one hand, extension of benefits prevents large declines. on the other hand, recent research implies the negative effects of extending unemployment insurance benefits are not a large in a large recession such as this one. the cost to society for a lower

employment -- suggesting the benefits in the recession are likely to outweigh the cost. extension of raising benefits -- the phrase, unemployment benefits. your written remarks say raising unemployment insurance -- does that mean raising the amount received or extending the time they are received? >> thank you, senator sessions for clarifying. i mean extending the time, not the amount of benefits from my research is focused on a typical policy, extensions and the rations. target those workers who are really at risk to going to 0, not the workers who already have benefits and then would consume more. one added advantage of extending the duration of benefits is it

can prevent some of the individuals that are at risk of permanently leaving l.a. geather pooforce. this possible cost savings should be incorporated into the calculations of the overall cost of u.i. extensions. cost savings could be substantial. however, although the exact quantification of these mechanisms -- is the principal possible using available data? the data is not available to researchers. you cannot exactly say how much we would save because of social security benefits by extending u.i. my second recommendation is a need to prepare an exit strategy once the labor market shows signs of recovery.

several things have been evaluated within the current u.i. system that seem to be cost-effective. these policies would make sure that once the labor market improved, the unemployed would benefit and also the finances of the unemployment insurance system would benefit free one of these mechanisms is -- unemployment insurance system would benefit. searching for a job in an environment such as this one is very time consuming and also frustrating. many individuals do not know where the economy is leading. we all do not know where the economy is leading, but there's a lot of information that can be provided to workers in this process. it is a long and time-consuming process. if workers want to go back to work at the level that is not too low in terms of earnings, they really have to do a lot of work to stay in the game. researchers also suggested that the current infrastructure of

shopping for tourists systems can be -- shopping for careers could be better. it could do a better job. we can talk about what has been proposed. another typical suggestion is that workers could be trained. not all training programs work as well as others. finding out which training programs work and then advising workers which programs to take is a very important step. i think the data is there to evaluate the training programs, but not all of it is available to researchers. for some workers, a long period of time may elapse before finding a job. providing them with bonuses to find jobs might be cost savings from the point of view of the unemployment insurance system. workers may have lost touch with the labour market and lost touch with what they can expect. they may search for too long.

providing incentives to take the job earlier may be cost savings. if they are targeted to the workers most likely to exhaust benefits, they have been shown to be cost effective. although these mechanisms can help people find jobs, help raise employment -- none of the mechanisms have been shown to reduce the job loss, the earnings loss of joblessness. that means that even once workers find a job, partly because of these programs, their earnings will be lower for a very long time. a recommendation i made before is my third recommendation. it is worth considering trying to reduce the massive amounts of layoffs that we have seen in this recession. there is a program in place to do that that is called a work sharing. 17 states have this. it is currently underutilized. it is partly underutilized because it is not a very generous system and partly because it is not well known.

more research into how we can prevent this delay in the future would be useful. the fourth recommendation is assistance for those unlucky enough to be looking for a job for the first time in this recession. one way to help those workers who are bound for colleges to provide financial aid. financial aid can be an important buffer to labor market shocks. it turns out not all eligible students apply for the aid that they can have. current research shows that reducing the complexity of financial aid and informing or assisting students with that application would probably raise take up a financial aid and college attendance. another concern -- many resources available for low- income college students are provided at the state level. these resources are at risk. it is worth considering how one

could maintain these resources for young college graduate of the risk of dropping out. let me just conclude. something can also be done for those young individuals not bound for college. in particular, recent research has shown that a relatively small training programs in which the program cooperate with employers to find out what kind of training is needed -- these kind of programs have been evaluated in randomized studies and have shown to be very effective in placing young workers into jobs. the alternative, of course, to encourage the use of financial aid, such as phil granell grant. that has been a tremendous growth area in the past. we know very little of how these private colleges and private vocational programs affect earnings out come later. the return to private schools receiving federal funding for

financial aid would be a useful power. to conclude, job loss and unemployment can impose substantial and long-lasting cost and affect workers, their families, in terms of earnings, held, and other outcomes. this testimony is based on cost- effective ways to alleviate the burden for these workers. it's also recommending data and research available to give workers a better assessment of the full cost and benefits of these programs. thank you. >> thank you. we appreciate very much your testimony. you have given us some interesting ideas that we can hopefully pursue as we go through the budget process this year. next we're going to turn to dr. raymond scheppach. one of the things that has come before the attention of this committee and other committees is the fiscal crisis at the state level. there's probably nobody better positioned to help the committee understand the dimensions of

that challenge thean ray. please proceed. >> thank you, mr. chairman. pleased to be here on behalf of the nation's governors. let me first say, if you drop back and look at along one -- look at the long run growth, it grew about 6.5% per year. it was relatively robust. there was only one year during that period, 1983, when revenues were negative and it was only negative by less than 1%. if you look at what happened during this so-called great recession, we had five quarters in a row of negative revenues. the numbers went from four% to 12.2% to 16.8% to 11.5% and then 4% again. there were huge declines in revenues over those five

quarters. there is some good news. we've had a positive revenue growth over last four quarters. the first three of those was about 3%. just yesterday in a preliminary way, it seems to be that revenues for the fourth quarter of 2008 were up 6.9%. that is based on about 41 or 42 states. it can be modified, but it is an encouraging number. i will say, however, in spite of that, we have to remember that revenues in 2010 versus 2008 are down about 9%. states reacted to this by cutting spending by $75 billion and raising taxes and fees by $33 billion. it is close to $100 billion swing. the cuts would have been much more draconian if the recovery package would not have provided

states with an additional $103 billion in medicaid and $48 billion in education money and an additional $10 billion that went to states to locals. in spite of that money, however, the states are still looking at shortfalls over the next two years or so of about $175 billion, which includes the so- called clip when the federal medicaid money goes away at the end of state fiscal year 2011. when i look at this impact that this great recession was so deep and so broad that unfortunately it is going to send applications to state government for almost the rest of the decade. i think that in terms of three stages -- i think in terms of three stages. from the previous downturns, we know the biggest impact on states is sometimes one, two, or three years after the recession

is over. that is when you lose the maximum amount of income tax revenues. that is when you see the explosion of medicaid. i think we're still in the end of that stage. the second stage, however, is the so-called jobless recovery. we do not expect states to come back to the 2008 revenue level until 2013 or 2014 and in some cases, 2015. that means, mr. chairman, five years to six years of zero revenue growth relative to a baseline where we were getting 6.5% per year. that is virtually over that period, like at the end of a 30% swing. the third stage -- at some point they have to go back and take care of some of the unmet needs that they did not fund during the downturn. that goes all the way from maintenance, rebuilding rainy day funds, and the big one, of course, the pension thing.

those states did not pay into the pension. states have always had what i would call long run structural problems largely because they have antiquated tax systems. you have that on the one hand. and you have medicate, which is 22% of state budgets, growing at 9%, 10%, or 11%. unfortunately, with the great recession, the long run structural problem is a lot worse now. i would probably argue that the revenue path going forward over the long run is not going to be 6.5%. i suspect we may see slower economic growth, but the revenues that are being lost in the sales tax now, which is about 40% of the taxes, is quite significant. we do not tax services. we do not tax downloads from the internet.

we do not tax goods sold over the internet. if it is a new economy, good and growing, we do not tax it. if it is a old economy, a contracting, the odds are we tax it. it is becoming a particularly big problem. medicaid is the four hundred pound gorilla and it continues to be that. if you just look at the actuaries from hhs's estimates, they say that the rules will increase by 11.6 million people in 2014 and almost 20 million people in 2019. the numbers that they have are essentially between 2010 and 2014 -- states will have to pay an additional $90 billion. between 2014 and 2019, an additional $100 billion.

you are looking at states growth over the next 10 years at virtually $190 billion. you might ask, why is that so big? there are three things coming together at the same time. one, because of the recession, the caseloads are higher. therefore, you start with an increase with that. the second problem is, of course, the enhanced federal match goes away at the end of fiscal year 2011. then you have the impact of health-care reform. when you add up those three and tax, they make a huge change. i have to say, as we get on the telephone with the state budget director every week, and they will tell you -- we do not know how to get from here to there, largely on the medicaid issue. on the unfunded pension liabilities, the numbers are

always a little bit suspect depending on the discount rate and so on. clearly, as of the year 2000, i would argue state municipalities were in good shape. began to deteriorate. we will probably have an unfunded liability of 23% of obligations now. it is significant. on the other side, -- >> can you repeat? i want to make sure i understand a 23%. >> that is the unfunded portion of that. if you are assuming that whatever that commitment is, numbers change a little bit, depending on if it is $1 trillion, then you are down $230 billion in terms of the unfunded portion. >>the pension contributions are

generally less than 4% of state budgets. >> can you help us understand? this became a source of discussion in a previous hearing when we had chairman bernanke before the committee. it seems to be concentrated in a relatively small number of states. is that your understanding? that is, a disproportionate share of the unfunded liability is in relatively small number of states. >> yeah. it is not four or five, but i would say eight or 10. >> eight or 10 states that are really extreme. >> some of them are smaller states, but there's also new jersey, illinois, and so on. as i remember, california is better on this issue than a lot of others. >> my recollection was that illinois was in the most

serious -- >> that is right. >> this shortfall, um, some of that is tied to the stock market's? >> that is correct. >> is not 23% of the market were continue to go up. >> that is right. >> it is dangerous. the numbers are so high that it should raise a red flag. >> you are right. is the return in the markets in bonds and then it is state's did not pay in during this crisis. it's a twofold issue. as i said, it's probably less than 4% of state budgets. we tend to track was born on -- we tend to track what is going on. we found that 30 states have made changes in pensions over the last five years.

