attract people to jihadis. people to pay attention to delivering this kind of services. the united states has to be smart enough so we are competing in the same ena. we are not going to be dealing with the fundamental problem that inspires the high -- jihad. >> thank you very much for your open testimony. one and thebe th chances for the american people to look at the business of intelligence and the american people. we will reconvene. we are running a little bit behind. we will work hard to be out at

1:30 p.m. -- to be out at 1:30 p.m. the will reconvene there. we will get under way. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> on "newsmakers" the chairman of the democratic congressional campaign committee talks about getting ready for to dollars and 12. today it 6:00 p.m. eastern on c- span. -- talks are getting ready for 2012. >> it is not on the one of the major challenges facing us in this country but also higher education. that is how we maintain a

healthy lifestyle and get kids to have the strength in the judgment to say no. >> the president of southern methodist university in dallas. tonight, discussing today's college students, his school as the site of the presidential library, and his own road to smu. on c-span's "q&a." >> treasury secretary timothy geithner and does the president's plan for the future of fannie and freddie mac. speaking of the brookings institution, he talked about the future of the home mortgage companies and reducing the government's role in the mortgage market. they are talking about enforcing a mandatory 10% down payment on houses. this is about 30 minutes.

>> i would like to welcome everyone to bring things. i would like to welcome treasury secretary tim geithner. he needs no introduction, as you know. he has been one of the key players with ben bernanke, larry summers, 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-franc note -- dodd-frank. one thing that was not included is what to do about the gse's. they have produced a white paper on which to do with that issue. we are delighted you chose to come here to brookings to talk about it. let me ask you first of all of you could give us a brief description on with the plan is and how it will be implemented.

>> thank you, martin. good to be a brookings. you have good timing for your conversation today and i am glad to have given me a chance to come in at the beginning. we got a lot of things wrong in the housing market in the united states. it is a complex system and reform requires a careful strategy that includes a number of elements. let me lay out the basic pillars and foundation for the reform plan. the first, of course, is that we need to wind down fannie and freddie and substantially reduce the government's footprint in the housing market. that is going to happen gradually because they are now the dominant source of housing finance and we want to be careful that the process happens in a way that does not interfere with or impede the process of repairing the housing market. it still has a long way to go. for the private market, they can

take on a greater share of the burden, we have to have in place, outlined come and understood a new set of rules for the game for all the pieces of the mortgage market. that means clarity on the capital that banks need to have against risk, stronger underwriting standards so we need to have more equity in your homes, better protection for consumers, a comprehensive oversight of servicers and all involved in the basic chain of command. better incentives, risk retention, the comprehensive set of reforms set out in the dodd- frank need to be put out into the market to give investors and banks time to adjust and to 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 for people who want to own a home and people who want to rent. the paper lays out a series of basic elements of vague reform role for the government concentrating on the fha in helping to support those basic objectives. finally, of course, is the end game and taking advantage of a lot of work that you have done and we provide a brief overview of the full spectrum of options for future reform and we trade in narrow the field to a more credible set of ultimate reform options. the three we let out in the paper, just to summarize, is an approach limited to the role that the fha provides, a proposal that would complement the fha's role with an emergency backstop mechanism only to be deployed in a crisis, and the third is an fha alongside a

redesigned and much more limited standing guarantee or insurance mechanism that would be available for a broader class of homeowners. they all have very different implications for the nature of the government support, the vulnerability of the markets in the future housing crises and recession, and we think it is helpful for the stakeholders in the country and on the hell to send -- on the hill to spend time thinking about those mix of options. we do take the view that it would be tenable for the country to adopt a role where the government plays no role. ense for thecountry for the government to be in a position in an ongoing basis of guaranteeing 80%, 90% of the

mortgage market, which many people have suggested. so we start this process of legislation with a white paper, which i think is a gd way to do it. there will be a long process of hearings on the hill. when we get a little further in that process, then congress should be in a position to legislate and we will at that point provide our views more directly on what mix of those final options makes sense. but again we're going to make sure -- there are a lot of good ideas out there. we tried to draw on those in this paper and will continue to work closely with all the stakeholders in therocess so we take advantage of the best ideas for reform out there. of course, we need to proceed carefully and gradually not just because it's complicated. as you know we're still living with the traumatic damage, scars caused by this recession. you still see those in housing most powerfully. >> now, in the plan, you retain an important role for the government in helping affordable

housing, helping people either rental housing or ownership housing. there are a set of people -- we have a range of papers for this conference that cover this spectrum. but there is a view that the effort to provide affordable housing is what brough down the housing market. thatas do-gooders that thought they should get everyone into a home and we ended up through cra and through these affordable house somethi houseing goals that that brought down the global market. could you comment on this and the role you think it may or may not have played in the crisis in. >> i think it's absolutely case the u.s. government provided too much support for housing. too strong incentives for investment ousing. and we just took that too far. and alongside that basic set of mistakes in the incentives we created, we allowed 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 and oversight. we allowed the market to build up really terrible incentives around underwriting securitization. we allowed underwriting centers to erode dramatically. and those things are -- i think they were avoidable mistakes. and, again, it's important to recognize that this was not just about what fannie and freddie ultimately did to follow the market down. it was about a much more comprehensive set of failures in the basic design of oversight and incentives in the syste and so absolutely the government did too much. and what it did, it did quite poorly. as you know, a lot of the basic subsidies and incentives the government provided were not really targeted to people who were at the lower side of income across the united states. so our general view is there's a

very important role for the government not just in providing access to affordable house something but in getting the incentives better, oversight better, constraints jubd wriin underwriting better. that's a critical part of this reform plan. >> now, sort of in the other direction a little bit, there is a view point -- well, two parts to it. let me take this part which is inevitably there's going to be a huge mortgage market. we're going to have -- we have $10 trillion. who knows it will be bigger in the future. at some future time, maybe 20 years from now, from might be another housing crash like this one. okay. so that risk then, who is going to bear that risk? is that going to put our financial system under stress, even if we have no fannie and freddie? and is there a roleor the government to provide emergency asstance when you get that kind of crash of the housing market?

or are there -- i think there are things you're trying to build in which would make such a crash less damang. >> all financial crises have at their center, most of it this real estate bust and bank mistakes. and we're not unique in that context. to make surehe system is more stable in the future, more resilient against the risk of future recessions or house price booms and busts, you need to have a system where again banks hold more capital against risk. people have more equity in their homes. and the government is not creating incentives that magnify the chance you have these huge imbalances -- overinvestment in housing over time. now, i think it's worth noting -- at least my view is even if you get that stuff

substantially better -- and we will. i'm sure -- i'm very confident we can do that. we're still going to have resetir recessions in the future. you want to be sure you don't leave the country vulnerable 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 sort of crushing de-leveraging, big withdrawal of private capital that happens in crises. but of cours doing that is terribly difficult. governments don't do that well. people think guarantees are cool and interesting, but they're very hard to do in a way that doesn't create the risk that political forces end up making them too gnerous, t cheap and undermining incentives to get a better balance of risk-taking. in thinking about the future --

and this is why we laid out the options we did -- is it's very impoant for people to think through the design questions. so, again, we don't end up recreating some of the same risks that got us in this mess. >> could you say a word about the role of securitization in this? historically or at least the last 20, 30 years or so, the u.s. has been a large capital importer. i think probably you and i would like it better if we had a smaller trade deficit and less of a capital import. >> was at the peak -- >> i'm sorry. >> americans are saving more. that's a good thing. >> definitely. but we are somewhat reliant on the inflows of capital and securitization therefore tends to play an important role if that inflow is going to support the housing market at all. we got into a lot of trouble with securitization.

nontransparent cdos. you talk about that in the paper. could you say a bit more about do you think we should revive securitization, how do we survive securitization and stop it from getting into trouble the way it did in this crisis. >> my view is we should preserve a financial system that -- in which banks are a substantial source of credit but not the only source of credit and complicated by a capital market including securitization market that can complement the classic role of banks. we are somewhat unique in that design of a financial system. and making sure that works over time requires the type of reforms i laid out to make sure the incentives are better and securization market and the design of capital requirements and thin like that are more evenlyapplied and better calibrated to take into consideration the risks of the

extreme crisis in the future. but i think those are achievable reforms. i think it's pretty clear what we got wrong in the basic securitization market. and there's i think a lot of consensus on changes that would make a big difference. and i would not support trying to create a system where ban are the overwhelmingly dominant source of credit. i think that would leave economies more vulnerable to the inevitable problems that comes with banking -- familiar problems to many in this room about banking. but, again, just to go back to one thg. there are a lot of mistakes in how we designed the housing market. but at its core, this crisis was caused by a whole range of people -- lenders, homeowners, investors, policymakers -- not imagining the possibility of a severe recession that would

include a very sharp draw on housing prices. central to any reform system you make sure the capital regime, the oversight regime, credit rating processes build in more ca and caution about the risks of this severe event in the future >> in the paper, you talk about wanting to move to a 10% down payment regime. so two questions. is 10% enough? some people say we need 20%, which a lot of countries have. and the second is, how do we deal with the sort of second moshtd i sha mortgage issue. people say get at 10% but the prary mortgage holde doesn't know there's a second mortgage on top of that. so talk a little bit about what i think is right. we need to get the loan-to-value ratios in the right place. how did you have set 10%? how rough going to enforce something like that.

>> fundamental again is the basi proposition that homeowners have to hold more equity in their homes and build in a greater cushion in their homes and we want underwriting standards and whatever role the government is playing to make sure they reinforce that basic process. what the report says is we think that -- think about fannie and freddie for the initial stage of this transition. there should be a cmbined limit ltb -- combined limit at 90%. again, i thi there's an overwhelming case for moving over time where homeowners hold more equity in their homes. there are costs to doing that. there's like hundreds of stories of businesses started in this country financed by people being able to borrow against the value of their equity at inception, not just on their credit card but against their home. and we're going to have to figure out how to make sure we

don't go too far in the other direction, because again ultimately what's the critical test of a financial system? you really want to make sure that it has the possibility of channeling the savingsof americans and investors around the world to finance innovation, including -- and a lot of innovation comes at that initial level -- in the garage classically or somewhere else. i think we have to be careful we don't push the balance too far. >> there's a -- we've mentioned ready a little bit about rental housing. but part of what you are saying in this white paper is that maybe we went too far on the home ownership and maybe we need to make sure that people who want to rent or it's better for them to rent have the opportunity to rent. so what is the plan to improve access to rental housing? >> that's something my colleagues at hud are going to be principally responsible for shaping and i'll leave it to them. we make suggestions in the paper

but again the fundamental point is too much of the assistance the government has provided to individuals went to homeowners. and there is a fundamental unfairness in that. and so we think we should alter thbalance where the government is going to provide a subsidy in a way that redresses that basic unfairness. >> you have laid out some options. could you just clair prify what the options you want congrs to consider? >> i want to start with one observation. if you look across countries, people do this i different ways and in a sort of simple way you could say there was our model where you had a variety of quite broad-based and very poorly designed guarantees by the gornment, explicit/implicit. alongside a private market. and you have at the other extreme in lots of countries a

system where banks really hold an overwhelming share of mortgage risk. and people tend to think about this about a guarantee or not a guarantee. that's not the way to think about it. in an alternative model where banks hold all the risk, the governments provide a guarantee but doing it through the classic broad support for the banking system. they don't charge for it. it's not explicit and it's -- it has a lot of other risks to how you think about financial stability in this context. some people say you can manage risk in banks more carefully, more easily. we understan the risks there better, which may be the case, although as you saw it's not as easy as people think. the choice is not really between rough going to provide a guarantee or not. it's in designing it so that where it is, it's explicit. the taxpayers aren't too exposed. you're not creating bad rk taki.

and that's sort of i think a helpful context. the three broad options we lay out are what we call the fha only model where the government's role is limited to a guarantied mortgage that would only be available to people up to the median income. second option we allow as a complement to that is an emergency backstop framework that we deployed only in the context of a crisis. a good example of this is a suite of facilities that the federal reserve. it's nice to see don cohen here, put in place in the fall of '0 and early '09 to provide a backstop for markets. in the context, the way that would work, you would set up this mechanismhereby the market would be more willing to provide financing to mortgages because there would be a backstop in place temporarily, and if you get the pricing in that right, as things improve,

demand for the backstop will recede and you can wind down the facilities as the fed did so deftly in the crisis. a third option, there are a lot of proposals in this arena, in this neighborhood, is a fundamentally redesigned, much more limited guaray or reinsurance mechanisms where there would be a lot of private capital ahead of the government, and the markets would be charged a fee for that guaranty. it would be explicit by the government, but the taxpayers would be behind a lot of private capital, and if the government mispriced the guaranty and was exposed to loss, that would be recouped in the form of a fee on the broader market over time. it has some similarities to the fdic regime, deposit insurance regime, although et cetera much more complex in this context. that's the credible set of options, but you can't think of themn isolation. it's possible, of course, that what we'll do in the end is

decide on a mix of those options. again, you have to think about them interms of what risks do they pose to the taxpayer, how difficult is it going to be designed the guaranty in a way that doesn't get the insennives wrong and leave the taxpayer too exposed. what kind of protections do you want to build in for the country in the next crisis, and whether that can be provided through an emergency backstop mechanism or requires the government taking even at normal times some of the extreme risk of credit and 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 that. i think someone could look at that and say, youknow, on both sides of the aisle, people complain about fannie and frede. 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. actual this is never going to happen. what would be ur 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 geral recognion 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 ndamentally 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 thatou 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 audien. 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 secondhing 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 ofadjustment 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 sustainabilityproblem 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 ca 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 mke 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.

[applause] >> we are having technical trouble with the program you are watching. we approach -- we apologize and are working to correct the problem. we hope to return to the program shortly.

