freedom might look like. we we heard a young egyptians say the for the first time in my life my voice really counts. even though i am one person, this is the way real democracy works. wyss of protesters chanted -- we saw protesters chanted, we are peaceful, again and again. we saw on a military that would not fire bullets at the people they were sworn to protect. and we saw doctors and nurses rushing into the streets to care for those who were wounded. volunteers checking protesters to ensure that they were unarmed. we saw people of faith praying together. chanting, muslims, christians, we are one. and though we note that the strains between faith still denied to many in this world,

and no single event will close that gap immediately, these scenes remind us that we need not be defined by our differences. we can be defined by the common humanity that we share. and above all, we saw a new generation emerge, a generation that uses their own creativity and talent and technology to call for a government that represented their hopes and not their fears. a government that is responsive to their boundless aspirations. one egyptian put it simply, "most people have discovered in the last few days that they are worth something, and this cannot be taken away from them any more." ever. this is the power of human dignity. and it can never be denied. egyptians have inspired us and they have done so by putting a

like to the idea that justice is best game -- the lie to the idea best gained by violence. there was not terrorism or mindless killing, but non- violence, moral force that meant the ark of history for jut -- towards justice once more. and while the sights and sounds that we heard were entirely egyptian, we cannot help but hear the echoes of history. echoes from germans tearing down a wall, indonesian students taking to the streets, ghandi leading his people to the path of justice. as martin luther king said in celebrating the birth of a new nation in, come up there is something in the soul that cries out for freedom. those are the cries that came

from tahrir square, and the entire world has taken note. today belongs to the people of egypt. the american people are moved by the scenes in cairo and across egypt because of who we are as a people. the kind of world we want our children to grow up in. tahrir means liberation, all words that speaks to something in our soul that cries out for speak -- for freedom. forever market will remind us of the egyptian people, but they did, the things that they stood for, and how they change their country and in doing so change the world. thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> is president biden including members of the senate and house

have issued statements about the resignation of president mubarak. to see those, go to our web site at c-span.org. following the president's remarks, outgoing press secretary robert gibbs met with reporters. this is just over an hour. >> obviously, >> obviously this is not think having said that, i thought i would come into the briefing room to say a few words about

my departing press secretary. as some of you know, robert started very early with me on this wild ride that i had been on. i had run for the united states senate. i was not expected to win. when i won, the democratic primary in illinois, i realize that was going to have to start stocking up a little bit. at the time, i only had six or seven people working for me. i did not have a lot of money, so all that i could afford was robert gibbs. [laughter] robert came to work with me and we had a pretty significant general election. and then alan keyes came in, and

so that ended up not being our primary focus. we then had this incredible opportunity to speak at the national convention. i know that a lot of you think that probably most attention was devoted to the speech that i delivered in boston. in fact, the most challenging problem was what tie to wear. this went up to the very last minute. but couple of minutes of -- a couple of minutes before i was supposed to go on stage, will still having an argument. i brought five or six ties. michelle did not like any of them.

somebody turned and said, you know what, what about gibbs's tie? that might look good. frankly, robert did not want to give it out. eventually, he was able to take one for the gipper. he took off his tie and i put it on and that is the time that i wore at the national convention. -- tie that i wore. he has not said anything about this all these years. but i have to tell you that i know there is a simmering resentment that he never got it back. as a consequence, i wanted to bring here today -- on the record, on camera, i am finally returning roberts tied. if he chooses to break the glass, he can.

this will be a reminder to me that robert has been a great friend. you could not ask for somebody better in the foxhole with you during all the twists and turns of my candidacy. the incredible challenges we face over the last two years. i am so proud of him. everybody here loves robert. he will be working closely with us. i do not think we could have a better press secretary. jay will do an outstanding job filling roberts shoes, but i certainly could not have a better friend at the podium each and every day. [applause] >> is it signed?

>> i did not actually signed a tie. he may decide that he wants to wear it. you hope to be distorted. thank you, -- you helped me get started. thank you, brother. [applause] >> did you notice, by the way, that he bought one just like it? [laughter] >> i like that tie. let me get a few -- let me say a few things before we get down to talking about what we have every day. that is the business of the country. it is a tremendous honor and privilege to do this each and every day, to serve and to take

part in days like today that are so momentous. i want to thank the president and all of this team for the privilege to serve. i do not want to spend a lot of time doing this. i do not talk about myself well. i would be remiss if i did not talk about a group of people that do not work for me, but i have a great privilege and i'm lucky enough to work with. i would not want to do this job, as amazing and as exciting as it is, without them. i would not have made it through

it without them. i do not intend to today or tomorrow to tell any of you could buy. i do not intend to go anywhere. you are forever a part of this experience for me. you have the, a -- you have become a greater extension of my family. we have shared a lot of extraordinary times. i will miss boring days like today at the white house. [laughter] for all of you that are looking for help on your morning shows, at j. likes to call around 4:15 in the morning. if you do not get through the first, keep dialing. it has been an extraordinary privilege. i will have more to say to these guys and to those in the back of the room that of men some much to me and continued to

mean some magic to me. before i lose it, we should start the briefing of the obama administration. >> thank you, robert. first of all, congratulations and best wishes. >> i would have lost that. >> shifting to egypt, a few questions. can you tell us whether president obama was surprised by the news this morning?

>> look, throughout the morning, we have got indications that the last speeches may not have been given. the last changes, particularly this morning when -- would everybody reporting that there would be a statement from the office of the president to -- the president was in a regularly scheduled meeting in office when a note was taken into him to let him know what had been announced. since then, prior to giving the statement, he spent an hour with his national security team from about 1:30-2:30 in the situation room talking about what is going on there now and what we have to plan for now going forward. >> so he learned with the rest of us? >> healer and precisely what

had been said. -- he learned what precisely had been said. i do not want to get into what other information he might have gotten. >> is this change helpful or harmful to the interest of the united states? >> anytime that a government changes based on the popular response of its people is important. all governments have responsibilities to those they represent. there will be many bumps along this road. this transition continues toward free elections. i do not doubt -- there is much work to be done. this was the beginning of that

process, not the end. >> does the president have any concerns about the unknowns? the instability? >> the partnership that we have had with the people and the nation of egypt for 30 years has brought regional stability and has brought peace between the countries of egypt and israel. it is important that the next government of egypt recognized the accords that have been signed with the government of israel. a lot has yet to be determined, but it is clear watching the events unfold over the last couple of days, that real friends of egyptian society that has been out seeking the type of change that we saw

happen today. this is not dominated by a single group or a single ideology. >> robert, since the protests began, all the statements about egypt have been very carefully worded. last night's statement from the president was especially carefully worded. mubarak was not even mentioned proposed. >> luck, it is safe to say that the very same context that we have in egypt are some of the very same context that many of you all have. they seem to tell everyone that a different speech may be what we would hear. we did not hear that last night. at that point, it was a missed

opportunity for the government of egypt to take the necessary steps toward that orderly transition. that has been building throughout the week. you have seen as the government failed to take the necessary steps, to broaden the coalition, to make some fundamental reforms that would signal to those of the opposition that they were serious, the problem grew larger and larger. there is no doubt that this is a situation where there is writing the needle. -- threading the needle.

there are a lot of equities and the country and the region. ultimately, this is something that started it, was driven by, and will ultimately only be solved by the people of egypt. i think that is true in the lead up to the historic announcement today, and be even more important in the days ahead leading to elections. >> can you talk about any [inaudible] >> the president has not made any phone calls either to those in the region or heads of state. >> [inaudible] what kind of assurances can you give israel and jordan about how this may affect them? >> throughout this process, we

have wanted to see protests that were peaceful. are all, and this process, we wanted to see how it happened in an orderly way to ensure some of the very stability. i think that is what has guided us this entire time. the president has not spoken with anybody. i do not believe, at this point, there has been any contacts. we had pretty good relationships on a military to military bases. it is remarkable to watch how iran is dealing with this. we saw a week or two ago, they made some provocative statements about what these marches meant.

we now know how they are responding to the images that we see in the square. they are arresting people in iran. they are blocking international media outlets. they are turning off the internet. for all of the talk about egypt, if the iranian governments, the government should allow people to exercise the very same right to peaceful assembly and the ability to demonstrate and communicate their desires. we have all seen their response. the head of the revolutionary guards said today that -- we

will severely crushed any of their movements. what you have seen in the region is the government of iran scared of the will of its people. >> thank you, robert. good luck. i hope you get to spend a lot of time with ethan. i've also taken the liberty of looking over questions that you said you would get back to last with an answer. when was last time president obama spoke with president mubarak? >> i think it was right before he spoke -- it was monday, right? the monday he spoke. >> under the obama

administration state department, it did not directly fund civil society groups for the last two years as the bush administration had done. it also lowered how much civil society groups were funded. in retrospect, does the administration regret that? >> i can get you a little bit longer -- our commitment to the universal principles that the president has talked about throughout this process in

countries are around the world are best exemplified by what he said standing in congress. saying many of the things he has said over the last several days. obviously, we are watching the situation. we will, as members have testified in the last day or so, tailor our assistance to a changing situation. >> lastly, egypt has been a tremendous allied to the united states, according to the government, on the issue of counterterrorism. where are you concerned that there might not be as much support in the next government, whoever it is? >> obviously, we are going to watch the events as you and many others will. in the days and months ahead. i can say that the important

relationships that we have at different levels and our government with their government, the president was assured continued. >> thank you, robert. can you talk to us about the role that the vice president played and what ended up happening in egypt? he he sent a strongly worded letter to his counterpart to days ago. can you describe -- >> the vice president -- he had a counterpart to counterpart relationship with the vice president omar suleiman, and has spoken with him directly. he reiterated the very same set of points that you have heard us may publicly.

the genuine step that needed to be taken to address the concerns that the people have had. he has been on the phone fairly regularly. obviously, he has brought to meetings and the situation room and the oval office -- last evening, quite a bit of knowledge and experience in foreign affairs and foreign policy that has helped guide the administration along the last 18 days or so. >> was that phone call -- digital readout of some of the demand?

was that a pivotal moment? >> it is probably hard to go back and penpoint all of them, it was hard to be any clearer and more blunt than the vice president was on that call. the international committee and the people of egypt needed to see happen. that has helped move this process along. >> when the president made his -- at the top of his remarks in michigan, was the white house fairly optimistic at that time that mubarak was going to step down yesterday? >> i think any of the same contacts are many of the same contacts you had in reporting what might happen in egypt yesterday. i think the president talked

about his -- we have seen them play out each and every day. but what is important now is we have to look forward and work through a process to get us to a free and fair election. >> finally, this notion of concern from the white house as to what happens from now until the elections. is there concern about what the structure will be like? what could potentially happen before the people get to start voting? >> i do not think we have to fear democracy.

i think the international community upheld the to the international committee has laid out a series of steps they need to see taken. it is important to understand that this was a group of demonstrations and protests that were -- demonstrated a concern across egyptian society. i do not think you can look at it and say, this was a group that to did this or these are the people who -- again, you have seen mothers and daughters. you have seen this process led by somebody that works for one of the larger companies in silicon valley. what you have seen is a brat and cause of concern that had to

be addressed and needed to be addressed by the government. what happened today was the very first up in that process. >> thank you, robert. congratulations. i hope the was as good for you as it was for us. obviously, there will be some bumps in the road. what is going to be the role of the president and vice president and secretary of state publicly over the next weeks and months? did they now hold back? did they keep up the public pressure would statements? >> first and foremost, this was always about the people of egypt. it was always going to be solved by the people of egypt. no statement here. no comment that was made here was going to bring the

fundamental change that people were looking for in egypt. the people of egypt have their concerns and they're not going to be the definition of how to solve the concerns is not going to be solved here. we will continue to try to play a constructive role in helping this process along. this started with the egyptian people and double into the egyptian people. -- it will end with the egyptian people. >> do you think they will be as publicly you out there? >> add every step, we have been very clear about the response of all the islands. i think it is -- about violence. i think it is remarkable. " we have seen in terms of the

types of sweeping changes unlike anything we have ever seen in a short period of time. the next process of this is going to play out over a much longer ark. we will continue to be involved and to ensure that the transitional government in egypt and the government that the people choose to represent them, if they take the steps that necessary to meet the concerns of those in egypt, this government will be a strong partner to all of our friends in the region. >> why did the president choose not to call for an leaders in the region? >> let me go back and see if there is -- he has not talked to anybody today.

i think we are watching events and monitoring them. i do not doubt that the president will reach out to those in the days ahead. this is an egyptian story today. >> is there any hope of the white house that the example of egypt could inspire another uprising in iran? >> there is quite a contrast between the way the government of egypt and the people of egypt are interacting and the government of iran is threatening its very young people. if the government of iran were as confident as they would have you believe, they would have nothing to fear. with the peaceful demonstrations like those you have seen in cairo and throughout egypt. they are not that confident. they are scared. that is why they have threatens

to kill anybody who tries to do that. they have shut off all measures of communication. i think it speaks volumes about the strength and the confidence that they have in the killing the wishes and the will of its people. >> are the images from egypt somehow getting into iran? is there a chance that the message is getting and somehow to iran? >> we of all seen reports that over the past many days, those in iran want to march and demonstrate peacefully. the government of iran has met those concerns of its people with a threatening to kill them.

it speaks volumes as to what the group that they have, or lack thereof, on the popular beliefs of their own people. >> he talked about the vice president's role at this point. is he still in a key role or is he on his way out as well? >> that is a question for the transitional government in egypt. >> talk about the communications challenge with this event unfolding halfway around the globe, try not to get ahead of the message. how challenging was that? >> there are a lot of different audiences. the bottom line was that this

started in and will be solved by the people of egypt. we spoke throughout this process about the universal values that went into the creation of our country and what those marching fought needed to go into the creation of their new government. i think -- it has been challenging and there has been -- we have one topic takes up so much space over the past 18 days. it is a challenging topic for us to discuss. there are challenging days ahead. for those in egypt to construct what our country will look like.