20 states have made pension changes this year. they are really beginning to face up to this and what is happening is that they are forcing current employees to pay in bore. they are making adjustments. they are extending the number of years. there's a lot of activity in this particular area. >> can we stop you on that? senator sessions and were wondering how states could fail to pay into their plans during this period? what legally allowed them not to pay in? >> some states just do not have requirements. some actually borrowed from the fund. sometimes borrowing from different trust funds -- highway trust funds or such. >> we know a lot about that. >> [laughter] i did not want to say that.

[laughter] in terms of what else has gone on, i do think the shortfall is about $175 billion. >> what period? >> over the next two and half fiscal years. i do see a commitment among governors. initially, there was a feeling that they needed to cut, consolidate, and eventually, the economy would come back and save them. i do not think anyone believes that now. i think the feeling among governors is that they have to continue to do this to make the long run sustainability. we don't really believe we can cut our way out. we think we really have to redesign state government in terms of how it delivers services. i think this group of governors are moving on it. i think that i'm fairly optimistic they will work through this problem, including the pension problem. >>in terms of things that you cn

do, the first thing -- please do no harm. as you begin to cut budgets, please do not cap the federal share of medicaid and shift it to states. i would encourage you to look for things and there are a number of things where we can both save money, both the federal government and states. please do not do any harm. the other areas are more around flexibility is on programs. maintenance of effort are causing big problems. to the extent that there are waivers in certain areas, that will all be very helpful. i will reiterate that the governors are not requesting any additional assistance. they are appreciative of what has happened, but they feel that they need to work their way through it and make these programs sustainable. the final comment, again, is all

roads lead back to medicaid. this is a serious problem. i think that it has to be dealt with where the feds and the states sit down and try to make this program much more efficient. i'm not sure states can continue to pay for the long term care of the bull eligible portion of it as the demographics change. it's not the tax base going forward to support that. with that, thank you very much, mr. chairman. >> thank you very much. mr. edwards, thank you for your patience. thank you for being here. -- dr. i'm not sure if his doctor. >> i'm not a doctor. >> you have that credibility producing like a doctor. chris edwards, director of tax policies that the cato institute, welcome back. >> thank you for having me here today.

i'm going to talk a little bit about challenges and then challenges for states. [inaudible] federally, we've seen an extraordinary increase in the spending over the last decade from 18% under president clinton's last budget to 25% today. i believe it is sucking the life out of the private-sector economy. the real problem is the united states is no longer a small government country. in my testimony, i have oecd data that shows the total federal state local spending in the united states is now 42%. we used to be 10% smaller than the average oecd country in terms of spending. over the last decade, the gap has closed to just 5%. you know, i think are uniquely high living standards in this country -- we are built on a

relatively smaller government and i think we are really risking becoming another stagnant state in the years ahead, which i think will mainly result in less opportunities and higher tax burdens for young people. we need to cut spending. obama's fiscal spending commission has a lot of great ideas. i put together all kinds of spending cut ideas at the cato website. here is what strikes me. other countries have cut spending when they have gone into crisis. canadian reforms in the mid- 1990s -- we can look at that. in the mid-1990s, a canadian government spending was 53% of gdp and their dead was exploding. there liberal government really changed course and a chop spending from the federal government by 10% in two years, which would be like us dropping $370 billion in three years.

the result was dramatic. >> what years -- i apologize for stopping. this is very interesting. we were talking about this in the committee yesterday. canada imposed a vat of 10%. it reduced it to 5%. during this period, it brought that as a share of gdp down to 69% down. it was a combination of revenue and spending cuts. >> 10% in two years. they brought in the vat under a conservative government in the 1980's. in the 1990's, the liberal government dramatically cut spending, as well as privatizing a lot of their government corporations. this was the liberal party and the liberal party did two rounds of corporate tax cuts. the politics are strange up

there. the canadian economy boomed for 15 years. i think we really need to look at what they did. let me put you over to the state and local budgets for a couple minutes. i think my views will contrast sharply with ray's. there have been a lot of horror stories about how states are in a crisis and drastically cutting their budgets. it is true on the state's general fund budget. it has been cut pretty substantially. although, they are growing again. if you look at the total state and local spending and the bureau of economic analysis data, it was never cut. the total state and local spending rose 55% between 2000 and 2008, but was flat in 2009, and now it is growing again for 2011. >> i apologize. i just want to make sure i

understand. you are now talking about allstate's? >> yes, all states and local governments. the general fund budgets are only about 0.5% of state budgets. total state budgets, as well as the local budgets together, it has been a lot more stable than the state general fund budget. as you know, they have to balance them every year. i think the states can solve their short-term problems. the real challenge is the long- term problem. state bond debt, state local bond debt, has doubled over the last decade. it has grown. unfunded pension liabilities -- depending on the accounting assumptions -- are $3 trillion or so. on top of that, there's the problem of unfunded retirees' health-care plans in the states, which is another $1.5 trillion

problem on top of the pension problem. i agree with the comments. this is something i think the media often misses. these problems vary dramatically by state street in massachusetts, they have a very high bond debt. other states, like nebraska, have no bond debt. >> let's talk about north dakota. >> i should have brought the north dakota numbers. i do not know them off the top of my head. i'm sure you do. >> very well. >> a lot of states rely on a pay-as-you-go financing more than issuing debt. pension debt, according to figures by economist andrew vix very -- bigg vary. i would say something else that is interesting. the state unions vary dramatically. california, new york, 2/3 state

and local workers are unionized. in other states, they do not have unionization in their public sectors. this affects fiscal policy. .

>> thank you. i am going to diverge from typical practice, because i've been asking questions as we have gone along here. we will go to senator sessions for his questions, and then we will go to other members of the committee, and i will withhold my questions until others have had a chance. senator sessions. >> thank you, mr. chairman. it is, i believe, pretty much a truism of state and local and even the federal government that financial crises provide the opportunity for improvement of efficiency and productivity while money is flowing in generously, we just add, we spend more, and we don't focus on the difficult task of productivity. a personal story -- i was elected attorney general, and my predecessor mismanaged finances

very badly. probably the only reason i could get elected. it came out he wasn't able to pay the license before the election. it turned out to be a $5 million deficit on a $15 million budget. this was 1994. people were not happy with the government then, like they are today. i did not want to ask the legislature for more money. we found that 1/3 of the people had been hired outside the merit system, a 200-person office. i terminated 70 people and brought seven new people. we closed off sides, we got rid of automobiles the people were driving home, lawyers were. we reorganized the entire office, and that was in 1994,

well below 200 employees today. and i think doing at least as good if not a better job of serving the taxpayers. i just want to say that government is a challenge, the idea that we cannot produce 10 or 15 or 18% spending -- reduce 10% or 15% or 18% of spending is not accurate. we will be more productive if the leaders get on board and do what they should do instead of the interior department closing down the smithsonian when you ask them to cut their budget. this is big-time stuff. i am not timid about the challenge and opportunity of tight budgets. the spending on the states, it

has been suggested, has been too often driven by matching funds from the federal government, and this has lured the states into commitments that now they are not able to meet. i see governor christie was having to make the choice about the tunnel, and he was attacked for turning down federal money, and he said, "well, i don't have the money. i don't have the money, i cannot help it if we turned it down." in your opinion, and federal policies -- have they seduced or encouraged states to undertake expenditures that they might not otherwise have? is that part of the problem that we have? >> yes. it is particularly acute, i think, in the medicaid area to trace medicate historically. what happened was, we provided options to states, and those states where a little wealthier

than some others would exercise those options. then we would have 25 or 30 states exercising the options, and then the congress would say, well, it is easy for those 35. let's make it mandatory tr. we have had this process around medicaid, and now you've got, depending on how you measure it, 60 million people in medicaid, and you are picking up another 20 million. that is going to be 80 million people in medicaid. it is an entitlement. there are very few cost-control strategy is that states to utilize. particularly about long-term care. you would never build a system from scratch to say if you are in relatively good health, relatively high income, you are in medicare. now your health deteriorates and your income deteriorates and you

get half of your service sa -- mrs. from medicaid and the other half from medicare. it makes no sense. people are confused. the incentives are all wrong because we don't do things to save money because we save money for medicare. you don't do things in medicare that makes sense because the savings come to medicaid. you have expanded this program that is very fundamental basis has huge problems. when you talk about some of the other areas, discretionary grants, there is like 200 discretionary grants from the big ones and education right down to a lot of small ones. it is true that at some point, there are some of those that certain states cannot utilize the money, moving to broader block grants in areas in states with a lot more flexibility that increase sufficiency.

