jobs we have. good evening many of us told the people who put us here that we understood that the first priority had to do with jobs, and we pledge to make jobs our first priority, and to do everything we couldjobs are not. you do not have to explain it to people. they understand the consequences of having one or not having one. many of us, to be great applause of some crowds, said that we would never raise the debt ceiling. the crowds yelled their approval. the debt ceiling is more

difficult. it is more conceptual and people do not understand it. a lot of people using the was the phrases like sitting around the table and balancing your check book. that makes sense to us. a number of bus plunged affirmatively on both the jobs and the debt ceiling. in a short number of days be rubber is going to hit the road or something is going to hit the fan. if the people that took the blood oath on the debt ceiling and the people that took the oath on jobs refused to move and we actually do not raise the debt ceiling, can you explain the correlation and how many jobs we would be creating.

>> the analogy of balancing your checked luggage is wrong. the reason for raising the debt limit is having a spending spree on your credit card and refusing to pay the bill. >> i know you get it. >> in terms of jobs, the worst outcome is that if will we do not raise the debt limit, then we default on the debt. that would create a huge financial calamity that would affect everybody and said job creation? significantly. >> it is that quantifiable? >> we saw what happened in 2008- 2009. we had two consecutive quarters of 6% negative growth in the economy. even if we are able to maintain

payments on the debt by prioritizing it and assuming that the operational issues are solved, it still would in's -- involve a very substantial reduction in government payments including social security checks, military payments, and so forth. that would force people to cut back on their spending with a very adverse affect very quickly. even than we were to pay our debts it will hurt us. >> it will not create jobs? >> yes. >> my second question has to do with the conforming loan limits. i represent one of the counties in the country. there are 669 counties in 42

different states that will be affected by this. the housing market in one of my counties is pretty high. that does not mean that the houses are of modest, it means that the real estate prices are high. it means -- these are not necessarily mansions. there are 669 districts that have this situation that are affected. you make note in your statement that this is the housing market out a low level of new home buying is a huge problem. the people looking for these homes are among the most qualified of buyers by any sets of standards. >> mr. ackerman, let him answer the question. >> how do you answer is that

they will not qualify to buy homes when they want to do so as? >> there is a tradeoff there between supporting the higher- priced homes and weaning the system off of the unusual limits that were put under the crisis. i understand that the private sector is taking a significant number of these so-called jumbo mortgages, maybe at a higher cost. it is a little bit of a trade- off there. i do not really have an answer other than to say we have to get our house in financial system back into working order. >> thank you, mr. chairman. mr. bernanke, you've made a statement that not raising the debt ceiling is like going out on a spending spree and then not being willing to pay your bill. were these people on a spending

spree drunk and did not understand that they would eventually have to pay it back? >> i do not know. the point is that the debt is to pay for the spending decisions that have been made. >> the debt ceiling was raised in june of 2010 after a spending spree of deficit spending. the senate has not passed a budget in almost 800 days. we continue to operate our government by a continuing resolution until april of this year. the people in charge of spending this money either did not care if we have to pay it back or they did not think that we had to pay it back.

there are some earlier things. that is not like paying your debt. i do not know the people of accumulating does that, what they had in mind for the program. to me, the people that spent the money and got us into this mess that -- this debt have come up with no solution as to how to fix it. the ones that did not run the debt up are the ones trying to come up with the solution. you talked about the housing market. i come from an area in georgia that had a lot of new development and new growth. we have had 65 bank failures in georgia. a lot of that had to deal with commercial real-estate acquisition and development and so forth.

what is your tank, -- take on a bank that reserved harpercollins -- on tarp funds and fire sold the assets selling them for 30 cents or 40 cents on the dollar. because they had an agreement with the government or because they had done this tarp money, that the community banks that have loans in the same area -- there were homeowners that the in the subdivisions that bought these houses. their value was not down. they no longer had any equity in their home because the

government had given the money to banks for them to come in and flush these troubled assets away. we have had a lot of communities immediately write down these loans. they closed them because they cannot raise the capital reserves. you see a problem with that. on the neighborhood reinvestment act, we just have a situation in my district where a county purchased some homes from a bank that had been foreclosed on. they got the bank out of the deal. this is federal money that we gave them. this is an active neighborhood. it is a fairly new neighborhood of people that had just moved in.

this county those in end rehabs the houses. it gives anybody who wants to buy one $20,000 for a down payment. it kills builders and it kills jobs. those are three examples of government intervention coming in to try to do something done, but it has actually destroy jobs, it destroyed well, and destroy communities. can you explain some of the thinking behind that. >> i am not familiar with those specific cases. i do know that fire sales from failing banks or from banks that are just trying to get their capital position in better shape or distress sales of the r.e.o. have brought down prices and brought down appraisals.

that is one of the reasons that the housing market is weak. your house does not appraise at the level you think it would because of fear by houses in distressed condition. that is in issue. i do not know if that i understand the part of the down payment. there are neighborhoods with a lot of foreclosed houses around. efforts to rehabilitate neighborhoods and convert old homes to rental homes or do whatever is necessary to restore the integrity of the neighborhood, that is only going to be good for housing prices. it is a matter of executing this in a constructive way. >> chairman bernanke, some are expressing concerns about an uduly lackluster economy and

problems that will bloom such as unemployment going towards 10%. i supported tarp because i thought that not taking action that would be far too grave. how would you encourage banks to lend to small businesses and the public in general? more banks have tightened their lending standards that have eased them. does the fed plan to keep interest rates low for an extended period of time. what are your thoughts on the requirement of 20% down for a payment and do you believe this will impact homeowner significantly or not that all? >> banks, they have stopped tightening their lending standards according to our

survey. they have begun to ease them for certain loans. small-business loans are strained because of banks' reluctance or because of lack of demand or because they are in weakened financial condition. i do not want to attend all of your time. we have provided guidance as to our examiners. there is balance between debt needs of soundness. we have had meetings all over the country with small businesses. if anybody wants to tell us about a problem, we would like to know about it. we have been working. though interest rates to support

the economy through a number of mechanisms including lowering mortgage costs and car loans and other types of rates. on the 20% down, i think you were referring to the 20% mortgage. the idea was that congress passed a risk retention requirements. if you sell a package of mortgages, you have to keep 5% of that as a guarantee that you will provide those mortgages of good quality. presumably, bill should be mortgages that are of very high quality. you look at the criteria that affects mortgage delinquency rates. one of the things the stood out is that people have a lot more

cushion to make a down payment. we do not think that this would necessarily block home ownership. downpayment requirements would be set by the originators. we are taking comments on this. we will listen closely to whatever the public has to say. >> thank you. >> thank you, mr. chairman. i appreciate this opportunity. i am talking fast and i may be sending you a letter with some additional questions. i am going to flash back to a couple of weeks ago and maybe a month ago. the republican caucus met with the president at the white house. one of my friends, the creator of a caucus that i am a part of, the small-business owners

caucus, he said mr. president, there are three things that those of us in a small business are looking for. one is consumer confidence, when its credit availability, and the other is certainty. that would be the basis in the foundation for recovery. i want to work through a couple of those. i appreciate my colleague from california talking about housing. my background is in construction. my family has a concrete company. i owned a gravel and sand company. i can tell you on page three when you talk about residential construction at extremely low levels, that might be the understatement of your remarks. coming out of michigan at the protract the time we have had very difficult times. i want to focus in on consumer confidence, which you reference on page 3 of your remarks.

on page 8 you reference to temporary shocks to the economy. i am seeing inflation, oil prices, which translates directly at the pump, food, commodities, those types of things. you said that this is transitory and you expect inflation to subside. what is going to subside? oil prices, in gas prices, our house price is going to recover so that people will have the cushion that you are talking about? i am curious what you think will cause that confidence to increase. >> the question of inflation, we had substantial increases in oil prices this year. there was about a $20 jump in oil prices this year when the

libyan revolution began. oil prices were driven up about $15 from where they are now. since then, they have gone down. gas prices are down 35 cents. gas prices in oil prices are a very important part of that. the same way with food. a lot of the increase in food prices have to do with bad weather, that crops. there are expectations smell of much bigger harvests of corn, which is driving down the prices. >> i am running out of time. i want to quickly move on. i do need to express, i was recently in iraq and saudi arabia. i had a chance to meet with the oil minister. both of them said that after libya, they ramped up their

production, it is not the production issue. i preached the subject with his excellency, what about the u.s. dollar and evaluation of the u.s. dollar? he said, congressman, i was trying to be polite. they recognize what we have done by the family wing of our dollar has had an artificial increase in prices. oil is paid for in the dollar. i was wondering if you could address that. >> the falling dollar is falling for a lot of reasons. that has contributed somewhat to the increase in oil prices. if that were the only factor, prices in a euros and other

currencies would be going down. >> not according to the two oil ministers. we can address that in some dialogs. my wife is from canada originally. it took 64 cents u.s. to buy a canadian dollar. yesterday, it was $1.40 to buy a canadian dollar. i do not see how we are going to avoid inflation in the future. is that not a consequence of some of our monetary policy as we move forward? >> there are two separate concepts. the buying power of the dollar domestically and the exchange power of the dollar internationally. we have kept inflation low since the 1980's. >> internally. >> as far as the monetary policy is concerned, the one thing we

can do to support the dollar is to keep the inflation rate low. this has to do with things like flows in the trade deficit and flows in capital in and out of the country. >> and not with us printing money? >> thank you, chairman of bernanke, for being with us today. i had a couple of questions. the first is the fact that there is a parlor game around here about the question of whether they were drunk making policy the last couple of years to attach blame and saddle the president and the minority with the full blame. there was a significant defect around contemporary factors like the earthquake in japan, the drought.