>> do you mind giving out your personal e-mail address? >> i probably should not set it on tv. >> you don't want the american people to have? [laughter] >> that is the thematic of the briefing, is in it? >> the events of yesterday or today -- which are the bigger surprises? >> everybody was surprised yesterday. you can go look at my transcript from yesterday. i was on the cautious side because it was clear that things were happening.

again, it is remarkable to stand here or to sit there or anywhere in our country and watched what has happened over the span of the 18 days. it is a remarkable art in human history. many people were surprised yesterday. >> how much -- is there a sense of relief versus trepidation? >> i do not think we need to fear democracy. i think that whenever the will of the people shapes the demands of those that government, that is what we had in mind the democracy and representation. that is an important step. this is about -- and about its people.

>> on television, on radio, an online, c-span, bringing new washington your way. none treasury secretary timothy geithner unveils the obama administration plan for the future of the home mortgage companies fannie mae and freddie mac. speaking at a forum at the brookings institution, he talks about the future of fannie and freddie over the next five years to seven years and reducing the government's role in the housing market in the future. the administration also proposes requiring a 20% down payment among other proposals. this is about 30 minutes.

>> tim has been one of the key players with ben bernanke and larry summers and henry paulson in stemming the tide of this financial crisis and starting to turn the economy around. he also has been the architect of financial reform proposals that became the dodd-frank bill, and one of the piece is not included in this bill is what to do about the gses. today the treasury has released a white paper describing their plans on that issue, and we are very delighted that you chose to come here to brookings to talk about it. let me ask you first of all if you would give us a sort of a brief description of what the plant is and how it is going to be implemented. >> thank you, martin. it is great to be a brookings. i am glad you give me a chance

to come in at the beginning of the conference. we had a lot of things wrong in the housing market in the united states. it is a complex system, and reform requires a careful strategy which includes a different number of elements. let me out lead they've rigidly up the basic foundation. the first is that we need to wind down fannie and freddie and substantially reduce the government's footprint in the housing market. that is a process that has to happen gradually since they are the dominant source of housing finance, and we want to be careful that it happens in a way that does not interfere with or impede the process of preparing the housing market that still has a long way to go. for the private market to take on a greater share of the burden of providing housing finance, we have to have in place outlying

and understood and new sets of rules of the game for all the pieces of the mortgage market. and that means clarity on the capital banks have to hold against mortgage risks, could mean stronger underwriting standards so that homeowners need to hold more equity in their homes, it means better protection for consumers, comprehensive oversight of servicers, and all others involved in the basic chain of how the housing finance. it means better standards for securitization, and that comprehensive set of reforms that are laid out in the bill has to be put out to the market to give investors and banks time to adjust and understand what will be the new economics of making mortgages in this country. the third piece is to define a substantial but more targeted role for the government in supporting affordability, but

for people who want to own a home and people who want to rent. the paperless out the series of basic elements -- the paper lays out the series of basic elements for a former rules for the government, concentrating on the fha in of and support those basic objectives. and then the end game, taking advantage of a lot of work that many of you have done, we have provided a brief overview of the full spectrum of options out there for future reform. we try to narrow the field to a more credible set up a ultimate reform options. the three we laid out in the paper to summarize them briefly are an approach that is limited to the role that fha provides, a proposal that would complement the fha with a emergency backstop mechanism that would only be deployed in crisis and a third option is an fha alongside redesigned and much more limited but standing

guarantees or insurance mechanism that would be available for broader class of homeowners. those all have different implications for the nature of the government support for the vulnerability of the market in future housing crises and recessions. it is helpful for the broad set of stakeholders in the country and on the hill to spend some time trying to fully understand the implications, the relative merits and disadvantages, of those mix of options. in laying those out, we do take the view that it would be fundamental for the country to adopt a model for the government plays no role, and we also think it would not make sense for the country to be -- for the government to be on and on the -- ongoing basis guaranteeing 80% of the mortgage market, which many people have suggested. the start this process of legislation with a white paper. we thought it was a good way to

do it. they will be a long process of hearings on the hill. and we get further in the process, then congress should be in a position to legislate. we will then provide a hard use more directly on what makes those final options make sense. there are a lot of good ideas out there and we try to draw on those in this paper. we will continue to work closely with the stakeholders in the process to take advantage for the best ideas for reform out there. we need to proceed carefully and gradually, not choose to cause this is complicated because as you know we are still living with the dramatic damage and scars caused by this recession, and you see those in housing most powerfully. >> now when the plan, you retain an important role for the government in helping affordable housing. either rental housing or ownership of housing. we have our range of interesting papers for this conference that cover the spectrum, but there is

a view that the effort to provide affordable housing is really what brought down the housing market, and was do- gooders that thought they should get everyone into a home, and we ended up through cra and for it is affordable housing goals, that that brought down the global markets. could you comment on this sort of affordable housing in the role you think it may or may not have played in the crisis? >> it is absolutely the case that the u.s. government provided too much support for housing. too strong incentives for investment housing. we took that to fall. -- too far. alongside that basic set of mistakes and incentives we created, we allow our financial system to take on too much leverage. we allowed a huge amount of basic mortgage business to shift where there was no regulation or

oversight. we allowed the market to build the terrible incentives around underwriting securitization. leo which will allow underwriting standards to grow dramatically. i think these were avoidable mistakes. it is important to recognize that this was just not about what fannie and freddie ultimately did the cause the market downs. it was about a much more comprehensive set of fell years in the basic design of oversights and incentives in the system. so absolutely the government did too much. in what it did, it did quite poorly. as you know, a lot of the basic subsidies and incentives the government provided or not really targeted to people who were at the lower side of the thing come across the united states. -- up in come across the united states. we need to get the incentives butter, the oversize better,

underwriting standards more conservative, and that is a critical part of this reform. >> so then in the other direction, there is a viewpoint -- two parts to it. let me take this part, which is you inevitably -- there will be a huge mortgage market. we have $10 trillions, who knows, bigger in the future. at some future time, maybe 20 years from now, there might be another housing crash like this one. that risk then -- who will bear the risk? will that put our financial system under stress even if you have no fannie and freddie? is there a role for the government to provide emergency assistance when you get that kind of pressure? i think there things you're trying to build in which would make such a crash less damaging.

>> all financial crises have at their center, most do, this combination of real estate busts and bank mistakes. we are not unique in that context. to make sure the system is more stable in the future, more resilience against the risk of future recession or housing prices booms and busts, indeed have a system where banks hold more capital against risk, people have more equity in their homes, and the government is not creating incentives that magnify the change you have these huge imbalances in housing over time. i think it is worth noting, at least my view is, even if you get that stuff substantially better -- and we will. i am pretty confident we can do that. we will still have recessions in the future. you want to be very careful you

do not leave the country vulnerable as we were in this crisis to the risk that a shock that causes a recession turns into a crisis of these dimensions. that requires there be some capacity for the government to step in and protect the economy from the collateral damage that can come from that crushing deleveraging of the big withdrawal of private capital that happens in crises. doing that is terribly difficult. governments do not do that well. people think guarantees are: interesting but they are hard to do in a way that does not create the risk that political forces in the making them too generous, too cheap, and undermining the incentives to get a better balance to risk taking. in thinking about the future -- this is why we let out the options that we did -- it is very important to think through the design questions so that we do not in that recreating some

of the same risks that got us into this mess. >> could you say a word about the role of securitization in this? historic plea over the last 20 or 30 years or so, the u.s. has been a large capital imports. i think you like it better if we had less of the trade imbalance. >> it is half what it was. >> is going in the right direction. but we are somewhat reliant on inflows of capital. securitization can supply an important role if that inflow is going to support the housing market at all. we got into a lot of trouble with securitization. non-transparent cdo's, that sort of thing. how do we realize

securitization and stop getting into trouble the way it got into trouble in this crisis? >> my view is that we should make -- we should preserve a financial system in which banks are substantial source of credit, but not the only source of credit, and their roles complemented by a capital market, including a securitization market, that can complement the classic role of banks. we're somewhat unique in the design of a financial system. making sure that it works over time requires the type of reforms i have laid out to make sure that the standards are better in the securitization better in the design of capital requirement like that are better calibrated to take into consideration the risk of the extreme crisis in the future. and i think those are achievable reforms. it is pretty clear what we got

wrong in the basic securitization market and there is a lot of consensus on changes to make a big difference. i would not support trying to create a system where banks are the overwhelmingly dominant source of credit. i think that at the economy would be more vulnerable to the inevitable problem that comes with banking, the familiar problems to many in this room, about banking. just to go back to one thing, there are a lot of mistakes in how we design housing market, but at its core this crisis was caused by whole range of people, flinders, homeowners, investors, policymakers not imagining the possibilities of a severe recession that would include a very sharp fall in housing prices. central to anything about reform of the financial system is that you make sure the capital regime, the oversight

regime, the credit rating processes, build in more care and caution about their risks of this severe events in the future. >> in the paper, you talk about wanting to move to a 10% down payment regime. two questions -- is 10% enough? some people say we need 20% which a lot of countries have. the second is, how do we deal with the second mortgage issue, that people in fact say they are getting to% but this primary mortgage holder does not know that there is a secondary mortgage on top of that. it is right that we need to get the loan-to-value ratios in the right place. how're you going to enforce something like that? >> homeowners have done more equity in their homes and a half to build in a greater caution in their homes. -- they have to build in a

greater cushioned in their homes. we need to reinforce that basic process. but the report says is that -- think about fannie and freddie for the initial phases of this transition. there should be a combined to limit at 90%. again, there is an overwhelming case for moving the system gradually over time to a world where homeowners more -- own more equity in their homes. there are cost to doing that. there are hundreds of stories of businesses starting up in this country financed by people being able to borrow against the value of their equity. at inception, not just on the credit card, but against their homes. we are going to have to figure out how to make sure that we do not go to far in the other direction. again, ultimately the critical test of the financial system is that you make sure you have the

possibility of channeling the savings of americans and investors around the world to finance innovation, including at that initial level in the garage classically or somewhere else, we have to be careful that we do not push the balance too far. >> we have mentioned already rental housing. part of what you're saying in this white paper is that maybe we went too far on homeownership and we need to make sure that people who want to rent or is better for them to rent have the opportunity to rent. what is the in -- what is the process to improve rental housing? to get my colleagues at hud will be principally responsible for shaping this. the fundamental point is that too much of the assistance the government has provided to individuals with two homeowners.

there is a fundamental and fairness in that. we think there we should balance where the government provides a subsidy in a way that addresses that visit than fairness. >> -- that basic unfairness. to give what the options that you're lying now for congress to consider? >> i want to start making an observation. if you look across the country, people did this in different ways. in the subway, you could say that is our model where you have a variety of quite broad based and very poorly designed guarantees by the government, explicit and implicit, holmes and the private market. -- alongside the private market. and you have an extreme in other countries, banks holding overwhelming share of more rigorous. people think about this is a world where there is a guarantee

-- there is not a guarantee that that is not the way to think about it. in the alternative model where banks hold all the risks, the governments are providing a guaranteed but through that classic broad support for the banking system. they do not charge for it. it is not explicit. and it has a lot of other risks when i -- when you think about financial stability in this context. you can manage the risk in banks more careful in easily. we understand the risks are better which you may see it is not as easy as people think. the choices the release between providing a guarantee or not. it is in designing its so that whatever it is, it is explicit. you're not creating that incentives for investment and for risk taking, and that is a hopeful context. and the broad context is what we called the fha-only model, where

the government role is limited to a guaranteed mortgages that would only be available to people up to the median income, and the second option allows an emergency backstopped framework deployed only in the context of a crisis. a good example of this is the suite of facilities that the federal government has reserved. it was put in place in the fall of 1998 to provide a backstop for markets. the way that that would work is you would set up this mechanism whereby the market would be more willing to provide financing for mortgages because it would be a backstop in place temporarily. if you get the pricing in that right, as things improve, the man for the backstopped will receive in you can wind down this. the fed did this successfully in the crisis.

and there are a lot of proposals in this arena, and it is a fundamentally redesigned, much more limited guarantee for reinsurance mechanism where there would be a lot of private capital ahead of the government's and the markets would be charged a fee for that guarantee. it would be explicit by the , but the taxpayers would be behind a lot of the capital, and if the government was exposed to loss, it would be recouped in the form of a free on the bonnet -- on the broader market over time. it is much more complicated to do in this process. our view is that is a credible set of options, but you cannot think of them in isolation. it is possible that in the and we will decide to do a mix of those options. again coming up to think about them in terms of what risk they

pose to the taxpayer, how difficult it will be to design a guarantee in a way that does not again get the incentives wrong and leaves the taxpayers to exposed, what kind of protections you want to build into the country in the next crisis, and whether that can be provided through an emergency backstop mechanism for requires the government taking even in normal times some of the extreme risks of credit in mortgages off the burden of the private market. . mortgages off the burden of the private market. but that's a mix. we're in the, i would say -- a lot of ideas and those dimensions. again, just to magnify the challenge, for this to be done -- well, you have to take it away from politics. you can't take anything away from politics, but we have to take monetary policy away from

politics. hugely important fundamental reform in central banking. it would be nice to take fiscal policy away from politics, that's not foreseeable. if you're going to do this, you're going to get into this mechanism of designing a guaranty, the people charged with doing it will be more independent from political affection, enthusiasm, influence than our system proved to be before. >> you're sort of talking about a pretty staged out wind down for fannie and freddie, it would be over several years. i personally think that's inevitable, you've got to do that. i think someone could look at that and say, you know, on both sides of the aisle, people complain about fannie and freddie. at the end of the day, they want those mortgages because they're so important to their constituents and you're going to put it off for three years, five years, six years.