medicaid is the biggest problem. >> another example of this is like any transit systems, with the federal government traditionally funded the capital costs of light rail systems, and fancy high-speed rail systems. the problem is that states that it used to build these really expensive systems but the federal government does not fund the operating costs, and cities and states are left down the road with a fancy new systems one bus systems would of been cheaper, lower operating costs, and they are stuck with the expense of infrastructure. >> i would agree. i might as well be frank about it -- and going to oppose that high-speed rail idea. we do not have the money. i do not believe it is going to be effective. you cannot pour money into projects that are not going to prove to be effective. we don't have the money. we don't have the money for things we have got, much less new programs that, even though

they may appear to be positive -- i do want to say, dr. scheppach, that many of the governors are doing great work. if we were running the federal government like many of the governors are running at the states, we would be a lot better off. the governor of alabama faced up to these problems. haley barbour in mississippi reduce spending 9%. california now, a bit late, but they are stepping on real reductions, and others are good i mentioned in new jersey -- and others are. i mentioned it new jersey. that is the kind of leadership we need in washington and i don't quit and getting. my time is up. dr. zandi, thank you for your work. i saw the case-shiller housing index predict another bad year for housing. are you in agreement with that? >> yes, i think there will be

more house price decline spurred on case-shiller, probably another 5% nationally -- morehouse de -- there will be more house price declines. on case-shiller, probably another 5%. >> i want to come back to that question, because as we look on the horizon here and we look at potential threats to the economic recovery, housing, state and local, european debt situation, middle east -- i would put those four at the top of the list. this committee -- we cannot do much about the middle east. state and local -- really, i think ray and mr. edwards have described it really well. states are taking on their own challenges. the european debt situation we cannot do a thing about in this committee. the one thing we might be able to make a difference in is housing. i want to come back to that.

but that will go to senator whitehouse, and then it will be senator begich, senator merkley, senator thune on the side. we go to senator winehouse, then back to senator thune. >> thank you, mr. chairman. i would urge the distinguished ranking member to at least keep a bit of an open mind as to the potential for high-speed rail. i think it's the same -- if same approach he indicated towards high speed will had been applied to high-speed roads, the highway system, moving goods around the country on local roads, through stoplights, over body surfaces and through local intersections, you find that it actually was worth spending that money because it carried follow- on economic effects that were far more -- >> the northeast could justify it more than a lot of places i

see it being projected to go. >> that's all i needed to hear. i appreciate it. [laughter] thank you very, very much. mr. zandi, you talked about housing market, and when i look at the failure of the program by its own standards, let alone any outside standard -- and you look at the foreclosure crisis, when you look to the horrible nature of the short sale market -- i had road island's realtors in yesterday, and it is completely defective across the country. they come in over and over again with the stories of having a short sale ready, at a price, the bank cannot get an act together, the short sale this "ok,ars, the bank says, o we are ready," the bair has moved on. they try again. the bank cannot get it back together. they don't get through the

process. finally, here you are with $200,000 of value out of the house. the bank is still in the state of confusion. wherever you go in this process, whether it is through foreclosure or short sale. -- whether it is it through foreclosure or short sale, you see the same thing, which is no matter who you are, almost no matter who you are, you cannot get a person representing the owner of the mortgage who can make a decision. i had a witness in the other day in the judiciary hearing who spent 20 months fighting through the program and the bank modification program to get a change, and for 20 months, he never once got in touch with somebody who would give him his last name, or you would even call back to. if there is something that is basic american, it is that when you are dealing with somebody else, you ought to be able to get a person on the phone who

can make a decision in your case, instead of being stuffed into this nightmare is bureaucracy. for me, that is confirmed with what i see at home, which is that local banks that hold loans that have bank officers in the community are to the problem. we don't have a short sale problems with banks, we don't have foreclosure problems with them. all the problems are in the big banks that sold of these mortgages and now there is this incredibly complex infrastructure and there is no way to cut through it. whether you are person in danger of a foreclosure trying to keep their home, a realtor being driven onets spending hours on the phone trying to get an answer on a deal, an applicant trying to work through the process, they all run into the same bureaucratic nightmare. i think it is a little bit like the story about the man who -- each an elephant, and one finds

a leg, and one finds a column, one finds a a truck, and the other thinks it is a snake and a tree and they think it is the brunn. it is all the same elephant. i wonder what your thoughts ar commone this same elephant ave -- your thoughts are, this is an elephant, this vast bureaucratic nightmare that prevents things are being cleared and discourages participants and is in many ways a vicious cycle, because you are driving property values down when the first buyer cannot get an answer from the bank on the short sale in time. the second buyer is going to be more fed up. the seller is going to be more discouraged. i think we are creating some of our own in negative energy by not clearing the fundamental problem of the system, which is that at some point somebody should be able to have a human being with a first and last and who can make a decision who they can get in touch with.

it seems to be simple as that. i would love your thoughts. >> i think your characterization of the problem is excellent. and the frustrations you have heard many've times as well. >> everyone of us has heard it from our constituents. >> i completely supplies with what you're saying. -- supplies with what you are saying -- sympathiz wille what you're saying -- >> what you think of it. >> there are things that can be done with the modification process. senator merkley has done many of these things. it would be heard in its mortgage servicers on the phone with the homeowner are required to have one of contact. when you call, you get the same person. right now when you call you get

numerous people. >> telling you to submit the same paperwork you have submitted time and again. >> and telling you you said it to the wrong person the last time you did it. i know if it is legislative, but certainly regulatory -- i don't know if it is legislator, but certainly by the door, to require services to adopt -- but certainly regulatory, it to require services to about one point of contact. right now, a person comes in with a problem and you have on vacation and foreclosure of the same time. you talk to someone about getting a mod, and then you get a letter in the mail saying you are in default. >> 14 of our realtors in rhode island -- every single one of them had the experience of a

short sale agreement with the bank pending, and in the middle of it, another part of the bank with the foreclosure note that went into silt for way less than the short sale but the bank itself agreed to. it is not be out there. -- it is nutty out there. >> don't do it will track i-- don't do dual track. failed through modification. another thing that could be done is a third party review. a number of states have adopted this approach. homeowners are ill-equipped to navigate through this process. they need help. i think there is tarp funds that is sitting out there that were allocated that will never be used. they to be redirected to provide some help in this area. i think it's it's everybody a

lot of money -- >> i will cut you off there, but i trichet thought you have given this. thank you. i appreciate -- that ought to have given this. thank you. -- i appreciate the thought you have given this. thank you. >> thank you. senator thune. >> i, like many of my colleagues, are very concerned about the steps to take to get this back on track and the spending and debt that continue to explode on a spirit if we don't start making hard decisions now, those decisions to get that much harder. mr. zandi, i would like to ask you how much you believe debt and deficit add drag on our economy, and if you don't believe it is today, when is the effect began -- does the effect begin?

>> i think in the fiscal challenge is the number one challenge, and if we -- you -- don't address it in a clear and credible way, it will have significant negative applications for our economy, quickly. i don't think it is this year, but by 2012 and certainly by 2013 we will be seeing the ill effects of an action. i would counsel, however, that while it would be very prudent to lay out a clear and credible path to fiscal sustainability, and we can talk about what that means if you like, now, i wouldn't begin that process in 2011. the recovery is still very fragile. in fact, imposing fiscal austerity in 2011, calendar year 2011, would be working at cross purposes with your own action, the tax-cut deal that you came to the end of last year, in my

view it very important piece of legislation, very positive, and for me sealed the deal for 2011 and 2012 that the economy is going to do immeasurably better because of that piece of legislation. it is also working to clear cross purposes with the federal reserve. the federal reserve as many as zero interest rate policy -- is maintaining its zero interest rate policy and quantitative easing for this part of the year of peace. i don't think it would be prudent to begin this in 2011, but 2013, certainly. and laying out a path for the future to achieve fiscal sustainability for the future would be incredibly therapeutic. >> and he said we can talk about what that means. what does that mean for fiscal sustainability? >> i believe that your target should be to reduce the deficit to gdp by 2.5-3 percentage points out five-seven years. i will explain how i get their. the deficit this year, fiscal

year 2011, will wind up being, in my view, somewhere around 9% of gdp. when the economy is functioning properly, and i think we are headed in that direction, coping reasonably well, the deficit will settle in and close to 5% of gdp. the deficit-to-gdp that we can manage, and this is what we can manage, is about 2.5%. our interest payments will swap us. we can manage that. -- our interest payments won't swamp us. we can manage that. you have to close that gap in the next five to seven years. if you lay out a clear and credible path to doing that, then you forestall the consequences for the financial markets and the broader economy. medicare and medicaid and health care costs and need to be redressed.