give us a sense of what the magnitude of what that effect was over the gdp growth. though you cannot predict events in the future, how is that likely to taper off? >> we saw significant effects on the production and sales of automobiles. there were also affects on the tech industry as well. oil prices increases also hit. that was the reason that consumer spending in the second quarter was extremely weak. this is not enough to bring down the unemployment rate. the federal reserve is expecting

3% + growth in the second half. that would require a resurgence in auto sales. the supply chain problems are being dealt with. we expect to see consumers and a little the stronger. we have more disposable income after the energy costs. >> i was struck that in your testimony you list four headwinds facing the economy. the fourth of those was fiscal tightening al all levels of government. i share in the belief that we need to put together a large package that will involve cuts over time for fiscal sustainability. there is a belief that there is a notion that severe cuts now will contribute to the health of the economy. listing of fiscal

tightening adult levels would be a rebuttal of that. >> to the extent possible, we should make the cuts over the long term. it is a long-term problem. that is where the issue of sustainability is. you need to be very careful about shortcuts in the near term. the job market returned just last week, the private-sector job creation alyssa little bit better than the headline number because there were 40,000 jobs are lost in the state and local governments. it is the indirect effects of procurements or tax cuts or what ever else is working for the rest of the system. i realize it is difficult. at the same time, the incredible

and strong about addressing the deficit problem. >> i agree with that. do you agree with the notion that very significant cuts to government spending now with its effect on copper demand runs the risk of adverse economic consequence? >> it really needs to be taken into account. >> the simpson-bowles proposal, which i thought was a good start, propose that fiscal cuts be delayed into 2012 or 2013. give us your sense of not in doing damage to a has a tin to recovery, how you might encourage us to think about different levels of cuts over time on the gdp? >> that is a tough question. it depends on how the economy recovers.

s bank continues to go slowly, it will be a problem -- if it continues to go slowly, it will be a problem. continue along lines that talked about.es it is something that you may need to do down the line to take action against the deficit problem. >> thank you. >> thank you, mr. chairman. could you give me the exact number of what you mean by severe cuts? are we talking billions over 10 years, trillions over 10 years? >> over 10 years. several members have been put out. >> what is your number? >> the bargain that has been

discussed is in the vicinity of $4 trillion over 10 years. >> is that too much? >> it is not too much. it has the vantage that it will stabilize our rate of debt to gdp. >> thank you. i wanted to make sure we were all on the same page. but i'm talking about a 10 or 12-year window. and not be back loaded. you need to be careful in the short term. >> i am talking to my job creators. they talk about uncertainty in the marketplace. that comes from the health care reform bill. it comes from the stimulus bill. comes from our government picking winners and losers. i am talking about the massive debt. there is a $14 trillion debt.

we are concerned about where interest rates are doubling. we are concerned about inflation. we are concerned about punishing tax increases to pay for this debt. if i am looking at expanding my business, i do not know if i am going to do that. the best done necessarily hurt the folks in our community that need jobs. you talked about certain numbers of how much we should cut and where we need to be today as we move forward. right now, we are at 70% of debt to gdp. that is going to have a real impact on our economy. if we are not going to cut now, then when? we have a debt that this 200

trillion dollars in interest payments, when we go back and it is going to be 400 plus in interest payments. at what point is they're going to be political courage to get the debt under control? this whole conversation does come back to jobs. my friends talked about, where is the republican jobs plan? we tried the stimulus bill. it was a silver bullet. the white house economic advisers said that it was $278,000 in government spending per job created. i would say that is not a very good investment for the american taxpayer. as you look at the unemployment rate of 9.2%, to you think you can help our job seekser by taxing our job creators? >> i am not applicable get into

the breakdown of the deal. if you were to do something significant to solve the fiscal sustainability problem, it would have benefits in the short term. >> do you think you could put people back to work by raising taxes on folks? >> there are trade-offs in fairness between the efficiency -- >> are we going to put more people back to work by raising taxes? >> it depends on what the alternatives are. >> maybe we will put more people back to work if we raise taxes. >> i am talking hypothetically because i am not taking sides on this issue. if there were a lot of spending increases that would reduce the deficits, maybe then they went out late the other costs. >> we will move on to the other question. we were talking a aboutqe2.

when you are buying access, where does that money come from? >> it does not come from the public. >> does it come from tax dollars? >> we are creating reserves in the banking system. >> you talked about a potential additional stimulus. can you assure us that there is going to be no qe3 or is that something you are considering? >> we can take no options of the table. if we are at the point where the recovery is faltering and we are looking at inflation dropping down towards the zero or something where inflation issues are not relevant, then we have to look at all of the options. >> and qe3 is one of those. >> thank you for being here today.

in the will of some of your comments you have made regarding short-term fiscal policy in the -- getting the economy stabilizes, i would like to hear some of your comments that we will be taking up in congress next week, which is a balanced budget amendment. you are way will -- aware with federal policy of fiscal policy, oftentimes, tax revenues will drop. other types of stabilizers are in place because of that. do you have concerns about a balanced budget amendment and your ability as federal reserve chairman to deal with a weak economy and employment issues in a future where fiscal policy is a key part of that along with monetary policy? are you concerned about that for the future? >> let me just reiterate that i do not think that everybody has

heard me. i am very much in favor of a substantial reduction in our fiscal deficits over time. i think that we need to do that. it needs to be some sort of structure. that may be as effective in helping congress reach those goals. if you were to do something like a balanced budget amendment, it would be very important to make it sufficiently flexible to deal with different contingencies. what do you do in recession, what do you do during war, what do you do during a disaster? when the economy weakens, tax revenues automatically decline and spending automatically rises. it provides the ability to the economy. i would not rule out that kind of approach. that has to be done carefully to create the necessary flexibility

to deal with unforeseen circumstances. at the same time, if it is completely -- the if there are no finding roles or no discipline, it is probably not want to help you very much. it is tough to come up with an amendment that will accomplish everybody's goals. >> flexibility is important. we need a 3/5 vote, that is hard to come by in the congress. the lack of flexibility in order to deal with that. i want to move to an article that bruce wrote yesterday. he was a senior policy adviser to president reagan and president bush. i know you are a well-known scholar of the great depression and era. i quote a little bit here.

friday's stock report indicates that the economy remains weak. the efforts of tightening fiscal and monetary policy has become overwhelming. some economists are getting worried with the economy in a fragile state. even a small amount of fiscal or monetary tightening may be enough to bring about another recession. the combination of fiscal and monetary tightening, which conservatives advocate today, which is what they did in 1937, brought on a sharp recession beginning in may of 1937 than ending in june of 1938. unemployment rose to 12.5% from 9.2%. i believe we are --at 9.2% now. >> that is true that most

historians describe the 1937- 1938 recession to a premature monetary tightening. every episode is different. we have to look at what is going on in the economy today. with 9.2% unemployment, i do believe the economy requires support. we do want to make sure that as we support the recovery, that we keep an eye on inflation. we are aware of that lesson. we have to take each situation as it plays out. and see how the couple of varies according to the information that we receive. >> hopefully, congress will be aware of history so that we do not have to repeat it. >> i do think that is one thing they did right in 1937, what the

chairman refers to. i think that that help. they made a mistake by tightening. one of the things that they did right -- >> thank you for being here. i read an industry research that moderate meager expectations are necessary for job creation andwi. th 9.2% nationwide setting a 10% in my district, my constituents can no longer afford moderate expectations or tolerate those. patience this bill logger a virtue that they can afford. what we are doing in washington has to be a aboutjobs, jobs, jobs. getting and spending down to sustainable levels, the whole thing is to be about the

economic growth and letting businesses create jobs. my believes are from being a businessman for 28 years, employing 3000 people, being the cpa for multiple businesses. our economy is drowning in unprecedented new reforms. the regulations crashing down upon their heads before the effects of the last wave can be really understood, evaluated, and properly and implemented. the battering that her job market has taken has not gone unnoticed by me or the underemployed members of my district. you made some headlines at a press conference when jamie diamond asked you about performing an examination of the cumulative effects of these new

mandates. as i recall, your response is that you cannot pretend that anybody really has. it is just too complicated. i learned a long time ago in my list as career that anything that i do should be smart. specific, measurable, attainable, realistic, and timely. the measurable one is the one i have a problem with. banks are looking at much higher ethical standards. everyone is facing higher compliance. has the fed began such an examination study yet? can we expect to see some measure ability of what these regulations are? >> yes. i agree with a lot of what you said about free trade and

regulation. i hope the congress will pursue those directions with the tax code and so on. it is very difficult to figure out all of the interactions of a complex system. the fed does do a cost-benefit analysis of everything that we do. we publish those by law and our the internal practice. we do our best to take the statute that congress gave us and making its asunburdensome as possible. we have a balancing act. we do not want to hamstring the financial system. that has only spend a couple of years since we have this enormous financial crisis. we do have to take necessary steps to make sure that does not happen again. the federal reserve wants to make sure that the rules and

regulations that we promulgate are as cost-effective as possible. and i do cost-benefit analysis on these rules. >> you said that based on the statutes that you have been handed. do you ever look at them and say that these are not working and come back and say that it is not working, here is the problems. we have so much uncertainty in the marketplace. we have to get some predictability to get this job market created here. >> we are getting this done as fast as possible. the statute addresses certain areas that are important. there are areas that we may want to revisit. i am not saying it is a perfect bill by any means. i agree that we have to make our regulations as clear and effective and as quickly done as