>> new york congressman steve israel, the chairman of the -- >> virginia republican gov. bob mcdonnell. >> it is with great pleasure that i introduce alan greenspan. as you know, allan became chairman of the board of governors of the federal reserve until 2006 and had an extraordinary amount stable and relatively inflation-free growth during that time. he is now and greenspan and assess its and i can attest that he is still extremely active in

the economics and research. he gave a paper at the brookings bell recently. i have had the privilege of talking to him regularly and hear what he is working on. he is very much still part of the world of economics and macroeconomics. welcome. [applause] 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 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 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 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 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 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 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 years an average annual level of single family unit completions and 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 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 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 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. 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 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 would 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 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 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 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 would be 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 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 for now. 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 cash by borrowing against the market value of equity in homes has faded as a key positive determinant in economic activity, but it remains

important to the housing 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 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 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 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 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 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 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 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 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 market into such a state where, as you know, virtually all mortgages are one way or another government financed, government guaranteed. >> right. >> 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 anible credibly 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 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? 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 it turned around so 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 get 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 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 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. >> thank 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 supply of 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 a 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 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 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 last 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 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 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 implicitly only refer to, quote, normal 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 parading out a whole series of different ideas unconnected to anything in particular. >> 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 forecast. 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 aware 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 markets 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's two answers. first, a lot of the options that are free in our mortgage such as the prepayment 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 have recourse, which means that in a sense the borrower has a much more difficult process 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 of mortgages 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 you've got 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 very 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't have nfdics. for those of you not aware of the problem, what we have on covered bonds in the united states is the sequence of where claims fall in a bankruptcy proceeding 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 road. 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 economic 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 capital investment was for a longer 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 productivity 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 propensity 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 particular 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 just parenthetically say i'm not talking about 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 the reason i might say parenthetically that a nonfinancial 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 equity and 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 the wealth 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 beyond 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 construction, we're getting nothing out of home construction and the nonresidential construction part of capital investment has been flat to

date. all of the increase that has occurred has been in short-lived assets. in fact, one of the calculations and i think 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 official 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 equivalent 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 the pew economic mobility project. running through 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 relatively thin social safety net 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 argument about easy fed monitoring policy, i'll refer you back to the paper i just wrote for the brookings annal, and i addressed 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 these markets and the evidence is you can't find it. now i will grant you that there's a tendency 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, which 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 sort 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 senior 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 of them actually said as they were going out the door, you know, you ought to play this for high 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 stagnating incomes for all but the highest parts of the distribution 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 important 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 and decreased wealth. 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 ter [captioning performed by national captioning institute]

[captions copyright national cable satellite corp. 2011] >> people can take a break and finish their lunch. we will reconvene at 1:30, sharp. >> new york congressman steve israel, the chairman of the democratic congressional campaign committee. that is today at 6:00 p.m. eastern on "newsmakers."

now, bob mcdonald. he spoke about why his state is in better economic conditions and others. this forum, hosted by atlantic magazine, is just over 20 minutes. >> tell us, in the state of virginia, what is the picture? the unemployment picture? what does it look like down the road? >> this is our top focused in virginia. for most governors focusing on economic development, getting people back to work is their top

priority. i had a bumper sticker last year that said i was for jobs. and i am still focused on that. jobs are what give people a sense of dignity, reducing reliance on government. i would say that virginia, because of our tax and regulatory and right to work was, we are more fair than most states. >> why is that? why is virginia a better spot? >> it is the simple thing that we have stayed strong, and we are a right to work state. we have a competitive advantage. long term we are always addressing development by having

skilled labor. we have proximity to washington, d.c.. because of that there has been a fairly stable market up there. and we have just focused on that. economic development takes work by the government. not to create jobs. i do not think that government creates jobs. but you can reduce the barriers for economic development and create the kinds of incentives that will allow you to attract businesses. i have spent a lot of time in other countries to talk about the story of virginia. >> tell us about that. as you said, not only traveling in the united states, but also overseas, talk about how that worked and how successful it has been.

>> we are fourth in the country in terms of new jobs being created. on a per capita basis, i think we are fourth or fifth. just like anyone else in business, you have to look a customer in the eye and say that virginia is right for you, here is why in here is what she will in july. business climate, quality of life when you get here. i made a couple of trips to california. because there system is not good. i would rather have people coming to virginia. i ask for a major economic development package. part of it was a money to open up trade offices in china, india, england.

india, israel this november, the purpose is to open the officess. >> how many jobs have to be at stake to get the governor, yourself, himself, to show up for one of these meetings? are we talking about thousands? hundreds? will you fly across the country for a few hundred jobs? >> of course. we have multiple meetings during those times. we put together a strategic plan to look at what we were good that in virginia. things like defense contracts, technology, tourism, film. that is where we put the new money to create those incentives. now i want to tell people in other states and other countries what we are good that and what

the incentives are that we have to offer. i think that one of the bigger issues is that we have agriculture, still our largest industry in virginia, i want to open new markets in china and india to the tune of some of the largest populated countries in the world. there is a lot of benefits to doing this. first, the ones that are based here. second, the ones that i hope will grow here. third, the ones that i want to come here. sometimes the relationship means as much as the money. if they come here they want to know that they have an ally in breaking down the impediments to

free enterprise. >> before we go, correct me if i am wrong, you cut the va budget -- correct me if i am wrong, but to oversaw the cutting by $1.2 billion last year. was there a net effect on jobs because of that? >> we did wind up with a surplus and had to make some tough choices like reducing spending. i think that the message to the business community is that we will not balance the budget on you. we will find a way to reduce spending. just like families and businesses are doing anyways. saying that we want to be able to fund services in the future through economic growth. every border state being open for business, sort of like that,

we are seeing great things and understand that jobs are created by the private sector. >> with net loss on jobs? >> i would say that there were some public sector jobs that were lost. over the last couple of years, between my predecessor and i, we have made that of much more. >> we have a question. >> governor, thank you for being with us. this comes from a user that wants to know -- you have made increasing trade with china a priority for our state? why? should other states follow your lead? >> have you been to china? >> we are going there in may. first of all, they have shown an interest in doing more trade

with the states. they have over 1 billion people there, so there is an enormous market for virginia products. agriculture, technology -- asked jesse james. that is where the money is. as well as potential consumers. we think that there are some opportunities there that we have not seen before. you have to look people in the eye and say that this is why you come to virginia. >> governor, you said that if you had more money, you would make more investments in higher education. infrastructure. it sounds like some of the same stuff that president obama is talking about. how are your idea its different from his? -- ideas differed from his?

or are they? >> for the first couple of years this administration was not very favorable to business and free enterprise. not only did they use rhetoric that talked down to wall street, but some of the policies, like micromanaging parts of the free enterprise system and not reducing corporate and capital gains tax rates, i would not call these things positive for getting us out of a global economic downturn. >> you would have let general motors go? >> what was in it for the small businessman that created all of the jobs in america? nothing. i will say that perhaps pieces of the stimulus for helpful. some of it was just pent-up spending from democrats being out of our. if they had spent the money on

the infrastructure -- 6% was on transportation, which is unacceptable. it would have gotten people back to work right away. we are investing this year, now that we have a surplus and we are forecasting $500 million in new money revenue growth because of the economy growing faster than anticipated, long term that is a critical part of growing your economy. improving higher education opportunities. putting money into transportation. i have asked for another $54 million from the general assembly this year on everything from tax credits to direct subsidies and other incentives to get businesses to come to virginia. >> when you talk about investing in infrastructure and education,

and so forth, what, it is different because it is that the state level as opposed to the federal level? >> i do think that some of the things that the president has begun to talk about after years of things that have not been helpful to the free enterprise system, investments in infrastructure are a good idea. there is a crumbling with a sub standard infrastructure in many parts of the country. i do think that these investments are prudent. in order for businesses to grow and develop, and that part i say they are in a little late. 6% for transportation, we are making that a big part of our package this year. we will be investing in the roads and bridges of virginia and i think it is critical for future prosperity. >> we have a question from a

student in north carolina, chapel hill. go ahead. >> good morning. you were talking about an aging in trade with other countries around the world and opening the borders. in terms of exports in general, are you concerned about how split the global economy could be? and how detrimental it could be to those that are not on the playing field? >> and pledgor calling in. not really. the governor down there in the tar heel state has done a good job. she is a staunch competitor with virginia. that is the way that it should be. that is why the federal government should not be involved. governor perdue has actually done very well. i believe in free trade and less

concerned about the concerns that the young man raised. i think that we should try to promote american goods and services around the world. if there is not a balanced playing field, that is certainly an issue for the federal government. free and fair trade, if i can expand markets for these products, i will try to do it. >> we have a question right here. >> good morning, governor. i am a defense contractor in arlington, virginia. my question was about impending defense cuts and how it will affect the state of virginia.

all, thank you for your work in that area. we have some of the greatest military on the planet. young men and young women doing a marvelous work, job around the globe. virginia is the home of the united states military. yes, the federal government makes enormous investments in virginia. i applaud that. we have $14 trillion that is not sustainable in national debt and it is immoral when we put that on our kids. every branch of the federal government should look at how they can cut. it needs to be done in a prudent way.

i can say the recent announcements from august about reducing the joint forces hampton roads assessment, contractors like you across the board, that was a of great concern. the announcement about the joint forces command, i will let him make that announcement. on the side of defense contractors, 30% was laudable but arbitrary. there was no analysis about whether it would create more value or if those same services could be done cheaper or more effectively. they are thinking that there is a workgroup with the secretary with technological capacity in

america. we are working on that and hopefully we will have a good presence. >> i am the president of the association for competitive technology. we represent hundreds of i.t. companies around the country, including here in virginia. general motors is likely to sell more cars. you just made a passing reference regarding confrontation of the issue that while china seems ready to take themselves from the beginning, what do we need to do to take the innovations in software and green technology more seriously so that those markets are

available to entrepreneurs in the state of virginia? >> jonathan, thank you for your leadership in the organization. i think that with that size of the population and more and more opportunities for markets to be opened over there, it is a prime time and opportunity to talk to them about these technological advancements. you pointed out these challenges of what we do not want to do. things being created in virginia, everything that we have that has been protected here in crystal city immediately incorporated. you lose the value and you have to cap the materials for that

technology. that is still a huge concern for our federal government and their ongoing work with china to find a way to develop and get those protections in place. in the meantime, those things where we do not run the risk of that kind of infringement on trademark is a push to expand those markets over there. we know that there is a flood of goods from china that used to be manufactured in southern virginia and are being sold back here. i would much rather than those things be manufactured here. the president was right the other day when he said that we need to make things in america again. we are much more inclined towards the service industry rather than manufacturing and we need to get back to that.

>> i have an online user that would like to know, governor mcdonald, where will the jobs be in 2020? what should we be doing to prepare today's youth? >> that is a great question. >> you would need a crystal ball. [laughter] >> i have asked for major reforms in higher education system. for the first time there is a strategic link between higher education and economic development. you cannot grant degrees without a sense for what the jobs of the future will be. scientists and engineers, we are on a bad long-term trend for the

manufacturing industry. defense contract in of virtually all flavors and some of the , part ofindustry's the incentive is for college presidents and visitors to create that adequate and highly skilled workforce needed in the future. for the young person in eight grade, we want them to know what will be on the table for them in 10 years. >> what have you learned in your years in office that have

surprised you? >> this trend towards incentives is not going away. some would call it corporate welfare. that young man that called in from north carolina, governor perdue has three times the amount of incentives that i do. >> an example? >> i have something called the governor's opportunity fund, which is an incentive to relocate to virginia. microsoft just invested its largest amount of money in the history of southern virginia. they were offered a significant cash incentive program to be able to come to offset the cost of the relocation. leaving one state to come here. i guess that the bigger one,

more than incentives, the basic fundamentals that made america great are still important. what my predecessors, the first of two governors of virginia said were important then, they are important now. heavy unionization, obligation, it is still a problem today. if your state is not friendly on those issues, your state will not be able to grow and expand. i think that there's nothing much new under the stun in terms of what it really takes to promote a strong economy. to the degree that america and virginia promotes that -- >> as well as the services that people need. >> exactly. i believe that i use the word excessive. i still have to be with to build roads and hospitals.

>> as well as educate your children. >> governor, thank you so much for being here. >> my pleasure. [laughter] [applause] >> we will have coverage of the president's visit to a middle school in baltimore on monday. we will also have reaction on the live budget briefings from the pentagon and members of congress. tuesday, the house is expected to start debate on a bill that proposes broad reductions in fiscal year 2011 spending reductions. live house coverage on c-span. >> north carolina republican congressman patrick henry said on wednesday that the age of bailouts is over and that congress cannot ignore what is coming.

witnesses included state budget analysts and corporate law professors. this is one of a series of hearings that the subcommittee plans to hold on allowing states to file for bankruptcy. this is one hour and 15 minutes. >> i certainly appreciate the panel of witnesses being here and taking the opportunity to be here. today is a chance to discuss the growing concerns over the fiscal crisis looming for states and municipalities. we have seen a culture arise where every institution claimed it was too big to fail. an eager president and compliant congress kept putting taxpayers on the hook for trillions of dollars. the national debt is crippling our economy. now we are facing the consequences of bad government policy.

we must understand the magnitude of this problem to avoid the ad hoc decision making that occurred in the 2008 financial crisis. this is not about one analyst. this is about the looming fiscal crisis in states and miss it -- and municipalities and the lack of transparency in their pension obligations. let's be clear about this. the perfect storm is brewing. already state and municipal governments are coming to washington hat in hand expecting a federal bailout like so many others. but the era of the bailout is over. that does not mean, however, that congress must turn a blind

eye or a deaf ear to the crisis unfolding in state and local governments. the beauty of federalism is in the fact that the government does not tell the gap -- tell the states have to manage their own affairs. the burden of federalism is that, when one state or all 50 states are in a crisis, we must work together to solve them for the good of the country. since 1990, state and local government spending has increased roughly 70% faster than inflation. the vast majority of the states now find themselves in its fiscal straitjacket caused primarily by the looming burden of paying out billions of dollars in lucrative public sector union pensions and health care benefits that come at the expense of taxpayers. for the last three years, funding from the stimulus at has amassed the severity of the state fiscal challenges. in fact, there was $140 billion in transfers from the federal

government's to the -- from the federal government to the states commend including stimulus. states know said that the money would -- that more money would help them through the current rough patch. the reality, however, is that the money states received from the stimulus has, in many ways, made them worse off. the funding comes with maintenance of effort requirements that force states to keep funding programs after federal funding dries out this year. more money from washington would just delay the rate -- the day of reckoning and only further complicate state fiscal situations. besides, we do not have any more money. beyond that, the simple fact is that the government has outgrown our capacity to pay for it. there will be severe consequences for not changing course. and teachers out of college will be tell them that their school districts cannot provide them with reasonable retirement

benefits because of the cash draft paying for the benefits of others. firefighters from a policeman, and other public servants are facing the reality that their vital jobs offer no promise of rising standards for their families or benefits and they will opt for a different career path. in the end, people will recognize that their government has failed them. not only that, they believe that their government is -- has actively hurt them. while we have the opportunity to change that, we are responsible to try. this is why we're here today, to come to a better understanding of the crisis of the state animal level, too sensitive causes, and to consider available solutions. with that in mind, this hearing, i intend to shut light on how the states arrived at their -- i intend to shed light on how the states arrived at the current extent of their fiscal distress and what needs to be done in

terms of the available solutions. my friend and and colleague from california has a proposal that would require a greater transparency of the pension problem. i look forward to hearing from both sides on any and all possible solutions. that is why we have this great panel here today. let there be no mistake, however, much as required to get our fiscal house in order, not just at the state and local levels, but here in washington, d.c. reckless spending fueled by bottomless borrowing and guaranteed by endless bailouts is an unsustainable course. with that, i now recognize the ranking member mr. quigley of illinois.