actually this is never going to happen. what would be your answer to that? >> well, i think it's a good question. of course, any framework, let's think about fiscal policy. any framework where you're promising future virtue is -- will suffer from credibility issues, but this is really the only way you can do it. what we're proposing, we laid out the first stage of more economic pricing, more sensible set of initial reforms to get the economics better, and what we're suggesting is the fhfa which has the legal authority over this for fannie and freddie and the fha lay out to the market an indicative transitional path for comment, in a sense, for feedback. they can lay that out. the market can figure out what that path is. we have to revisit over time, because we won't have perfect knowledge about how long this process of repair will be or where the pricing should end up. that will help reinforce the

momentum, the change and make it harder for people ultimately to step back from that transition. now, again, we have some important things working in our direction apart from the general recognition that this system is untenable, that is that they don't want the taxpayer exposed to loss in the future. they recognize the model we have is fundamentally unacceptable, and the option of doing nothing, leaving ourselves only with the legislative authority that exists in what's called harrah, would put us in a position where we risk recreating a lot of the flaws we created in the system. we did financial reform when the crisis was still burning in the united states. we did that in part because we thought that you want to act when there's still a substantial amount of political will. and i would say the same thing in housing. you don't want the process of reform to wait until things are fundamentally better and the

memory has receded. it will take a long time for the memory of this to recede. although we're starting with this white paper, we don't want legislation to be too far deferred. we can do this initial transition thing without legislation, but ultimately, we're going to have to explain to the market what the end game is going to be. we can't wait too long to lay that out. >> fannie and freddie will remain as government held utilities in this transition peter. >> they will. they have to. >> let me take a question or two from the audience. karen? >> thanks. karen dinen from brookings. your paper lays out several alternative proposals. we're going to see more alternatives laid out over the course of today's conference. all told, it seems like we might be a ways away from locking in on a plan. i was wondering if i could build on your last response. do you think this lack of a plan is hindering the mortgage market recovery, hindering mortgage

origination and securitization while at the same time increasing the government's exposure to risk? >> i think the three things that are still in the way of broader recovery are, one, the economics of what the government is doing now, because what the government does now in mortgages is more attractive than what the market is willing to do, you're right. that's why we want to begin the process of changing the pricing and the ltvs conforming limits to help facilitate that transition. the second thing is lack of clarity about what the rules are going to be over the rest of the private market for mortgages. the act requires a complicated set of rule writing across the board. we're the responsible agencies are starting to lay that out. but until that is in place, people can see them, those final rules people can see, it is going to be harder for banks to decide how much capital they want to put against this and for investors to decide what role

they want to play in this. that's a necessary precondition. the third is realistically, just a little bit of time. again, we're three years into the process of adjustment of the housing markets. we probably have three more years left, and, you know, we're still pretty close to a deeply damaging financial panic, so we need a little -- we need to have a little more time for that uncertainty about the future to be reduced a bit. i think those things require a little bit of time. i think we lay out at least notionally, a three stage plan, the three steps in walking about the government's role, comes alongside putting in place the broad rules of the game over the private market, and then, i say -- we say two to three years because we feel the housing market still needs two to three years to recover. the second stage which is going to accelerate that process of

transition. ultimately, we have to choose this framework. i think our suggestion is that congress try to legislate the next two years, even though you don't have to lock in that successor regime until probably five to seven years from now. the way we describe this, we're going to drive west. we're driving -- everybody wants to go west. we know where we want to go. somewhere around salt lake city, we'll make a choice about ultimate options. >> questions? yes. alice? do you have a microphone? >> your paper basically supports the role of the government in affordable housing, both rental and home ownership and suggests that we do it on budget. we appropriate a balance for this rather than try to hide it

somewhere. that all seems to be good, but in a moment of great budget posteri posterity, when everything is going to be facing cuts, won't it be sort of a hard sell to set up new kinds of programs that are oriented toward affordable housing? >> i do think it will. but as you know better than anybody, you know our long term fiscal sustainability problem is fundamentally about long term entitlements, particularly the cost of health care. i think there is -- we, as a nation, can absolutely afford to make and commit to a set of targeted assistance for low, moderate income americans. i think the challenge again is to do that in a way where it's more targeted and more

transpare transparent. i think that's something we can afford. as you know better than anybody, we're not going to serve our long term fiscal problems by just by spending less in what we call nondefense discretionary spending. we're going to spend less in those areas, but we're still going to have to make sure we can sustain the capacity and we can afford it to make sure we're making investments in things that are critical to our capacity to grow in the future and to make sure we're providing broad opportunity to americans across the income spectrum. i think it's affordable. the politics of all this stuff will get much harder. >> thank you very much. secretary geithner.

it is with great pleasure that i introduce alan greenspan. as you know, alan became chairman of the board of governors of the federal reserve in 1987 and served in that position until 2006. we had an extraordinary amount of stable, relatively inflation-free growth during that period. he is now at greenspan and associates. i can attest that he is still extremely active in economics and economic research.

he gave a paper at the brookings panel recently. i had the bridge of talking to hem regularly and hearing what he is working on. he's very much still part of the world of economics and macro. alan, welcome. >> thank you very much, martin. you didn't say of's been around here 40 years being one of the very early numbers of the brookings pnel on economic activity. >> i apologize for not saying that. >> all i can tell you is if you go into one session today versus what the sessions were 40 years ago, you realized how little we learned. you haven't been coming often enough. that's the problem. >> while the rest of the seminar is devoted to the structural

mortgage finance, i thought it might be useful to spend a few minutes on what mort ga finance is ultimately all about, home building. the last 20 years have exhibited the longest, uninterrupted rise in single-family housing starts, and by far the sharpest collapse in the post war years. starts in recent months half languished at a little more tha 400,000 annual rate, less than 1/4 of where they stood at the top of the boom in early 2006. nothing reassembling this collapse has occurred in the six decades following the war. to find such a data, we have to goack to the 1930s, when single family housing starts between 1925 and 1933 fell by almost 90%. housing starts did not regain

their 1925 level over the next eight years prior to the war. starts, in fact, did not recover to their 1925 levels until 1947. i do not expect a similar hiatus this time, but the trudge uphill is not going to be easy. during the recent boom years, demand for singl family units and their financing was predominantly demand for owner occupancy. the level of additions to ownership was significantly driven by the rate at which households chose t own rather than rent and could afford to do so. the ownership rate in turn was fostered by rising home prices and the implementation of affordable housing goals. after a protracted peri of stability, the ownership rate at 64% in 1994 began its historic

rise to more than 69% a decade later, producing from 2001 to 2004 an average annual increase in new, single-family, owner-occupied dwelling units of approximately 1.2 million. absorbing all and more of the gain in household formation. in addion to the demand for owner occupancy was a significant demand for single family residence by investors. according to the homeortgage disclosure act data, the share of total investment and second home purchases rose from 9% of home originations in 2001 to 14% in 2004. that combination coupled with a 200,000 annual rate of demolitions and some loss of single family units to multiunit

conversions supported over those years an average annual level of single family unit completions d mobile home placements, amounting to 1.5 million. the demand for homeownership peaked at the end of 2004 as the limited backlog and higher prices began to take their toll. ownership rates turned downward in the fourth quarter of 2006, ultimately, incidentally, falling below 67%. single family housing starts peaked in early 2006. but it took another seven months for starts to turn to completions, and not before adding an unstoppable and unprecedented 430,000 units to the inventory of single-family homes for sale over the four quarters of 2006 on top of

170,000 added during 2005. by the e of 2006, the level of vacant single-family hes for sale had reached 1.8 million. a staggeringly historic overhang of more than 700,000, the equivalent of six months of sales. for years prior to the surge, compted homes available for sale had been relatively stable at a little more an million units. following the topping out of demand late in 2006, home prices proceeded to fall for three years. the largely futile endeavor to uncover enough demand to absorb inventory excess. but homeownership by then no longer held the seemingly irresistible profit-making

attractions of earlier years. home builders and other owners of newly constructed but vacant homes have been abe, through price discounting, to fully liquidate their share of the overall inventory excess, about 200,000 of the more than 700,000 for sale excess. the remaining vacant homes offered for sale by investors, the bulk of the vacant market were still hovering around 1.5 million, less than % below their all-time peak reaed at the end of 2007. the level of home completions declined by more than 2/3, but demand fell almost as much, placing new supply only modestly below demand. even at current depressed levels of new single family

construction, the inventory overhang cannot be credibly absorbed quickly. a stabilization of the homeownership rate would help in the sense that a falling ownership rate severely undercuts single family unit demand. th ownership rate moving from negative to zo is, in fact, is in that sense, i guess, a positi. nonetheless, market pressure could keep completions below demand for much of this year or longer. as excess inventories are gradually brought under control. new demand creation must come from either an increase in the rate of household formation or increase in the share going towards owner occupancy. temporary tax credits rarely do

either. it is thus no surprise that the recent first-time home buyer tax credit produced little, if any, permanently higher demand. certainly the currently more than 2 million single family units in foreclosure has not helped. recent history suggests that approximately 2/5 of the surge in foreclosed properties on completion of the foreclosure process will be sold, possibly into a still-troubled market. that would amount to an additional several hundred thousand overhang, bringing the total excess to more than a million units. home prices after falling almost 30% from their late 2000 peak stabilize by most measures between early 09 and the

spng of 2010. by the summer of last year, however, they began to soften again, largely as a consequence of the pick-up in distresd foreclosure sales, especially in december. there was, however, some evidence of price stabilization at the end of 2010. seasonably adjusted core logic prices, excluding stress sales rose as the median price of newly built homes. stabilization is important, not only to theousing market you about economic recovery as a whole. since approximately 8 million homes were financed with conventional conforming mortgages during 2005 and 2006. most of their 20% or more original down payment plus recent amortization of that debt

has eaten into the 25% decline since origination. another 5% to 10% decline in home prices that many are forecasting would place a significant part of the 8 million homes under water. to be sure, the propensity to default on underwater conventional conforming mortgage debt has been much less than for the more vulnerable subprime home mortgages financed homes. nonetheless, a price weakening itself could set in motion the contagen for further decline. however, with the rest of the economy currently recovering rather impressively, i'm hopeful such an outcome can be avoided. but it woulde unwise to fully rule it out. as a consequence of the near 30% decline in home prices, equity in homes by the end of the third

quarter of last year had retraced all of the $7 trillion rise between 2000 and 2006. its composition had changed. currently, it is highly concentrated. subprime and alt-a financed homes are net under water. there is some net equity in prime jumbos, and surprisingly, in the niche market of homes financed only with home equity loans. nationwide, well over half of home equity is currently in homes free and clear of debt. conventional conformg financed homes are running a distant second. prior to the crash in 2006, they had similar shares of net equity, but that was a time when virtually all homeowners had positive net equity.

with home prices after their crash landing have been flatted out over the past year, the number of homes under water has stopped rising. the number of homes in foreclosure has also stabilized at approximately 2.3 million, seasonably adjusted, at least for now. but they presumably would move higher should home prices slide ain. the rapidity of housing markets will depend on trends what we used to label equity extraction. equity extraction, the raising of cash by borrowing against the market value of equi in homes has faded as a key positive determinant in economic activity, but it remains important to the housing and rtgage markets, and it will surely re-emerge as a factor

driving the household saving rate and personal consumption expenditures in the future. today, equity extraction is negative, as debt write-offs and the new owners add equity to the nation's own homes rather than extracted it. despite flat home prices, equity has risen by $500 billion since march 2009. the overall stock of home mortgage debt is in a constant state of turnover and revaluation, owing largely to changes necessary home prices and/or the degree of refinancing of the debt. but to understand the equity extraction process better, we can usefully separate quarterly debt change into two components. one, that part of the increase

or decrease that is solely the difference between a mortgage originations on ney-built homes and the scheduled amortization of debt that exists at the beginning of each quarter. in short, the amount of debt accumulation that occurs solely from the finaing of newly-built homes. and two, the remainder of debt change that owes wholly to actions that in total we measure as equity extraction. equity extraction is capable of being fully accounted for in three buckets. first, debt changes owing to the sale, that is turnover, of existing homes. the buyer of an existing home will almost always add more debt on that home than the seller will repay as part of the transaction.

secondly, cashout refinancing. the difference between the balance on a refinanced mortgage less the mortgage balance being refinanced. finally, three, unscheduled repayment of debt unrelated to a property transfer or a refinancing, including especially delinquent scheduled amortization that may or may not more than offset burgeoning writedowns. in years past, jim kennedy at the federal reserve, and i, went through a set of detailed calculations to separately estimate each of these three components equity extraction in total can be approximated more expeditiously from a simple regression in which equity extraction per capita is regressed against the refinanced

share of total home mortgage originations and a cumulative moving four-year change in home price. i must say that the latter is by far the most potent part determining the issue of equity extraction. the results over the past 15 years are statistically highly significant. moreover, the regression accurately traced equity extraction in the boom years, as well as its small negative during t past year. what the price variable suggests is that it takes four years of cumulative capital gains on homes, on average, before homeowners endeavor to extract equity. mainly through a sale of a home or cash out refinancing. the regression coefficient can be employed along with the calculated amortization rate and value of home originations estimated as the product of the

number of one to four family completions and the average price of sales of newly constructed homes. these inputs estimate the change, and hence, the level of one to four family regular mortgages. regular mortgages are the usual numbers you look at, x construction loans and equity lines of credit. this simple model suggests that home prices will have to rise by 10% or more before signs of a full-fledged recory in housing, and the mortgage finance that goes with it becomes unambiguous. thank you very much. i'm open to your questions. >> thank you. we have some -- yes. we have some microphones. let's get some questions.