possible. we are aiming to do that. >> some people have asked in previous questions. the you put uncertainty as a concern? being a business owner, uncertainty will cause a locked up. the private sector, a small- business owners creek, a 67% of our jobs. we have to give them the certainty so that they can create jobs. >> you are not interested in my phd thesis. it is called uncertainty in investment. there are many kinds of uncertainty. there is uncertainty about regulation. there is uncertainty about whether this is a doable recovery. they do not know whether the recovery is going to continue. we want to address the regulatory training tax environment. we also want to do whatever we

can to make the economy grow faster and make people competent. we will see a dynamic going forward s bank economy picks up --if the economy picks up some. >> thank you. thank you, mr. chairman, for coming today. i appreciate your remarks. when the fed chairman speaks, people listen. the roster were wasfull today. you have an enlightened us with what you have said. i would like to review some of the products for the issues around. a lot like to come up with a plan that makes sense. we fattah the a little bit of the back and forth. you said that the support a significant reduction in fiscal

deficit. we have had a sharp cuts in the short term. can you characterize the kinds of cuts in programs, i know you have tried to shy away from that. we have discretionary domestic spending, we have discretionary military spending, we have mandatory domestic and then we have these big entitlement programs. i would like a review on those kinds of cuts as it relates to your caution about shark cuts in the short term. >> there is already a good bit of fiscal contraction going on in the sense that there was a spending.up in the states and localities have done under continuous pressure

because of limitations on their budgets, which has led them to be cutting. we have experienced a good deal of fiscal tightening. there are some headwinds in the economy. i cannot pick and choose among programs. you want to think about the desirability of these programs under their own merits. i want to be clear that cutting programs or raising taxes in ways that will reduce demand and spending and the ability of consumers to meet their bills and to purchase goods and services is going to slow the economy. that will offset some of the benefits of the cuts. it will reduce revenues and make the deficit worse in the short term.

>> let me suggest an approach. it showed entitlement program spending that created the real challenge in the long term deficit. you said yourself that the long- term deficits were really the problem. does that suggest that the structure of the entitlement programs is what we should focus on in terms of the long term? in the short term, maybe a different kind of approach? >> yes. i do not think anybody is proposing big cuts in medicare this year. >> you just have to look at the graphics to show that medicare and health care spending in general, medicare, medicaid, medicare is the 10,000 pound gorilla. >> this shows a very long- running trend that we have to morey about. this is a long-term problem that

we have. we have to address it over a period of time. we will have to look at those and make sure that they are providing support and medical care that they are intending to provide. again, that is a long-term issue. that is not going to take place over 10 years, but maybe 20 or 30. the more we can do now to say that we're serious -- >> that was the point you were making about having a plan in place about raising the debt ceiling. >> two legs, both are important. >> let me explore with the two that i have left. mr. duffy said that putting

people back to work, will we be able to put people back to work by raising taxes? you said that it depends on how to do that. can we strengthen our economy in the long term with additional tax revenues, maybe through tax reform or some other way? >> these are congressional decisions. the structure of the tax code matters a lot. the incentives are most affected by the marginal tax rates. that is fortunate to look at. there may be tax exclusions which is the spending in disguise, maybe breaks that are not really achieving anything. you would be able to maintain or even lower marginal tax rates. most economists agree that broadening the base and

maintaining marginal tax rates gives you a better tax system and promotes growth. >> do you think that additional revenue is part of the system? >> this is your decision. i am still talking about how it will be structured. >> we would like to end on a balanced if possible. these will be our last two questioners of the day. >> thank you. chairman bernanke, i would be interested in your thesis from 32 years ago. that was funny. you have about 99 ph.d. economists that the fed? >> i do not know. more than that. >> i have been struggling to find the data or somebody that

has model the uncertainty of a regulatory environment. i do not know that is the promulgation of the reg or rule writing or whether people are willing to engage in activities. when you are doing your model and here is what we see coming, here is what we see in the regulatory environment, some of the other things, do you ever model on the dampening effect of rulemaking? >> we have been trying to look at that. we can maquettes stock market volatility to reflect the uncertainty that banks have. that is hard to disentangle the effects of revelatory uncertainty with other things like the state of the economy. we have tried to find those kinds of effects.

it plays a prominent role. we discussed issue substantially. >> that is an area that i am interested in. we might be better off squeezing down the timeline. knowledge is isdue to decision making of what is coming. you touch on something earlier. you and i have had the opportunity to talk to this earlier. the over performing of assets that are still on balance sheets. this could be everything from the home down the street that is on foreclosure to the toxic paper that may be sitting on balance sheets. i believe that we would be better off if that we are aggressively push through a non-performing mortgage debt. whether it is sold to an investor or first-time home buyer.

how much overpaying has been created by the non-performing debt. am i right or wrong about being an evangelical pushing it through the system? >> the area where this is most relevant is in the housing market. we want to do all we can to people in their houses, to avoid foreclosures. there have been very long delays because of servicing problems and so on. moratorium's that have really slowed this process down. it is true that there are a large number of distressed properties overhanging the housing market. addressing that problem is a very important one. i agree with that very basic point. >> some of the large servicers have gone into mortgage forbearance.

we are going to holdfor 90 days. i do not know it is banking is an anticipation of another wave of foreclosures or that uncertainty. i have heard in some of the discussions, here were the positives of the fed buying as much paper. would you be willing to share -- for every positive side, there are also some negatives. what would you say some of the costs are for the economy of the rapid monetary expansion? >> the main one is that there has been some contribution to commodity prices, which we anticipated. i think that supply and demand factor is global. that increase in commodity prices offset some of the

benefits that the lower interest rates and more accommodating financial positions have for growth and addressing the rest of the inflation which we saw last august. >> the inflationary pressures were on many commodity class as. were they within the range that you expected? >> again, the bulk of the movements can be contributed quite correctly, i gave a speech and it went into some detail about a global supply and demand. on the oil side, it is striking that the u.s. is importing less oil today than it did 10 years ago. the emerging markets are growing quickly and the demand is going up substantially. those are some of the factors that have been important. we did not anticipate libya, we

did not anticipate japan. >> i think the chairman may have broken chairman paul's heart when he said that gold was not money. >> thank you very much. thank you for being here, mr. bernanke. we are always pleased to see you. i would like to ask you a little bit about the tremendous power that you have. it seems that there are about 21,000 transactions that are being examined. basically, it is about the billions that you were able to lend out to banks or hedge funds or what have you. this article, that i am sure it mentionslill see,

that the fed spent billions. japanese car companies, $2 trillion in loans each. billionaires and on and on. a loan you made in the cayman islands which has a concern. you know the reputation of the cayman islands. this is what caught my eye, the shadow budget. this was a loan that was reported on under your tax program to something called waterfall opportunity. the chief investors included the wife of morgan stanley, john mack, and a close friend of mr. mack that served as the president of the morgan stanley banking division. neither of these women had any business experience.

for an investment of $15 million, they received $220 million in cash. with the investors keeping 100% of any gains and taxpayers taking 90% of all losses. you know that i have spent in your face for a long time about opening a up opportunities to minority banks for example in the discount window. they are undercapitalized. if they have money, they would spend money. the unemployment rate is unconscionable. businesses cannot get any capital. how is it that in the past program, the shadow budget that they are referring to could make it possible for waterfall opportunity to end up with just a $15 million investment

getting $220 million when i cannot get any money from new from small and minority banks. can you answer that? >> i would have to look that that story. i am very skeptical. >> you have not investigated in your house to see what happened? >> the story completely misrepresented how this program were to what the goal of it was. the goal was to get the asset backed securities market working again. it worked very similarly to the program in the treasury or any u.s. company, minority or otherwise, the if they purchased assets, could use part of the -- >> i do not want to interrupt you. i understood what it was all about. as i have talked with you over the years, you always remind me

that minorities need to concentrate on education and training and competency. as you know, i have created these opportunities. they are competent investment bankers and asset managers. you have been very generous. you have come to our meetings. why is it that a company like this with two women with no background or education, they get the money because they are connected. >> the program was open to any u.s. company. >> how many african americans did you fund through the program? >> steny who qualified. >> no,no, no. >> i do not know the answer to your question offhand. >> if you cannot tell me today, can your office get to meet the number of minorities and

african-americans in particular that have been funded under the program similar to the way these two women were? >> i do not think that story is very accurate. i am not sure that weekend. i am not sure that we can identify the race of the shareholders. >> i have a few seconds here. the bank o >> your time is up. >> the new york fed is one of the investor selling in this deal. some have questioned whether it is very favorable and about conflicts of interest. does the fed had a conflict of interest? how can they both be the regulator for a party trying to exact a fair settlement? the $8.5 billion settlement is for $174 billion in mortgages.

this allows for a mortgage rate. 2/3 of the loans have representation. this seems awfully low. can you find that? >> id is not regulated by the federal bank of new york. it is the federal bank of new england. that is what the objective was. >> that is all they could get that > we? >> we went for all we could. this is what they said we were moving toward. >> bossy but very much. >> chairman bernanke, let me congratulate you on our testimony.

one thing that i do want to say, you have always stressed and i agree with you, is that long- term structural changes, a long- term structural changes in our program in our tax policy will bear short-term benefit. i think you agree that if we do not make those longtime structural changes there will be consequences. they could be immediate. four years ago you said that. you said there would be a time when we did run out. i hope that is not the case. we all do appreciate the consequences.

some of us were disappointed that we would not see a grand bargain. what many members on this committee realize is that tax spending and tax subsidies is quite a different thing from a tax increase. in fact, that is sometimes more spending than it is a tax. some of the questions -- in 1937, there was an over- tightening of credit restriction of monetary policy that can be very deflationary and adverse on the economy. i believe now we have gone from being too loose on our housing

and some of our lending to too restrictive. i do believe the down payment could be problematic. we would appreciate continuing the dialogue we have had with you. many of us on this committee believe your approach has been beneficial and that i am glad that you are going to maintain some flexibility and that you do not get straight jacketed into not having some flexibility. that may be needed. we do not know what tomorrow brings. spicy but very much.

very much. the record will remain open for 30 days. the committee appreciate your testimony today and your service to our country. this hearing is adjourned. thank you. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> ben bernanke returns to capitol hill tomorrow to present the fed's monetary report. you can watch live coverage beginning at 10:00 a.m. eastern time on c-span 3 and c-span.org. >> coming up, they propose a bill to guarantee a military funding in the case of a debt limit impasse. they host a forum on jobs and the economy. >> the consumer financial bureau supervises the language -- the largest banks on january 1. the committee will hear from elizabeth warren on the plans and why the white house has yet to appoint a permanent director. live coverage will be on-line at c-span.org.