>> thank you. you and your staff have been accommodating and cordial to myself and my staff. i also think you in that come any time i take complement -- in that, any time may make complement, it should not take away from my time. [laughter] this is not come in a sense, but bailouts or bankruptcies. i do not believe that any of those options can work or are optimum. i am from illinois and you do not need to tell me how bad the finances are and how critical these issues are. illinois has gone through decades of bad financial decision making under both democrats and republicans. illinois now has an $8 billion backlog in payments and a gaping $136 billion hole in its pension system, leaving its

pension less than 50% funded, which should be no surprise that the rating agencies have downgraded the illinois bond issue in the last 12 months. lester, illinois bonds carried the worst risk than any state -- last year, illinois bonds carry the worst risk than any state. this bad rating was costing illinois taxpayers $551 million a year extra in interest payments. until the service -- debt service in illinois is expected to increase 20%. the only way illinois was able to climb out of the bottom rung was a whopping 66% income taxes. that was an outcome no one wanted. only by passing costs on to taxpayers was a done.

illinois has to reform its pension system and it has to reform its whole way of doing business, which has left retirees and vulnerable and taxpayers on the hook. as the professor said of harvard, the 1990's boom is a lesson for all laws. during seven good years, there were seven lean years. illinois did not save for the seven lean years and now it has to pay the consequences. that is not necessarily what is going on everywhere else. many states have grown large deficits during a drop in tax revenue during a recession. the real problem is at -- is an actuarial problem. they suffer from long term structural imbalances. the causes are rising health

care costs, pension plan, and poor financial management. some of the look particularly bad because of a collapse in pension value assets. even the appreciation in asset value would leave several state pension plans under funded. the municipal bond market is now responded to legitimate concerns about the long-term structural bounces in the -- in 60 states states. i think we would have to distinguish these bad apples -- in six to eight states. i think we have to distinguish these bad apples. a one-size-fits-all, like bankruptcy frosted, could do more harm than good. -- like bankruptcy, could do more harm than good. we need to be crystal clear

that, although there is a national interest at stake, the onus must be on state governments to reform themselves. they need to reform sooner than later. a default on payments would make a seemingly expensive way for all states to borrow. states will suffer the brunt through higher taxes and a move toward austerity. these states have to shore up their finances. at the same time, governments mission matters and successful reform will ensure that workers get the pensions they earned through the years of service. all we need is the political will to get it done. a look for to hearing from our witnesses on this matter and a discussion on the next possible steps. >> thank you. you certainly have been wonderful to work with. we certainly appreciate that. this certainly is not a shirts vs. skins or a democrat versus

republican issue. it is important to understand the depth of this problem. it behooves both parties and the american people and their right to know. before we introduce the panel, we have the mission statement of the oversight committee and, at the chairman's request, i would like to read the for all who are here today. we exist to secure two fundamental principles. first, americans have the right to know that the money washington takes from them is well spent. second, americans deserve an efficient and effective government that works for them. our duty on the oversight government reform committee is to protect these rights. our solemn responsibility is to hold government accountable to taxpayers because taxpayers have the right to know what they get from their government. we will work tirelessly and with citizen watchdogs to deliver the facts to the american people and bring genuine reform to the federal bureaucracy. this is the mission statement --

this is the mission of the oversight and reform committee. but like to introduce the panel. nicole is the trust fellow at the manhattan institute. she writes in urban and economics of finance and business issues. she is a chartered financial analyst, charter holder. and a member of the new york society of securities analyst. her most recent book "after the fall, sitting capitalism from washington" was about the financial crisis in 2008. david arthur still is a professor of corporate law at pennsylvania law school. it was published in 2005. they are a history of bankruptcy law in america.

eileen norcross is a senior research fellow with the social change project and the lead researcher on the state and local public policy project. her work focuses on the questions of how society sustained prosperity and the rules that civil society plays in supporting economic resiliency. her areas of research include fiscal federalism and institutions, state and local governments and economic development. iris j. bland is a senior adviser with the center on budget and policy priorities. prior to joining the center, she was the associate director of public policy for the american federation for municipal employees and senior associate at a consultant firm. thank you all for being here today. members will have seven days to submit opening statements for the record.

it is the policy of this committee that all witnesses be sworn in before they testify. will you please rise and raise your right hand? do you solemnly swear that the testimony you are about to give to this committee will be the truth, the whole truth, and nothing but the truth? thank you. the record will reflect that all answered in the affirmative. thank you. we will certainly began. you have -- we will certainly begin. you have five minutes for your opening statement. if you could just summarize your opening statements, everyone has that for the record and we will begin with you. >> yes, good morning. >> bring the microphone closer. >> good morning. thank you for inviting me to testify today on this important topic. congress is right to worry about

the choice between bailing out states and watching as they risk repudiating their long-term obligations to bondholders and other creditors, including union members. the good news is that congress can still act to avoid the difficult choice. the bad news is that the bank -- that the state bankruptcy statute will not be the answer. the solution means eliminating bad solutions. i will talk for a moment about why state bankruptcy is not the answer and then talk about what must be audiences. proponents of the bankruptcy statute for states say that special interests have taken over the state budgeting process. there's no prospect for states getting their long-term pension obligations, health care obligations to retirees, and a debt obligations under control absence an external force outside the state political process. proponents believe that this could be the external force.

in this scenario, states could threaten bankruptcy to bring successions from their creditors, primarily labor unions. bondholders who would be worried about this prospect would force states to do this before they get into a crisis situation. as a practical matter, though, bankruptcy is luck -- is unlikely to help states solve their fiscal problems and would actually add new problems. one problem is how states have structured their bond obligations. when many people think of money that the state owes, they think that the jet -- they think of general obligation bonds, bonds against which the states has put its whole fifth and credit. -- its full faith and credit. however, new york state, for example, owes $80 billion in debt. only $3.5 billion is too general

obligation debt. the remainder is through these public authorities, special purpose vehicles, and forth -- and so forth. they are each their own corporation. they are not an arm of the state. they have their own board of directors, their own coverage with bondholders, their own legal and contractual agreements, of family bond holders, but with retirees. there is not -- with not only bond holders, but with retirees. changing the rules would affect not only state to have gotten in trouble with their own decisions, but with also states

that are not running these long- term deficits. introducing the bankruptcy statutes would force all states to question the legal regime. it would take many months to weed out the uncertainty and it would have to pay more on their debt. another practical problem with bankruptcy is that the seats are not like corporations were one person can be authorized to speak for the state. in a corporate bankruptcy, you have a ceo, an agent of the ceo, and a small board of directors all speaking as one. in a state of bankruptcy, hundreds of state lawmakers could not give their power to a governor to speak in one voice. bankruptcy would not eclipse the normal processes of democracy. you would still have hundreds of lawmakers speaking in different voices before a judge. there's no way for a judge to simply take over this process of democracy and solve the state's obligations from on high.

another problem is that states do not owe pension benefits for the most part. they administer pension benefits on behalf of local governments, cities, towns, and school districts. bankruptcy for the state would not take care of pension obligations. municipalities can do that with changes in state law. but municipalities can already declare bankruptcy if that is a way for them to deal with their pension obligations. so this is not an added benefit for municipalities who 0 health care benefits. what are some of the other solutions that congress can look through to help states and municipalities pair back other benefits? one is saying is making sure that congress understand that states already have the tools to deal with these things themselves. states can change their laws that govern pensions. states can change their laws that cover contracts, health care benefits, and do not need to look to congress to do this

for them. with that, i will close my opening remarks. thank you. >> thank you. mr. steele. >> i am tempted to say that everything the kohl just said -- that nicole just said is not. we have a lot of experience dealing with complicated bankruptcy. the lack -- the fact that it is a multitude of entities is not news in the bankruptcy context. i would be happy to address questions about that or either the other issues that were just raised if folks are interested. currently, it is a state financial -- if a state's financial crisis spirals out of control, we only have two options. the first is that a state might simply default on some of its obligations, declaring itself unable to pay. the second option is for the federal government to bail out one or more of the states as it

bail out financial institutions like bear stearns, fannie mae, freddie mac, and aig during the recent financial crisis. i believe that both of these alternatives are deeply problematic and that congress should enact a bankruptcy law for the state, not as a first resort, but as an absolute last resort in the event that everything else fails. the claim that we do not need a bankruptcy law per se strikes me a little bit like saying that there is no need for a fire department because most homeowners have never had fires in their houses. if one starts, the homeowner can probably stop it before the crisis gets out of control. each of these things is true, but we still need fire departments for the rare case when the fire does burned out of control. the remainder of my discussion, i would like to make three simple points. first, bankruptcy would provide several enormously important benefits that we do not have in

the absence of bankruptcy. second, it is constitutionally permissible in case you are concerned about that, as well you should be. third, the loss would be tailored to address any particular concerns you may have about things like it being too easy for a state to file or a bankruptcy law being too harsh for particular kinds of constituencies. but we say, to the extent that have, a report on each. first, the benefits that bankruptcy would provide for a troubled state -- one of the main benefits bankruptcy would provide is the way to restructure some kinds of obligations that cannot be restructured out of bankruptcy. that would include pensions and limits on what can be done with pensions out of bankruptcy. i would include bonds in that category as well. the other huge benefit of

bankruptcy is that, if it is necessary as an absolute last resort, it brings everybody to the table. we do not just have water to constituencies that it singled out to make sacrifices. we get everybody to the table and we ask how can we distribute the sacrifices so that it makes sense and we can put our finances on a fiscally sustainable course? my second point is that bankruptcy is fully constitutional, even with respect to states. all that needs to be done there -- there are genuine state concerned and the need to be honored. and we can honor them to make sure that the bankruptcy law would be voluntary, meaning that a state cannot be thrown into bankruptcy against its will and it would also need to ensure that state and governmental decision making functions are

not interfered with. these are things we already do with respect to municipal bankruptcy. one final point is that the law can be tailored to deal with any concerns you all may have. a lot of the criticism of state bankruptcy seems to assume there's only one possible state bankruptcy law we can have instead -- one possible state bankruptcy law that would require us to tear everything down. i think that is not a serious worry. if you are worried about it, all you have to do is put some the entrance requirements of bankruptcy. we already do this with municipal bankruptcy. if you are worried about the bond market, that they will be concerned that bonds will be written down to zero, you put restrictions as a prerequisite to doing anything with bonds. the final point is simply that we can tailor the bankruptcy law

to address any concerns we may have. my bottom line is that bankruptcy is not a perfect solution. it would be messy. it is an absolute last resort. but it is better than the other last resort, which is states simply said -- simply defaulting on their obligations or a federal bailout. >> thank you. >> thank you for inviting me to testify today on this important topic. the recent recession exposed several longstanding problems in state budgets. it -- if left unaddressed, the -- it left unaddressed in the short term causes. with reform today, states can mitigate the worst while meeting their promises to employees and taxpayers. the recent downturn is only one cause for recent state budget gaps. state and local spending has

grown faster than his state's own source revenues. the fastest growing area of state budget is medicaid. states have avoided showing deficits in part due to federal funds and an increasing reliance on debt finance. in some cancers, but differ in their contributions to pension systems -- in some cases, by deferring their contributions to pension systems. without any changes, diego participate state and local government will require -- dao will require funding " -- an increase in revenues between 2009 and 200058 to close the projected $9.90 trillion fiscal gap. state and local governments face a large funding gap in their pension systems.

according to government accounting standards, the discount rate may be based on what the assets are expected to return when invested. this violates economic theory which says that the value of a liability is independent of how it was finance. choosing the discount rate would require matching that rate to what is being valued. and this case, it is a public- sector pension. that is government guaranteed and should be matched the rate that reflects the safety, which is the yield of treasury bonds which is currently at 4%. the secular logic of government pension accounting standards has had several consequences. it has led to the undervaluing of pension promises and the amount necessary to be set aside for the pension promise. plans have been encouraged to embrace more investment risk, including increasing the investment exposure during the recent downturn to make up for

losses. union leaders and politicians negotiated in the 1990's when the market was booming and boosted benefit formulas. governments also deferred payments to the system and issued bonds. when will bonds be likely to run out of assets? it is estimated that, under the generous assumption of an 8% and a return on pension assets, by decade's end, eight states will run out of assets to pay their beneficiaries been illinois will require $11 billion annually beginning 2019. a less dire scenario is offered by boston college. illinois will require 30% of its budget to ensure fund solvency. new jersey will require 12.5% of its budget. this requires choices --

ultimately, i stressed that it is incumbent upon state treasurer's -- i believe the biggest impact the fedele garment can have in helping the state is in the area of medicaid reform and mandate relief. for state pensions, i have two recommendations been first, transparent and accurate accounting. these scenarios should include the risk-free discount rate. the data rate should be made available to the public appeared second, stabilize public-sector pension systems. palin as promised while minimizing what is offerechargey -- paid what is promised while

minimizing what is charged to taxpayers. the last reform will allow workers more flexibility, shift risk away from taxpayers, i and. accurate accounting will allow states -- thank you. i look forward to your questions. >> thank you. >> thank you for the invitation to appear before you today. i believe that predictions that states throughout the country will have to bailout localities are that the padilla government will have to bail out the state's parks -- or that the government will have to bail out

is exaggerated. first, cyclical issues. states are projecting large operating deficits for the 2012 fiscal year. unemployment remains high. we met -- revenues remain low. moreover, the fiscal relief provided through the american recovery and reinvestment act in 2009 is ending. that is not mine. that is someone else's? ok. it has been enormously helpful to allow states to revert potential budget cuts and tax increases. states have used the fiscal relief to cover about one-third of their budget shortfalls through the current fiscal year. but only about $6 billion will

be available for next year, covering less than 5% of these shortfalls. as difficult and painful as the trusses are, states and localities will bounce their upcoming budgets through budget cuts, tax increases, and user reserve funds. that is what they do. second, bonds -- there is no credible evidence of a bubble or crisis in state and local bonds. we can go to figure three, please p.m. first, interest payments of state and local bonds absorber just 4% to 5% of state and local expenditures, no more than they did in the 1970's. the historical default rates since the 1970's, after several recessions, has been about one- third of 1%. finally, there is no large increase in bond issuance nor

are there exotic securities that high the underlying value of the assets against which the bonds are issues, which was the case in the subprime mortgage bonds. third, but tensions -- this is more complicated. there are shortfalls in pension funding states will have to address them over the next three decades or so. figure four, please. tensions were fully funded in 2010 -- pensions were funded before 2000. some have not made the required deposits. states and localities have about $700 billion in unfunded liability. that implies that have to increase their contributions on average over the next 30 years from about 3.8% of adjusted 5% of budget. that is on average, not