but i think the immediate target should be reducing the deficit by 2.5% of gdp. >> you talked about the potential for the sovereign debt crisis in the year is out. what is the potential here in the u.s. -- in the eurozone. what is the potential here in the west? >> if there are no significant policy changes in the next few years, this is very high. we have got the window, we have latitude, the economy is moving in the right direction, but we have two or three years to move in the right direction. >> you mentioned is that's policies on quantitative easing. what effect is that happeaving a growth? >> a net positive. there are negatives. it contributed to higher

commodity prices. but the positives, including long-term lower interest rates, treasury yields at 6.5%, stock market up significantly, in part because of qe, that the positives trump the negatives in a measurable, meaningful way, and it was an appropriate thing to do. i don't think we will need, based on one -- is on what is happening with the economy today, any further qe, and at the federal reserve might start tightening monetary policy sometime in 2012. but what they have done in my view is entirely appropriate. >> what you think the reductions have to be and when did they have to take effect? >> the basic mathematics is that we have to get the deficit down to 3% of gdp to stabilize that. i disagree with mark really

on the timing of this. the view that we have to wait until we start going to start cutting spending doesn't make any sense to me, because we all assume -- we look at the cbo projections and we assume everything is going to be hunky dory and we will be growing again. but folks like mr. zandi say we need to spend more money, so there is always an excuse to not cut spending. i think it's cutting federal spending moves resources from the less efficient government sector to the more efficient private sector. i think it helps growth. i talked a few minutes ago about canada. canada past experience was that they dramatically cut government should -- canada's experience was that they dramatically cut government share of gdp and they did not go to recession.

>> what does for dollar gasoline due to the american economy? >> if that were to occur in the next six to 12 months -- i know that it would push us back into recession, but it is a tax increase -- i don't think that it would push us back into recession, but it is an increased rate every increase costs to market consumer $1.5 million a year. -- costs the american consumer $1.5 million a year. it would be very difficult, particularly for lower-income households, who, obviously, don't have a lot of attitude, and parts of the country in the south. the hardest-hit group will be low-income household and the house, because a high share of the budget goes to ghastly --

low-income households in the south, because a high share of the budget goes to gasoline. >> thank you for sharing your views. very helpful. dr. zandi, there was a quotation in your testimony when " nothing works well in the economy when house prices are falling." you please add this is on the housing market, and i appreciate -- you placed emphasis on the housing market, and i appreciate your bringing it to the forefront. 300,000 foreclosure filings amount for the last 20 months. in my home state, every community is affected by this. it isn't it just a disaster for the family, but the and the houses is helping to drive down the value -- the empty houses is helping to drive down the value of the adjacent homes, discouraging consumer confidence, and having a broader

impact, since the construction industry is not going to recover as long as there is a lot of empty homes. i appreciate your attention to the several different ways of helping to take on the foreclosure crisis. the single point of contact, ending dual track. after talking to a lot of homeowners in oregon, it is not simply that the banks complete the last stage, the actual foreclosure of the dual track, it is that they suspend all the steps of the dual track ring a time period whether they conclude up or down weather modification is going to work. you are talking about spending the entire track, not just the final step -- suspending the entire track, not just the final step. >> the entire foreclosure process should be suspended until it is determined that the borrower cannot qualify for any kind of modification.

>> there were three ideas i had put out in the paper you referred to about further intervention, and one is foreclosure mediation -- mandatory mediation that you addressed. in other words, short refi programs 3 another is to address the power of bankruptcy judges, at least in a very constrained format. maybe taking it in a more narrow direction than the last time congress took a look at it, primarily not because those judges will exercise that power, because they don't exercise that much in the other areas they can modify, but because it does in incentives -- as it gives an incentive to close the deal. i just wanted to get your thoughts on that. >> i think it is a good idea. i think, as you know, right out bankruptcy judges can reduce the

debt owed for everything but a first mortgage. and that, in my view, should be changed. there has been some effort during this crisis to make the change on a historical basis. loans allow bankruptcy judges to change the terms on those loans. at this point, i don't think that is appropriate. changing the bankruptcy reform law for the future, future loans, would be entirely appropriate. in fact, i think it would be therapeutic for a better system. >> let me press that in the but, because the problem seems to be, and we have folks calling our offices every day at oregon describing how difficult it is to deal with servicers. it is to create a little bit of countervailing incentives for the servicers to close the deal. at this point, i want to mention that there seems to be an ever

of perverse incentives for servicers -- a number of perverse incentives for servicers. i just did a tour of the cities where homeowners were affected, and i heard the same stories we are hearing in our office, which is i call the bank to tell them we have a decrease in income, they say, "hey, you are prea pproved," and really they were calling the servicer, not always the bank. this is a charge a huge amount of fees once they stopped making -- the service surcharge a huge amount of the fees once they stop making the payments, -- the service are charged a huge amount of fees once they stop making the payments, and the servicers make a tremendous amount of money once the property insurance -- several times what are normal more would pay, and there is huge feed back into the hot water in that regard.

servicors incenti -- servicers have incentives to put families in trouble, sort of. any comment on that would be helpful. but also, that is why i felt lifeline bankruptcy power creates a countervailing incentive to close the deal and help address these problems. >> this is what i would suggest. fdic chairman sheila bair has recently proposed the establishment of a fund financed by the mortgage servicers and companies designed at the same way as the bp fund. if he you are a homeowner who has been wronged by this process, then you can go before this commission, air your grievances,

and if it is determined you have been wrong, the fund pay you a fee. i think this is an appropriate way of getting servicers and mortgage companies -- it would provide, as he said at the beginning of your comment, a catalyst for getting them to work on this process in a more effective and prudent way. that would be my approach, as opposed to -- there are potentially significant unintended consequences from going back and rewrite and bankruptcy laws on existing mortgages. you really have to think that went through. in times of deep crisis, i was sympathetic to that argument, particularly when the securities market was at the heart of the problem. increasingly, that is no longer the problem. it is the load on the books of the banks, fannie mae, freddie mac, fha.

and less sympathetic to that and i know think that is where it should go. -- i don't think that is where to go. >> my time has expired. thank you very much. >> senator begich. >> senator begich was here a year. i had to rush out and make a quick call. mr. edwards, i agree with you in regards to states in bankruptcy that we should not go down that path. from talking to multiple people in the business, muni bonds, it is having an effect on the market. states are feeling that. the rates have been adjusted upwards, but there are risks being calculated into what we might do or not to.

even the notion of talking about that is not healthy for what we need to get through. i agree with you in that regard that we shouldn't be going down that path. i would be interested in your quick comments on that. obviously, mr. edwards, you already made a comment. if each one of you could just quickly comment on the idea of the state's walking down that path of declaring bankruptcy, which i think would be a huge mistake. >> senator, i can tell you that we have discussed it and we have basically -- governors are pretty united in opposition to that legislation. nobody is asking for it, nobody wants it. we agree with you that the mere conversation around it is forcing the small risk premium to be built into the bonds. we are very strongly opposed. >> i know they call it in the markets sometimes headlined risk. >> you are right, i second the

views of mr. edwards. i agree that we should not talk about bailouts. but there are some areas where there is a close connection between federal and state funding the unemployment insurance system, with the federal government stands in to design the system for it. one thing that the organization has already done is reform at a state level, funding from the aara. an additional step to help the long-term sustainability of these programs, relief both state budgets and federal budgets, is to mandate a higher wage rates -- >> i don't want to get into the program specifically. narrow in on the fact that states could -- >> so -- >> i understand that it is right that there is -- >> the states can essentially

it -- would bar from the government once the trust fund has run out -- borrow from the government once the trust fund has run out. this is a system where it is more concrete. concrete steps to be taken to avoid the behavior -- the ability to borrow later on creates uncertainty for taxpayers. the possibility of being bailed out -- probably this to a pay- as-you-go situation, where you really should be building up a fund. taxes are low in good times and then they -- taxes are low in good times and that after a rise in bad times. talk of bailouts would encourage that. >> dr. zandi? >> i don't think that is a good

idea. >> bankruptcy? >> bankruptcy did the state of all the tools they need. -- bankruptcy. the states have all the tools they need. >> governments aren't asking for it, no one is asking for it, really. it is just really bad thing. let me go into two other areas. let me give a thought. i, like a senator sessions -- in a different way, i was elected mayor of a city with a 33 million-dollar hole. we had to resolve it. we have a three-pronged attack. what was spending issues, investment -- what was spending issues, infrastructure, and when i was mayor, i turned down the fed raised -- the federal resources were not offered for a simple reason, we did not have money. and also, sustainability of this resources.