>> she testified in may on a home foreclosures. >> we have seen little accountable -- accountability. it is both before the crash of 2008 and after the crash of 2008. this has been really hard on america's families. it has been hard on them when they have gotten their feet tangled in credit card agreement and paid a loans. it has been hard on them when they thought -- and paid a loans. it has been hard on them when they thought they would lose their homes. it was hard on people that did nothing. people see the small businesses they work for periods their markets have dried up. it has been hard on community predict they work for. there markets have tried -- it

has been hard on the small businesses they work for periods their markets have dried up. it has been hard on the community. >> you can watch this live tomorrow on c-span.org. >> this is the great hall at the library of congress. it is the largest library in the world. if you were to read one book a day it will take you how long? you will find the answers on c- span's original document during the documentary airing this sunday night. -- original documentary airing this sunday night. there are presidential papers from the george washington to calvin coolidge. if there are hidden secrets in

the collection. this monday night on c- span. to read every book in this library, one a day, it could take over 60,000 years. >> steve king introduced a bill today that would require the federal government to continue paying military salaries if the u.s. meets the debt limit. he along with others said that the social security trust funds have enough money to continue these payments and that there is no reason for the u.s. to default. they told reporters about this bill at a news conference.

>> good morning. i am pleased to see such a great crowd for an introduction of a bill on a policy we think it's important. colleaguesl for my for joining me periods today we will be introducing a piece of legislation that has been working a long time. it guarantees that america will keep its promises. our creative capitol hill comes up with good names for bills. it stands for payment reliability for our obligations to military and investors to ensure stability. we are faced with the debt

ceiling debate. it is unknown as to how it will ills.e in the context of wel this includes a constitutional amendment for a balanced budget and a repeal of obamacare. we have watched as a couple of things were used as leverage. one was military pay. ics.president had taxct he said he cannot guarantee that the checks will go out on august 3 if we have not resolve this issue. they may simply not be the money in the coffers to do it. this sounds to me like a threat of not an ultimatum.

there is money that comes in. there is a revenue that comes in. it is currently $2.50 trillion. we want to make sure we keep our promises. they have powerfully led on the issue. they make sure that they're not used as a leverage politically. it is my belief that we put these issues together and we get them to the president's desk for a signature, if we do that and it turns into law, then it is easier for us to sit down and

negotiate what we might do without the threat of no military pay, without the threat of watching our credit go down. if you want to see our credit hold up, we need to service our debt. these are too high promises -- two high promises. servicing our debt is a constitutional recommendation carried it guarantees that we set a priority to pay our debt. we pay our military first. they protect the security of america. we cannot protect our interests if we will not pay our military. -- ifu let them in ou andlook them in the eye tell them they do not have the resources to pay their rent, we owed them better. we ought to owe them for all

time. this would consume around 15.2% of our revenue stream. there's still plenty of time to play military games. the faith and credit of the united states to go to pot over leveraging. i would be happy to speak. i am happy that michele has agreed to join this bill. we will see many principles of merge. >> fosse bet. i want to thank my call it -- thank you. i want to thank my colleague on this bill. earlier, the military payment issued this. we're coming to another turning point in our nation. it is whether or not we will raise the debt ceiling.

i commend my colleague for putting this together. during the course of our session in congress, we had a bill come forward in california. i was pleased that they came forward with the bill that would first make sure that we keep the full faith and credit of the united states. this is a misnomer that i believe they have been trying to pass off on the american people. if congress fails to raise it by $2.50 trillion, somehow the united states will go into default. that is simply not true. it is important to recognize continue to come into the united states treasury. it is the president's obligation to make sure that the interest is paid on the debt.

we are grateful the revenues are sufficient to pay the interest. let it be known and let us have a budget is slated direction that we do pay off the interest on the debt first -- let us have the budget to go in the direction that we do pay off the interest on the debt first appeared under no circumstances should the brave men and women of this country have their military pay be somehow suspended. the families of the military deserve far better than that. we must stand with our military and also with making sure that we stand to secure the faith and credit of the united states. i commend this team for trying to put the effort forward.

we cannot go on scaring the american people. we need to be truthful. i call on the president and treasury secretary to tell the truth to the american people. this is what this effort is trying to do. thank you. >> i want to thank you for being here today. i am particularly grateful to steve keen and michele bachman and micheleng bock men. you would think that a responsible leader in this country would make sure that we encourage bondholders, that we encourage people who held our debt. you do not have to worry about anything. the only thing you have to fear is fear itself. instead, we have a white house

who goes out and to has made basically the last 2.5 years about fear mongering. now you have to worry that seniors will not get their social security check. we know that the president never lies. he is taking advice and information from somebody apparently who is willing to lie. it is just not true. the fear mongering need to stop. i have heard many people on both sides of the aisle including the president say we need to have adults conversations. what you have seen and what we have proposed is a bill that is an adult approach to a problem. it does what the president should be doing, saying those of you who are holding debt of the united states if you do not have to worry.

you will get paid. that is so we do not panning the bond markets and those who may be looking at buying debt in the future. our military members who are in harm's way, i am sorry. they were used by both sides as pawns in the political game. i do mean it appeared both sides used them. they should never -- i do mean it. both sides used them. they should ever be used as pawns. i accompanied a helicopter pilot to was crashing killed in afghanistan. i am telling you from the bottom of my art, our service members and their families should not have to give it a second thought as to whether the paychecks come

in on time. that should not even be a thought process. you have combined these ideas. we will provide full faith and credit. anyone holding our debt has nothing to worry about. our military members who are dodging bullets for our benefit to secure this land and liberty we love, i never give it a thought whether you will be paid. the you would get your paycheck on time. you will not have to worry about your car being repossessed. the things and that one way have not changed a whole lot. -- the things in that one way have not changed a whole lot. they should not have to worry about it. i am very grateful that this bill is going to put together this. let me say with regard to any

president, particular the the current one, who has never thought of saying something like the only thing we have to fear is fear itself and instead is saying we have another problem, a senior see may not get your check. -- seniors, you may not get your check. i would it buys him to look at what you have. -- i would advise him to look at what you have. you have assets. you have a land. you have leases. there are all kinds of assets. the federal government has got into fannie mae and freddie mac and car manufacturing. you give me a long weekend and i can get us out of all of it.

that is the kind of thing we need to do. i look forward to whether it is this president or perhaps another one who will stand up and say we are going to be ok. here is the plan to get us there. i think this bill is a good start. >> i want to point something out of that i think we should thinking aabout. i would remind you that article one section 8 of the constitution says congress shall have the power to pay the debt and provide for the common defense of the united states. we can direct this. the president may have to veto it. we are going to limit the questions to the subject matter of the bill.

i know that is a disappointment. i will be happy to take questions. >> they suggested there were issues that this may not default. do you think the speaker will get away with this tax do you think he is not telling the truth? -- with a visit? do you think he is not telling the truth? >> i am the one that said he is giving this honest advice. i'm talking about the president. the problem with the speaker and him saying that is he believed the president. i will encourage the speaker not to believe the president any more. if he will do is homework, there is a thing called the social

security trust fund. it will be able to pay seniors their checks for many months to come even if congress does nothing. i would encourage our speaker to quit believing the president when he uses these scare tactics. there is money regardless of what we do. the seniors will be taking care of. that is why it is dishonest. we got this clarification by a bipartisan group. they said there is money there. there is for many months. the only way seniors would not get paid is it the treasury secretary makes the decision that even though the money is there to pay them if he decides for what ever reason he does not want to pay them. >> i agree. if you look at the revenue stream we have and you go through medicare, $43 billion a

month. medicate, $23 billion a month. defense is $58 billion a month. part of that is military pay. if you look at these numbers, they still fall within the revenue stream. we can pay the entitlements along the way. there is a concern about the credit part of this. bill. t to pass this fel >> my response would echo that. they want to take the politics out of this issue. 9.2% unemployment. this is a bad jobs report.

all the jobs were traded by businesses that have less than 50 employees. -- created by businesses that have less than 50 employees. small businesses are hurting. the chamber of commerce said the 64% a small business executives said they will not be creating any jobs next year. 12% of small-business executives say they will be cutting jobs. add that up to get there. that is 76 the term of small business executives will be creating predicts 76% -- 76% of small business executives will be creating zero jobs. we are giving them the authority

to borrow money we do not have. in monday i was in iowa visiting a great company. they had well over 200 employees. they have lost 50% of all their employees because the economy is tanking. this is washington. we are in a bubble. i have been spending my time where the real world is. the real world is telling the politicians to get your act together. saut being political. we are not -- stop being political. we are not your ponds. pay off the interest. militaryllow our wille to worry about not getting paid. that is a dangerous game to pay.