somebody needs t get us started. yes. can you identify yourself? >> yes, sir. i'm arnold king, mr. greenspan, how are you doing? yes, sir, my queion is about the receipts. how did they play a role in deconstructing the u.s. market? the balance sheet had caused a fall in the housing prices. >> i don't quite get the question. which balance sheet are you referring to? >> how did balance sheet play a role? >> company balance sheets or household balance sheets? >> very much so. indeed, another way of looking at the equity extraction issue is to recognize that that is the

far most important determinant of what the asset side of the equities are in the household balance sheet. so what we were beginning to see all through the period of the boom was a very dramatic rise in the market value of real estate matched only in party a rise in the liabilities. the effect was to very significantly augment the equity that the personal sector, meaning households or nonprofit organizati organizations and in some calculations, noncorporate business. there was this big surge going up on the asset side. and almost comparable surge on the liability side, and it went

into full reverse on the down side. a goodly part of the decline in the level of debt was actually write-offs and effectively very significant part of the housing stock going into foreclosure. that moves it off individual balance sheets. >> can i ask you a question? the treasury paper that just came out raised three options they gave to congress for the role of government going forward. one was anfha-only option, a small narrow role for government. second was that the government would provide a backstop to the mortgage market at a time of prices. the third was more extensive, the role for the government as a reinsurance vehicle for the mortgage market. you may not want to answer this question, but i'm asking it in iway. do you have a preference among those three or do you have a

different view of what might be, if any, the role of government going forward? >> i'll pretend to answer the question. i'm aware of what tim said, the secretary said. i thought it was a good presentation, frankly. the problem i'm havi is that we have gotten a housing market into such a state where, as you know, virtually all mortgages are one way or another government financed, government guaranteed. >> rig. >> we get the impression that because of that, the private market is dried up. of course it has. the difference here is that we don't have any good sense of what is out there ex the actios

of fannie, freddie and other organizations. i would like to see at least in an academic simulation what the yield spreads would look like if the government was not there. this may sound like ancient history, but i served on a savings and loan holding company board in 1962. all we had really to finance mortgages was savings and loans. it was anibl credibly effective market we h huge amount of home construction because baby boomers were building up. you had levitt towns and other types of operations going on. i will tell you, aside from the very chronic concern that those of us as economists or finance people who are in the s&l

industry feel very uncomfortable about the fact that a savings and loan institution is constructed at that point. required inflation was low, therefore interest rates were low. you could play the yield curve which is how a lot of those holding cmpanies had stock prices at 50 times earnings. it was really extraordinary what was going on back there. it struck me, especially after the s&l debacle many years later that there is nothing wrong with that particular model if we could get the people to swap their short-term overnight liabilities into longer term debt. it would have cost another hundred basis points, i'm not sure what it was. the short sidedness was something you couldn't get around. when you look at northern rock

and the recent crash, that was the same thing. they went from deposits which were reasonably stable to short-term financing. why? beuse they could get a few basis points less. i would be very curious to get a sense of what the current housing market would look like if the government were out. i know there are several things. one, interest rates, mortgage rates would clearly be higher. the question is, how much higher? the size of the market would be smaller because of that. is that all bad? we went through a period of hyping up housing in every con seasonable respect, and i think it was the general economics pr that we were putting too much of the nation's capital into ownership. and the fact that it turned aroundo dramatically, we

erased virtually all of the runup in home ownership in a very short period of time tells you how unstable that is. in any event before we get into the notion of which of these various different pockets we wish to put the new sets of regulation in, it would be useful to g a sense of what the alternatives are. to start merely with saying we're going to start somewhere in the middle presupposes a degree of subsidization the size of which we do not have the slightest clue about. i ink we get a much broader notion of what would work and be the nation's interest if we first have some view of what level of degree of subsidization we find desirable and acceptable and i don't think we're getting

into that discussion. it sounds to me as though we're sort of starting somewhere in the middle, working our way backwards and forwards, and i've been looking at this market for generations and i don't have a clue what we have here. i do know that a home mortgage, amortized 30-year mortgage has a value to an investor. the only question is, at what yield? i mean, i have no doubt that you could probably sell subprime mortgages at almost any volume if people wanted to take the risk that would be implicit in the mortgage and accept the 13% yield or whatever the number would be. >> right. >> but let's get a sense of what it is we're trading off here, rather than making the key decision before we go to square one. >>hank you. that was the best pretend answer

i've ever heard. bob post has a question. >> so actually some of the papers here try to answer that question and give you some modeling and i think it's a fair statement that if you looked at those papers, the sources, and the sources, that there would be some increase in interest rates, decrease in the supplyf mortgages but i think that my sense is politically we could handle that. there is a second argument and that's what i'd like to know what your view is because it's essentially that that's a normal but the reason why we need insurance all the time or as a backup is because, one, there is liquidity crisis whether it's every 20 years or 30 years, whatever you want to define it. at that point the notion is that even at a higher price that people walk by and implicitly

the notion must be that the fed doesn't have powers to deal with it, so i guess i would just like to refine your excellent answer from before and try to get you to take one step further, because i think that when that work is done, actually people might be willing to accept that as normal time and then it's the second argument that seems to motivate people to say, we need either back up insurance or full-time insurance and that implicitly assumes that the pricing mechanism you've just described won't work and also implicitly assumes the fed doesn't have other tools to deal with it. >> well, 13.3 essentially gone the fed does not have the tools it did have. but this is more a nonhousing question, because it rests very critically on the issue of how unusual this recent crisis was.

from what i can gather, this crisis was the greatest financial crisis ever. it was not as large an economic crisis obviously as the great depression, but the short-term money markets did not go out of business during the great depression. money rate went up to 20% but it still traded, but in this particular one, we had major aspects of the shortened of the market collapsing and that is the -- the short, overnight rate is the ultimate determination when it goes how bad the crisis is. the st time we actually had a shutdown in a short-term market as i recall, i wasn't there but some people think i was, was in 1907. >> remember it well.

>> the cold money market shut down for one day. and going back in history, it is very difficult to find anything like this. now, i grant you that when you get a structural breakdown of the type which we had, you have no substitute for other than substituting sovergn credit for private credit and that's indeed what was done and i happen to have been a strong supporter of t.a.r.p. i think it was the right thing at the right time and i think it worked. the question of whether the repayment was out of the capital gains, they all got as the stock market went up is a secondary question. what it did do is when the market was going down, it stabilized a lot of institutions. i think we have to do that periodically because the system has human nature associated with it and human nature is a remarkable tendency to do very

punitive things. i first say if you're going to make it every 20 years we're going to have a problem like this, then i'd have to agree with you, but i don't see it that way. i see this is a much rarer event and i think the critical issue you have in the catastrophic insurance issue which is basically what everybody is talking about is how in the world do you price it? i mean, we know that if we actually had a probability distribution of potential outcomes and we had a full measure of the tale risk we would probably calculate the costs of the subsidy. in fact, almost by definition, at the margin where people who are borrowing money would be indifferent as to whether they would be getting either one or the other. and i will tell you, however one does this catastrophic insurance calculation, the numbers that come out really ilicitly only refer to, quote, norm times.

and so it is a degree of subsidization and i think you have to ask yourself, is it worth while or not? and this is where the issue comes in from your point of view you would say it is worth while. from my point of view i would say i would agree with you if i agree with the underlying premise of how often we have these crises. but that's the type of discretion we need to have, just not parang out a whole series of different ideas unconnected to anything in pticular. >> there's another question coming but can i just sneak in, you mentioned the 13-3 is gone and that the t.a.r.p. was helpful. though t.a.r.p. was very hard to get, took a lot of political effort to get congress to pass it. do you think with 13-3 gone we still have enough tools to deal

with these rare but very severe crises? >> i don't think that if you have a committee of diverse people that you could get 13-3 acted in a timely manner. i mean, don kohn is sitting there. don probably could tell you that it wasn't self-evident to everybody that that was the desirable thing to do and the reason why that happens is that we all have this very unusual psychological problem. we believe we can focast. and we can't. and in a financial crisis, by definition, is a dramatic decline in asset prices virtually overnight, and if that were anticipated by the great majority of the people, it would be the way. and indeed, i don't know how

many crises we never even were awe are in the process of brewing which got arbitraged away before we knew it. the only one i would say we were clearly aware of was my recollection that the trigger of the crisis that was going to occur after say 2005 whenever it happened was going to be a collapse in the dollar because of our current account balance being out of whack. everybody agreed with it. so what happened? the dollar basically moved down very sharply over a number of years and arbitraged the crisis. and the only thing that had nothing to do of any significance with the crisis was the american balance of the dollar. so i think that there is this just general implication that we can have committees which can somehow anticipate events. good luck. it will not work that way.

i sat in meetings for years and years and years and it is remarkable what amnesia overcomes you after the fact. you forget how little you knew, and i just question how successful we will be in setting up some of these things. >> dwight? >> i'm one of the researchers that have actually looked at the question of what might be the level of u.s. mortgage rates in a private, nongovernment market. the key evidence we have is of course most of western europe has mortgage marts with very little government intervention with a wide range of fixed rate and variable rate mortgages and the evidence is that by and large their mortgage rates, the spreads of their mortgage rates to their treasury rates are lower than ours. and of course the immediate question is what are they doing that makes it work? and i think there'stwo answers. first, a lot of the options that are free in our mortgage such as

the prayment option, are actually priced there, and that's wheorth 50 basis points immediately you've knocked off 50 basis points if you make the borrower make a decision whether they want a free prepayment option or not. >> used to be able to do that. >> advocate going back to that. and then of course a lot of those countries ha recourse, which means that in a sense the borrower has a much more difficultprocess of default and the bankruptcy laws do not allow bankruptcy to be an alternative to the recourse. so i think the question -- i think if we move to a safer mortgage market and a safer instrument, we actually would probably end up with lower mortgage rates. the question in a way is, is this political system up to creating ofortgages and allowing the consumer the ability to make a choice among them and pick the one they actually feel is best. >> well, there is double entry

bookkeeping. if you find that some structures which help one group disadvantage another and vice versa. and the whole purpose of getting market prices is this is supposed to be a nonpolitical, anonmouse way of making choices among democratic societies. i, you know, i'm usually arguing on your side but there is another question here. in fact,societies. i, you know, i'm usually arguing on your side but there is another question here. in fact,among democratic societ. i, you know, i'm usually arguing on your side but there is another question here. in fact, a quasi-implicit guarantee in europe that banks will not be allowed to fail. when youe t that it is almost the equivalent of fannie and freddie not being allowed to fail. >> we had this argument earlier. i'm glad you're on my side.

>> it's made a much easier job when the underlying mortgages are ve safe. in other words their mortgages are like double-a securities so it's a much less of an onerous task on the banks and the regulators to have them than if you have a system where the underlying mortgages are bs. >> they've been having covered bonds for generations. but they don'have nfdics. for those of you not aware of the problem, what we have on coverebonds inhe united states is the sequence of where claims fall in aankruptcy proceedi and the fdic insists it not only be on the top but on top of the top and that's not going to work in this context. >> you talked about the recovery of housing. your main part of your speech was about what's happened to housing. you said the economy is recovering impressively. where do you think the growth is

coming from? your discussions about housing suggested that that's going to be a slow ad. now, investment tends to do well if everything else does well, business equipment and software is doing okay. but that need other things to keep growing in order to grow. nonresidential construction is still fairly weak, so where is this impressive growth going to come from? i agree with you by the way but i'm a little nervous about where we're going to get this growth from, exports or consumption? >> well, martin and i have discussed this previously so i'll just repeat it, but -- >> i wanted to give the world your --. >> my view is that one of the consequences of the extraordinarily long period of virtually no contractions in the american economy from the early

1980s forward, very little, and indeed it was interspersed with 1987, stock market crash, which historically would almost always have brought ecomic activity down because the wealth effect was dramatic at that time. and then we had the dot com boom. we had a soft landing in the process. and the consequence of that is that all the vast proportion of capitalinvestment was for a nger lived market expanding type investments longer lived market expanding type investmen longer lived market expanding type investments and the result was a dramatic change in capital stock and activity but it did create i should say an unexploited backlog of cost saving investments. when the economy went into the

sink, all of a sudden you had this large amount of potential, very, fairly safe investments, and the result of that was that we have had, up until very recently, an extraordinary rise in cost saving investments, which largely of course boosted labor productivity but also shows up as significant gains in energy productivit and materials productivity and the result was without any increase of significance in sales, margins opened up wholly because of the productivity changes. this created a surge in profitability which under ordinary circumstances would have created a major increase in investment in long-lived assets.

but if you take a look at the ratio of fixed capital investment, illiquid capital investment, as a share of cash flow, you find very quickly that what you are looking at is the willingness on the part of corporate management to convert liquid cash flow into illiquid fixed investment. their propsity to do that is a very important measure of their sense of confidence or lack thereof and data show that what has happened in this pticular period is looking at the lowest ratio of fixed capital investment to cash flow up until, i should say maybe 6 to 9 months ago, the lowest since