senator sessions brought up a good point. you are right, there is this kind of an addiction. it is up to the governors and, i auld say, mayor's, who have larger amount of debt that states do, but it is about leadership. for them just to say i will get 10% from the feds, there are many times when i just said now. we changed our policy. we never used one-time resources for ongoing expenses. i had to tell the local city council, which was hard for them to get off of that gravy train. once we did that, at great stability. governors, mayors -- i'm not biased. i am a former mayor, not the governor, it never have been. we have to do it, otherwise we will be held at the grocery store -- be yelled at at the

grocery store. sometimes it is just a lack of leadership to say no. getting off these one-time monies are, for me, the right way to deal with the budget even from the federal end. we use one-time money is to solve the problem and hope it works out next year. very dangerous. i think i heard the same statistic. the pension issue -- we dealt with it, cities dealt with it, we are more sound than ever before. 4%, whatever percentage, a small percentage of the overall budget. states are managing their weight kind of threw it painfully. but should there be a more consistent rules of the game in how they do this? you are right, it is very convoluted, especially to the bond markets, to understand how stable is that state.

can you give some thoughts on that? how'd you get some uniformity here where financial markets can respond in the right way credit scoring for their bonds? >> the problem is that the pension things are pretty much considered to be legal contracts. >> right. ours is interested in our constitution >> hours is vested in our constitution -- ours is vested in our constitution. >> a lot of times, for example, cola is not in the contract, or maybe they age is not in, or other components of it. i think -- we had a 30 states in the last five years, we have 10 now. the basic problem is that they have defined benefit as opposed to a defined contribution.

some, like you talk, are moving to a hybrid-type system -- like utah, moving to a hybrid-type system. ratings agencies are looking at liabilities there, liabilities on bonds, and making informed decisions. i don't know if uniformity is really necessary. there is serious focus on this right now. >> i know there is always these headlines about the crisis of the states, but really, what you are stating -- the majority of the states have started to deal with this. they recognize ongoing cost is not millions, billions. is that a fair statement? -- not millions, but billions. is that a fair statement? >> yes, it is. they cut spending by $75 billion over the last two years. that is factual. >> that is real dollars.

>> i think they understand there is a lot more to do, but i think they are prepared to do it. >> thank you, mr. jarrett. my time is up. >> senator cardin. >> i want to thank you for this series of hearings we have held on the national deficit. dr. scheppach, i want to follow up on senator begich's point, because we talk about the states. i don't think we talked enough about the risk factors for municipal and county governments. if you are a governor, you have a proprietary interest to avoid a problem with the county or municipality within your state . today our state governments have limited capacity as to how they can respond. they have to take care of their own budgets. they are not as well-prepared as, perhaps, they would need to be to avoid a consequence in the state that have been taxed not

just on their town or county but on the entire state -- have impacts just on a town or county but on the tires state and could have impact well beyond the borders of a state. i just want to get a sense of how much governor's -- how much attention governors are paying to the problems of the municipal or county governments, obviously in a more difficult position? >> i hate to say this -- they are into survival for themselves to some extent, focusing on their own problems. some states, like pennsylvania, who actually had a little -- had laws did not require them -- they're not focusing on that issue in line. personally, if i looked at it to some extent relative to the

states, it is a bigger problem, but, again, i think if there are some going into default, my sense is that they are going to be fairly small. again, that you look historically, and there has not been a lot of defaults in this particular area. when we get some positive revenue growth, i think they will be able to work through this as well. >> i think that is a pretty direct, honest answer, and i appreciate that. we are all in a mode right out of survival, and that is true that the national level also. but i would just like to remind my colleagues of the concept of federalism, that the federal government has responsibility as it relates to the states, working with the states. but i also believe that our municipalities and counties -- the state has a responsibility to work with the municipal governments. they have no other place to go. a lot of governors -- at the

national level, we are clearly going to be provided less resources to our state, no question. at the state level, you are going to be providing less resources to the county. the county is going to be providing less help to municipalities. municipalities don't have anywhere else to go. we need to understand, as we look for this plan to deal with our national debt, that it is the same people who live in municipalities, counties, states, federal government, and it does not to a person in baltimore city any good if that plan is credible at the national level but dumps its problems on the taxpayers of baltimore city and the people of baltimore city are dependent on the survival of the federal government and the state government i like the language our chairman has used. it is worth repeating. the chairman said we need a credible plan.

it does not need to be a radical change overnight. a credible plastique that gets us to the numbers that, mr. edwards, you were -- a credible plan that gets to the numbers that, mr. edwards, you are referring to. we need to be mindful that we don't want to see the people of our nation harmed because we take care of our problem at the national level but we dump everything off to the states and the states dump everything off to the local governments. the mortgage issue is still a huge problem in our community and all committees. your exchange with senator merkley -- do we have a structure in place that could implement a policy that you are suggesting? do we have a credible way of being able to determine whether a potential person who is subject to foreclosure quickly could determine whether they are entitled to some form of help? >> no, i don't think we have a

mechanism in place that is appropriate and helpful enough. some states have been more aggressive than others, and i think the state of connecticut, new york, new jersey, in processes with third parties involved to facilitate homeowners, but it is not something that is being done nationwide or in parts of the country where the foreclosure problem is particularly acute. in some places it is obviously very acute. no, i don't think we have addressed that adequately enough. >> if we were just to put in a moratorium without having a process in place, is that really going to help the situation or not? >> no, i am not advocating we have a moratorium. i am advocating that we, through the regulatory process, require

some changes in the way that mortgage servicers conduct their business. one point of contact, no dual tracking, third-party review, a fund established to compensate home owners that are shown to be wrong to in the process -- wronged in the process. if you do those things, and it would not be difficult to do this legislatively or through the rigors or process, that would be helpful to make a difference -- through the regulatory process, that would be helpful to make a difference. we have got some tools. we just have to make them better. we have to work through this process as fast as we can and get on the other side of this so that the housing market can begin to function properly and house prices start to rise. we need to work through foreclosure modifications. >> i agree. we are still in a very, very difficult position on these issues. uncertainty in the marketplace also is not helpful.

the further we can clarify this, and i agree with you, we have enough tools out there, we just need to make sure that they are used, that regulators do their jobs. thank you, mr. chairman. >> i deferred my questioning time because we were late because of the prayer breakfast this morning with members being here. i can ask questions as we went along. but i want to come back to the fundamental questions i wanted to ask. as i see it, in terms of the work of this committee, one of the most important things we can do contribute to giving on a more stable course. how serious a threat to you believe it is to our long-term economic strength to have a deficit of 10% of gdp this year, and being on a course to a debt

that would be 233% of gdp, according to cbo, if we stay on the current trend line? dr. zandi, how big a threat to use the to our long-term economic security? >> it is legal. if you don't make changes to change that forecast in -- it is lethal. if you don't change to change that forecast in a substantial -- has to change. >> lethal is pretty strong. i agree with that. i believe that. so then the question becomes a matter of timing. i personally believe -- and all the bipartisan commissions have come to roughly the same conclusion, which is don't make big changes right now, but put in place of plan that makes big

changes over this decade. in the case of the fiscal commission, we reached a determination that they need to reduce the deficit $4 trillion. $4 trillion. that is real money. what do you say with respect to timing and size of the changes that are required? >> i think the fiscal commission laid out a very good road map for you. there is two commissions, and both roughly 10 to the same place and laid out -- roughly came to the same place and laid out the same path. getting the percentage of gdp to 2% by the end of the decade, we're going to that -- and

in a way that everybody believes we're going to do that -- and we don't have to do that in one year. when the economy is moving forward in a clear and definitive way -- wide benchmark for that is falling at a blended rate. as soon as it is going south -- wide benchmark for that is a falling unemployment rate. as soon as it is going south, we can start with a real fiscal austerity. we could probably make our way through, but it would be a risk we should not take. in 2011, you have done what we need to do. i would not change the thrust of this policy for calendar year 2011, but through 2012 and the decade, we need to be disciplined with respect to reducing deficits, getting down to 2% of gdp. >> in dollar terms, what size

the package would be required? >> if you need the numbers i mentioned earlier, and your bogey is 2% of gdp -- to get that down to zero in five to seven years, that is $50 billion a year. in today's dollars. obviously, it is more dollars in the future, but that is roughly what you need to do any needs to be clearly done. >> it has to be credible that it is going to be done. >> there are many elements of credibility. harkening back to the commission -- >> just in terms of the total package, you are close to the $4 trillion number that the commission came up with. >> 95% of our problem is health care costs.

the structure of the package is also very, very important. you can cut discretionary and get the savings there. but if it is a package of domestic discretionary, it seems to me it has got to be health care. that is a problem we have got to have some more experimentation. 90% of that problem is health care. >> all roads lead to health care. but the commission concluded correctly, everything has got to be on the table. you have to do revenue, domestic discretionary spending. testimony before the commission on some things that are happening at department of defense was startling. you have to do entitlements.