illinois. 25% oft 3.8% of budget's budget. that is on average, and all not illinois. pension funds do invest in a diversified basket a private securities. the average historical rate of return has been about 8%, as you can see in the chart. it may or may not be a little lower going forward, but it is unlikely to be just 4%. the $3 chilling construct this not represent -- the $3 trillion construct is not represent -- to summarize cyclical problems will

abate as the economy improves. pensions need attention, but, in most cases, they are not in crisis. i see no need for federal intervention in these areas. states do not want or need the power to declare bankruptcy. nor is there a need for federal legislation to require states and localities to report their pensions on a riskless rate as a condition for issuing tax-exempt bonds. there is a process going in the governmental accounting system in a way that pensions are reported. >> thank you. i certainly appreciate that. we will begin the questioning

with the moisture of the sub ginta.tee, mr. dento >> i have a couple of questions for each of you. first, you stated that there is no impending or looming crisis at the moment. the first question i would have is how would you describe a crisis if what we see states and the levels of their requirements where they are at that's what i would describe it as something that states have no way of digging themselves out of. states have many, many tools in which to do this. if you have to raise your pension contributions from 8.8% -- from 3.8% of expenditures to 5%, you can do that after the economy recovers. states are finding ways to close

the cyclical deficits. we do not appreciate many of the cuts that states are doing because they affect low-income people, but that is what they do. they manage their finances. >> i think the concern that i and others share is that, as states "manage their finances," they are spending a higher amount of money percentage wise of borrowed dollars to get us through these "lien or challenging" economic times. new hampshire has done that to pay expenses. new jersey has done that to pay expenses, which is not be there good accounting standard practices or good business standard practice. in your written remarks, you talk about the cats be standards. my concern is that, at some point, there is potential of states wanting to come to the

federal government for a bailout because of what they define as an economic challenge that they are having. i would argue something a little bit different. any responsible governor or a legislature or administrator should be practiced -- should be anticipating these challenges. it should be done in a responsible way. i and stand your point, but can you speak to the states that our borrowing -- all i understand your point, but can you speak to the states that are borrowing to pay their expenses. >> very few states borrow for operating expenses. illinois has borrowed to make its pension obligations. that is bad practice. many for infrastructure. you do not see the data any substantial is in many states borrow for infrastructure. you do not see -- hon

semany states borrow for a structure. it is not good practice for states to borrow for pensions. it makes sense to borrow for infrastructure. usually, in the longer paper that i referred to in my written testimony, we do have the whole last section where it suggests that states do have some structural deficits, some mismatch between their expenditures and their revenues. part of that -- they do need to take some steps to fix those mismatches. there's no question about it. but a lot of it comes from the rate of growth of health care costs and the economy. they spend a lot of their money on health care. health care costs are growing faster than the economy. in the private sector and the

public sector, it is growing fast. states have a hard time meeting the responsibility is to provide health care to those people in the states that need it, the elderly and the disabled. >> i would agree that states need to better manage the pie and monetary budget -- monetary challenges they are facing. but it sounds like you're for bankruptcy even though your comments say that is not necessary this point. >> they do not need bankruptcy. >> i do want to ask miss norcross to comment on the testimony we just heard. >> it has informed decades of policy within the pension system that i believe we see the results of that today. the analogy is this. the reason we cannot choose a discount rate on which what your

think you're as a start in terms of value is because, consider you have a mortgage and you have a mutual fund. your broker says, i think you will return 10% annually on your mutual fund. that does not allow you to slice your mortgage in half. what that circular logic has produced over the years, certainly in the 1980's and the 1990's when pensions were fine, they undervalued the size of the promise. they expect the rate of return will be taking care of the necessary contributions that they should be making to fund the system. no. 2, when plans were funded on paper, it led some states to grant generous benefit enhancements without doing the math. in new jersey, in 2001, they offered a 9% benefit increase and they did not figure out what it would cost them. remarkably, you can secure a

guaranteed investment with a high-risk stream of investments. in the short term, you will realize more volatility in your investments. yet the promise is due within 15 years. they are trying to secure a guaranteed payout with a high- risk investment. that is the flawed logic. joshua route in his paper, he uses the 8% discount rate. even if it grants to that, we are looking at running out of assets with 3% revenue growth by the end of the decade. new jersey's actuary released a paper on friday using the 8.25% discount rate and said we have 12 years on the police officers plan. i hope that helps. >> thank you for your testimony. the gentleman's time has expired. the subcommittee ranking member

has referred to the full committee ranking member. >> thank you. i think you for working in a bipartisan way to address this problem. -- i thank you for working in a bipartisan way to address this problem. i find it interesting that the national governors assertion, republican and democrat said this on february 4, 2011. "allow states to declare bankruptcy is not an authority. -- not an authority that any state leader has asked for nor will use. states are sovereign entities in which the public trust is granted to elected leaders. the eve -- reported bankruptcy proposals suggest that a bankruptcy court is better to overcome differences, and manage the finances of a state. these assertions are false and serve only to threaten the back

of state and local finance." do you agree with these governors, that the state bankruptcy proposal threatens the fabric of state and local finance? can you be brief, please? i have several questions. >> i do agree. states have all the tools they need to manage their finances. occasion, one state does not, but they have the tools they need. >> what would you recommend as to how those states might improve their fiscal situations? >> there are many ways that states can improve their fiscal situations. they can take a longer-term look. some of them only look when you're ahead. they can improve their revenue system. they can make sure their revenues match with their expenditures. they can have processes in place where there are consequences of skipping a

pension contribution. there are many things that they can do to make it clear to policymakers and the public about their own situations and allows some oversight. but i think states themselves have the ability to do that. this recession has been so very long and so very deep that some of the flaws have become apparent. but it will let be forever and i think they will adjust their revenues and their expenditures to manage this problem. >> the house budget committee chair paul ryan and the republicans propose cutting the federal budget, domestic non- discretionary, and non-military, approximately $40 billion this year and much more in the future. would this not significantly you worried the state and local governments fiscal problems? it is not a gift to the states.

>> no, it is not a gift. it is a penalty for the states, basically. about one-third of non-security spending that mr. ryan wants to cut is for state and local governments. depending that we do not have the exact number, but probably between $10 billion to $30 billion, that is money that the states would have to scramble for -- $10 billion to $13 billion, that is money that the states would have to scramble for. >> is not most underfunding of state pensions due to recent dramatic declines in the stock market that hurt investment portfolios of almost all american investors, including hedge funds, regular working people, and probably do most political people. -- political people? do you not agree with the analysis that expecting long-

term gains to smooth out today's current problems? the reason why i raise this is that, when the storm is over, i do not want to see situations where our employees -- by the way, a lot of them are working in this room today -- may have lost their pensions. state pensions have been diminished. state commander recovery -- states come out of recovery. because they do not make their pension payments on time -- employees have to pay, right? >> yes. >> they have to pay. one of my concerns is that, when the storm is over, then these folks have been locked out of a lot of money that they were due. >> of course, the improvement of the economy and the market will have a lot to do with improving the outlook of pensions over time.

and for most states that have not provided retroactive benefits without funding them or have not skipped payment contributions in the past, they will be fine. the vast majority of states will be fine when that occurs. >> the only reason why workers may lose some of the benefits they were promised is because the investments have been treated as a gamble rather than having been secured the way they should have been secured. then miss valued and the payments have been in a prepared for the plans. i am of the view that what was promised should be promise. i also cautioned that every state pension system and every local pension system has something going on that is different. joshua rouse says there's a timetable of where there is no change to policy and they will run out of assets.

>> thank you. >> this is a representation of the difference between inflation of the 1950 baseline. the blue line would be private spending increases since 1950 until now versus state and local government spending increases in the red line. private spending has increased by times, but local and state governments have increased 10 times. it is not the question of a funding shortfall, but a spending problem. would you concur with that? >> yes. >> the discussion about public pensions, understanding the magnitude of the problem is one thing we want to understand here

today. what you mentioned in your testimony, a funding shortfall, is there an agreement on with the funding shortfall is for public pensions? >> there is not an agreement. their rough range would be several hundred billion to $3 trillion. that is a large range. this involves predicting things that are very difficult or impossible to predict. you have to predict the performance of the u.s. stock market and the global equity in bond markets. you have to predict the course of future inflation and how long people and their survivors will live. >> this norcross, do you concur with that range? >> yes. well, under a range of assumptions, yes. the $700 billion would be under the current assumptions of the 8% range.

>> what is the airport and? >> $3.50 trillion. end?- what is the upward an >> $3.50 trillion. >> ok. do we have enough transparency and understanding of the unfunded liabilities? >> is not sufficient. i would advocate asking the states and large municipalities to report the assumptions -- report the liabilities of range of assumptions reported under what used to be called a risk- free rate, maybe 3% annual return reported under the 8% return, and allow investors to make up their minds. there is a problem with this closure, but it is not the

biggest problem. investors can do their own calculations on these liabilities. we have seen many do it on their own crud and. if investors do not like it, they can not invest on the debt. we do not understand -- it is not that we do not understand the depth of the issue. is the political will that governs pension. >> would you concur with that miss norcross? >> i agree. >> that is simple enough. that is reasonable. are the government accounting standards for pensions similar or dissimilar from what come -- from what public companies are required to disclose? >> they are a little bit different. in the private sector, the use

something closer to a risk-free rate. they are valued differently from public sector plans. >> would like to add anything to that? >> no. [laughter] >> this is going pretty smoothly. this norcross, in your testimony, you discuss that state spending grew faster than states on revenue sources. that was in 47 states from 1997 until 2007. to this point, can you explain the danger of states reporting budgetary imbalances when they are actually using federal funds and debts to fund these expenditures? >> i think that highlights what is in the pipe. you have the state's own revenue, the federal fund that, and other. if you're just considering what the state can support on its own, that can be papered over if

you then discount that they're getting federal funds, which can stimulate greater spending or cause the states to raise taxes to support that spending. also, there is the rise of debt. while that is not a very large portion of budget, we have seen techniques recently were states will dump a trust fund bond to replace the budget. it may not be directly for operating expenses, but they are. >> have states changed the nature what they use bonds for? rather than building a road, are they changing it to plug a pension fund promise? has that changed? >> we see more bonds for that. also, the definition of capital can be flexible. >> thank you for your testimony. i time has expired. mr. quigley is recognized for five minutes. >> thank you, mr. chairman. >> so far, the problems we have seen with these states that are

in particular trouble seems to be self-contained. i would like to ask anyone of you, a few can, what the potential systemic risks are. the last economic crisis taught us that everything is interconnected, in terms of the market or what have you. if there is a big pickup, and we are certainly threatened with some of the states, -- a big certainlynd we're threatened with some of the states, the effect on other states and the bond market itself. while there may be only 10 states, what are the impacts on the rest of the states? >> i think the risk of contagion is much less severe than it was in 2008 with the financial institutions. i think the bond market knows

the difference between the states that are in real trouble and the states that are not. what do you think the investors do? >> i do. i do. we have to have some confidence in the ability of the markets to make those distinctions. that would be my first point. my second point would be that a lot of the problem with the financial institutions was hot money. they depended heavily on short- term financing, which was subject to immediate withdrawal. states are not subject to financing that will disappear instantly. that tax revenues coming in. they are likely to be able to continue borrowing. i think it is a different kind of crisis. >> it possible, the panic markets in the short term. >> you violated our role. [laughter] >> but, in the long run, people realize what the fundamentals are.

you can see that there is beginning to be improvement in that market. those comments have been put to rest. i think that there are distinctions among states. the last time a state defaulted was in the great depression. even in the great depression, only one state, arkansas, defaulted. only four cities or counties have actually defaulted since 1970. i do not think we will have a major default crisis. i think there will be ways -- you will have some sewer districts and revenue bonds that were tied to the housing bubble and so forth. they will have trouble paying in those districts and they will have problems and the state will probably a step in, as pennsylvania did in harrisburg, and try to sort that out in a reasonable way. i just cannot see a scenario of

major the fault contagion. >> if i may add to that, i would say that -- of major default contagion. >> if i may add to that, i would say that it would be changing the statute to allow for federal bankruptcy because, if i am a bondholder, take new york's metropolitan transportation authority with $30 billion worth of debt, i have lent money to this entity based on a long list of covenants, including a state law that says that, for as long as these bonds are outstanding, this entity will not declare bankruptcy. that is what new york lawmakers have determined under the democratic process. if there's any question that you have a federal statute that would somehow supersede that or this idea that you could take away promises made to these bondholders to give to bondholders or unions at another state entity, this risk would take many months to sort out. i would also add, maybe not the

potential for an acute crisis that we saw in september 2008, but the potential for the risk of losses at banks where you do not need a default for the market value of these securities decline. if banks worry that the value of these securities has declined, they may pull back on lending to the rest of the economy. again, not a crisis or a panic, but makes the recovery more difficult. the question is what are you getting for making it more difficult? you do not get much deficit. because the states have the tools to fix these problems. >> one brief response. this is all assuming that the states would not default on these bonds. i think the question we have to ask is what are the possibilities? one possibility is no bankruptcy. they simply the fault completely. >> but may ask another question

of this norcross. he talked about the return and you advocate for reducing it to what you judge as a more realistic figure. a quick shift from 8.25% to 4% would have to have some impact. it is pretty dramatic from a fiscal point of view. the contributions would up to be increased. again, the market that looks at this, would you see this done during a slower time or an adjustment. the dax how would you see it done? -- adjustment? how would you see it done? >> >> targeting a rate that makes it look better only masks the reality.

in cases like illinois, where they will take on more risk in their investment strategy to make up what was lost. that is why the ranking member is recognized for five minutes. >> thank you for organizing this meeting and all of the panelists for their thoughtful testimony. i rejected the need deeper understanding of the magnitude of this challenge. first, i would like to ask you to qualify and expand upon a statement in the testimony where you said that states and localities devote 3.8% of their operating budgets to pension funding. first, i would like to know where you got the number from and is this an accepted number universally. if that, in fact, is the correct

number, based on this no. how can you suggest that public pension costs are the large costs of the state and local financial problems as we know we are just picking our way out from the great recession that has impacted our entire country. there are many costs there, but could you comment ms. norcross then ms. lav? >> that is what states have been contributing on average. she estimates that if you use the discount rate that you would have to raise it to 5% of budget's on average. >> that is correct. we've worked with the boston college people using our expertise on state and local finance to come up with that number. >> how can you suggest that this

is the cause of the local and state financial problems at the contribution is just 3.8%? >> it is not the cause. pension contributions come from the general funds. but the big deficit numbers, the $125 billion, is a general fund number. neither contributions or interest on bonds are the major component. the major component of the deficit are the expenditures that states have a like healthcare and education and so forth. that is why i said that it is not a crisis to raise from 3.8% to 5% in the way the state and local budgets are put together. you can do that over time. and it is not a big crisis. there are talks about the risk of the rate. that is one way to look at this.