1940. now, i want to jt parenthetically say i'm not talking abou liquid markets. liquid markets are very different. baa corporate ten-year note, for example, is highly liquid and therefore has an effective maturity of five minutes. you you're looking at effective, short-term instruments which often happen depending where the maturity is, highly volatile interest rate risk and credit risk, but not liquidity risk. this is th reason i might say parenthetically that a noinancial corporation keeps capital at 50% of its assets or as a financial institution like commercial banks it's 10. and what i'm raising here is the

fact that something very significantly dampening is occurring on the american economy, which is suppressing it. i'm just finishing up an article, which will be published by the council on foreign relations on this. i did an op-ed piece for "the financial times" a while back in which i tried to explain this. but i think this explains something very unusual. it's the reason why the -- best way of putting this -- it's either price earnings ratio or, more importantly, equity premiums are at the highest level in a half century. and that means that with a surge in profitability in the context of a very high degree of risk premium, stock markets have been going up very gradually against

the pressures of extraordinarily high equity premiums. what this means is that we have a very significant backlog in which we have been getting a major wealth effect, which has been spilling all over the place. remember, what energized the financial markets from their lows in the early months of 2009 was a dramatic rise in equity prices, which essentially created for the banks a big increase in the market value of equitynd it is the market value of equity which determines what level and risk type liabilities you can sell. and with the market value of equities doubling in the banking system, all of a sudden they didn't quite open up for lending but the issue of solvency

disappeared. and this is true as it spills over into the nonfinancial sector and to make -- and to end this answer on a more positive note -- what it's now -- in the process of what we are seeing is a fact of theealth effect in consumer markets. in the last four or five months, these markets are beginning to look very much like they used to prior to the crisis. personal consumption expenditures, last quarter was up 4.4%. annual rate as i recall in real terms. the monthly running data say that the first quarter of 2011 are really quite strong. and this is mainly consumption.

and it is mainly the fact that part of the whole collapse in the home market and stock market induced a dramatic rise in the savings rate as one would expect. and i think we're now working in the other direction. so i think this thing is just building and if we somehow could get beyo this very heavy overhang in the residential markets, it would be very helpful. but remember, with 400,000 single family completions, and no vibrant multi-family nstruction, we're gting nothing out of home construction and the nonresidential construction part of capital investment has been flat to date. all of the increase that has occued has been in short-lived

assets. in fact, one of the calculations and i thk i mentioned this to you the other day -- >> yep, yep. >> -- that if you take, reconstruct the gross domestic product by age of the type of elements within the gdp, what you find is that if you look at the gdp of only those assets which are 20 years of prospective life or less, since i guess the last three years the gdp has been growing one percentage point more than the ofcial numbers. if you translate into the total gdp, we didn't have the collapse in these longer lived assets, mainly construction, we would have had a gdp going up enough to have pushed the unemployment rate, if you just, you know, do something which i hate to do, leave everything as though it

were, you get under 8% unemployment rate. just merely by the growth rate using the same productivity levels and all the various other elements. it turns out that the equivale of that accumulated 1% over three years translates into well over a percentage point in the unemployment rate. and so you can -- this is a very unusual situation and i think there are so many things going against it, that it's very hard not to start to pick up because we are beginning to see a degree of lesser activism, which i think has been a major contributor for the suppression of the level of illiquid risks. and the numbers are just gradually now beginning to soften and look somewhat better and ordinarily i don't listen to

businessmen when they're complaining because it's usually why they can't get a subsidy. but when they tell you that they are very much at sea as to what the future is going to look like, if that is true, what is happening to the degree of illiquid risk in the economy is precisely what you would expect if that were their view. so without taking what they're saying at face value, they are behaving as though they really believed that. >> other questions. one at the back there. >> hi. i'm with thepew economic mobility project. runninthrough the discussion so far has been this undercurrent about how attempting to help the disadvantaged creates in its own way a lot of problems for

broader macro economic policy. in his recent book there is this idea i wanted your thoughts on, which is that the united states has a relavely thin social safetyet and that in turn puts pressure on fiscal policy but also monetary policy to stimulate the economy more aggressively perhaps than might be best, which he argues in this case led to the housing bubble. in your view is there any merit to this idea that broader safety nets or the thinness of them does actually translate into impact on monetary policy? >> i doubt it very much. let me just say with respect to the argumt about easy fed monitoring policy, i'll refer

you back to the paper i just wrote for the brookings annal, and i addresse that subject. while i acknowledge the possibility it could have been, the data showed that it was not. and the fact is, what we're looking at, is the real world. were we dealing with something in which monetary policy was a major contributor to the bubble? and i would say you look at the evidence as to what was going on in the markets and the evidence is you can't find it. now i will grant you that there's a tendey for somebody sitting in the middle of the federal reserve to come up with that conclusion, but i do have a wife who tells me, you know, be careful. the question is, the data have to stand on their own. if i am wrong in that, i wish somebody would take a look at the brookings panel paper that i

wrote which relates to that issue. if they can find a hole in my t-values or biases in my regressions, i will change my mind. i'm waiting for somebody to do that and i'm prepared to change my mind. but no one has tried it yet. i don't know if they'll succeed, but have fun. >> there is a slightly nuanced version of that, though,hich is not around monetary policy, per se, but that is all these incentives for housing which we either kept or strengthened were a way for -- to provide additional wealth to middle or low and middle class families that weren't getting much increase in their labor income. so i think that's part of the argument as well, that this was a policy conspiracy of let's buy off these folks. they're not getting any money.

so let's generate a housing bubble. i don't actually believe that but that's, i think, part of the story. >> if that were the -- i mean, one of the rare advantages of sitting at the head of the federal reserve system is you are right where all those conspiracies are supposed to happen. 18 1/2 years, i don't think that i recall a single instance of that so of thing going on. you know, i always used to argue that when the congress would say you guys do everything in secret and so conspiratorial, and they were pressing us to open up our minutes and this and so i finally invited down a couple of nior staff people from the congress to sit in and listen to

the actual oral transcript of a meeting. they went away. i never heard from them again. one them actually said as they were going out the door, you know, you ought to play this fohigh school students and they would see the way our government functions. now that is as far away as you can get without naming names some of the conspiratorial views of what goes on in government. it's not that bad. >> question here and then i think we'll -- >> nyu. i just want to pick up on that fact about stagnang incomes for all but the highest parts of the dtribution and come back to this issue of housing prices. because you talked a lot about factors that may be contributing to an excess supply but we didn't talk a lot about what people are going to be willing to pay for housing going forward

giving the stagnation of income, increases of medical costs, energy costs that housing is not going -- at least in the short run going to be viewed as a great investment. how much will people be willing to pay for housing? how will that affect the evolution of housing prices until we get to some new floor? >> yeah. this gets down to the critical question of what proportionat propensity of buying homes during the boom period was attributable to the expectation and in fact the need to get a capital gain? the data do show some significant part of it is there. what you have to essentially do i guess is try to separate that factor out and you've got a normal market or as close as we can get to it. i've actually not seen that done. i'm sure that people in this room have done that. but i think it's impoant to realize the extent to which

housing is a very critical investment vehicle for a very substantial proportion of the population. it's their sole major source of increased wealth andecreased weal. and we should be able to ferret out from all the various surveys that we have where the dividing line is between adding to the owner occupancy capital stock as a function of price expectations and not merely the desire to live in your own home. >> alan, thank you so much for talking. that was just terrific. [ applause ]

>> we have a few minutes where people can take a little break, finish their lunch, and we will reconvene at 1:30. 1:30 sharp.

>> david keen has been a special friend to us all these years. as we say thank you to him we look forward to many things we can do and expect. and our friend.

next month mitt and i will have been married for 42 years. [applause] you know him for a lot of things. he has done as a businessman, an olympics leader, and a governor. but the most important things he has done have been as a husband and a father. when the children were young, mitt would call home from a business trip on the road and he would often hear a very tired and exasperated young mother. overwhelmed by our rambunctious five boys. his consoling words were always the same. and your job is more important than mine. my work is temporary. you're building a family that's forever.

[applause] later in life, we faced another challenge when i was diagnosed with m.s. as we stood together, fearing what diagnosis we would hear from the doctor, mitt simply said this. we can handle anything as long as it's not terminal. i will love you no matter what. i know mitt. thank you. [applause] i know mitt as a person. a very good person. i have also seen him as a leader. and i for one would like to see him lead the country as president of the united states. [cheers and applause]

>> hey there, how are you doing? wow. thank you. thank you. thank you. cpac. i've been in that woman's shadow ever since our first date in high school. and over the years together she's waged some pretty impressive battles. but among her many accomplishments, there's none been more important and rewarding to us and frankly to the country than her accomplishment as a very successful mother of five sons and grandmother of 16. thank you, sweetheart. thank you.

[applause] the other night, from opposite coasts of the country, ann and i were watching the president's state of the union address. and she figured out pretty quickly what was going on. she sent me an email saying that what he was saying sounded just like he was reading my cpac speech from last year. [laughter] now, what we were hearing was not just a new and improved barack obama. it was an entirely different barack obama. sliwinski, he was out. jeffrey immelt, he was in. the president went from change you can believe in to can you believe this change? [laughter] [applause] it sounded like he was going to dig up the first lady's organic garden and put in a bob's big boy. [laughter] but as the speech went on, it became more and more clear that

this was the appearance of change. his answer for americans out of work was more government spending. and a $50 billion high speed rail project. he replaced his chicago politician chief of staff with a fresh face from chicago. named daley. make no mistake here, folks. what we're watching is not brache new world. -- brave new world. what we're watching is groundhog day. [applause] two years ago, this president faced an economic crisis. and increasingly uncertain world. an uncertain world has been made more dangerous by the lack of clear direction from a weak president. [applause] the president who had touted

his personal experience as giving him special insight into foreign affairs was caught unprepared when iranian set zens rose up against oppression -- citizens rose up against oppression. how did that nobel peace prize work out by the way? iran is arming hezbollah and hamas and is rushing toward nuclear armament. north korea, fired missiles, tested nukes, sunk a ship and shelled a south korean island. and then there was his reset program with russia. that consisted of course of our abandoning, our missile defense in poland. and in signing a one-sided nuclear treaty. the cause of liberty cannot endure much more of his they get, we give diplomacy. [applause]

the world and our valiant troops watch in confusion as the president announced that he intended to win the war in afghanistan as long as he didn't go beyond august of 2012. and while the taliban may not have an air force or sophisticated drones, they do have calendars. [laughter] [applause] it is my sincere hope that at some point in the near future, this president will finally be able to construct a foreign policy. any foreign policy. that will be a change. now, here at home, the president's response to the economic crisis was the most expensive failed social experiment in modern history. he guaranteed that unemployment would stay below 8%. as he watched millions and millions of americans lose their jobs, lose their homes,

lose their hope. his response was this -- it could be worse. it could be worse? this is the free world leader's answer to the greatest job crisis since the great depression? what's next, let them eat cake? [applause] excuse me. let them eat organic cake? [applause] it's often said that the presidency of the united states is the toughest job in the world. fair enough. undoubtedly true. but how ditch is it to take office -- difficult is it to take office in the middle of a raging economic crisis and understand that the economy should be your number one priority? the president who took office on january 20 of 2009 should have had one central mission, put every american back to work. fight for every job.

because every job is a paycheck. and paychecks fuel american dreams. without a paycheck, you can't take care of your family. you can't buy school books for your kids. you can't keep a car on the road or help an aging parent make ends meet. president alabama -- president obama has stood watch over the greatest job loss in american history and that's one inconvenient truth that will haunt this president throughout history. [applause] today, there are more men and women out of work in america than there are people working in canada. and in the month of january, canada created more naoup jobs than we -- new jobs than we did. when ronald reagan ran for president, remember, he hung the misery index around jimmy carter's neck. today's misery is real

unemployment, home foreclosures, bankruptcies, this is the obama misery index. and it is at a record high. and it is going to take a lot more of the new rhetoric to put americans back to work. it's going to take a new president. [applause] [cheers and applause] let me make this very clear. if i were to decide to run for president, it wouldn't take -- [applause] it sure wouldn't take me two years to wake up to the job crisis threatening america and i wouldn't be asking timothy

geithner how the economy works or larry summers how to start a business. i know. [applause] 15 million. 15 million americans are out of work. and millions and millions more can't find the good-paying jobs they long for and deserve. you've seen the heartbreaking photos and videos of the job fairs around the country. where thousands show up and stand in line all day and just to have a chance to compete for a few job openings that probably aren't as good as the job they held two years ago. these job fairs and unemployment lines are president obama's hooverville. and they got to end. make no mistake about this. this is a moral tragedy. a moral tragedy of epic

proportions. unemployment is not just a statistic. 15 million people out of work is not just a number. unemployment means kids can't go to college. it means that marriages break up under financial strain. the young people can't find work and start their lives. the men and women in their 50's in the prime of their lives fear they will never be able to find a job again. liberals should be ashamed that they and their policies have failed these good and decent americans. and so president is trying to show that he finally gets it. that he really isn't a liberal after all. but his idea of conservative economic policy is to invite some corporate c.e.o.'s to the white house for an evening of table talk. i'm sorry, mr. president. but that's not a policy. it's a dinner party.