obviously, the biggest entitlement, where we have the biggest unfunded liability, was the health care account. i would say this to my colleagues -- i was deeply involved in that effort, however imperfect it is. we took up virtually every idea for reducing health care expenditures that analysts gave us from whatever perspective sps. senator gregg and i wrote a letter to cbo asking what other things we could do to get the biggest bang for the puck in reducing health care expenditure? cbo told us that you need to change the tax treatment of health care. economists from almost every philosophical perspective said that is the case. you are encouraging overutilization.

no. 2, they told us you have to change the payment method ology -- methodology. how to move to pay for health care outcomes. third, they told us you have to put in place some ongoing mechanism to get the ideas that work in terms of bringing down costs, getting them implemented. we put in place this all the institution -- this whole institution to try new things, and if they work, to implement them nationally. i'm sorry, do you want to add a point? >> the only point i would mention is this not the position of the organization. but having spent a fair amount of time on this one thing that you want to look at, because we have all-pear data systems and a

bunch of states, a much better sense of what is driving cost of health care. one thing i'm concerned about is if you cut medicare or medicaid, it gets shifted to firms and so on. i almost think it has to be done state-by-state now. one thing that may be worth looking at is that you provide incentives to states. i think it has got to be addressed across the board. some states may want to regulate, others may want to do transparency. i think it is an approach that may be worth looking at. >> senator portman has joined us. welcome. let me just indicate that dr. zandi needs to leave right about noon. why don't you proceed, senator portman? >> thanks for allowing me to

come to speak. i apologize for not getting to hear your testimony, but i really wanted to come by and opportunity to speak briefly and hear from you. i love the fact that we're talking about health care. let me just mention that 95% figure -- i'm not sure that is accurate, but you should know that at this very table last week, dr. elmendorf that healthcare is the number-one fiscal concern he has. i have a more fundamental question for you about the impact of current deficits on our economic growth. there's all sorts of data out there about the future impact of the enormous debts we are building up and the cbo projections are sobering, to say the least. what is the impact today? we don't talk about enough, and you can correct me on this, but i believe we are crowding out private investment.

the $1.50 trillion in deficit projected this year in the track to double in the next 10 years. we are impacting our ability to get out from under difficult economic conditions we have been under the last few years. i just wonder if you can comment on that. with a $1.50 trillion deficit building on the $1.30 trillion and $1.40 trillion the last couple of years, there is maybe a point and a half of gdp. do you agree with that? if you could take it to the next e the attack on the economy in terms of impact on jobs. what does it mean for job growth in this economy, dealing with this high unemployment never even as the caught -- the highest unemployment ever even as the economy is beginning to grow? >> i don't think the current

budget deficit is crowding out private investment. i don't see evidence of that. the 10-year treasury yield is 3.5%. corporate borrowing yields even -- junk corporate bond yields are low by historical standards. .

if everything sticks to my script, by next year we should be in immeasurably better place. fiscal austerity, which i think is important, should begin then. we should engage in a way that ensures we will not crowd out private investment. pick the government will pull back quickly once the economy -- the government will pull back quickly once the economy is moving forward. >> i think we should put a mechanism in place today that is conditional on the unemployment rate falling. we may need to do important

investments, to help workers. for example, we were talking earlier about the housing market. the regulatory difficulties in the housing market may take longer to fix. we want to be ready, for example, to give people mobility bonuses to take up jobs in other regions. we have to be able to spend and invest in areas that allow us to get out of the current situation to achieve sustainability when the unemployment rate is down. >> i would agree with mark. i do think that the faster you can enact the changes, the better, even if they are not going into effect for a year or a year and a half. to the extent the we can put together a package now, i think that will be very positive.

>> i agree with mark that the usual way economists think is that government borrows more, interest rates go up, and less goes into the private sector. you cannot think that way now. if the department of defense procurement budget is going way up or the size of the structure is widening, you are taking the skills of talented people producing things for the private sector, private market, and they are producing in the public sector. i would say, going back to the previous question on when we need to make these cuts, we should not think of this in terms of one big change, one big giant reform. we obviously have to do incremental stuff over time. this year, it is defense.

next year, we can raise the social security retirement age, and on and on. some of these things will be very painful. congress is going to have to cut every year. there is no more getting elected by just promising goodies. that is all going away. >> what is the last election shows. people got shellacked. the myth that it is somehow a harder to cut than it is to spend -- i should not have an era did you. -- i should not have interrupted you. >> one thing we need is to put in place a credible plan as soon as possible. differences in the timing and makeup of the plan. we do agree that we need a plan

that is timely incredible. i think we need to have a plan that takes a series of of votes and noun -- devotes now that makes these changes over time. -- votes now that makes these changes over time. i do not want to do a little bit here and then hope that a little bit more will be done. my experience around here is that you had better act while you have the opportunity, and you had better put in place a multi-year plan that has real discipline associated with it. this operating year by year at around here is one of the things that gets us into trouble. >> of barley agree with that. even then the belt mechanisms to put a -- i partly agree with that. you can think about mechanisms to put in place, for example, a

cap on public debt as a share of gdp. i have proposed the idea in my testimony of putting a cap on the growth of total annual outlays pocket. pick a number, 3%-4%. it would sort eve -- it would sort of be like the 1990 budget. it would force congress to focus on discipline every year. >> we need to shut down because we promised witnesses they would be out by noon. we are a little bit beyond that. i want to thank this panel. this was outstanding. we appreciate you taking the time and energy to present to us here this morning. thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> as senator conrad wraps up to that hearing, we want to take you live to joe lieberman to be released a report today that blames the army and the fbi from -- for not been doing enough to prevent the fort hood shooting. >> he was himself the subject of a major ongoing fbi terrorism investigation. the fbi ought to not to identify this individual. the media reached the conclusion that the individual was anwar all o.

this was and not one of just thousands the straight pieces of evidence that comes to the fbi. this was a serious piece of evidence required serious investigation. what followed was a lackadaisical investigation of hassan by the fbi, coupled with the internal disagreements and a failure to use the analysis that led the bureau to contribute to the government's failure to prevent the attack at fort hood. in other words, the fbi actually had information that a member of the united states military was in communication with a target of their own terrorist investigation and did not pursue its investigation of that lead or notify the defense department myriapods -- defense department.

for three months now, we have been in difficult and often frustrating negotiations with the law enforcement and intelligence communities of our government and over their proposed reactions. some of our objections have led to withdraws of request for reductions, but we still believe the some of their reductions aren't justified finish in -- we still believe that some of their redactions are unjustified. with that said, let me describe some of the evidence we have found that should have flashed like red warning light. first, let me talk abut the

department of defense. from 2003-2009, when his son was a psychiatric resident at -- when hassan was a psychiatric resident at walter reed, he suggested that revenge might be a defense for the terrorist attacks of 9/11. he openly sympathize with violent islamic extremists and defended osama bin laden. he justified suicide bombers, said u.s. military operations represented a war against islam, stated that one of the risks of having muslims in the military was that they might commit fratricide of their fellow service members, and publicly said that he had an allegiance to his religion that was greater than his allegiance to the united states constitution, which, as a military officer, he was sworn to uphold.

to me it is frustrating that someone who expressed such radical opinions was not discharged. frankly, to me, his words made him as much of 8 -- made him not just a ticking time bomb, but a trader. the officers who kept him in the military and moved him along knew full well of his problematic behavior. the officer who later decided to deploy them to afghanistan admitted that they were sending their worst. their most profound reason for not taking action against him was because he could provide a profound understanding of the nature of islam. they tried to turn his radicalization into a virtue, as if he was benefiting the u.s.

army with his radical believes. for example, an evaluation report from july, 2007-june, 2008 said the the role of culture and faith in the context of terrorism has "the extraordinary potential to inform military policy and strategy." let me now turn to the fbi. the fbi under director muller has made substantial progress since 9/11 in turning itself into america's lead counter- terrorism organization. in this case, unfortunately, the fbi also had the opportunity to take action that would have prevented the fort hood murders, and failed to do so. if the counterterrorism task force in san diego had flag initial communications with the suspected terrorists that i referred to for review, and

transfer those communications to the fbi's joint terrorism task force here, it would have bennett delivered to walter reed. the washing -- it would have been delivered to walter reed. the washington task force waited three months before producing a cursory reported that the mall for hours to write. the report explained his communications in -- it took them all of four hours to write. that report explained his communications. the fbi inquiry was limited, focused only on whether he was engaged in plotting a terrorist attack, not whether or not his communications might be evidence that he was radicalizing violent

islamic extremism in a way that could well lead to an attack. the fbi conducted a superficial inquiry and ended it prematurely. the san diego task force was upset with the way washington handled the case, but they too dropped the matter. fbi headquarters, specifically the national joint terrorism task force, never got involved in the investigation, although they were responsible for overseeing the bureau's's counter-terrorism work. as we say in our report, this attack was a warning that the transformation of the fbi remains a work in progress but must be accelerated, considering particularly the growing threat of homegrown and terrorism.