this paper says you have to get a 9% which would be a big problem if you use a riskless rate. there's a difference between vitamin the liabilities and how much have to deposit -- how much you value the liabilities and, to have to deposit mature two different things. >> the number you testified on, and i would like some clarification on this, is it true that this rate is different than what the private pension plans years? >> private-sector pension plans admit they have more resonance of the company can go bankrupt. they use the corporate bond rate. the corporate bond rate is 5.5% or 6%. >> why should there be a different rate for public and private pensions? >> private pensions have to be a little bit more conservative because a private company can go

out of business and then they dump their liability on the public benefit guaranty corp. said the federal government does not have to bailout and pay the pension liabilities. instead they use a more conservative rate. they can adjust taxes and expenditures. this will be an ongoing entity. there have been gao reports and others. most say you do not need stringent standards for a public entity that you do for private. >> with the rate increase the pension shortfall? >> substantially. >> how would this increase it? >> 60% of the pension assets come from investment income. if you're going to say you will

only get 4% on investment income and you are projecting that 30 years into the future, you may get a much larger hole that you have to fill. if you say you're going to give 4% and you continue to invest in equity, then you are saying something that is not true. you have to find something in the front-end. if you get 7% or 8%, you will have more in in and there could be more temptation for an overkill the pension funds and not have consisted contributions -- for an overfill the pension fund to not have a consistent contributions. >> my time has expired. with anyone else like to comment? >> i would just like to add that the logic behind the discount

rate is the risk at what you are valuing. a private sector plan reflects the risk involved that a company can go out of business where is the government guarantees of 100% that you will get paid. you have 15 years with the majority of your money comes due in your lessening the likelihood that the money will be available to pay out. >> if i could comment to the magnitude of pension liabilities. the reason they do not show up as much of the state level is because these have the responsibility of of the local governments. they are set by state law but paid by the localities. new york city will pay about $8.50 billion in pension obligations this year which is more than 10% of the entire budget including federal funding for the city. a much bigger problem in the local level rather than the state. >> thank you.

a unanimous request -- consent request? >> a statement from the governor of massachusetts of. >> without objection so ordered. mr. cooper for five minutes. >> thank you, ranking member, for holding this meeting. are like to insert into the article -- in search of an article by jeb bush and newt gingrich called "better off bankrupt." >> it is important to keep things simple. it is my understanding that 80% of municipal bonds are owned by individuals in some form. is that your understanding? these are more widely held. >> the tax-exempt bonds. >> most investors hit a nasty surprise. -- hate a nasty surprise. they do have transparency when markets perform well and you have a heads up and people are

usually less alarm. on when to ask you questions about the transparency of these markets. what are reversing -- what are we missing today regarding the obligations that would enable an individual investor to better evaluate these investments? it is my understanding that some of these get packaged up in bond funds, a tax break, and that is how they diversify their risk. you do not want the fund to be harmed be there. what are we missing in terms of transparency between the states? they follow them very closely so i am not aware of anyone

complaining about the transparency. moody's just put out a new kind of analysis where they have added together the outstanding bond debt, pension obligations, could the could this in the one place. i think that is a good thing. with respect to pension obligations, i think there's a problem of not really being able to look at state-by-state pensions of the same basis. >> what exactly are those problems? >> they use different standards. there are a range of actuarial standards that are pretty arcane as to how you measure future liabilities and so forth. states can choose which ones they want. i mentioned that the governmental accounting standards board is very close to issuing a new standard that will no longer allow that and will require. >> and then after they have a

standard we can have an apples to apples comparison between the states? >> i believe so, yes. >> do all panelists agree? >> i believe that is so. >> that is pending? >> is this a rule that will require them to use the apo or tbo or are you referring to gasby 25? >> there are looking at both together. >> so in the next few months we will have a greater compare ability between the states so that individual investor can evaluate the risk involved in value in pension obligations? >> that is why i understanding. there are working on it. >> are all panelists equally hopeful that they're going to do this? >> i am hopeful. >> they have taken comments and

had a drafter wrote in september. they are very far down the line. it is appropriate because of the stakeholders have had a chance to comment. it is not being imposed and various people object to various parts of role. it will be a standard rule and better than the one we have. >> of the manhattan institute and university of pennsylvania concurs? >> i am not following this that close late so i will be agnostic on it. >> i have no prediction on how it will come out. >> you mentioned the rating agency analyses. they did not have the credibility that they once had. are they on top of this? between the states and municipalities? >> i think they are. but there are rating agencies and a whole foot post -- a whole host of analysts out there in

keeping an eye on this. they look at this and they have specialists who spend all of their time looking at state and local finance. i think they have a pretty good handle on what is going on. they are saying that there is no major chance of a contagious default. there are likely to be in small things. >> my time has expired. mr. chairman, thank you. >> i thank the gentleman. if it is ok with the panel, we have time for a second round of questions if there are now pressing concerns this morning. with that, i recognize myself for five minutes. the definition of default is it

to fail to fulfill the contract agreement or do they come to fail to perform or pay, or make good. -- a bill to the fell the contract agreement of pay. can we, as policymakers, defined as more broadly which is dealt to the fell an obligation to the people you are serving -- which would be to fail to fulfill an obligation or not making good so you have to sell city or state assets in order to pay bondholders which is an interesting piece here. beyond that, as federal policymakers are we making the matter burster are transfer payments to the states?

there have been some point of reference and the testimony here today than that is the case. ms. norcross, your written testimony discusses some of this. to the tune of hundreds of billions of dollars per year, there are federal transfers to states and there are federal mandates on the states that are cost drivers to the government. can you touch on this and the implications this has for the bond market and the indebtedness of the taxpayers? >> at the most well-known is currently with the medicaid requirements on the states. there are many other grants that are handed out to the states that occasionally come with maintenance requirements or may encourage the municipality to raise taxes to support spending. i do not know if i answered your question. >> you did. there are certain states that are in certain fiscal

situations. is it the difficulty of policymakers to pass a budget have a bearing on their credit rating? you would believe. in your research of the dormitory authority or a resident authority, does that have a bearing on the state revenue sources, whether or not they are sustainable? can you touch on that? >> it does. without saying whether the ratings agencies or right or wrong on the broad issues or near a credit, the rating agencies to have a good understanding that each bond is different even at the state level. california, for example, they have said very clearly that paying debt service on general

obligation bonds that this is one of two top priorities for the state. even if california has massive budget deficits, they pay them first before anything else. rating agencies look at that and see the structure of the law and precedent and it goes into the analysis. other states it may not be as high a priority, but it is a very high priority in every state. danny looked at the states that have bond-secured and they pledge the sales tax to pay bonds before they use it for anything else, that is actually higher than a general-obligation bond. that gets the a.a.a. rating in a lot of cases. he have to look at each of the repayment schemes. in sometimes, the willingness of the state to make bad decisions, as we have seen in illinois from the state raised taxes to give comfort to the bondholders so

trying to get more market discipline in getting the bondholders to care about the fundamentals, it does not necessarily give you good, long- term decisions for the state. it may make the situation worse and not better. >> we appreciate that. in today's "the wall street journal" there is a reference to this hearing. they say that california borrows billions of dollars to cover their seasonal shortfalls in their shortfalls. illinois wants to issue an $8.70 billion debt restructuring fund to pay past due bills and a $3.70 billion bond to make required pension contributions into their pension system. there is a larger system here about whether they will be able to afford higher interest rates following the end of quantitative easing and what impact that will have on the

pension fund gaps. if i could ask the panel to make comments on that briefly? >> higher interest rates are certainly a risk. also, how do global investors feel about the prospect of inflation and in the u.s.? it is likely that municipal-bond rates will go up at the same time. >> those facts are likely and already are disproportionately borne by the states in big trouble. california's interest rate is much higher than other states. that is what we would expect and in the long run that is what we want. >> i concur with what professor skeel said. >> i would distinguish the different things. california issues revenue anticipation notes and they pay

them back within the same year. that is down barman for operating expenses. it it just changes the timing of their borrowing. the illinois bonds are boring for expenses which is a big distinction. if interest rates go up, total interest on bonds, depending on the source used to calculate, only 4% or 5% of total state and local expenditures. again, this is not something that will break the bank if it goes up from 4% to 5% to 6%. to have to accommodate but it will not break the bank. >> thank you. >> think you to our panelists and the chairman for participating in this. this is a good first effort by the chairman and the committee on an important issue. before i asked my last

questions, the thoughts of state and local governments are that from my point of view that the mission matters. we hear so much that people do not like government, but when it comes to local government, when they call 911, they want a fireman or an ambulance. they want to know when they crossed a bridge that it is safe. so much of local government strikes so close to home. what we're talking about today is the poor financial management can put all of those things at risk. beyond the financial management dealing with pensions, it is really the notion that governments need to look at themselves and reinvent themselves and i am not just speaking as a congressman but i was a county commissioner for two years. all governments need to reinvent

themselves, streamlined, and consolidate not because they do not matter because the matter very, very much. there is a lot at stake here. i want to commend the panelists. with one exception, you said you would not mention the name that would not be mentioned. this is what the public wants to know. to what extent could there be significant bond defaults in the year 2011 or 2012? >> i do not think there will be a city or county that defaults. i think that there will be some defaults in special districts and on revenue bonds. in florida, there were bonds issued for sewers in a development that never got built because the housing bubble

burst. you cannot pay back those bonds because there's no sewer revenue coming in. there are those kinds of things around the country that are going to be a bit of a problem and could go into default or restructuring. as the chairman said, the term "default" could be used a few different ways. i use it to say you are not making the interest payments on the bond. there are some projects that go bad in the bad economy, but i do not think that there'll be any major large city or county that the faults -- defaults. by and large, even for smaller ones, the state will step in. we have a control board now in the nassau county new york. we will see quite a number of control boards, i think, to come

in and impose these for localities in trouble and help them figure out a plan for working their finances out. >> i would just add that i do not think it there will be defaults. it is important to keep in mind that we do not know. 50 states will probably survive but if only 48 states survive the current crisis, we are in trouble. we really need to plan for that. we need to plan for surprises in way than in 2008 we had not planned for. >> as a democratic people in each state, we do not have to wait for the bond markets to make common-sense decisions today. we know state-by-state and in the nation as a whole that we have to control our health care costs for public employees and everyone, retirees, pension

liabilities. if we did not get a handle on these things, we will not be building or repairing roads, bridges, or transit because we are paying the growing retiree costs. we should not wait for a bond market to tell us what we should be doing already. >> i concur with what ms. gelinas said. >> thank you and i yield back of. >> mr. cooper is recognized for five minutes. >> i would like to thank you for this excellent hearing. the question of individual investors, if i am a local tax payer thinking about maybe buying these bonds, what is the easiest way for me to find on the web or another source the credit rating status, financial soundness of the entity in which i am investing your living?

>> bond prospectuses have a whole lot of information about the state and locality. >> that is a big, long legal documents sometimes hundreds of pages. what is the best way for a consumer who may be sitting in the broker's office who wants a tax-free bond. how do you find at the intermission and tell whether your living in a credit or the jurisdiction or not? -- how do you find that information? this is the information age. is there a web site you can go to and find out with relative ease if small town, usa, is worth it or not? >> it is fairly difficult. you have to piece together information. all of the brokerages to the reports on individual bonds. to assemble it together yourself is a little bit difficult. >> that is why most people and

do not rely on financial advisor is an down brokers rather than make their own decisions. as ms. gelinas said, it depends on the type of bond. you may be wanting to know about the possibility of tolls being able to pay the bond on a highway or it may be credit in which she may need to have some sense about the budget of the entity and its long-term prospect. >> she said earlier that individual citizens should take it upon themselves to anticipate and get in front of the bond market. it is very difficult to that practice. you have to be a student of this to understand what is going on. >> just like to go to a lawyer or a doctor, i am a finance person, but everyone is not. >> for the individual investor, it should be made relatively

easy. some of the brokerage houses to be affiliated with the underwriting banks and have an interest in making them look good. >> that may be the case. there is not a lot of weight that an individual can -- there are not a lot of ways an individual can investigate. most towns have their budget on the website, but they may not tell you everything you want to know. >> we can compare almost everything else in life for easily accessible web sites. why cannot we get these? >> there are 80,000 jurisdictions in the united states and some say 90,000 that issue bonds. it is quite a large undertaking that maybe one would want to undertake, but it would be a good deal. >> , the people buy into bond funds. -- so many people buy into bond funds. how do you tell what is in your

fund? with the housing crisis, the have bundled the sub-prime credit and it tainted the whole package. >> that was a different kind -- those were white people called sliced and diced securities. >> that is not being done with muni bonds? >> no, never. >> the bond fund, there is at least something there on like with something like a collateralized debt obligation built on mortgage bonds built on more mortgage bonds. some of these things were rated aaa and eed up being worth literally nothing. i do not see how that would be the case here even if we did see it small-scale municipal and project defaults.

it is hard to conceive waking up and having a triple-a-rated municipal bond fund being worth nothing. the other point is very important. individuals on these bonds, but they did not end them directly. they on them for money markets. $300 billion mark of state and local debt in money market funds. there is an issue of financial intermediation and the responsibility that these are the large investment makes -- banks that have these holdings in many of their books. if we have not succeeded in getting financial discipline in those firms and believe they are too big to fail, they will not worry about state and local that because they think congress will bailout them. >> with any of you invest today in a bond fund with higher tax- free interest rates, project funds in nevada, southern california, florida? would you put your life savings

or your pension fund in the fund like that especially since it is apparently quite >> i would be careful, but i certainly would not stewart away from -- steer away from the muni market. you would have to look at the project. >> that is virtually impossible to do, unless you're a bahn lawyer and willing to read 200 pages. -- unless you are a bond lawyer. it just seems to me that we are not giving consumers,ndividual investors, enough information here, at least that is easily accessible. my time has expired. i appreciate the chairmans patience.- chairman's