lay. they are trying to pull the politics out. they're trying to get serious. >> let me follow up on that. with the continuing resolution, there were fear tactics used. you had republicans that voted because they were told if they did not the military will not get paid on time. it could have been brought to the floor. they could have taking care of that issue. they were used as leverage. i am so grateful we are getting push this forward. we had about 190 on our bill.

senators supporting her bill in the senate. >> [inaudible] >> i will now pass it to the others. i think that is a fox in a henhouse. i am apprehensive about that proposal. >> i am raising the debt ceiling right now. i have been here long enough that i have seen a lot of smoke and mirrors. i forget to predict i do not forget to ricer or where i come from -- i do not forget to i serve or where i come from. spending is what has to be addressed. president obama has yet to put

forward a true spending plan. his goal was to first tax small businesses. what did he say? e your peas -- eat your peas. i spend the floor on a shop floor where it was 90 degrees the whole day. i stood at the line or the guys have lost 50% of their employees. they checked out as they were leaving. they were hot. they were sweaty. one guy shook my hand and said as president of the united states, i want you to give this country back to the people. it is not working for us right now. i am not worried about myself. it is my six-year-old grandson. that is who i am worried about. i am here to tell you. it is not a game. it is real.

the american people are worried about america's future per. this country does not belong to politicians. it belongs to the people. >> you say that the military should get paid if there is no deal and we cannot borrow money. the money has to come from somewhere. >> we have to start somewhere. we need to make sure we do not use the credit of the united states. our military are fighting in harm's way. we were all shocked and appalled that president obama said that senior citizens may not get their checks. that is a very dangerous statement to make. excuse me. excuse me. we do not believe that for a

moment. there is plenty in the social security trust fund to make sure they get checks. that is irresponsible that we as a member of congress need to do -- that is the responsible thing that we as members of congress need to do. >> we are setting a priority. we are protecting military pay. the president has said by his comments about social security and military pensions that is not setting a priority. that is the important part. >> they said they would lower this. is that ok with you guys ta? >> if we do not get our spending under control, the rating will go down. i put a little tweet out

yesterday. ?hat is this really mean th we borrow the money from greece. if we do not gets this under control, our credit rating we're trying to preserve with this bill. we want to guarantee it stays. it is just a delayed reaction. this is a way we can solve both problems. >> none of us want to see it go down. they gave the united states in negative credit outlook. that should have sent shock

waves. you notice there is the chance to continue the level of spending. it appeared that washington was not going to get serious. are we serious about addressing our fiscal problems? we all know we will fast- forward. it will be moving up closer. the problem is not five years from now. to the problem is today.

>> i appreciate the question so much. the biggest concern is that we do not get our debt under control. that is will be trying to do. this bill addresses the issue you raise. . our creditors will get paid. one of the things that set this country on a great course of international prominence was after the war with great britain, people in the united states said we had been at war but we owe some people money. we're still going to pay its.

they will still stand could for their debts. this is a country to watch. it is a country of integrity. that is what we still need to do. >> i will wrap this up. >> you joked about greece. are you truly worried that if it comes and goes there is no agreement that the global markets will not violently react to what the congress and the white house had refused to do? another global concern is the notion of a phone hacking. it has been happening a lot overseas. you have a reaction to that as well. but i'm just trying to watch that.

>> this is a violent reaction. we had some smart people that have been in the business for a long time. i continually challenge them. how does this happen? play it out for me. i am yet to find anyone he can lay this out for me. -- who can lay this out for me. no one has the nerve to find out. i do not know. we can make sure that we maintain the full faith and credit of the united states so

we do not become a greece. they had to make real cut. i think it brings us close to better shape. this does wrap it up. i appreciate you coming here. >> that is exactly the purpose of this. this is why we are here. we're standing with the full faith and credit of the united states. he will continue his spending spree. president obama, it is your spending spree that important to you that you put at risk the full faith and credit of the

united states ta? we want to make sure we do not allow the ratings agency to downgrade american debt. we have the means to do so. we say let's stand there and agree how anyone could disagree with these two items? they simply must be paid. that is what we're saying. we can negotiate this after. did these two items must be taking care of. >> fussy but very much. -- these two items must be taking care of. >> thank you very much.

>> on tomorrows "washington journal" the americans for tax reform and a discussion about the betty ford's legacy. "washington journal" begins live at 7:00 a.m. eastern on c-span. >> ben bernanke returns to capitol hill tomorrow to present the fed's monetary policy report. you can watch live coverage beginning at 10:00 a.m. eastern time on c-span3 and c-span.org. >> now is the time to deal with these issues. if not now, when it? >> the debt limit is the legal limit on borrowing. since 1962, it has been raised

74 times. learn more and followed the process of raising the debt ceiling on line with the c-span video library. it is washington your way. >> the consumer financial protection bureau began supervising the largest banks on july 21. the house oversight and reform committee will hear from elizabeth warren thursday on the plan and why the white house has yet to apply for a permanent director. live coverage will be on-line at c-span.org. >> we have seen very little accountability among the largest financial service providers and among the largely unregulated financial service advisers before the crash of 2008 and after the crash of 2000 and eight.

it has been really hard on american families to spend this when they have their feet tangled in credit-card agreements. it has been hard when they thought they redoing sensible things on mortgage only to find they would lose their home. it is also been hard on others. some people lost their jobs. you see the small businesses they were working for. it has also been hard on community banks and credit unions who worked so hard day in and day out to work with their customers to be the relationship lenders. people are getting crushed in a financial turnaround that was not their fault. >> you can what elizabeth warren tomorrow on capitol hill at c- span.org.

>> this is the great hall at the library of congress. it did you ever wonder if you were to read one book a day how long it would take you? you will find lots of answers about this unique library on the c-span original documentary "library of congress." we will toward the icon in jefferson building including the reading room. -- iconic jefferson building including the reading room. the library is using technology to discover hidden secrets in the collection and to preserve the holding for future generations. join us for the library of congress this monday night at 8:00 eastern on c-span. to read every book in this library, one per day, it would take over 60,000 years. >> for the first time in over 60

years, the house ways and means committee and the senate finance committee held a joint meeting. the topic was taxation. the two hour and 15 minute hearing begins with the ways and means chairman. >> bossy before joining us this morning. according to the service -- thank you for joining us this morning. according to the service, the last time we met together on tax issues was more than 70 years ago to discuss the war and profit tax. why have been looking forward to the two committees working together, i hope you know i did we would beat w

squeezed in here so tightly. i appreciate the opportunity to use this room. i want to thank senator baucus for working out the details. i want to thank my colleagues in the house and senate for being here today. it is an illustration of how serious the issue of tax reform is to both committees and the american economy. as james baker said, tax reform has something in it for everybody. for the american family it means greater simplicity and predictability so families can plan and prosper. transforming our tax code is critical to making america more vibrant and a more attractive place.

issue of debt and inequity is among the most complex issues that we grapple with. it is among the most important to get right. earlier this week, the issue to reports responding to the reports predicaments we made on household and business debt. -- responding to the household and business the reports. the business that report focuses more on the debt relative to equity and the implications for corporate capital structures. these are are crucial issues. it is fitting that we are here to receive these reports. before i yield to my friend from montana, i would like to congratulate him on his recent marriage. i now recognize the senator for his opening statement. >> thank you very much.

that is something i did not expect. that was very thoughtful. i deeply appreciate it. also, i appreciate you holding this joint hearing. i will take this opportunity to work together. we can work together on the tax reform. we have been working together. >> we're more likely to get something accomplished. an author once wrote "debt is like any other trap. it is easy enough to get into

but hard enough to get out of." we share a common goal. we believe the goal should boost competitiveness, secure job creation. it should not encourage household spending. right now we are confronting a massive debt problem. the year before the crisis, led the five major banks were 40- one. for every $40 in assets there's only $1 in equity to cover losses. debt played a huge role in the meltdown. we seek to understand how it affects private debt. does it encourage household businesses to become more

leverage? it gives them treatment of debt. we clearly do not want to encourage them to assume this month. we want to ensure that businesses can borrow at a modest rate. that is an essential step on the road to economic recovery. it is hard to tell what is considered borrowing and what is equity investment. they can make an infusion of cash that will look like either one. this requires a tax bracket that not everyone can afford. they are both bible tools. as the word to inspire growth, we need to make sure it is not -- it does not put us in a precarious position.

they need a tax service they can understand pi. let's work together to make this more competitive and fair. hads my hope that we'v hearings on tax reform. i think that will provide a good foundation for what ever we do this year or next year, perhaps even into 2013. let's work together. let's have separate hearings. let's have joint hearings. it is a service to our country. think you. >> thank you. let me now yield to the ranking

member of the ways and means committee for his statement. >> and thank you very much. this is the first time i have been in this room. there are television sets here. i think they have been turned off. i noticed fox news, cnn, and espn are on these assets. i am not sure why. i watched the baseball game last night. i see we turned it off. >> yours is not off. >> no. >> i pushed it. you mentioned this is the first time since 1940 that there has been this kind of combined meeting on tax issues.