we reach the following, fundamental conclusion in the seminal report from the summer of 2004. america's economy today is not terrorism or a particular terrorist organization, or a particular religion. the enemy is the ideology, the political ideology of violent islamic extremism. it takes the remarkable work of america's military organizations and personnel. the ideology that inspired 9/11 and other attacks around the world continues to motivate individuals to commit terrorism. that now increasingly includes americans, inside and outside america. people we referred to now as homegrown terrorists. we must take strong new steps

urgently, and with the same sense of purpose we all felt following the 9/11 attacks, to identify and combat the ideology of violent islamic extremism and to prevent terrorist attacks against americans which that ideology causes. in our report, briefly, we make the following recommendations. the department of defense policies must finally explicitly describe and confront violent islamist extremism. the department of defense can no longer subsume that reality with a vague, inexact and politically correct terms like violent extremism or workplace violence. it is violent islamic extremism. second, our military must clearly differentiate between violence -- violent islamic

extremism and protected religious observance, particularly by muslims. that way, the thousands of muslim americans who serve our country honorably in the american military every day and in other ways will be protected from suspicion for practicing their religion. military employment evaluations and personnel records must accurately in candidly described performance and behavior, or military personnel will pose threats. the fbi field offices must be brought more effectively under headquarters leadership. the fbi headquarters never step into the dispute to ensure that the evidence on hassan and received the urgent attention it

deserved. the fbi it needs to strengthen communications with other federal, state and local agencies. even though a service member radically -- a service member radicalizing violent islamic extremism clearly pose the threat to our military and our country. the fbi should take steps to make sure that the large number of intelligence analysts it has hired since 9/11 are used effectively. this has not -- this was not the case with regards to hassan. finally, our government must develop a more comprehensive national strategy to counter the threat of radicalization to islamic extremism. we have not adequately define the roles and responsibilities of agencies of our government

and other institutions of our society that must effectively counter and radicalization to violent islamic extremism in our country. of course, that work must be done with leaders of the muslim american community. 13 people were killed at fort hud. to honor their memory, we pledge to use this report and its recommendations as a blueprint to ensure that appropriate reforms are adopted quickly so that the next human ticking time bomb will be identified early and defused before a in another deadly detonation. we believe this report and its recommendations are particularly timely given the dramatic increase in home run terrorist plots against america and americans over past few years. finally, we are submitting this report to the indirector of

defense, director of the fbi, the national security director, and others with a request that they respond to our inquiry as soon as possible. we will also send a copy of the report to the president for his review. senator collins. >> thank you. i am very pleased to join senator lieberman in releasing today our investigative report into the events leading up to the fort hood attack. before i begin my formal remarks, i want to thank the chairman for working as a team, as we do on so many issues. our staff also worked as one, and i want to echo the chairman of the banks to our staff -- the

chairman's thanks to our staff. they have worked extremely hard cover the past year. they have encountered a lot of resistance along the way, but we of persevered to bring us to where we are today. our conclusion is alarming. the department of defense and the fbi collectively had sufficient information upon to have detected major hassan's radicalization too violent islamic extremism, but failed to act effectively on the many red flags signaling that he had become a potential threat. due to multiple ms. judgments and failures to act -- mis-

judgments and failures to act, actions that might have prevented his attack were not taken. detecting a lone wolf can be difficult, but in this case, the fact is that both the fbi and the army were aware of major hassan. this is not a case where a lone wolf was unknown to the fbi, and then to the military officials until the strike. that is the tragedy of this case. major hassan was known to both the fbi and the army. this was an american military officer, known to have communicated with a terrorist suspect under active

investigation by the fbi. a military officer whose radical extremists them was increasingly evident to his colleagues and to his superiors. most disturbing to me are three failures. first was the failure ad hoc of the department of -- the failure of the department of defense to act on his radicalization by at least in disciplining him or even discharging him. i want to point out that those corrections and that should have been taken under existing personnel and extremism policy. is it increasing extremism was well known to his supervisors -- his increasing extremism was

well known to his supervisors, as was his poor performance. he traced a clear path toward radicalization in plain view of his fellow army officers. indeed, as the chairman has pointed out, his revelations of his violent ideologies disturb his colleagues to the point that two of them separately described him as a ticking time bomb. yet, despite all of these indications, despite the clear evidence, the army took no action, laying the foundation for what would be a cursory investigation by the fbi which relied, in part, on his inadequate and misleading officer evaluations.

the second finding that is most disturbing to me was the failure of the joint terrorism task force to share with the army the fact that hassan was communicating with a known terrorist. in this case, they did not live up to their potential and acted instead as another stove pipe instead of communicating vital information. third, in my judgment, was so wrongfully the inexcusably inadequate investigation conducted by the washington joint terrorism task force. as the chairman has pointed out, it was about a half day, four hours, that is all the time that the washington jttf spent

investigating whether a military officer, in communication with a known terrorist suspect, a it amounted to a national security threat. additional investigative action was not taken even when the jttf responsible for forwarding believe pressed for more action. -- for reading above lead pressed for more action. -- forwarding the lead pressed for more action. this eliminated the opportunity to potentially prevent the attacks. let me just make a few other important points. our investigation revealed that

there were no legal restrictions that incumbered the investigation of major hassan. you may recall that at first administration officials pointed to restrictions that they said made it difficult to conduct the investigation. what we have found is there were no legal restrictions that hindered that investigation. similarly, there are no legal restrictions that prevented the sharing of investigative information on hassan, particularly his communications with the known terrorist suspect with the army. there was no reason that information could not have been communicated. third, hassan's behavior and

declarations at walter reed were not first amendment protected activities, and they went far beyond an academic debate. it is clear that the fbi has made great progress in the focusing on counter-terrorism since the attacks on our country nearly 10 years ago, and the fbi has experienced some successes for which we give them credit, for which our nation is grateful, but it is equally clear from our yearlong investigation that much additional work is needed to truly transform the fbi into a counter-terrorism effective organization, and much more

needs to be done by this administration to name the enemy that we face, and to develop strategies to counter it. thank you. >> thank you very much senator collins. thank you, once again, for your partnership and for the role our staffs have been able to play. >> senator, based on the litany of failures and missed opportunities, what do you say directly to the families of the victims at fort hood? >> this is heartbreaking, because the painful conclusion of our investigation is that the massacre carried out by hassan at fort hood in november of 2009 could have been prevented. what can you say to the

families of people who were killed there, other than to say that, having found what we have found, that this was a preventable attack, that we will do everything we can to push the relevant federal government agencies to do everything they can urgently to make sure that nothing like this ever happens again. the fort hudson massacre resulted because of what i would -- fort hood massacre resulted because of what i would call a tragedy of errors. people just totally failed to act in a way that, as you look back at the evidence with the clarity of hindsight, just shouts out, stop this guy before he kills somebody. >> i would just echo the

chairmen's comments. we kept in mind the victims and their families throughout this investigation, and it is why we kept pushing for word, and it is why we kept demanding information, why we chose the very unusual step of actually issuing subpoenas, because we did want to thoroughly understand what happened and make sure that we are truthful with the family is about what happened, and that we put in place effective reforms to greatly lessened the chances of successuch an attack happening . >> has anyone been fired for the behavior that was mentioned in your report? >> i do not believe anyone has been disciplined or terminated

because of the failures mentioned in this report, and that is something that i want to hear about from both the department of defense and the fbi that we are sending the report to. it was not evil intent on the part of people in the federal government, it was just negligence, failure to perform in a in duties in the the way we have a right to expect them to do. >> that is very disturbing. the department of defense has told us that they are waiting until after the legal proceedings against major hassan are completed. i expect and hope that we will see action and that time, but that is a long time. >> i will say briefly, if you're interested in this parkint, thee

were two arguments made. one was that we had to be careful not to disclose information we had that would compromise an ongoing investigation. we do not want to do that. the other thing was that because there is an ongoing prosecution of hassan in the military justice system, we had to be careful not to affect the prosecution. we felt and we still fee today that we were not about determining guilt or innocence on november 5th when this occurred, in other words, the murder case. we were trying to figure out how it got to that point. that was what a lot of time was

spent negotiating and arguing over, and finally we thought we had enough to go forward with the report. >> does your report show that perhaps not as much progress has been made as you believe? >> at a lot of progress has been made in connecting the dots, with the establishment of a national counter-terrorism center and a director of national intelligence. i am convinced that if a those two organizations existed prior to 9/11, we would have been able to stop the attacks of 9/11. but this case shows that the work isn't finished. these are two separate agencies, -- showeto great agene department of defense and the fbi, that acted negligently.