>> would you invest in these funds, yes or no? if you all want to answer that, that would be great. >> i think there is a very real problem with trust. people's trust in the financial industry and trusting their financial advisers and trusting managers of these bond funds, and that issue is not going away anytime soon. >> miss? >> i would probably ask my financial planner. i would not invest immiscible bonds. that is not my thing. >> -- in municipal bonds. that is not my thing. >> ok. >> thank you for holding such an important hearing. like the ranking member, i am from illinois, as well. illinois is a mess. we all know that. there is no way the government

will bail out my state. the constituents will not allow it. i feel like i left the movie right before the good part, and i am sure the case was being made that bankruptcy is not feasible, so bankruptcy is not feasible. let me just start out with a real quick round robin question. give me your 20-second solution, just so i can walk out of here with that take-away. bankruptcy is probably not feasible, so what is the state going to do? if you can give a quick one to that. go ahead. >> voters in many states are already doing the right thing. we have got new governors in both parties who are starting to address what we do with pensions for future employees, what we do with medicaid costs, something we can deal with. pressuring their own lawmakers to change state laws, and in

some cases state constitutions, not something federal government can and should do for them. >> i guess, my question is, if there is going to be no bailout from us, and bankruptcy is not feasible, and the state is falling off of a cliff, let's assume that a state is literally going to fall off of a cliff, we can assume we can do something in the future, but what do we do for that state that is falling off of a cliff? >> my answer is that i think we really should put a bankruptcy regime in place to precisely deal with that problem. that is the only problem -- i will add one thing to that. i agree that states are doing the right thing, and i hope that we have heard to date is correct, that most are getting their way through. -- what we have heard today is correct. there is a lot of debate in

illinois and about what can and cannot be done, but in many states, it does require a constitutional change, and i think that is unrealistic. >> what are you going to do? >> i think we need to figure out how you are going to pay out what has been accumulated. >> miss? >> i think states can use their normal processes for dealing with their taxes and their expenditures to set themselves on the right path. illinois, i have been writing and talking about the illinois problems for the last 25 years. i am a native chicagoan. but it can, you know, it just needs to do those things it needs to do to get out of it and to bring itself to balance, and it has the tools. >> thank you. let me, in my remaining time, let me just ask one quick

question about market risk. bill gross, who manages one of the largest mutual funds in the country, he started that a low or negative real interest rate for an extended period of time is the most devilish of all possibly -- of all tools. this is while harming all of those who work hard and saved money. -- who worked hard. in fact, the fed is enabling those to deal with their debt on the backs of those who save money -- who deals with their debt. -- who dealt with their debt. >> i would hesitate to say that. >> miss? >> there are some who borrowed at very low rates, not just in the last few years, but, really, for two decades now.

they will have to be used to a very different environment. >> could you argue that the fed quantitative easing is in effect, has in effect been a bailout? >> sure. this is a bailout for anyone who owes money. states and municipalities may not be the biggest proportionate benefits of this, but it certainly helps them. >> do you concur? >> i concur. >> ok, thank you. mr. chairman, i yield back to >> thank you. from new york, miss, you are recognized for five minutes. >> thank you for this very important meeting. coming from new york state, as you can imagine, this is on many of our minds. i appreciate your time this morning. the first question i want to ask is regarding actually stimulus money and the fact that so much of it was paid to the state.

do you think that this put the state's -- states off? it was delayed? and now the states have to reckon with the situation? and that is a question for anyone. >> i am happy to respond to anyone. when that money first came out in 2009, it covered about one- third of the state's -- states' deficits, and we would have seen very sharp cuts in education and health care. we would have seen millions of people losing their health insurance, and the states were poised to cut people, and we would have seen many, many more layoffs of teachers and other public employees, which would, in fact, have potentially delayed recovery, because you take that demand out of the

economy, and, you know, the stimulus, you know, actually provided a boost to the economy, and it was very important, so now, as the stimulus is ending, at least state revenues are beginning to grow again. they are still below 2008 levels, but they are beginning to grow again, and states have a little more ability to absorb the end of the stimulus. they are proposing very major cuts in budgets this year, but it is probably better that they are doing it now, that the economy is on somewhat of a growth path than in the deaths of the recession, which would have been very damaging -- than in the depth of the recession. >> it seems to me that the decisions they are making now are ones that they should have made a year ago, to get their house in order, and this is

just reckoning with the reality of the situation. mr. skeel? >> there is no question in my mind that it has delayed the restructuring. >> yes, i would agree with that. there was a missed opportunity in that congress may have said two states, -- to states, "yes, we will give you $1 today if you will reduce costs by $1 in the future," use it as leverage to work on the long-term problem, and that was something that was not done. >> i would add to that that some of the stimulus expanded to spending, and some of the cuts being taken today, and in virginia and others, different pension payments. >> thank you.

while i still have some time, if i could ask another question? mr. skeel, regarding the bankruptcy's in some of the states that are so strapped, -- regarding the bankruptcies, does that impact a state that kept its the schoolhouse in order, and now, they will be impacted by someone else's state that did not -- that kept its house in order? >> they have the ability to distinguish between states that are in good physical shape and states that are not. it is really not like the big bang in 2008, which was really connected to each other, had the same kinds of assets, the same kinds of problems. the states really are independent. >> thank you.

in the few seconds that are left, if he was also like to address that issue, as well? >> i would respectfully disagree -- if you would also like to address that issue? >> i would respectfully disagree. changing the law in this way, really sweeping away past centuries worth of precedence, it would take a long time, and healthier states would suffer during that time, as well. >> wen jiabao -- just remarked -- one just last remark on that. it is remarkable how quickly they can go back to the market. i really believe markets respond a lot more quickly than people tend to think. >> thank you. thank you. i yield back. >> thank you so much for your line of questioning. i just have three more questions that i wanted to pose to the panel, if that is all right with

ya'll? unions versus private-sector, the unions now account for more than the private sector unions. an interesting crossover we have had just in the last two years. and on average, public-sector workers make $14 more per hour in total compensation, wages and benefits, than their private- sector counterparts. ms. gelinas, you have written about this, i know, but if you can testify, it seems that public-sector employees and private-sector employees are living in two different economies. what are the ramifications of that? and what is really the root cause of that disparity? >> yes, it varies from state to

state, some states particularly, the northeastern states, illinois, offering greater opportunity -- offer greater opportunity. generalizing the problems, it would not be so much the wages as is the benefits, because these are open-ended liabilities that states and localities are taking on. right now, they are and controlled. so one aspect of getting these under control -- they are uncontrolled. a good first start would be to switch some into 41 k plans. you are getting away with the open-ended liability -- into 401k plans. workers do not pay a share or anywhere near a share of their own health-care benefits that private-sector workers pay. asking workers to pay more for

their health care would do much to help states and cities with their liabilities. >>so you mention from switching from a defined-benefit plan to wait for a one-k -- to a 401k plan. that is one change that the state connect -- could enact. what are the prescriptions that the federal government can take action over to help stem the tide? ms. lav talked about the loss of revenue and the fact that this immense funds sort of which you relieve the states of the responsibility -- and the fact that the simmons funds sort of

relieved the states of responsibility. what i believe i saw, and i think a lot of folks saw, the day is coming. the day of reckoning is coming. when those stimulus funds run out. and rather than realize it two years ago and making changes, and they are having to do it now. what policy changes can we make to help stem this crisis? and i will oppose that for everyone -- i will pose that for everyone. >> one. that may be most straightforward to help states is in medicaid -- one area that may be most straightforward. you have to change your pension plan. you have to change the way you govern yourselves. medicaid is currently a program that encourages states to spend more, because when a state

spends $1 more, sometimes it gets more than $1 back from the federal government, gradually turning medicaid into a block- grant program, with increases on a set formula, and states are forced to innovate and cut costs and thereby reward them for cutting costs rather than raising costs. that would deal with another chunk in the current day and future. >> i agree. medicaid is the most obvious place to do things. there are real limits on what you all can do, with pensions and that sort corestates sovereignty reasons, so a place -- and that sort of core sovereignty reasons. >> increasing pressure on states. >> i do not think in the areas we've been talking about today, it areas for federal

intervention -- >> other than money? >> i am not asking for the extension of the stimulus. i mean, it is unfortunate that it was designed that the economy would already be recovered when the stimulus and it. they are at a previous level, so, of course, the end of the stimulus states were not able to get back to where they were. this does not help the economy right now either, necessarily, but with respect to medicaid, i think you can easily talk about a block grant, but medicaid is often more efficient than private insurance per individual matched for health conditions, so i think that the best thing would be to figure out how to control the rate of growth of health-care costs in the economy wide. all of those scary numbers are entirely driven by the way of

growth of health-care costs. if health-care costs continue to grow more than gdp, states are going to have trouble. states are in major driver of the federal deficit. >> the final question today, and this is something i intend to ask future panels, as well -- we are going to have a series of panels about this at the state level and ramifications, and this is the opening of it, and we wanted to hear from informed individuals to start this process, but i would like you all, if you could, as you on the spot, but in the future, as well, -- ask you on the spot, tell us who we should hear from, pension holders, unions? who should we hear from? ms. lav, and we would just go right down the line. >> i think that is a pretty good

list. there are several that have a good handle on this. i could suggest a few. and, of course, unions have a major stake in this, and you should hear from them. i think you should also listened to the governors. thank you. >> -- thank you. >> ms? >> finance and other policy areas. -- financing other policy areas. >> i would also add that you should talk to lawyers. these are also legal, and i think you need to see the whole picture. >> i would also suggest speaking with infrastructure people, because the other side of this is that states have to grow. the private sector cannot create jobs -- so helping states spend congress' money and their own money, and help grow the states,

so these liabilities can be better controlled from that and, as well. >> thank you, thank you -- from that end, as well. >> thank you, thank you. thank you for your time. thank you for spending the morning with us. and this meeting is adjourned. [captions copyright national cable satellite corp. 2011] [captioning performed by national captioning institute] >> in this week's youtube address, president obama discussed his 2012 federal budget proposal to be unveiled tomorrow, including a five-year federal spending freeze, earmarks, and new spending priorities. he is followed by the ranking member of the senate finance committee cannot -- finance committee, orrin hatch.

this is about 10 minutes. >> a few months ago, i received a letter from a common -- a woman named brenda reese. it offers a good example of a tub of responsibility that is needed in washington right now -- it example -- it covers a good example of the responsibility that is needed in washington right now -- it offers a good example. they work hard their whole lives. like many folks, they have taken hits in the last few years. when the course the plant closed, they had to take early retirement. he got half of what he earned before. meanwhile, because of budget cuts, brenda has had to buy school supplies for students out of her own pocket, because it is her job and because she cares about those kids. money is tight. they are doing the best they can, and like so many families,

they are sacrificing what they do not need so they can afford what really matters. this is what brenda told me. "i feel my family is frugal. we go to the movies once a month, but usually, we wait for them to come up on tv. we watch our food budget, use coupons, and we treat each other's hair when we need a haircut. --." they also know what investments are too report to sacrifice. their daughter is a sophomore in college with a 4.0 grade point average. tuition is a big expense, but it is worth it, because it will give her a chance to achieve for dreams. -- achieve her dreams.

well, it is time washington acts as responsibly as our families do. i will have a budget that will help us save while investing in our future. my budget freezes annual domestic spending for the last five years, even on programs that i care deeply about, which will reduce the deficit by $400 billion over the next decade. if this freeze will bring this type of decade -- this type of spending to its lowest level of gdp since the dwight eisenhower was -- administration. for example, we are getting rid of thousands of government-owned buildings that are sitting empty because we do not need them. everyone has to do their part. and i'm going to make sure that politics does not add to our deficit by vetoing any bill that contains your marks. and yet, just -- that contains your marks -- earmarks.

yet, i am proposing what we do the most to grow the economy in the years to come. this means high-speed rail and broadband. this means cutting-edge research that holds the promise of providing countless jobs and whole new energy and biotechnology jobs, and it means improving our schools and making college more affordable, to give every young person the chance to fulfill his or her potential and receive the job training they need to receive, because it would be a mistake to balance the budget by sacrificing our children's education, said after a decade of rising deficits, this -- so after a decade of rising deficits, it cuts what we cannot afford to pay for what we cannot do without. that is what families do in hard times, and that is what our country has to do, as well.

thanks so much. >> good morning. i am senator orrin hatch. we celebrate the centennial of robin -- ronald reagan's birth. -- we celebrate the centennial. there was the constitutional liberty and the future of higher taxes, less opportunity for families and businesses. last fall, american citizens again had a choice to make. ratify an agenda of trillion dollar deficit and out of control debt that the president imposed war korea from constitutional principles that korea from government and free enterprise -- out of control debt that the president imposed or constitutional principles that free government and enterprise. now is a time for president

obama to choose. it is time to get our spiraling spending and debt under control. willing to become the guardian of an unsustainable status quo. next week, we will find out what choice president obama makes when he releases his budget. unfortunately, early indications are that he and his capitol hill allies are not taking the debt and spending crisis, the most critical challenge facing our nation today, with the seriousness it observes -- it deserves. americans cannot afford to kick this can down the road any longer, and this cannot be solved with higher taxes that will only result in lower economic growth and less opportunity for our children and grandchildren. the president's proposal for a freeze in government spending might give the government a good talking point, but it is a totally inadequate solution to our nation's spending problems. over the past years, the

administration increase discretionary spending by 24%. if you count the so-called stimulus package, spending is up over 80%. this cannot continue. business as usual is unsustainable, and job creators know that higher debt today means higher taxes tomorrow, and if the president's future budget simply freezes the last budget, he will stifle growth by continuing to spend too much, tax too much, and far too much. it is beyond irresponsible. to settle the next generation of americans with the responsibility of paying back our debt -- to saddle them. if this is like before it, the price tag is just going to go. our debt is over $14 trillion, and about 90% of the size of our economy, and this is the

highest level since 1950. think about that. we are spending at a level not seen since the second world war. i 2021, our public debt is expected to hit $20 trillion -- by 2021. there are the interest payments alone on this debt. we are approaching a real crisis. not only does the president wants to set the spending levels, he is now talking about investments, saying 10 times in a speech on thursday about billions in washington spending. this week, the vice president advocating for more expenditures, told americans to get a grip and get on board with this new spending spree. with due respect to the vice president, the american grip on this situation is just fine. they know we cannot afford these investments that are financed by

taxpayer dollars. the decisions to make cuts are not easy ones, but with leadership, this can be done. look at what governor mcdonnell has done in virginia. he is taking on big spending and is winning. the bottom line is we are a nation working on borrowed time korea we have to make significant changes in order to compete -- working on borrowed time. we have to make significant changes in order to compete. we need to have a debate about reforming social security and medicare so they will be here for our children to depend on. we need to ratify free trade agreements with south korea, colombia, and panama. we need to have american innovators and spur growth around our country, and we need to start -- the ever increasing federal expansion of medicaid. yet, all of these things will