[applause] we've seen the failure of lebral answers before. -- liberal answers before. liberal welfare policies. condemn generations to dependency and poverty. liberal education policies fail our children today. because they put pensions and privilege ahead for the union bosses ahead of reading scores for our kids. [applause] liberal social policies. those have failed to protect the unborn. and now -- and the hollow promises of liberal economic policies have failed to provide millions of americans with the dignity of work. now, under the pressure of a crisis, people turn to what they really believe. with our economy in crisis, the president and his fellow

liberals turn to europe for their answers. like the europeans, they grew government. they racked up bigger and bigger zists. they took over health care. they pushed cap and trade. they stalled the production of our oil and gas and coal. they fought to impose unions on all america's workers. and they created over 100 new agencies and commissions and hundreds of thousands of pages of new regulations. theirs is a european style solution. to an american problem. it does not work there, and it will never work here. [applause] the right answer, the right answer, isn't to believe in european solutions. the right answer is to believe in america. to believe in free enterprise, capitalism, limited government, federalism, to believe in the constitution as it was written and intended by the founders.

that's the right answer. [applause] my father never graduated from college. he apprenticed as a plaster carpenter. and he was darn good at it. he used to brag that he could put a handful of nails in his mouth and spit them out nail or pointed nail end first. and then on his honeymoon he and mom drove across the country and they sold aluminum paint to pay for gas and dad believed in that america, and he could work his way up to running a little car company called american motors and governor of the state where he once sold aluminum paint. [applause]

for my dad, america was the land of opportunity. where free enterprise and small business and entrepreneurs were encouraged and respected. the spirit of enterprise propelled america's economy and our standard of living past every other nation on earth. i refuse to believe that america is just another place on the map with a flag. i believe that america is an exceptional nation of freedom and opportunity and hope. we are an exceptional land. [cheers and applause] the america that you and i believe in has a goodness and a greatness. that creates a unique american genius and that genius has blessed the world. led the world.

even saved the world from the unimaginable darkness that could have occurred. we didn't originate the concept of liberty. but our founding fathers redefined it and shared it with the world. from the sands of omaha beach to the dark valleys of the hindu kush, we have fought with an unmatched courage and determination. not to conquer territory, but to give others the chance to experience the liberty that is hue -- humanity's destiny. given all that america has done to lift others from poverty, given the millions of afflicted we have helped to heal and comfort, and given the hundreds of thousands of america's sons and daughters lives that have been sacrificed and are today sacrificed to demand freedom, i will not and i will never apologize for america. [applause]

i don't apologize for america because i believe in america. we believe in freedom. and opportunity. we believe in free enterprise and capitalism. we believe in the american dream. and we believe that the principles that made america the world's leader, yesterday, will make america the world's leader forever. we love this land. we believe in america. this is who we are. these last two years haven't been the best of times. but while we've lost a couple of years, we have not lost our way.

this is fundamentally what conservatism is all about. we sing for god to bless america. he already has. he does now. and thanks to the goodness of the american people, and the principles that guide us, he will do so for generations to come. believe in america. our freedom depends on it. thank you. great to be with you. thank you.

♪ [applause] >> do we have wisconsin in the house? [applause] all right. hey, thank you all very much. again, i'm sean duffy. freshman congressman from the seventh district of the great state of wisconsin. [applause] now, wisconsin's also home to our r.n.c. chairman rines priebus.

home to a budget committee chairman paul ryan. but most importantly, home to our super bowl champions, the green bay packers. now, now. let's not get rowdy. just quickly, i ran for congress when dave obey, my congressman, ahored and help pass a nearly $1 trillion stimulus bill. i knew that government borrowing and spending won't lead us to economic growth, prosperity, wealth or sustainable jobs. that comes from the private sector. people who invest in their businesses and ideas. and from there, they expand and grow and that's how we create jobs right here in america. it was that -- it was that stimulusill that helped bring us to a $14 trillion national debt. we are projected to borrow $1.5 trillion this year alone.

and to put it in a little different context, in the 11th congress controlled -- 111th congress, they increased by $682 billion. now take the republican-controlled 112th congress, and we have cut spending by $600 billion. and so the conversation is not about how much we are going to spend, the conversation is about how much we're going to cut. and we do face challenging times. china is on the rise. radical muslims are plotting against us. and our people, they're suffering from unemployment, and a lack of opportunity. how we respond to this crisis has implications for generations to come. will we model ourselves after

eupe and ten down the path of dependence on a ever more intrusive government? no. which will alslead us to more economic decline. or will we return to our founding princips. of free markets, free enterprise, american capitalism. limited government and personal responsibility. will we put our faith in people in -- and not in government? will we be a nation who understands that economic prosperity doesn't come from bureaucrats and policians? but it comes from the ideas and hard work of individua. this is the greatest battle of our generation. it is my honornd privilege to introduce our next speaker who all too well understands this great battle because for eight years, he was fighting that battle in the great state of minnesota.

[applause] now, this is no conservative state. they were the only state that nevevoted for ronald reagan. i know. they haven't voted for a republican candidate in over 40 years. but listen, governor paw lnty over his eight -- pawlenty over his eight years balanced his budget every year without raising taxes. that's right. . minnesota $7.50 billion. he cut taxes by $800 million. he moved and minnesota out of the top-10 tax states in e country.

he cut spending in real terms for the first time in minnesota history. the reduced government growth and got rid of wasteful spending. i have to tell you this. i always a great things about governor 10 pawlenty. -- governor tom pawlenty. tim pawlenty. he is proof positive that our conservative principles work. we can cut spending, cut taxes, we can balance our budget with innovations in education and healthare. he is a great midwestern art with a sunny disposition. he is a happy warrior. it is my great privilege to introduce to you the best governor of minnesota has ever had and one of the greatest

governors of ts country, governor tim pawlenty. [applause] >> thank you. i appreciate it. thank you very much. i want to thank john duffy, a rising star in the conservative movement in our country. [applause] i know this crowd, and i want to ask you one big favorite with your lumberjack background -- when you come to stay in washington, d.c., bring that big budget ax and swing it hard, baby. [applause] i want to give a special cell al

to my minnesota college republicans. where are they? [applause] these guys drove over 20 hours in a bus. thank you for coming. pplause] are you fired up and ready to take this country back? [applause] that is great. we really need you. do you know why? president obama has succeeded in doing the impossible. he has proven that somebody can deserve a nobel prize less than al gore. [laughter] now, i am not one who questions the president's per certificate or the existence of his birth certificate, but if you listen to his policies, do you not at

least wonder what planet he is from? [laughter] [applause] i mean, really, on what planet do they create jobs by taxing the daylights out of the people who grow jobs? on what planet do they reduced the deficit by spending even more? on what planet do they make healthcare better by putting t bureaucrats in chae? [applause] i do to get the cat to president obama in one area -- he has been really good at duping the mainstream media. [applause] in fact, you may have noticed by

some of them have been reporting that his behaving like ronald reagan. [catcalls] can you believe that? ronald reagan knew how to stare down our enemies. ronald reagan understood the price of freedom. [applause] and ronald reagan also understood that putting our people back to work means the u.s. has to be open for business, not open to more taxation, more regulation, and more big government strangulation. [applause] ladies and gentlemen, barack obama is not behaving like ronald reagan. he is behaving like jimmy carter. [applause]

the individual mandate in obama care is being paid -- is a page out of the jimmy carter playbook. the left simply does not understand. the individual mandate reflect completely backwards thinking. they, the bureaucrats, do not tell us what to do -- we, the people, tell the government what to do. [applause] we are blessed to live in the freest and most prosperous nation in the history of the world. our freedom is the very air we breathe. make no mistake,he policies of the left anchorage -- encroach every day on the very freedom that has made this country great. we will never, ever stop fighting for our freedom.

[applause] if we compromise on this bedrock issue, we are in danger of losing our age. for some, there is a real concern that we are losing our edge. did you know there was a recent survey of americans were they asked the question which country will be the dominant country in just 20 years. guess what the answer was. that is right. china. begin the what i say to that? no way, no how. [applause] no the america we note and not the america we love. america's rightful place is not lagging behind china. america's place is leading the

world. [applause] my friends, we need to restore american confidence. we need to restore american optimism. we need to restore america's "for the future. we need to restore the american dream by restoring american common sense. [applause] as a washington bruce time and time again, not everyone is born or elected with common sense. we need a leaders to remember wherthey came from and what made this nation the greatest country the world has ever known. [applause] for me, that is a real world experience that started in my hometown.

it was a place with good hearted people, strong families, and a rock-solid -- and the rock-solid values of the heartland. when i grew up there, it was all to some of the world's largest stockyards and meatpacking plants. manyamilies in my hometown rely on those big plants for their paychecks, for their family's well-being, and for their future. but those plants shut down and so did a big part of the srit and the soul of my home town. my mother died when i wa 16- years old. not long after that, my father lost his job for a while. the foundation of my hometown and my family were shaken really hard. at a very young age, i saw up close the face of loss, the face of hardship, the face of losing

a job, and i saw in the mirror is something else -- the face of a very uncertain future. so i know americans are feeling that way today. i know that feeling. i have lived it. but in those moments, we learn some things. we see some things. we remember what is important. one of the most important things that we should always remember is the motto of our country -- in god we trust. [applause] we should stand on that foundation as our founders intended. a few weeks into the constitutional convention in 1787, benjamin franklin

addressed george washington and the other convention members, speaking to theedrock importance of seeking dodd's guidance as they pursued the sacred task of creating our nation. he said this, "i have lived a long time. the longer i live, the more convincing proof i see of this trut that god governs in the affairs of men." he went on to say, "if they spero cannot fall to the ground without his knowing it, is it probable that an empire can rise without his aid?" ladies and gentlemen, we as a nation need to turn towards god, not away from god. [applause]

the solutions to our problems are not easy, but they are not out of reach. we need to remind each other what made this country great and restore america's greatness by restoring american comn sense. we need more common sense and at last obama nonsense. -- and less obama nonsense. [applause] let's start with this one. this one is kind of complex. there may be some democrats in the room, so i will say it real slow so everyone can understand [laughter] ] are you ready? we cannot stand more than we take in. [applause]

you cannot do it as an individual you cannot do it as a family. you cannot do it as a business and we cannot let our government do it anymore. [applause] the big spenders in washington, d.c., have us on a course of a trillion dollar deficits as far as the eye can see. the federal government spen our money the way keith olbermann talks -- too much and without a point. [applause] 8 leaves the whole country confused. -- he leaves the whole country confused. it is not a matter of right versus left, it is a matter of

sixth grade mathematics. it is not going to work, it is irresponsible, it is unsustainable, it is reckless, and just because we followed greece into democracy does not mean we need to follow them into bankruptcy. [applause] of course, we have these big spenders on the other side of thaisle. they come with all of their excuses. "governor, how do you do that? it is really hard. the politics are difficult i the interest groups are tough." i know something about the big spenders and i know something about difficult. i come from the statef mccarthy, mondale, humphrey, wellstone, and now, united

states senator al franken. [catcalls] but we cut government in minnesota and if we can do it ther we can do it anywhere. the naysayers say, "we cannot cut spending. weannot prioritize. we must raise taxes." i drew a line in the sand and said, "absolutely not." [applause] we are going to live within our means just like our family, just like businesses, just like everybody else. it was not easy. as shaun mentioned, i set a record for most vetos in my state again a year. i was second overall.

i vetoed billions of dollars of tax and spending increases. had the first government shut down in my state in the 150 year history of my state. [applause] we took one of the longest in transit strikes in the history of the country to get publi employee benefits under control. [applause] in the last budget. , we cut spending in real terms for the first -- in e last budget period, we cut spending in real terms for the first te in minnesota history. i hope you'll agree with these things. we'll see what you think. we should not raise the debt ceiling. [applause]

we should pass a constitutional amendment to finally balance the budget. [applause] here is one i know you agree with. we should repeal obama care. [applause] while we are at it, let's do one more thing. let's through the tax code overboard. [applause] let's start that last one by doing this -- i do not mean any offense to you personally on this o, shawn -- but let's require under penalty of perjury that every member congress complete their own tax returns without the help of a

tax preparer, accountant, or lawyer. [applause] let them experience fully first- hand the moronic, burdensome, intimidating piece that our tax system has become. -- intimidating beast that our tax system has become. [applause] here is another common-sense principle from the heartland that president obama clearly needs to learn. it is best -- people spend money differtly if this is their own money. -- if it is their own money. maybe in your busy life you have time to read papers, go to seminars, stay up all night and watch tv, read public policy

journals -- i hope you do. it is valuable and important. but if you do not, here is all you really need to know about government reform. you can do it in one weekd. do this -- go to two weddings. but to e where there is an open bar. -- go to one where there is an open bar, where the drinks are supposedly free. [laughter] on the next night, go to another wedding where they have a cash bar where people pay for their own drinks. u will see a very, very different behavis. [laughter] [applause] i said this on wall street not long ago and somebody yelled out on the back of the room, "to the

hat has a cash bar any more -- who has a cash bar anymore?" that question from a wall streeter tells you all you nd to know. if you have a system where people can send stuff without any scanned in the game at the mirage is created that the bill and manages to go on somewhere else, that is system that is doomed to fail. [applause] unfortunately that describes most of our government. whether it is education, health care, housing, or anything else, we need to put people in charge. we need to give them the power to make their own decisions, not government. the best thing we can do to empower people is to make sure they have access to a good job. that means remembering this next

common-sense principle -- the private sector, not the gornment, is the answer to job creation peri. we should not be looking to washington, d.c., for how to create jobs. we should be asking the people who actually provide the jobs. when you do, they give you some pretty clear answers. they say this -- reduce my cost and get the government off my back. [applause] by the way, in minnesota our unemployment rate was significantly lower than the national average. since e crash, we have helped lead the economy toward recovery.

america needs job growth, not government growth. [applause] this and next and last one you may have learned on the playground. u may have learned it in sports. you may have learned it at work. you may have learned it in a ba alley somewhere. but no matter where you learned it, it is always true. bullies respect strength. they do not respect weakness. [applause] when the united states of america projects as national security interests here and around the world, we need to do it with strength. [applause]

[crowd chanting u.s.a.] we need to make sure there is no daylight between us and our allies around the world. this current administration does not seem to understand this important principle. we undermine israel, the u.k., poland, czech republic, colombia, amongst other of our friends, meanwhile weppease and accommodate iran, russia,

adversaries in the middle east including hamas and the muslim brotherhood -- mr. president, might makes right. [applause] we need to get tough with our enemies, not our friends. one more thing -- mr. president,top apologizing for our country. [applause]

the terrorists and tyrants of the world have a lot to apologize for, america does not. [applause] my friends, this is not going to be easy. prosperity -- at prosperity was easy everyone around the world would be prosperous. it freedom was easy, everybody around the world would be freed. ifecurity was easy, everybody around the world would be secure. they are not. it takes an extraordinary effort. it takes an extraordinary commitment. it takes extraordinary strength to stand up to those whose

opposed -- who oppose these principles, but we can't do it -- we can do it. [applause] valley forge it was not easy. settling the west was not easy. winning world war ii surely was not easy. going to the men was not easy. this is not about easy. have had enough of the height and speeches filled with rhetoric tt takes the country in the wrong direction. this is about rolling up our sleeves, standing tall, and getting the job done. [applause] this is the united states of america. we are the american people.

we have seen difficulties before and we always overcome. we can and we will do it again. we will rise up as r forefathers did with the assurancef our time-tested conservative values, the wisdom of the american people, and the courage of our convictions. thank you, god bless you, and god bless the united states of america. [applause] ♪1

♪ >> well, ladies and gentlemen, i am proud to come before you as the leader of the largest growing conservative news organization in the country -- young americans for liberty. [applause] like the generation before us, another anti establishment republican candidate, barry goldwater, inspired a generation that led to the reagan revolution. today our next distinguished speaker has lost a revelation of his own. he has given a voice to a new generation, a generation ready to rise up against government takeover, bailouts, unconstitutional war.