as we know, it is scheduled. we will discuss certain aspects of the certain tax issues relating to equity. let me make this comment. because of the uniquely serious challenges facing this nation, today would seem most appropriate as we are gathering to address this challenge. the issue of debt limit is within the jurisdiction of our committee. that does not mean that it is unimportant. if we are to seriously address tax reform, issues relating to debt and equity must be considered. it must be done so with open debate. as our witness is prepared testimony, the subject is

complex. answers do not always automatically fall into our usual ideological frameworks. i fear the chances of discussion leading to fruitful action have been damaged by the environment on the over arching discussion on the debt ceiling. "after years of discussion and months of negotiation, i have little question that as long as this is in the oval office, a real solution is probably unattainable." in my judgment, this politicizes tax reform in the near future. it also flies in the face of basic facts. president obama inherited a debt that has risen under president

bush urging that was risen under president bush. -- president obama inherited a debt that was a reason under president bush. president obama has said very clearly that we need a balanced framework to reduce the deficit now and in the feature while allowing for immediate investments to promote economic growth and job creation. it is not helpful to walk away from the table. it is not helpful to insist on an agenda that cannot become law. we should review carefully the testimony to now be presented to us by our distinguished, and if you read these documents in advance, very knowledgeable witnesses. my fear is that any insight that we gain in the process today will be washed away if the debt

ceiling is not raised and we suffer the momentous consequences and destroyed the full faith and credit of the united states of america. thank you. >> i yield to the ranking member. >> and thank you. this is a historic hearing. we appreciate you. tax reform should be based on the same three principles allegedly enacted on the tax reform act of 1986, fairness, simplicity, and economic growth. i'm looking forward to hearing what our witnesses have to say. allow me to share a few of my thoughts. the first is with respect to individuals and then with corporations.

on the individual side, savings and investment is a good thing. an income tax system by its nature discourages it by taxing the returns. this was made by john stewart over 160 years ago. it encourages consumption. it encourages debt rather than equity. if a corporation is in need of additional funds, our tax system encourages the -- rather than raising funds. any interest rate on the borrowing are deductible. many u.s. national corporations are sitting on large piles of

cash but are borrowing money. one reason is that their cash is strapped offshore. they will be subject to a 35 certain tax on bringing it back -- 35% tax on bringing it back to the united states. there affordable to the risks of bankruptcy and downturns. i would like to thank our witnesses for attending this hearing. want to thank all others on this important day. thank you very much. i appreciate it. >> without objection, you may submit anything in writing. they have a wealth of experience. but me briefly introduced them.

we thank you and your staff and your efforts to putting together this report. we look forward to your presentation. she served as the assistant secretary for tax policy. we will hear from the associate professor. his research is focused on tax planning. we would hear from a professor of finance at harvard business school. he recently accepted an appointment as a tenured professor. is also a research associate. finally, we would hear from the

professor of entrepreneurship. he is also a senior fellow at economics in washington, d.c.. here is a director of the research department. the committee has received each of your witness statements. they will be made part of the formal record. youwe begin with you, mr. barth, . >> it is my pleasure to deliver to reports requested by the chairman related to the tax treatment and the use of debt finance.

i will just use my brief time to highlight a few points. first, as was noted in some of the opening statements, the recent recession raised valid concerns about leveraging the u.s. economy. it is important remember there are many sound economic reasons for households and businesses to finance with debt. debt is not inherently a bad thing. relative to the growth of the economy, as measured by the gross national product, of the past 25 years, nonfinancial corporate debt has been largely unchanged, while the debt of the household sector and the debt of the federal government have increased by more than 50%. this is shown in table one. in looking at household debt, the primary source of gross household debt is the growth of mortgage debt, documented in figure three on page 18.

mortgage interest is favored as an itemized deduction and the internal revenue code, yet over this same 25 year time frame where we see the substantial growth in household debt, congress has generally lowered individual tax rates which lowers the benefits of that interest deduction. congress has capped the aggregate amount of acquisition indebtedness as part of the itemized deduction, and congress has limited the interest deductibility of home equity debt. with those factors, it is it difficult to conclude that the deductibility of mortgage interest would explain the growth of household debt of the that time. when the business side, -- on the business side, one cannot discuss business finance without equity finance, and there are tax rules that create debt finance over equity finance.

the deductibility of interest expense and the non deductibility of dividends makes debt a cheaper source of money for the business. it is also a partnership. the inclusion at the partnership level increases the partners basis and the partner shares and a partnership losses and deductions. debt-financed of investments can shelter other taxable income of a business and can lead in some situations to negative effective tax rates. on the other hand, there are tax rules that favor equity finance. at the individual level, the individual investor may often prefer equity finance because under present laws there are relatively low rates of tax on dividend income compared with interest income, and if the

investor recognizes a capital gain as a result of obtained earnings from the business, that is also taxed at a lower rate. for corporate equity holder, the low effective tax rates from dividend received reduction where a corporation had a lot of money -- had lent money would be paying at the full corporate rate. for both investors and businesses, there is the possibility of tax-free mergers and reorganization, facilitating the business sector. taxpayers have considerable flexibility to design instruments that are characterized as debt or equity under code, and it is difficult to create rules to distinguish this. over time, we have identified multiple items of what is that. because of these factors comet instruments can be constructed

as an economic matter, and as the finance experts can probably explain better than i, that land to the characteristics of debt and equity. in the 1950's, congress attempted to define debt and equity, but retreated from that effort. the treasury had the authority to issue regulations to identify debt and equity, but has never exercise that authority to do so. thank you for the opportunity to prepare this material for you. i would be happy to provide more detailed work and any questions that may arise at today's hearing and i am happy to answer any questions you may have today. thank you. >> thank you. ms. olson, you are recognized five minutes. >> distinguished members of the

committee, thank you for inviting me to testify. i am appearing on my own behalf, and not on behalf of a client or other organization, and the views i expressed are solely my own. my compliments first to the chairman for your decision to tackle tax reform and a bicameral and bipartisan basis. it is one of many issues that should be considered carefully. it has been observed that the one the law congress cannot repeal is the one of unintended consequences. individuals and businesses respond to incentives and disincentives. his support for the tax-writing committees to be cognizant of the tax -- is support for the tax-writing committees to be cognizant of this so consequences can be factored in. in its current form, the

internal revenue code provides incentive for businesses to raise debt rather than equity. there is the double taxation of corporate income and the tax deductibility of interest payments. anchoring that is a straightforward means of -- incurring debt is a straightforward means of lowering this. there have been several failed efforts to draw bright lines between the two, both legislatively and administratively. they tried in the 1980's but it was subsequently withdrawn. the impact of the preferential treatment of debt has been confirmed for a number of years and has led to proposals to neutralize or equalize the tax debt and equity. the disparate treatment, particularly the double tax of the dividends, has given rise to

corporate governance concerns, which the treasury department designed and exclusion of this in the 2004 budget. prior to 2003, it brought the tax rate to nearly 60%, creating opportunity for corporate managers to use dividend payments as a basis for reinvested corporate profits rather than distributing them. the payment of dividends is a healthy financial discipline because it requires free cash flow,. results and paying dividends. prior to 2003, the lower tax made methods of delivering this to shareholders such as stock redemptions and more efficient means to distribute excess of to shareholders.

the attractiveness of tax-free dividends was seen as giving corporations an incentive to pay income tax, to the extent that they be paid to shareholders, and shareholders had to pay tax. subsequent proposals could have reduced the value of corporate tax incentives by reducing that from flowing to the shareholders. there are simpler means of reducing or eliminating the double tax inequity, including the reduced rate congress ultimately adopted or making dividends deductible at the corporate level. it would have a significant impact on tax revenues because it would eliminate all untaxed dividend income. as is the case with interest income were it is held by tax- exempt entity. it could result in the removal of a significant amount of corporate income. as the committee's concern the tax-writing option, one option

is to lower the corporate tax rate. the preference is the result of the ability to deduct interest payments and lower corporate tax rates to reduce the value of the interest deduction, thus reducing the disparity in the taxation of debt and equity investments. loring the corporate rate would have the benefit of more closely aligning the rate with the rates of other countries that have fallen in recent years. another option would be to integrate the corporate individual tax systems along the lines of the bush administration's 2004 budget proposal by removing corporate income distributed by dividends. t could eliminate the tdebt financing incentive. he could also go for the adoption of a comprehensive business income tax, also a study by the treasury department. i encourage the committees to make sound policy the primary objective. thank you for the opportunity to testify and i would be pleased

to respond to questions. >> thank you very much. mr. fletcher, you are recognized for five minutes. >> thank you for let me participate today. i am an associate professor at university of colorado. i research focuses on how text shapes -- how tax shapes the focus in the field. the main point i want to make is the debt equity distortion as costly on two levels. the first level of cost is obvious. deals are restructured to reduce taxes, which erodes the tax base. this is the explicit cost. the second level of cost is implicit. when a corporation restructure's a deal to reduce taxes, it imposes an implicit cost on the corporation itself that adds complexity to their capital structure, distorts corporate governance, and even changes critical business decisions.

it imposes an additional implicit cost of the public in the form of increased systemic risk, a taxpayer bailout, and the like and a lot of wasteful tax money. one could say this is the collateral damage. the best way to reduce this collateral damage is to eliminate the underline distortion in the tax code. the legal distinctions have no basis in underlying economics and are almost always a bad idea. the tax lawyers that i know are very clever. if you give them an economic incentive to turn equity into debt or corporation into a partnership or ordinary income into capital gains, they will work tirelessly into your convinced that a dog is properly treated as a catch because of tax -- is properly treated as a cat because of the tax basis. as firms take on more debt,

common stock behaves like a risky stock option, giving executives unlimited upside but limited downside risk. with enough that, and even becomes rational for them to make bad debt for the company. the debt holders bear most of the downside risk. the second cost is the social cost. excessive leverage fuels' risky speculation and has repercussions for taxpayers that never engage in risky behavior themselves. the problem is especially acute with banks and other financial institutions because the externalize social costs are larger than other sectors. the third cost is wasteful tax planning. in a world without tax distortions, corporations make planning decisions based on market conditions, not a tax calculation. instead, many corporations and financial institutions issue new products to engage and

regulatory arbitrage. in the typical scenario, bank executive is what to increase the amount of leverage in a firm to reduce taxes and supercharge return on equity. but taking on too much debt runs afoul of banking regulations and credit regulators. there are complex products that classify these as that for tax purposes, whereas tier 1 capital for bank principles. this allows them to appeal sit -- appear safer, but it masks an increase in debt. they are dogs that are treated as cats for tax purposes. aig, lehman brothers, bear stearns, and other organizations all had these on the balance sheets before the crash. that did not perform well and the financial crisis because they typically contain ongoing obligations to make cash payments.