take presidential leadership, and so far, the president and the democrats are missing in action. indeed, the white house is floating a proposal to increase the cost of hiring and retaining workers. next week, a great debate will begin. the president will send his budget to congress, and once more, americans will face a challenge. do we accept achoosing. do we get our fiscal house in order, cut spending, and reduce the tax burden on all american? i expect americans will choose the course of greater freedom and more opportunity. the question is whether the administration will choose to listen to the american people or continue our current spending crisis. thank you for listening and god bless america. >> in washington, the focus will be on the federal budget this week. we will have coverage of

president obama's visit to a middle school in baltimore. he will be joined by education secretary arne duncan. we will also have briefings from the pentagon and the members of congress. on tuesday, the house is expected to start debate on a bill that includes broad reductions on fiscal year 2011 spending levels. live house coverage on c-span. now a look at the week ahead for the president and congress from "washington journal." this is just under one hour. sunday round table, welcome back. let's begin with c-pac conference which wrapped up yesterday. coming in first in the non- binding straw poll again this year, texas commerce ron paul

getting 30%. what do you read into those numbers? guest: ron paul has proved to be pretty popular. this group -- the tracks college students and their behind the libertarian message. if you combine the ron paul and gary johnson numbers, you get more than 1/3. that is the great libertarian side of the party. i think you will see some very interesting shaking of the party from that side. the 2008 democratic presidential field, if you look at them, the top three candidates, edwards, clinton, obama, they were

running a campaign closer to the dennis kucinich 2004 campaign. whoever wins the republican nomination in 2012 will be running something closer to the ron paul 2008 campaign. that is some of the direction the party is going host: rounding out the list are three or four individuals who are likely to run for president including newt gingrich, tim pawlenti, minn. congresswoman michelle bachmann, and mitch daniels, the current governor of indiana. guest: these are individuals will been organizing and getting ready for an actual presidential campaign or some of them have been more of a tease. mitch daniels, this does not show a groundswell of support but it shows they have a launching pad there is a little

bit of support for them and will have a ways to go if they want to get out rate -- name recognition. host: a cover story from the national review -- the front page story of the miami herald is -- he has no intent to run. guest: that is an interesting story. i have not heard the begging in washington from the conservative side of washington. i have heard some folks saying wooded -- wouldn't it be interesting if --. he has been fairly solid about not running. the bush fenty is a very real

factor out there. -- the bush petite is a very real factor out there. -- a the bushfatigue is a very real factor i can't imagine that the boy fatigue has gone away enough. host: george bush sold about 2 million copies. guest: and a former president will attract a certain amount of attention. it is not a typical memoir. he is open about some of his decisions and willingness to stir up controversy. that will probably have some residual of fact. we can only take a jeb bush at his word. there is no indication he is building up an organization or that he has folks in iowa, new hampshire or anything of that nature. it looks like he is not running. host: we will talk about the

situation in egypt and the budget outlined by the white house tomorrow. we want to focus on c-pac. ron paul came in first and he is a former libertarian presidential candidate. this is part of what he had to separate >> i am glad to see the revolution is continuing. we have seen some of the results of the revolution of a few years ago and that was last year's election. we have a few new members in congress. we have you to thank for it. i want to take a moment to take a special privilege and say that we also had a new senator from kentucky and we like that, too. 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. i believe we live in a time where we do need a change in attitude, a change in ideas buried we don't need to just change the political party, we need to change our philosophy about what this country is all about. host: what ron paul so popular among conservatives? guest: this message of the government borrowing to bay ,ron paul has squatted on that message since he ran back in 2008. you now have much of the rest of the party and the tea party energy is very much behind that message. he has been there were the rest of that republican party is going. he may be further than the rest of the party at this point. he may be either in front or in a different place than them, but they are moving in that direction.

we could go through all the issues. he may be more extreme on the federal reserve and the gold standard but the basic of the government needs to live within its means at ron paul rallies in 2007, he would save a were 'constitution' and his fans would go crazy. guest: he has been out front talking about these issues for 30 years in congress. some of his ideas have actually gone sort of mainstream in republican circles he and even among some democrats like auditing the federal reserve or giving scrutiny to their policies of printing more money. i think there is a breakdown with his foreign-policy views. he is essentially an

isolationist. he does not believe in an assertive foreign policy and not of the nature that george w. bush as ballast and john mccain and other leaders of the party. there is in increasing amounts of members of congress who are questioning troop levels in afghanistan and iraq but that is not a majority of the party. if congress paul starts to pick up traction, his foreign-policy views would get more scrutiny. host: you're never senior edit "politico." your also the all of"going dirty." terry is joining us from pennsylvania, republican lie caller:. my question is for your to

reporters. i am watching the events in egypt over the last couple of weeks, the liberal media has been ecstatic over the change in egypt. they said the protesters were unhappy with the government and they were speaking up. the economy and jobs or in the tank. look at how the liberal media treated the protesters in america, the tea party. they painted them as racists or carrying swastikas. they are trying to give obama credit with what is going on in egypt. it is just amazing. the 2012 campaign has started with the media trying to promote obama. host: these are photographs and news from egypt.

you can see a very different situation on this sunday morning midafternoon in cairo. guest: from the u.s. government's standpoint, it will be a tough transition. president obama had some remarks friday afternoon after we got the news that the egyptian president mubarak is stepping the military has to continue some sort of commitment to democracy. there will be a lot of pressure on him to do it with the security side of things, make sure that they do not achieve victory over a sand in the egyptian government. there are not that much leverage he has to pull. we saw the lower level of leverage he has to pull. throughout the first 18 days of the crisis. host: what egypt can teach

america. it is a new day in the arab world. let's hope that the truth is that the u.s. has been behind the curve not only in in the shed and indonesia, but in the entire middle east for decades. we support autocrats as long as they keep oil flowing. guest: this is been the critique from the left in the right that this is something fundamentally wrong with u.s. foreign policy directed toward the arab world. it is supporting these autocratic leaders that do not have popular support. there are a lot of question marks about how to replace them, how they threaten u.s. interests, a lot of geopolitical sense iterations. -- considerations. hillary clinton was there just a few weeks before the egyptian uprising. she made this point. it is hard to believe in cause

and effect but it seems that the administration was how they had this a bit. it was not completely ignored. host: from your vantage point with members of congress keeping a close eye on this and the money part of it, the $1.5 billion that the united states provides egypt, what business? >> that is the only major lever that the u.s. can pull, to stop it or let it continue as a report -- as a reward. it is the sentiment that the u.s. -- even though foreign aid is a miniscule part of the u.s. budget, that sentiment is certainly out there. congress is under the same sort of pressure as the white house, to figure out a way through. host: david mark, the white house proposals will be out

tomorrow. it would barely put a dent in the deficits that congressional budget analysts say could approach $12 trillion through 2021. the policies would stabilize ball rolling, and reverse the trend would put a blunt of the trauma of the recent recession. >> it will not be enough for congressional republicans. they will said the cuts are too small, they do not go far enough, the administration will counter that we have to maintain some of these services. we cannot cut of all in one year. but it is like having a huge credit card bill and paying down 20% of that, at least making again. it remains to be seen how much will get through congress. the budget the president proposes is just that -- a proposal, only a beginning. we are in for a long fight in going forward on these budget issues. guest: the art two good test we

will see on the budget. one thing both for proposing is cuts to the low end, assistance program. the president proposes that to 2008 levels and republicans propose cuts on that. northeast centers in particular have said that they oppose that. harry reid says he opposes those sorts of cuts. that can be the first test for the president, to see how serious he is about cuts, and the congressional republicans. and the f-35, the ultimate engine program. the pentagon says it does not want. congressional republicans have included it. they have left that in their continuing resolution. the president has repeatedly issued a veto threat over this period that will be a real test. it is easy money for them to go

after and they did not. the president has said he will veto. they will be another test. host: it does not matter who runs against president obama in 2012, the economy will be booming in the unemployment rate will be 6%. obama rules. guest: even the most optimistic economists i've heard leaning toward the democrats has not predicted 6% unemployment. that may be far out but the basic point is correct. the economy seems to be on the upswing unemployment has dropped to 9%, better than what it was. the ash on the blue jobs created is not particularly strong. the stock market says the gdp is growing at a reasonably healthy clip. the economy does not seem to be turning around. we're still 21 months out from the election. a lot can change. host: stephan dinan, many

congressman announcing their retirement. in arizona, senator john kyl saying he will not seek a fourth term. some speculation about representative gabby giffords. guest: as a virginian, i was looking forward to the rematch between allen and web. that would be one of the big senate races. senator webb has announced he will be returning to the private sector. democrats are under a little problem there. their bench is not particularly deep in virginia. while republicans are deep, george allen is the giant in that race right now. there are conservative tea party types who are planning on challenging him.

the republican binge in arizona is also incredibly deep. the democratic and it is slightly deeper than it is in virginia. you mentioned gabby giffords. we have the story that if she runs, if she is up for it in she runs, it is hers for the taking. the amount of goodwill out there for her right now is so exceptional, it is tough to challenge gabby giffords from either side if she chooses to run. guest: there is a long way to go before that. we do not really know her health prognosis at this point. very optimistic reports about her recovery, but let's remember she was shot in the head and we do not know exactly how that will play out. where she will end up medically, the thinking was that she should run for her house seat again in the tucson area. it puts a freeze on all the other candidates. on the republican side in

arizona, there were seven or eight viable candidates, three or four members of congress, others who could jump in, others waiting in see. in virginia, the most we hear about is the former democratic governor. he is the democratic national committee chairman. if he had not become dna -- dnc chairman, he might have a better shot. when you're the head of the party, you have to defend with the president is doing at every turn. some of this obama administration positions may not play well in virginia. it may be more of an albatross than people are thinking. host: he said last week he did not think he had another race in him. he said that before the jim webb announcement. guest: exactly. he ruled out seriously before hand. i have not heard one way or the other what he had said cents. that is exactly the question. there are a couple of members of

congress talk about whether he lost his reelection bid in the that they should be in november. host: another departure, christopher lee. it was the worst week in washington. one of the questions often asked is, what was he thinking? [laughter] guest: who knows? i will say this. the numbers might prove me wrong but there is a sense that people who come to washington believe that the normal rules do not apply to them. i do not know they do not realize that in washington, our celebrities are politicians, that you will get noticed. the nose? host: we talked to steve israel head of the democratic campaign

committee. the special election that will be later this spring. >> i do not know what it is about new york and special elections. every few months, it is back to new york for special election. it is not a slam dunk democratic district. i have an obligation to be honest. is a potential opportunity, if the president obama that 47% there, john kerry got 43%. it is not necessarily a slam dunk. it is a republican district -- that the republicans must hold. >> one of the rumors that we have heard is that the white house official bill burton might be interested in the sea. have you had conversations with bill? >> no direct conversations with bill. we're respectful of the process.

if @ two conference calls with the county chairs, how you feel about the district? this is to we want -- so we make sure that we respect the collaboration. i've had conference calls with the county cheers. we're talking to local leaders, local political leaders. we respect the process and i assume that if bill is interested, is having the same conversations i have had over the past couple of days. host: that was steve israel, referring to the seas last year as well. guest: he is right in that sense. new york of state has seen a number of these elections. there was another one -- kirsten gillibrand, when she was appointed to the senate, plenty of things going on. there was one for the secretary of the army.

he hits on an interesting point. the nominees are not chosen by primary voters. they are selected by county chairs that go behind closed doors and make the decision. it is not necessarily to the party folks in washington might want. you can see funny things going on in this upstate new york special elections. host: on the grisly story, its shows how quickly the story unfolded. we heard about it mid-afternoon, he announced his resignation at 5:00 that same day. guest: that speed did not shock people but i was sitting in the senate press gallery watching it. had that play out that quickly, there are other members of congress who have been through not exactly the same thing but similar situations who are still sitting in congress. for him to have gone in that short period of time was interesting. why did he go so quickly?

i do not know. one person has told me that a theory, that says that he maybe had more of a natural sense of and harassment about what he did then some of the other people still sitting in congress. there was a sense that he got pushed. speaker boehner says that it was his own decision but certainly given all the other things the republicans have going on, republicans were happy to see him go so quickly and not remain and drag out this issues. host: david mark, another election in chicago. by all accounts rahm emanuel is ahead in the polls. it is the majority, he would get elected. guest: the former obama chief of staff, former member of congress from illinois, it looks like he is going to claim the chicago mayoral seat on the first ballot.

he may be pushed off to a runoff, but he seems to be in a commanding position. had he not live there, he had not really been a part of the committee for the past couple of years. he had the name recognition. he was able to unite various factions of the traditional party machine folks, the upper and liberals, north side chicago group, analysts like he has a good shot. host: kathy is joining us from cleveland. the democrats' line, good morning. caller: i have a couple of things that i would like to get off my chest. yes, there are jobs, but they are only 16 hours a week. how can you raise a kid on 16 hours a week? they are not hiring full-time. there are jobs but 8 to 16 hours a week this is not putting on -- food on the table for a full family.

obama is trying to get health insurance for the rest of the people who have not got it. number three, the security -- we pay so much money to security but it done not -- it did not stop the 9/11 attack. at midday. we have a good day. guest: the health care one, i'll take care that quickly. we will see this play out. the country is absolutely divided on the health care bill. the polls suggest a certain percentage in favor of repeal, others in favor of fixing it, others in favor of going further. it will play out in the courts and throughout congress. one of the interesting things about the budget -- the continuing resolution for the rest of the 2011 spending bill that that house republicans proposed on friday and will vote on, the proposed stopping

funding for the exact title, a particular office for health reform. they propose to halt the funding for that office. there are ways the republicans are going to continue to try to push this -- not exactly the repeal, but ways to hinder that law. we will see how that plays out. host: the republican line. caller: i think you're dismissing the wrong thing. i think that for him to win last year and again this year is not a matter of a bunch of college students very active and very much a control of the convention. this is a very sustained an active group that is when the conduct a very intense campaign in iowa and new hampshire that

will shock the republican establishment. if he gets the nomination in 2012, it will totally revolutionized not just the republican party but american politics. it is such a way that the republican party will have the greatest shift in its fundamental shift since 1952 when the eisenhower, big government, to cover the party and really stole it from the classical, liberal, small government. guest: i did not mean to minimize their ron paul candidacy. i would tell the caller at cpac, it is a broad gathering of conservative activists from around the country. getting good social conservatives, defense conservatives come and those who were definitely the most

pro-run ball were the young college students. that is not minimizing it. that is where a lot of this support is coming from. that is a very important thing in the nominating process. the caller is is the right. would run poll win the nomination, he would be a major shift in the republican party. that is absolutely true. i am the one that thinks that the next republican nominee will look more like one poll in 2008. but we heard about his strength in iowa back in 2008. we heard about his money bonds, a sizable about money. you may remember the exact percentage that he got in the iowa. it did not translate into major victories in primary after primary. it did not translate into victories. we will see if 2012 is different. but the amount of attention and money he had could have

translated into something less time and did not. host: there is up peace posted online at the politico. rick santorum touched off of media firestone that. to denigrate sarah palin and her response was swift and unforgiving. guest: comments by rick santorum now considering a bid for the republican nomination. his essential message was sarah palin was skipping cpac so that chicago make money, making speeches and other financial ventures. there was some blood back pretty quickly about that. he came in for a lot of criticism. he took it that that was not what he meant. he went after political by name. by the video tape, it seems that what he was implying. he was the first likely presidential candidate to really criticize sarah palin.