[applause] infringements on our similarities -- and frenchman's on are similar -- in first men on our civil liberties. se to your feet and join me as i introduce a champion of the constitution, congressman ron paul. [applause] >> thank you very much. it is great to see everybody. i am black tuesday the

revolution is continuing. -- i am glad to see the revolution is continuing. we saw some results of this revolution in november. we at youtube thank you for it. i want to take a moment to say we also have a new senator from kentucky. we like that, too. [applause] there is a lot of exciting things going on. there is truly a revolution going on in this country. we have been dealing with this and encouraging it because i believe we live in a time where we need a change in attitudes and ideas. we do not need to just change the political parties, we need to change our philosophy about what this country is all about. [applause]

this past week we had a pretty good victory for the freedom movement. we had something to do with the patriot act. it has nothing to do with patriotism. they always blame it opposite of what it is. the patriot act is literally the destruction of the fourth amendment. that is what it is all about. [applause] the one thing in washington they do not understand is what is happening in grassroots america. they assume that everybody loves be paid yet act. they will pass it automatically. we did not get a majority vote, but they did not pass it automatically, sending a message that the country is waking up

and we want to protect our civil liberties as well as our economic liberties. [applause] this week i was scheduled to be on a financial program. i had been on a few of those lately talking about things like the federal reserve and a few othethings. i never got around to talking about this program about the federal reserve because, all of a sudden, there is a speech given by mubarak about his potential resignation. of course, he resigned today. that was the subject. a lot of people say, "what should our position be about fighting the next dictator of egypt?" we need to do a lot less a lot center, not only in egypt, but around the world. [applause]

some people want to argue and say we have a moral responsibility to spread our goodness around the world. it is our obligation to do this. but let me tell you, fiscal conservatives should look at this carefully how much should we invest in that dictator over the past 30 years? $70 billion we invested in egypt. guess what? the government is crumbling and the people are upset not only with their government, but with us for propping up that dictator for all of those years. [applause] to add insult to injury, would you think the money went? a swiss bank account. new baruch's family has $60

billion -- mubarak's family has $60 billion of your money stashed away in other areas. it used to be the conservatives were against foreign aid. i am still against foreign aid for everybody. [applause] i have a saying i used to describe foreign aid. foreign aid is taking money from the poor people of a rich country and giving it to the rich people of a poor country. [applause] and there cannot be a better example of that than what we did in egypt. we made people poor and contributed to our debt -- billions and billions of dollars and all we get is chaos and instability.

there is nothing wrong with what the founders talked abo. they talked about having -- getting along with people and staying out of the internal affairs of foreign nations when it is not of our business .ricte [applause] we have been doing it for a long time. you have periods of relative stability. there was relative stability we were propping up the shot. we ended up with the ayatollah. all of the middle east is unstable because of this. it is going to keep going because all the problems are there because the people do not like us propping up their dictators no more than we would like it if a foreign country

came in here and prop up a dictator in our country. [applause] but the real danger is that this will most likely spread. when a guest to saudi arabia and there is a destruction there, we'll have a big problem. there will be a partial boycott events -- partial consequence of our policy. we just flat out do not have the money and we should not be doing it. [applause] just remember the soviet system did not collapse because we had to fight them. they collapsed for economic reasons. guess where their final plunge was on their empire?

it makes no sense for us to think can keep troops in 135 countries, 900 basis, and think we can do it forever. no matter how badly we want to do that, it is time to reassess our politics. we have troops in japan and germany. why are we paying for their defense? [applause] you know, there has been a lot of talk about the budget deficit. thats something i was concerned about just a few years back, like 1976. [laughter] that is why i have not voted for any appropriations bills. it is bad. we have to do something about it.

unfortunately, even in spite of the improvement in the economy right now, we do not have the votes. it is tragic. it is going to continue. we will continue to bail out and spend the money. nobody wants to cut. i am sure half the people in this room will not cut one penny from the military. the military as not equated to defense. defense spending is one thing. military spending is what is here -- eisenhower called the military industrial complex peri. [applause] government, as you would all agree, is out of control. it is hard for us to get a handle on it. let's say a miracle happens and we balance the budget where we are today. it would still be a disaster

because we are spending too much money. it would nothange a whole lot. when a crisis comes, guess what happens? guess who does the bailing out? the federal reserve eased $4 billion with al congressional -- without congressional approval. it is our j to check up and find out what the federal reserve has done, audit them, and find out who their buddies are they are taking care of. [applause] the federal reserve creates money out of thin air. they can loan to other governments and international financial institutions, and we are not allowed to know.

they resent the fact that when i ask these questions they do not have toive the information. that is why a bill to audit the fed is the first step to ending the federal reserve. [applause] the federal reserve will distillate the dollar. -- will destroy the dollar. they hadliminated 98% of the value of the 1913 dollar. believe me, there is an economic law that says you just cannot continue to do this. congress has the responsibility. they need to protect the value of the currency. that means we have the moral and legal authority to put checks on the federal reserve system. [applause]

there has been a lot of talk about bipartisanship after the election. "we need bipartisanship." in some ways that might be true. i tell you what i think about it. i think and i believe that we have had way too much bipartisanship for about 60 years. [alause] we have of bipartisanship on medical care. the current administration is a given medical care, but what has happened with the other administrations? it is the bipartisanship of the welfare system, the warfare system, the monetary system, the challenge to our civil liberties -- it all goes through both parties. this should be a challenge in the issue of philosophy -- good philosophy versus bad philosophy. [applause]

agree oncan't something you should make coalitions with whoever agrees with you and come together, but i would like to see it is the big conservatives to like to spend money and get the big government liberals and let them get together and say, "it is time. let's have a little bit of bipartisanship and cut both." [applause] there has been talk lately about american exceptional ism. we like to talk about that. we certainly will in an exceptional country. we have been blessed. we had the most freedom and those prosperity. my concern is i am afraid we e

losing it. we have given up on our devotion to liberty. that is where our problem is. where i think we go astray on is thatceptional as soism there are people who are neo conservatives who believe we have more responsibility to use force to go around the world and tell people to do it our way or else. force does not work. it never works. [alause] the best way to get people to act more like us if we are doing a good job is for us to have a sound economy, a sound dollar, treat people decently, have a foreign policy that makes common sense, treat people like we want to be treated and maybe they would want to emulate us as a free and does work and we ought

to try it. but you cannot force it on other people. [applause] there is one general rule about what we should expect from government. the first amendment is a great amendment. freedom of expression is protected. the government shall write no laws in reference to our freedom of expression. it does not say that we can only have the expression of the noncontroversial ideas. it is freedom of expression. [applause] most people are pretty good on the first amendment, but where they slip up is they say government shod write no loss about the freedom of activity. the liberals want to talk about how to regulate your economic activity and how you spend your money. others want to legislate your personal life style. government should not be regulating us. we should adapt one other principal for that to work.

we should swear off the use of violence against our neighbors. [applause] the purpose of all political activity from my viewpoint is to promote liberty. liberty is the most important element. liberty comes from our creator, it does not come from our government. if we have a free society, we can go about our business and do our very best, work towards a virtuous things, and work towards excellence. when government takes over the role of making us virtuous and excellent and redistributing wealth, they only do it at the expense of liberty. that is why we are in such terrible shape today because we have allowed the government to be so much inlved. government should never be able

to do anything you cannot do. [applause] if you cannot steal from your neighbor, you cannot have your government steel for you. there should be no redistribution of wealth. pplause] the exciting things that are happening today get me energized. coming to events like this and meeting with young people and going to campuses and finding out what the young americans for liberty have done. if the ideas and principles of liberty are alive and well in e next generation. there is every reason i did it -- in the world for u to be optimistic about what is coming. [applause]

i would like to make one suggestion before i close for you to think about. it is not a perfect solution. what if i could if i had the authority to do it -- what if i said we are not doing such a good job. we make promises and we do not know about the future. but would you consider opting out of the whole system under one condition -- you pay 10% of and you take care of yourself. do not ask the government for anything. [applause] tragically, you'll probably have the opportunity bause government is in the process of filing and they cannot deliver on the goods.

we will have the same problems and that russia had. we face serious economic problems. let me close with comments from sam adams. "do not worry about it if we are not in a majority, all we need is a minority came on spreading the brush fires of liberty." that is what we need to do. believe me, the brush fires are burning. they will not be able to squelch the brush fire. they are burning and they are spreading and people are getting excited because they are starting to separate out what true liberty is all about, what personal liberty is, and what it means for the american tradition. the constitution confers and confers with what i am same. there is nothing in the constitution aut having a federal reserve system, no authority for the welfare

state, and no authority for the police state. it is not there. [applause] we should all assume personal responsibility for promoting the ideas of liberty. one thing tt samuel johnson always advise when we were in the dire consequences of the problems of the revolution, "we cannot present long faces to the people because it will make them realize how tough things are." we should not have a long faces. we do not know exactly what tomorrow will bring, but i d know that you can have a lot of fun extending liberty. if you understand liberty and understand it is the only humanitarian system that has existed since mankind -- if you

study it and fight for it, i can guarantee you will sleep bette tonight. you enjoy your life and feel like you are doing something worthwhile. defense of liberty. -- defend liberty. [applause] >> next, remarks on the u.s. economy by former reserve chairman alan greenspan and secretary timothy geithner. at 7:00 a.m., your calls and comments on "washington journal." tv, weekend on booke

predictions for u.s. foreign policy for the next decade. also, former defense secretary donald rumsfeld talks about his memoirs. abbas milani on the shah of iran. get our schedule e-mail to you. signup for our booktv alert. >> now, alan greenspan at an event hosted by the brookings institute. he said home prices would have to rise by 10% or more. the former fed chairman also took questions about the state and future of the housing market. this is about one hour.

it is with great pleasure that i introduce alan greenspan. as you know, alan became chairman of the board of governors of the federal reserve in 1987 and served in that position until 2006. we had an extraordinary amount of stable, relatively inflation-free growth during that period. he is now at greenspan and associates. i can attest that he is still extremely active in economics and economic research. he gave a paper at the brookings panel recently. i had the bridge of talking to hem regularly and hearing what he is working on. he's very much still part of the world of economics and macro. alan, welcome.