warning lights were flashing. part of this is not only to make sure that we take some of the steps that were recommended, but that the next time somebody at dod here's a fellow service member hearing some of the things -- here's a fellow service member saying some of the things that hassan said, that they will act more aggressively. >> there have been some clear successes. for example, there are examples where federal, state, local law enforcement and intelligence agencies did work together and thwarted terrorism plots. there have been others that were just close calls that we have been surprised by. in this case, however, i do

believe it is fair to say that it is eyeing the dots were not connected -- fair to say that the dots were not connected, despite the progress that has been made since 9/11. >> you mention forming a better relationship with the muslim community. how do you expect to balance that, especially since various muslim communities have objected to the tactics of law enforcement? >> we've been doing a series of hearings and investigations regarding homegrown terrorism for four years, since 2007, and one of the interesting things we heard at one of those meetings,

we talked to the leader of a muslim organization and ask if they had any communication with a federal organization, and the answer was the fbi. the fbi has reached out effectively to the muslim- american community. there is a lot of anxiety, understandably, within the muslim community about young people being radicalized. that is why there needs to be cooperation between our law enforcement and intelligence community, and the muslim american community. in the department of defense, as far as we can determine, the department of defense is still not prepared to call the enemy what it is. unless you know your enemy and describe it, you're not going to be able to defeat it. the enemy is violent islamic extremism. to me, when you say that, that

should not offend muslim- americans, the overwhelming majority of which are patriotic, law-abiding, a muslim-americans. in the department of defense, they have to start being truthful about who the enemy is. >> hassan has been charged as a lone gunman. in your investigation, did you see any evidence of conspiracy, a broader conspiracy around these attacks? >> there was no evidence that hassan was part of a broader conspiracy. this is what makes these cases, typically, so difficult, except that here, as we said to you, he was open in statements that were radical at walter reed, and the fbi happened to intercept his communication with the terrorist suspects. just shows the difficulty.

our investigation shows that the song really was a lone wolf. it bears apps -- that hassan really was a loan of wealth. -- loan wolf. it bears pointing out that people acting alone can be part of this conspiracy just by going on the internet, going in chat rooms. how do we fight the ideology of violent islamic extremism? one of the things we have to try to do, and we're doing some of it now, is to intervene, to try to present the other side, if you will, to people trying to become part of a larger conspiracy even though they are

acting alone. >> in general, what we found through our investigation into homegrown terrorism is get the individual is frequently inspired by al-qaeda or by other violent islamic leaders, but not directed by them. now, that can happen on occasion, but that is the more common pattern that we see. to me, to go back to a point i made earlier, what is so frustrating in this case is that this is not the lone wolf operating with no one aware of his existence or his communication with a known terrorist suspects. this was an individual who was open about the fact that he has radicalized, who said outrageous statements in front

of the entire class of military officers, and yet he was promoted. it is just astonishing, and very troubling. >> thank you. >> just a quick note on senator lieberman. the associated press has reported the senator lieberman is working on a book that will come out in august. there also reporting ahead of ben bernanke's note remarks today, that he will talk about the future of the u.s. economy and that it will not rebound until hiring returns. later today, journalists will be

discussing the anti-government protests in egypt and future if it is eyeing implications of that uprising. we will hear from bob schieffer at an event hosted by the center for strategic and international studies. that is live at 5:30 p.m. eastern here on c-span. the u.s. senate is in session today. members gaveled been earlier and are reauthorize in a federal law in aviation administration program, with a pellet hopes -- with a bill that hopes to modernize the program. senators will also today marks the upcoming 100 the birthday of former president ronald reagan with speeches. he would have been 100 this weekend, for every six. -- february 6th.

while we wait for ben bernanke at the national press club, a news conference from earlier today with the egyptian prime minister. he met earlier today in cairo with reporters and apologized for the violence. he said the government has begun an investigation and is in dialogue with the opposition. this is about 20 minutes. >> here is the egyptian prime minister. this is a little bit earlier on. >> it was very civilized scene.

it matter in which they had access to the scene, individually, or groups, it matters. i myself recognize that they had a leader that was spur of the moment. i cannot gather all of the evidence, and investigations are underway. these groups went to the square and there was some kind of friction which was very likely to take place. we gathered at the moscoque, and the demonstrators were in that the square.

they came with the intention to create violence and a riot. there were opposing groups in two different locations. i cannot say what happened, but the situation added fuel to the fire. clashes started to erupt. as you are aware, clashes between the youth are different from clashes between elderly people. there overenthusiastic andover excited. -- they are over-enthusiastic and over-excited. friction heated uppe. blood started to pour. more division, a more attention.

a scene that will remain in the hearts of egyptians, which will remain in our memories along time. it was not expected. the square ken be filmed from rooftops -- can be filmed from rooftops. despite the fact that the health minister entered the scene and stayed there for three hours accompanied by ambulances, the injured from both sides, but some of the anti-government demonstrators refused to be

transported hospital bed the ambulance. it was a reflection of the lack of confidence. i was on the telephone with hampshirim, and the health minis began to vote offer treatment to both sides. this is unprecedented in egypt. the wound is deepening which is the most grave matter. the wound is deepening. it means it will take more time to heal and more time to address. i pledge and i promised before ito that this -- promise before you that this incident will be investigated.

by virtue of the instruction given to me as prime minister, one of the instructions given before this incident took place, was only the problem of absence of security. we will investigate and carry out tan in-depth investigation f the absence of security, the absence of security which absence of security which resulted in grave losses in the event public access. lack of security, and for the first time in egypt, we see the youth and the elderly it forming groups and marching in their own neighborhoods. this is the only positive aspect inves this, is to see the family

members and household holding hands to defend their own lives. however, it is very regretful and disappointing. an investigation will be carried out fairly. it will be the top point of the investigation. i promise that this investigation will be disclosed, and we will establish whether these clashes were organized by some person, one party, one body, whoever or whatever it is. any person or body responsible for these incidents will be held accountable and penalize accordingly.

i offer an apology in all the mass media, and all the television channels i spoke to today. i apologize as a man of responsibility. i was not aware of this situation. i could not envisage that this situation could take place. being a public servant, i believe i am duty bound to offer an apology. there was a live baloophole. how did they endure? to push them? why were they left in this scene? this is the first time for me to enter this office by virtue of my office and the ethical and

humanitarian duty i tell you that we apologize. this was not planned. it was unintentional. it could be childish? , or it could be planned and orchestrated. however, it has taken place, the disaster suffered, and a promise it will be the last. we will start a dialogue or understanding in an attempt to bridge the gap between the two sides. when i speak to my colleagues i say the beginning of dialogue is that i should not hold to my opinion until the end of time.

otherwise, there is no point in initiating the dialogue. dialogue means i said at the table with the degree of understanding and flexibility to negotiate positively or negatively. if i have demands, i must sit the the negotiating table and say, these are my demands. we should confirm a, discuss, negotiate and engaged in dialogue to reach common ground that is acceptable to all. above all this, we should bear in mind the we should ensure the safety and security of our children in the square. a young egyptian fighting his brother fellow egyptian,

throwing smoke and molotov bombs, this is unimaginable. this is unacceptable. it has led to all of these regretful incidents. i hope this is a lesson to learn, and i hope we exit safely for the better. we will now open the floor. i will not leave many questions unanswered a iraq will go from a right to left. it's a it's -- any questions unanswered, but will go from right to left. i will not leave questions unanswered, but to save your time and hours to, we have another duty to discharge. we are one family, and i have a duty with the foreign mass media.

we cannot smear our reputation, but we should immediately try to dress a wound to our reputation which was injured abroad. so please tell me to complete that with the foreign mass media. question? >> the dialog will be initiated with those demonstrating in the square or any other party, and will you attempt to reach a settlement? there is no doubt that there was a bigger conspiracy.

these are five questions, not one. >> as to the first part of your question, let's be open, let's listen to one another. i may listen to an idea that may enlighten me to move forward. dialogue is open. to home or with whom? to whoever requires a dialogue. people of wisdom will enlighten young youth. yesterday, i telephoned the used inside the square -- the youth inside the square. it was a shock to them.

i anticipated the situation, but i was telephoning damagthem. they're the same age as my children. we are open to all without any limitations. we cannot deny that there is a conspiracy, but we should not add fuel to the fire. there are possibilities. even if there is a conspiracy, we ourselves committed a mistake. if there is a conspiracy, this conspiracy succeeded in driving a wedge between alveall of us. question? >> there is an international

concern about one of the very important arteries in egypt, the suez canal. are the operations of the suez canal running as usual, and concerning the pipeline, the oil pipelines, are they functioning? >> i assure you there are no indications -- everything is running. briefly, to save time, i briefly check with my fellow mr. before i come here today -- my fellow minister before i come here today to ensure that

household goods are made available. i issue rio -- i assure you, there are no negative impact on our daily lives. by the grace of god, everything is available, but you will find long queues for salary recipients and now we are dispersing salaries and we see long queues, simply for their reason. all beds are available. the suez canal is functioning -- all goods are available. the suez canal is functioning. if any operations are disrupted,

we will immediately raise the issue with those in charge of the operation. >> i have 83 part question. -- a 3 part question. some say that friction will erupt again. have you obtained any a sureties -- the suretieassuritie the gap and allowed demonstrators together peacefully