they are seen as debt obligations that would not provide a cushion in the way that real equity would. but the resulting loss and instability is borne largely by the public and not the banks themselves. what is the bottom line? the best solution is a broader corporate tax reform effort that would eliminate the debt equity distortion altogether, including eliminating the deduction for interest, and the deduction for corporate equity, or moving to a corporate cash flow or consumption system. if congress is interested in moving more immediately on this, i suggest to focus on financial institutions. there were the problem is. the have the most excessive leverage. and the failure imposes enormous social costs. one approach would be to eliminate the deduction of interest by financial institutions to the extent the debt equity ratio exceeds five- one. the goal is not to punish banks

but remove the tax incentive to increase leverage beyond the ratio that would arise in a world without taxes. i would be happy to answer any questions you have, and i think you for the honor for participating in this hearing -- and i thank you for the honor of participating in this hearing. >> members of the committee, it is a pleasure to appear before you today. i'm a professor of finance at the harvard business school and a research associate at the national bureau of economic research. i want to describe the fundamental problems, changes in the economy create novel complications, and on several of the tentative -- and outlined several alternative solutions. a written testimony can be summarized in five points. at first, classical corporate tax increases the potential for a semester treatment of debt and

equity income. this treatment can distort financing, organizational form, and decisions. in the u.s. system, equity income is taxed once what that income is taxed -- equity income is taxed twice what that income is taxed once. the differential tax treatment creates a host of opportunities for financial engineers to innovate around that. second, the treatment of debt and equity income has been complicated by three significant developments. the first development is the rapid globalization of firms and capital markets. this makes the tax treatment of multinational firms and transfer pricing concerns central to the corporate tax. it creates situations where it often involves foreign investors and allows the possibility of allocating various headquarters

and domicile functions across multiple jurisdictions. the second development is the simple characterization of entry-level taxation that is customary in these discussions does not reflect two very important developments, the rapid rise of business income and the rise of tax-exempt investors. the third development is corporate tax is now largely for corporate -- is for large corporations. it competes with tax obligations and these incentives compromise. while excessive leverage is sometimes associated with the tax code, concerns over the role of tax policy in fostering the financial crisis appear unfounded. it is difficult to describe specific roles and the housing markets as primary or secondary actors in the drama of the financial crisis. for the nonfinancial corporate sector, the startling fact is

how unleveraged the sector was prior to the crisis. the rise of cash balances and the decline of net debt is the trend of the last decade. a remarkable burst and buyout activity that is not related to tax incentives is likely responsible for the perception of excessive leverage in the nonfinancial sector. the increased reliance on equity financing also speaks to the central spoke of debt. in my opinion, the excesses of the financial sector leverage which are very important best addressed through regulatory approaches rather than tax instruments. fourth, corporate tax is ripe for reform, but excessive leverage may not be high among them in my view. i have three approaches to the debt equity extensions, regulatory, structural, and right solutions. the regulatory approaches which provide arbitrary limits must be crafted with care as they can

create added complexity to limited chaos. if the stripping of earnings by multinational firms is the concern, the new regulations should be to the credit with current policy instruments that. that problem. and lowered corporate rate is likely the best antidote to that. interest of deductibility must be considered highly leveraged and impacted and the consequent effect on the capital investment level. such regulations would appear to be more tax planning. fifth, reforming the corporate tax structurally could provide a solution, and provided for step towards a fundamental tax reform. a more modest approach should couple a rate reduction with a move towards territoriality that is funded by income tax reporting and some taxation.

reducing rates, simplifying international taxation, and broadening the base are honest bourne's -- are cornerstones of reform. such reform efforts rather than regulatory approaches would best advance your admirable agenda while strengthening tax policy and america's economic future. thank you, and telephoto and the questions you may have. >> mr. johnson, you are recognized for five minutes. >> thank you very much. i'd like to speak about household debt, nonfinancial sector debt and financial that as three separate issues. there is a common problem across all of these kinds of debt, which is now i think apparent to all american homeowners. if you buy a house that costs $1 million but only $5,000 down, the breast is leveraged, more much more at risk when house. -- where the rest is leverage,

you are at much more risk if the housing price goes down. the issue i think before us with regard to what may happen in the future and what happened in the previous crisis is what happens when there is a spillover, a sort -- a form of system risk when they choose to be over leveraged. looking at households, i think it is somewhat obvious the tax code has encouraged households over long times -- it was not the primary instigator of the crisis, but encourages households to massively over the average, taken a great deal of risk, which they may or may not fully understand, and it has bad economic consequences when housing prices go down. i would urge you to consider phasing down the mortgage interest deduction for a long

time, perhaps 20 years, so it is not disruptive. on the nonfinancial corporate side, i think we don't have a problem. i agree with what the previous witnesses have said about the attractiveness of making the system more neutral. i think there are a number of reforms that could be done. he the lower the tax equity or the with the deduction for interest payments, or move to a new system, more integrated system for the corporate taxation, perhaps even with individual taxation. that i think is not a pressing issue with regard to macro risks and financial stability. those risks are about the financial sector. we had financial firms going into the crisis with leverage of at least 40-one, and those are not isolated examples. we have tried for a long time through regulation to limit

leverage because of capital requirements, which have a similar effect, and it has not worked. not only that, but the attempt to limit leverage to require more capital, the major international response to the crisis has also not had a dramatic effect either now or because of what will happen later in the cycle because firms want to take on more leverage. the top bankers and traders are paid on a return on equity basis. if they have less equity in the business and things go well, they get nice compensation. if things go badly, there is a downside risk, but who bears that downside risk? it is largely borne by the rest of the economy, by the nonfinancial sector, by households. whether or not you are in favor of bailouts does not matter.

you get devastating losses, it an increase of debt to gdp, thinking in fiscal terms, and the debt level has gone up dramatically in the past few years and the united states most the because of the recession, caused by the excessive leverage in the financial system. it makes no sense to have a tax code that encourages that leverage at the same time we try to pull it back, rather and effectively, with regulation. -- rather in effectively come up with regulation. at a minimum bid should be equal. i would strongly advise to follow the lead of other countries and tax excessive leverage. in the u.k., they have a tax of 7.5 basis points on what they define as excessive leverage. i think that is low if he considered the imf and other organizations assess the dow you of being too big to fail --

assessed the value of being too big to fail is 50 basis points. we should be taxing away that advantage. i would suggest speaking to the points made by mr. hatch. if you want a fair, simple, pro- growth system, the tax the excessive leverage and use the revenue that generates for the nonfinancial sector. the nonfinancial sector is what got hit hard. that is why the jobs are not coming back. this is why this is such a painful recession. thank you. >> thank you. we will now proceed with questions from the witnesses. questioning will alternate between members of the senate, as recognized by chairman baucus, and members of the house as recognized by myself. senators will be it recognized in in order consistent with rules and practices used at senate hearings. house members will be recognized

in an order used in the ways and means committee hearings. each member will have three minutes to question witnesses. in order to accommodate everyone, we want to hold to the three minutes for each member. with that, let me invite chairman baucus to begin the questioning. >> thank you, mr. chairman. i am curious about the question of which financial institutions over leveraging had the ability to create infinite number of financial products, to set their own needs, and should be best dealt with the code or through the regulatory regime, or is there some combination? are there some areas were may be changing the tax code is better , some general feeling of lowering the rate help?

i like to throw in the implications. what effect does that have -- a little difference between you, mr. johnson and mr. fleischer, but it could briefly comment on that basic question, which is more important. >> on the question of whether we should try to address excessive leverage through the tax code or through regulatory response is, the answer is yes to both. on the tax side, i think it is important remove the extra incentive to borrow. i don't think we should try to

use the tax system to try to solve all of the issues in the bank regulatory area. the critical thing is to try to make it more neutral. on passthroughs, it used to be when you thought of a partnership, you think of a small business. now we see very large companies, including financial institutions like hedge funds, organized as partnerships. to me, that shows they're very sensitive to tax distortion and will go to great lengths to try to avoid the corporate tax. >> what is the solution? >> well, i think the short-term solution, in the short run, it would be to limit or cap the deductibility of interest by financial institutions based on the leverage ratio. i could talk more about comprehensive tax reform.