>> thank you very much, martin. you didn't say of's been around here 40 years being one of the very early numbers of the brookings panel on economic activity. >> i apologize for not saying that. >> all i can tell you is you go into one session today versus what the sessions were 40 years ago, you realized how little we learned. >> you haven't been coming often enough. that's the problem. >> while the rest of the seminar is devoted to the structural mortgage finance, i thought it might be useful to spend a few minutes on what mort gain finance is ultimately all about, home building. the last 20 years have exhibited the longest, uninterrupted rise in single-family housing starts, and by far the sharpest collapse in the post war years. starts in recent months half languished at a little more than

400,000 annual rate, less than 1/4 of where they stood at the top of the boom in early 2006. nothing reassembling this collapse has occurred in the six decades following the war. to find such a data, we have to go back tohe 1930s, when single family housing starts between 1925 and 1933 fell by almost 90%. housing starts did not regain their 1925 level over the next eight years prior to the war. starts, in fact, did not recover to their 1925 levels until 1947. i do not expect a similar hiatus this time, but the trudge uphill is not going to be easy. during the recent boom years, demand for single family units

and their financing was predominantly demand for owner occupancy. the level of additions to ownership was significantly driven by the rate at which households chose to own rather than rent and could afford to do so. the ownership rate in turn was fostered by rising home prices and the implementation of affordable housing goals. after a protracted period of stability, the ownership rate at 64% in 1994 began its historic rise to more than 69% a decade later, producing from 2001 to 2004 an avere annual increase in new, single-family, owner-occupied dwelling units of approximately 1.2 million. absorbing all and more of the gain in household formation. in addition to the demand for

owner occupancy was a significant demand for single family residence by investors. according to the home mortgage disclosure act data, the share of total investment and second home purchases rose from 9% of home originations in 2001 to 14% in 2004. that combination coupled with a 200,000 annual rate of demolitions and some loss of single family units to multiunit conversions supported over those ars an average annual level of single family unit completions and mobile home placements, amounting 1.5 million. the demand for homeownership peaked at the end of 2004 as the limited backlog and higher prices bgan to take their tol

ownership rates turned downward in the fourth quarr of 2006, ultimately, incidentally, falling below 67%. single family housing starts peaked in early 2006. but it took another seven months for starts to turn to completions, and not before adding an unstoppable and unprecedented 430,000 units to e inventory of single-family homes for sale over the four quarters of 2006 on top of 170,000 added during 2005. by the end of 2006, the level of vacant single-family homes for sale had reached 1.8 million. a staggeringly historic overhang of more than 700,000, the equivalent of six months of

sales. for years prior to the surge completed homes available for sale had been retively stable at a little more an million units. following the topping out of demand late in 2006, home prices proceeded to fall for three years. the largely futile endeavor to uncover enough demand to absorb inventory excess. but homeownership by then no longer held the seemingly irresistible profit-making attractions o earlier years. home builders and other owners of newly constructed but vacant homes have been able, through price discounting, to fully liquidate their share of the overall inventory excess, about 200,000 of the more than 700,000 for sale excess. e remaining vacant homes

offered for sale by investors, the bulk of the vacant market were still hovering around 1.5 million, less than % below their all-time peak reached at the end of 2007. the level of home completions declined by more than 2/3, but demand fell almost as much, placing new supply only modestly below demand. even at current depressed levels of new single family construction, the inventory overhang cannot be credibly absorbed quickly. a stabilization of the homeownership rate wld help in the sense that a falling ownership rate severely undercuts single family unit demand. the ownership rate moving from negative to zero is, in fact, is

in that sense, i guess, a positive. nonetheless, market pressu could keep cometions below demand for much of this year or longer. as excess inventories are gradually brought under control. new demand creation must come from either an increase in t rate of household formation or increase in the share going towards owner occupancy. temporary tax credits rarely do either. it is thus no surprise that the recent first-time home buyer tax credit produced little, if any, permanently higher demand. certainly the currently more than 2 million single family units in foreclosure has not helped. recent history suggests that approximately 2/5 of the surge in foreclosed properties on

completion of the foreclosure process will be sold, possibly into a still-troubled market. that would amount to an additional several hundred thousand overha, bringing the total excess to more than a million units. home prices after falling almost 30% from their late 2000 peak stabilize by most measures between early 2009 and the spring of 2010. by the summer of last year, however, they began to soften again, largely as a consequence of the pick-up in distressed foreclosure sales, especially in december. there was, however, some evidence of price stabilization at the end of 2010. seasonably adjusted core logic

prices, excluding stress sales rose as the median price of newly built homes. stabilization is important, not only to the housing market you about economic recovery as a whole. since appximately 8 million homes were financed with conventional conforming mortgages during 2005 and 2006. most of their 20% or more original down payment plus recent amortization of that debt has eaten into the 25% decline since origination. another 5% to 10% decline in home prices that many are forecasting would place a significant part of the 8 million homes under water. to be sure, the propensy to default on underwater conventional conforming mortgage debt has been much less than for

the more vulnerable subprime home mortgages financed homes. nonetheless, a price weakening itself could set in motion the contagen for further decline. however, with the rest of the economy currently recovering rather impressively, i'm hopeful such an outcome can be avoided. but it would be unwise to fully rule it out. as a consequence of the near 30% decle in home prices, equity in homes by the end of the third quarter of last year had retraced all of the $7 trillion rise between 2000 and 2006. its composition had changed. currently, it is highly concentrated. subprime and alt-a financed homes are net under water. there is some n equity in

prime jumbos, and surprisingly, in the niche market of homes financed only with home equity loans. nationwide, well over half of home equity is currently in homes free and clear of debt. conventional conforming financed homes are running a distant second. prior to the crash in 2006, they had similar shares of net equity, but that was a time when virtually all homeowners had positive net equity. with home prices after their crash landing have been flattened out over the past year, the number of homes under water has stopped rising. the number of homes in foreclosure has also stabilized at approximately 2.3 million, seasonably adjusted, at least fonow. but they presumably would move higher should home prices slide again.

the rapidity of housing markets will depend on trends what we used to label equity extraction. equity extraction, the raising of cas by borrowing against the market value of equity in homes has faded as a key positive determinant in economic activity, but it remains importt to theousing and mortgage markets, and it will surely re-emerge as a factor driving the household saving rate and personal consumption expenditures in the future. today, equity extraction is negative, as debt write-offs and the new owners add equity to the nation's own homes rather than extracted it. despite flat home prices, equity

has risen by $500 billion since march 2009. the overall stock of home mortgage debt is in a constant state of turnover and revaluation, owing largely to chans necessary home prices and/or the degree of refinancing of the debt. but to understand the equity extraction process better, we can usefully separate quarterly debt change into two components. one, that part of the increase or decrease that is solely the difference between a mortgage originations on newly-built homes and the scheduled amortization of debt that exists at the beginning of each quarter. in short, the amount of debt accumulation that occurs solely from the financing of newly-built homes. and two, the remainder of debt

change that owes wholly to actions that in total we measure as equity extraction. equity extraction is capable of being fully accounted for in three buckets. first, debt changes owing to the sale, that is turnover, of existing homes. the buyer of an existing home will almost always add more debt on that home than the seller will repay as part of the transaction. secondly, cashout refinancing. the difference between the balance on a refinanced mortgage less the mortgage balance being refinanced. finally, three, unscheduled repayment of debt unrelated to a property transfer or a refinancing, including especially delinquent scheduled amortization that may or may not

more than offset burgeoning writedowns. in years past, jim kennedy at the federal reserve, and i, went through a set of detailed calculations to separately estimate each of these three components. equity extraction in total can be approximated more expeditiously from a simple regression in which equity extraction per capita is regressed against the refinanced share of total home mortgage originations and a cumulative moving fr-year change in home price. i must say that the latter is by far the most potent part determining the issue of equity extraction. the results over the past 15 years are statistically highly significant. moreover, the regression accurately traced equity extraction in the boom years, as

well as its small negative during the past year. what the price variable suggests is that it takes four years of cumulative capital gains on homes, on average, before homeowners endeavor to extract equity. mainly through a sale of a home or cash out refinancing. the regression coefficient can be employed along with the calculated amortization rate and value of home originations estimated as the product of the number of one to four family completions and the average price of sales of newly constructed homes. these inputs estimate the change, and hence, the level of one to four family regular mortgages. regular mortgages are the usual numbers you look at, x construction loans and equity lines of credit.

this simple model suggests that home prices will have to rise by 10% or more before signs of a full-fledged recovery in housing, and the mortgage finance that goes with it becomes unambiguous. thank you very much. i'm open to your questions. >> thank you. we have some -- yes. we have some microphones. let's get some questions. somebody needs to get us started. yes. can you identify yourself? >> yes, sir. i'm arnold king, mr. greenspan, how are you doing? yes, sir, my question is about

the receipts. how did they play a role in deconstructing the u.s. market? the balance sheet had caused a fall in the housing prices. >> i don't quite get the question. which balance eet are you referring to? >> how did balance sheet play a role? >> company balance sheets or household balance sheets? >> very much so. indeed, another way of looking at the equity extraction issue is to recognize that that is the far most important determinant of what the asset side of the equities are in the household balance sheet. so what we were beginning to see all through the period of the boom was a very dramatic rise in the market value of real estate matched only in part by a rise

in the liabilities. the effect was to very significantly augment the equity that the personal sector, meaning households or nonprofit organizati organizations and in some calculations, noncorporate business. there was this big surge going up on the asset side. and almost comparable surge on the liability side, and it went into full reverse on the down side. a goodly part of the decline in the vel of debt was actually write-offs and effectively very significant part of the housing stock going into foreclosure. that moves it off individual balance sheets. >> can i ask you a question? the treasury paper that just

came out raised three options they gave to congress for the role of government going forward. one was an fha-only option, a small narrow role for government. second was that the government would provide a backstop to the mortgage market at a time of prices. the third was more extensive, the role for the government as a reinsurance vehicle for the mortgage market. you may not want to answer this question, but i'm asking it in iway. do you have a preference among those three or do you have a different view of what might be, if any, the role of government going forward? >> i'll pretend to answer the question. i'm aware of what tim said, the secretary said. i thought it was a good presentation, frankly. the problem i'm having is that

we have gotten a housing maet into such a state where, as you know, virtually all mortgages are one way or another government financed, government guaranteed. >> right. >> we g the impression that because of that, the private market is dried up. of course it has. the difference here is that we don't have any good sense of what is out there ex the actios of fannie, freddie and oer organizations. i would like to see at least in an academic simulation what the yield spreads would look like if the government was not there. th may sound like ancient history, but i served on a savings and loan holding company board in 1962.

all we had really to finance mortgages was savings and loans. it was anible cribly effective market we had huge amount of home construction because baby boomers were building up. you had levitt towns and other types of operations going on. i will tell you,aside from the very chronic concern that those of us as economists or finance people who are in the s&l industry feel very uncomfortable about the fact that a savings and loan institution is constructed at that point. it required inflation was low, therefore interest rates were low. you could play the yield curve which is how a lot of those holding companies had stock prices at 50 times earnings.

it was really extraordinary what was going on back there. it struck me, especially after the s&l debacle many years later that there is noing wrong with that particula model if we could get the people to swap their short-term overnight liilities into longer term debt. it wouldhave cost another hundred basis points, i'm not sure what it was. the short sidedness was something you couldn't get around. when you look at northern rock and the recent crash, that was the same thing. they went from deposits which were reasonably stable to short-term financing. why? because they could get a few basis points less. i would be very curious to get a sense of what the current housing market would look like if the government were out. i know there are several things.

one, interest rates, mortgage rates would clearly be higher. the question is, how much higher? the size of the market would be smaller because of that. is that all bad? we went through a period of hyping up housing in every con seasonable respect, and i think it was the general economics pr that we were putting too much of the nation's capital into ownership. and the fact that i turned around so dramatically, we erased virtually all of the runup in home ownership in a very short period of time tells yohow unstable that is. in any event before we get into the noti of which of these various different pockets we wish to put the new sets of regulation in, it would be useful to get a sense of what

the alternatis are. to start merely with saying we're going to start somewhere in the ddle presupposes a degree of subsidization the size of which we do not have the slhtest clue about. i think we get a much broader notion of what would work and be the nation's interest if we first have some view of what level of degree of subsidization we find desirable and acceptable and i don't think we're getting into that discussion. it sounds to me as though we're sort of starting somewhere in the middle, working our way backwards and forwards, and i've been looking at this market for generations and i n't have a clue what we have here. i do know that a home mortgage, amortized 30-year mortgage has a value to an investor. the only question is, at what

yield? i mean, i have no doubt that you could probably sell subprime mortgages at almost any volum if people wanted to take the risk that wod be implicit in the mortgage and accept the 13% yield or whatever the number would be. >> right. >> but let's get a sense of what it is we're trading off here, rather than making the key decision before we go to square one. >> thank you. that was the best pretend answer i've ever heard. bob post has a question. >> so actually some ofthe papers here try to answer that question and give you some modeling and i think it's a fair statement that if you looked a those papers, the sources, and the sources, that there would be some increase in interest rates, decrease in the supply of

mortgages but i think that my sense is politically we could handle that. theris a second argument and that's what i'd like to know what your view is because it's essentially that that's a normal but the reason why we need insurance all the time or as a backup is because, one, there is a liquidity crisis whether it's every 20 years or 30 years, whatever you want to define it. that point the notion is that even at a higher price that people walk by and implicitly the notion must be that the fed doesn't have powers to deal with it, so i guess i would just like to refine your excellent answer from before and try to get you to take one step further, because i think that when that work is done, actually people might be willing to accept that as normal times and then it's the second argument that seems to motivate people to say, we

need either back up insurance or full-time insurance and that implicitly assumes that the pricing mechanism you've just described won't work and also implicitly assumes the fed doesn't have other tools to deal with it. >> well, 13.3 essentially gone the fed does not have the tls it did have. but this is more a nonhousg question, because it rests very critically on the issue of how unusual this recen crisis was. from what i can gather, this crisis was the greatest financial crisis ever. it was not as large an economic crisis obviously as the great depression, but the short-term money markets did not go out of business during the great depression. money rate went up to 20% but it

still traded, but in this particular one, we had major aspects of the shortened of the market collapsing and that is the -- the short, overnight rate is the ultimate determination when it goes how bad the crisis is. the last time we actually had a utdown in a short-term market as i recall, i wasn't there but some people think i was, was in 1907. >> remember it well. >> the cold money market shut down for one day. and going back in history, it is very difficult to find anything like this. now, i grant you that when you get a structural breakdown of the type which we had, you have no substitute for other than substituting sovereign credit for private credit and that's indeed what was done and i

happen to have been a strong supporter of t.a.r.p. i think it was the right thing at the right time and i think it worked. the question of whether the repayment was out of the capital gains, they all got as the stock market went up is a secondary question. what it did do is when the market was going down, it stabilized a lot of institutions. i think we have to do that periodically because the system has human nature associated with it and human nature is a remarkable tendency to do very punitive things. i first say if you're going to make it every 20 years we're going to have a problem like this, then i'd have to agree with you, but i don't see it that way. i see this is a much rarer event and i think the critical issue you have inhe catastrophic insurance issue which is basically what everybody is talking about is how in the world do you price it? i mean, we know that if we