he backpedaled on it, but some people think he would've been better off sticking with that line of criticism, punching above his way, getting his name up there, getting mentioned in the same breath with sarah palin. he would seem like a more viable candidates. we will see how the other candidates respond. host: ron paul came in first. coming in second was mitt romney. gary johnson, the former new mexico governor, and the governor of new jersey tie for third place. a great line to david keene, who brought the factions together. nobel peace prizes had been awarded for less. guest: the responses of this.

i number of social conservative birds dropped out of cpac. they had been there holding booths and what not. they dropped out, arguing that goproud is incompatible. this is what we mentioned earlier with the different factions, and the social conservatives at cpac and who does the voting. david keane managed to keep the peace. is the chairman of cpac, he is stepping down as chairman of the american conservative the union. he was able to keep the peace this year. i do not know that this will last through the next year of cpac. there was a lot of push back from these groups that want -- that do not believe that the gay republican activist groups are compatible.

host: 1 sarah palin -- guest: a lot of people would agree with that. if she wants to be in the political agreement, she is going to alienate a lot of people. this is one reason why she might not choose to make the race. she is in a good position now. she is certainly in a lucrative position. why would you want to undergo all these attacks not just from democrats but from republican primary rivals who will have to go after her if she is the front runner? that is how politics works. she and ron paul of the two major factors right now in the republican primary at this early stage. they are the folks that are the major factors there. she has a very devoted set of supporters.

there are also a huge number of folks who are in the anybody but palin crowd. rick santorum, if he stuck to his guns, that was the opening to become the earliest of the anyone but palin candidates. host: stephan dinan is with the washington times and david markets with the political. from birmingham, alabama, good morning. caller: a couple of issues here. one is health care. the democrats do not get it, ok? we came out in massive numbers. states have passed laws against forcing americans to buy anything. that is common sense. we should not have to pay for it. the government has way over reached over the last 100 years. it is time to go back to the

constitution, just like ron paul. the constitution is one to pull the conservative republicans to gather to go back to a constitutional government, which is a quarter of what it should be. it needs to be a quarter of what it is. they are involved in our everyday life. like the sozzled my light bulbs. host: the budget debate will begin in earnest this week. guest: there is something going on here. you have a whole bunch of people who picked up the constitution for the first time in a long time, read it through, lifted the federal government and said these things do not square route. there are a number things the government does right now that you look at it and say how can that be? but there are 100 -- 200 years

of supreme court case law that have allowed all of these government actions to build up. what we're looking at here, and what one paul is talking about, and is the driving force behind the tea party and the republicans doing on the capitol right now, with those two things are colliding. the buildup of constitutional case law in the original meaning of the constitution. we will have that fight in the courts over healthcare and what republicans are putting in the budget. we will have this fight. kohler will see the class she is talking about play out. host: from twitter. he took the coveted speaking spot rejected by sarah palin. we covered it live on the c-span network. here is congressman west.

>> but as be remembered of the pillars of kurd terrorism which will lead us to the new dawn of the new america. the first one is very simple. it is effective and efficient constitutional government, when thomas jefferson said, "my reading of history convinces me that most that the government results from too much government." [applause] therefore let me ask you a simple question -- do you believe that america can survive as a bureaucratic ministate? >> noaa! >> and you are absolutely correct. and i appreciate the emphasis over there. [laughter] [applause] the framers of our constitution, they had one true intent, to put a restraining order on big government.

fiscal conservatism is a derivative of constitutional government, which understands it's right and proper mandate, and that is why next week, we're going to cut $100 million of spending off of the federal budget. host: david mark, there is a dual debate going on with what congressman wes talk about. the continuing resolution debate and the fiscal year 2012 budget debate. first of all, your reaction to conference midwest. guest: it's something to see a freshman congressman giving the keynote speaker. last year it was the land back in that position. -- it was glenn beck in that position. the time before, it was rush limbaugh. is essentially making that argument that we have been discussing this morning and we will hear a lot more of on the campaign trail in 2012 from the

various presidential candidates. it marked him as a rising star and someone who will be out in the public eye a lot more. regarding the spending programs, it is a dual track issue. before the democrats got out of town, to keep the government running they had to pass the continuing resolution which has funded the government at the previous year's level. that runs out in late march or so. congress and the president still have to fund the government through the end of the fiscal year, september 30. republicans in the house, many of the freshmen want to cut $100 billion as congressman west noted. that is a tough lift for a truncated budget year. then that is the next budget year, republican leaders have not been very amenable to kidding -- they had been in the $30 billion range. it is not clear how it is one of

the resolved. host: west palm beach florida for stephan dinan and david mark. caller: first-time caller. i really have to give the wonderful agenda of c-span, what they're doing -- when you watch something alive and you do not fit the sound bites and media of what they're trying to pose, it is a wonderful idea. host: as they say in those commercials, we approve that message. caller: it is so wonderful thing. on a personal note, all little bit less hair mousse. i am agreeing with everything you are trying to say. i was thinking, way back, if it took a long time for this phone call to come through, but the f-

35, i am an aircraft mechanic and like having dual engines for the whole thing, you have to reconfigure the whole air frame. you should stick with one thing and i'm getting tired of the earmarks being deployed across the idea of all the government trying to be redundant. i just think we have gone into an idea where, you know, we spend absolutely too much money, too much money. what i mean -- host: we would get a response. do not be a stranger. stephan dinan. guest: he mentioned earmarks. one of the things the republicans -- earmarks are

officially gone in the 2011 and 2010. they are rescinding -- they're not rescinding. there are no earmarks in the continuing resolution. both sides have agreed there will not be earmarked requests in 2011. that is a major request. it is still a very symbolic step that congress is taking. all of that, the more important fight will be d f-35 in the alternate engines. we want to see whether obama wants to outbid republicans on cuts. he has a veto threat on any bill that spends for this alternate engines. the house republicans still have that money in the bill. we will see that play out. host: what the president calls investment, the republicans called spending. on our twitter page --

guest: the basic argument that goes on every day. democrats led by president obama, most democrats on capitol hill would consider spending to be in desman. growing for the future, whether high-speed rail, health care, you cannot cut those kinds of programs because it is going to hurt economic growth in the future. republicans have the different role -- world view. they have the majority in the house and it is the argument we will. going forward. we are already seen democratic members of congress putting a press release saying that you cannot cut these programs because it will hurt people. that is what we will hear four months to come. host: from twitter -- guest: congressional for senate

democrats have taken the line that republican cuts are to die -- too deep. you can get to where you can get by cutting waste. that is the line that they are going to use going forward. it is an interesting attack, and gets that the issue of those -- what you're talking about, one person's spending is another person's investment. the white house realizes that has to go further than that proof vice-president by and was delivering a speech at the university of louisville. he literally -- as democrats were saying we should only cut waste, biden said that we will have to cut muscle. this is not just about that. president obama has the middle ground position right now between those senate democrats and house republicans. we will see how that plays out. host: dayton, ohio, car line for

independents. caller: i am commenting on the budget proposal. to hear some of the callers saying they are sick and tired of hearing about the poor, 48% of americans do not pay their taxes, and so i can only -- it is very complex. i listen to you all in the round table. it is like listening to sports, like football commentators. people like me -- respectfully i say this -- people like me, i want to know how is it going to be government for the people? what are they going to do is i do my place, doing my thing as an american, paying my taxes, working hard? i like to note that i am a

divorced mom, left with kids, could not finish my degree. i had to work get these jobs where they do not pay you enough. this is so prevalent in our american citizen. -- system. i would be considered low-middle income. and they are talking about rapport. i am falling off the edge of po or if i can i get decent wages. host: let me put two issues on the table. we're going to get word that there is $90 billion in the pell grant programs which provides grants to college students. capping the amount that they get to $6,500. -- $5,500. this is coming from the white

house budget proposal. caller: and it is coming from government workers who cannot relate to someone like myself. you will hear people come up the middle class who are just over that hump, they have their degree in a given enough money so -- they are still be going to fall over into where i am if things do not change. those things of cutting from the port, i can only relate. i can pay my bills but i have nothing left over. i can see what is going to happen. it is going to affect me. it will make my situation worse when we keep on having this attitude, we cannot really relate. we are paying for the government officials to work for us. ok? host: a couple of quick question. have you received unemployment in the past?

caller: never. host: do you own or rent your home? caller: i have to rent. host: you have any savings? caller: no savings. host: how much do you learn a year? caller: probably about $25,000. host: we will get a response. thank you for calling. guest: these and the conditions of millions of people facing in one form or another. there is a human cost to when you cut programs. this is what members of congress will hear from their constituents as well. what bothers a lot of people about talk of budget cuts is when they feel it is coming down unfairly on their group, when they say, ok, we have to take a hit, but other folks are still getting what they had before, whether it is defense spending, big corporations, you hear more from the democratic side.

republicans have their own view of it. i think it will be a revolution to the fiscal crisis, something that affects everybody, where all groups take a hit, and get their budgets shaved down. host: the unemployment rate, the other number is the u.s. debt clock, $14.1 trillion. guest: the fundamental problem that the government is dealing with is that tax revenue has been completely divorced from spending. over the last several years, spending his summer on the order -- you do this as a percentage of gross domestic product, how much of the economy is taken up by this -- government spending has been on the order of 24% of the economy. i believe that is the number for 2009-2010. revenue is in the order of 50%, and 8% gap.

for every dollar the government spanned, 40 cents of that is being borrowed. that cannot be continued. this is what families go through in congress is going to have to deal with that. there are hard choices to make. the question is where to the tax increases come? where did the spending cuts come? host: of focus on the reagan on the centennial of his birth. he lowered the tax rate but then raise taxes in certain areas 11 times. guest: that is not often brought up by supporters. it is brought up multiple times by people who are not big fans. but it is a good model for what both sides may have to look at. it is not abandon ideology or their core beliefs. it is about of pragmatism. realizing that as stephen said coming you have to cope -- close the budget deficit somehow.

will have real world ramifications on future generations and even our current generation. very difficult choices will have to be made, whether raising taxes, cutting spending, even cutting out popular tax deductions. charitable giving, something like that, which could bring in a good deal of revenue to the federal treasury. host: and there are 30 lobbyist on every issue they will focus on matters something else. as go to lee in bad rouge, louisiana. caller: good morning. i have a cold so you have to bear with me. not got a question and i do see anything in the news media about this. a cut this over the internet -- 11 states are finding proof of eligibility, that anyone that

is going to run in that state has to prove they are eligible. in other words, that they were natural born citizens in the united states. you never see it in the news. when this first guarded, i saw two 43 states, now it is up to 11. i did not know. i imagine there will be over half of the states that are going to pass these laws. i was wondering how this with that election in 2012. host: think for the call. guest: the caller is talking about something that is on the mind on a very insistent group of folks. i have never been able to get a handle on how big that group of folks is. the question the president obama's citizenship and where he

was born. there's no question that people are out there that want to drive this issue, and still question the president's birth, essentially whether he is eligible for president. the new governor of hawaii has promised to get to the bottom of this and make it clear what his current status was. the last i checked in, they were having some difficulty figuring out exactly which documentation to release. we may end up getting an answer. whether it will convince the people who doubt the president's birth, i do not know. guest: that is the interesting thing that the caller is talking about. there is absolutely a movement from people -- not just people question the president. it is a move to establish, if this is a requirement of the

constitution for the presidency, should you have to prove this to the -- i guess, the satisfaction of some sort of authority along the way? that would be with the state effort would be. with a thick anywhere or not, i would not know. host: new clothes in the budget deficit coming have to work from both ends. reducing spending and increasing income. as a way to get there, someone writes about president obama breaking bread with the gop. is try to strike up a more intimate report with republicans with whom he has had a long feud. this is a sport that he will need in the newly divided washington. in a series of private lunches and in the oval office, a meeting with senator john mccain, and even the most chummy of american sporting events, a super bowl party.

>> this is part of a continuing effort to bring down the level of partisanship, infected, particularly after the tragedy in arizona with congresswoman giffords. it was a push to lower the heat of political rhetoric, even if it does not change policy. it is about a political reality. these people are running the house, whether speaker john painter, kevin mccarthy, eric cantor, even though individuals with which the republican -- the obama administration has to do business. there is no harm for having them over to the super bowl party. i am not sure it will change the policy one way or the other. it is something the american people would like to see at a basic level of civility. host: at the super bowl party, pat toomey, a harsh critic of the president. guest: david raises the question, how far these meetings

and get you. i was offered the example of how bipartisanship actually plays out. a lot of attention being given to the tax deals that republicans struck with democrats in the lame duck session last year. if you look that has to, republicans said that tax cuts for everyone should be extended. they got their way. democrats said they need to do more spending on unemployment benefits. they got their way. the federal budget, the long- term federal budget to the hit. when bipartisan ship breaks out in washington, is often the budget that takes a hit. they cannot hit -- happen anymore. that is where i think bipartisanship does break down. host: sandy from detroit, you get the last word. we lost that call. last night on saturday night live, taking a look at the week's events, including the situation in egypt.

there is an excerpt from last night's program. >> history was made friday when hosni mubarak out of pressure from peaceful protesters and step down from office. no were what he would do next. there's only one job available for an 82-year-old man. [laughter] this week was the conservative political action conference, an annual meeting of conservative politicians and activists, or some people call it, tea party, y comic-con. guest: it will be interesting to see what president mubarak does. how do not think it will be in that position, the saturday night live position. guest: i am convinced that there are people who can for trade george washington or some of these other people, there is

money in traveling around as a tea party re-ena >> tomorrow on "washington journal" president obama's fiscal year 2011 budget proposal. and joh taylor, -- john ta ylor talks about the plan to eliminate fannie mae and freddie mac. "washington journal," live at 7:00 a.m. eastern on c-span. >> this week on "newsmakers,"

the chair of the congressional democratic committee. we have reid wilson and alex isenstadt. go ahead with the questions. >> you have taken over a committee that is $90 million in debt. you are -- you have one of the smallest minorities you have had in a long time. tell us about your plans from an institutional and a political standpoint. >> it is an uphill battle. i love uphill battles. i am a student of military history. there are a lot of uphill battles that can be won. we need 25 seats to take the house back. we have a rich environment of 61

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