>> to outline the possibilities, i think in the tax policy rahm, there are several variants. one is the financial taxability for the purpose of disrupting excessive levels of transactions. the second would be financial activity taxes, or anybody involved in taxes -- where anybody involved in financials is taxed. the other could be if your assets are above a certain threshold level, the of the potential of an export tax. roughly speaking, those are the variants. the first thing to realize is financial institutions are highly specialized. understanding them is difficult. in situations like that, regulatory apparatus is are best used. that does not mean we succeeded in the past, but it also does not mean that we should try it the tax instrument in a complex

setting with highly responsive taxpayers and a lot of institutional detail. that is why i am skeptical about tax instruments to address financial leverage, not because it is not a problem, but because i think there are better ways to dewitt. i understand there has been a failure to do it, but there is little evidence in my mind these kinds of taxes are a little more than a representation of incentives that many of us feel. >> financial planners plan all around any financial regulations that you come up with. there are clever. >> indeed, they are. >> they are so driven to find the greatest return. >> indeed, and it will be even more so when you talk about a tax instrument. that just means we need to strengthen the regulatory approaches. we could actually govern them in a much more thoughtful way than the tax system. it is useful to remember that a

lot of leverage was hidden. right? think about lehman brothers. i don't think anybody knew how leveraged they were. that is part of the crisis. it was beyond the realm that he could of imagined. >> whether you like it or not, senator, the code impacts the leverage choices these firms make. i think we all agree with what the staff determined. there is a big buy as towards debt, including the financial sector. it makes no sense to have tax code point in the opposite direction. i worked a great deal with regulators, and i am supportive of what they're trying to do, but it is not enough. there are constrained by the international regulation, including bottle 3. -- including basil 3. why should we regard that as the

last word on appropriate constraints on the extent of excess of leverage? i agree with mr. fleischer, there are many ways to tax excessive leverage, including thin capitalization tax. the imf made a good report to the g-20 on these issues. >> thank you very much. >> you said that a lower corporate tax rate would remove pressure on the debt over equity. can you explain how that would address the debt equity bias that we have heard about? >> the most simple version of this is the entity level taxation is part of the problem. reducing that rate ends up taking away that distortion to some agree. but a kind of goes further. one of the problems is not just

that in the aggregate for nonfinancial corporations, but the possibility of the tax base being eroded, which it is a widespread concern. lowering statutory rates is a valuable thing to do because it takes out the incentive. i would say there are two levels. it is the one level of the system, which is part of the reason why it may be taxed biased towards that, because of the high tax rate. and when you take that away, you reduce that. second, if we think that earnings stripping and reallocation of the income, which are legitimate concerns because of how easy it is to reallocate, boring the rate has the additional effect of taking away that incentive -- lowering the rate has the additional effect of taking away that insensicentive. >> to the extent to consider

this a problem, is the solution to change the treatment of equity or the treatment of debt? and how would those changes affect taxpayers that take advantage of the current debt bias? if each of you would like to briefly answer. what we start with miss olson and go down the line. >> i think he could go either direction. right now i think you have too much by towards that against equity. i think it could go in either direction. you could reduce the double tax on corporate income or go in the direction of some restrictions on interest. if you go with the second, you have to first think about significantly reducing the corporate rate and think about transitions because there are capital structures in place that would be significantly affected by that. >> mr. fleischer? >> i largely agree with that. my preference would be to limit

on the interest side, limit interest deductions. the benefit their issue could reduce corporate tax rates, which reduces all sorts of incentives to tax planning. >> i think this is an opportunity that one should not squander. there is the possibility of more comprehensive a purchase. -- more comprehensive approaches. to try to fix this on the margin is not as viable. >> mr. johnson? >> my suggestion for the nonfinancial sector is to have an allowance for a corporate equity, or you are allowed to deduct some of the dividend payment based on the normal rate of return of capital. for the financial sector, i am proposing that you tax excessive leverage. that is what generates -- is a form of pollution. it is a bad form of pollution that does not hit every year, but every five, 10 years it has

nasty consequences. you should use that as general revenue to reduce tax rates on other parts of the economy. it is those parts of the economy that will be hit hard when banks go bad again. >> thank you. chairman bacchus? >> thank you. under the senate rules, we go according to first-come, first- served. the earliest bird to arrive was senator hatch. you are next. >> thank you, mr. chairman. professor desai, this is a question for you and i would also like an answer from miss olson and mr. barthold. professor desai, he said the current corporate tax system has the worst of all worlds. to please explain that a little

more? say the average rate is 17.5% and say the statutory rate is 30%, the average would be 1-2. is there some ideal ratio, 1-1 maybe? or would be ideal to have a statutory rate lower than the average rate of that could be accomplished? >> i guess was trying to get two or two things. the statutory rate is high by global standards. when a said the worst of all worlds, there would be some benefit that would come from that and we're living in a world where we're not getting that. we have highly responsible taxpayers and high statutory rates which distort the margins,

and we're not collecting very much. the problem with tax reform that other countries have embarked on and i hope that you embark on is that the war rates, broader base, and bring them together -- is at the lower rates, broader base, and bring them together. it is also more consistent with political viability. corporate tax is now viewed, widely by the american people, as something that is not paid at all. it discredits the overall tax system and has repercussions. bringing them back in line i think is a worthy goal. >> miss olson? >> i agree with those comments. i think it would be much better if we had a lower statutory rate and we did things to broaden the base, which would have the effect of increasing the effective rate of bring it closer to the statutory rate.

the differences now i think illustrates the ways in which the tax code directs resources as opposed to resources been directed on the basis of what produces the best pretax returns, and it will maximize national income and economic growth if we remove those distortions. >> senator hatch, i will just to emphasize the point. when we are looking at the statutory rate, we're looking at the marginal tax rates. the importance of marginal tax rates, because it is at the margins, it influences the next investment with the next financing choice that will be made. high marginal tax rates tend to distort choice. they promote debt equity, a tax shelter behavior, reduce incentives to invest, which reduces incentives for future growth. that is what economists

generally are always in favor of lower marginal tax rates. as to an optimal ratio of marginal to the average, the average also reflects a number of other policy concerns that members may have in the design of the tax code. the optimal on that is your decision. >> thank you, my time is up. >> mr. levin is recognized for three minutes. >> thank you, mr. chairman. this has been interesting and i hope helpful. i do think the complexities emphasize that as we approach these issues, we kind of need to leave ideology at the door and try to dig into these issues. in a sense, it is easy to say the lower the rates and broaden the base.

the problem is when we start talking about how you broaden the base. that is not at all easy. we have held hearings on transfer prices, and it is not easy. we have held hearings on tax savings, and there is often disagreement about that. let me just say, quickly on the mortgage interest deduction, some of you have mentioned it, i just urge that we be careful about our proposals. because that is one way to kind of lower the rate, but the impact, when you look at the distribution analysis of mortgage interest, it has been very much a middle income tax

provision, and i think most of us have to ask where we would be if it had not been in existence the last 40 years. there are some problems of excess, but i think we have to be careful about not throwing out the baby with the bathwater. one corporate, let me ask each of you directly, some of you have expressed yourselves. do each of you favor taxation of excessive leverage in the corporate sector? yes or no, or however you would like to modify that. ms. olson, we will start with you. >> i would go in the direction of eliminating some of the bias between debt and equity. i don't think it would be a great idea to tax excessive leverage because i am not sure how we would define it.

when i was at the treasury department, there was an effort to try to cap interest deductions. it did not turn out very well. >> mr. fleischman? >> i favor removing the tax incentives to be excessively levered. going beyond that, you have to proceed carefully. if you want to impose penalties on excessive leverage, i might support that, but you have to be careful in the design. >> no one very targeted things towards excessive leverage. on revenue, you are right to broaden the base. there are two solutions. the second is the gap between book and tax incomes, which is something that generates revenue. >> if i could add, the tax on excess of leverage is where the

european union is heading. london it is our major competitor, visa of the new york, so we are behind the curve -- fees of the new york, so we're behind the curve on that. >> thank you. .> ok >> let me thank you both for your bipartisan leadership putting together this import hearing. i believe that tax reforms now is the major unused tool in the economic recovery tool shed. the federal reserve has cut interest rates repeatedly. the economic recovery act was capped. numerous initiatives are in place to help hard-hit homeowners, but bipartisan tax reform is now sitting in the tool shed.

a variety of factors go into this, but our country created 6.3 million new jobs in the two years after this was passed. on the debt equity issue specifically, senator coats of indiana and i put in as part of our broad tax reform an idea that suggested that one way to make the tax code less stilted toward debt finance is to disallow a portion of the deduction for interest costs that is attributable to inflation. that would make the interest on debt a little less deductible and would make equity finance more attractive. that would raise $163 billion over 10 years. thold, tion is, mr. barr to

if you had broad tax reform and that one feature in it, that means you would have that substantial sum, $163 billion, that you could cut for middle- class folks, focus on creating jobs for our metrics, pin down the debt. isn't that what that means? >> yes, sir, our estimate is if you had a proposal that would limit interest deductibility and you chose to do that by measuring the inflation component annually, as we noted in a report, there is a substantial amount of interest expense claims annually by business. a reduction in the deductibility of that is a substantial base brunner, given the rest of the internal revenue code. >> thank you, and thank you for your professionalism as always. mr. fleischer, we appreciate

your involvement in this. the congressional research service has found in recent years, over the life of a loan, about half of the value of the interest deduction is now inflation. isn't that another argument for a limiting the deduction to its non-inflation component? >> i think it is. i think there are different ways to limit interest deductibility. he would want to think about inflation as one possibility. my own personal opinion would be somewhat of a comprehensive business income tax, which i think would be simpler. but, yes, you are right. >> thank you, mr. chairman, my time is up. >> thank you, mr. chairman. several of you mentioned in your testimony that the tax code by yes towards that investment -- the tax could bias towards that

investment may encourage some businesses to take on an excessive riskiness of debt, increasing the risk of bankruptcy and the associated cost to society. among the most serious of these consequences is a loss of jobs resulting from major bankruptcy's. since one of the most important issues facing congress is the urgent need to create jobs, could you, maybe beginning with you, mr. fleischer, comment on whether reforming the tax treatment of debt and equity may create a better foundation for stable job growth? >> i think it would come at it would find -- i think it would, and i think he would find that unanimous among the panel. the easier it is, the easier it is for businesses to be planning decisions, including hiring workers going forward.

>> thank you. >> as i mentioned in my written testimony, it is remarkable we have not had more corporate bankruptcies, given the nature of the credit crisis. i think that is because the nonfinancial corporate sector is under-leveraged, and we should be happy and grateful for that. would have a saudi tory affect -- would it have an effect if we did not deductible? the cost of capital would rise as a consequence. some of the social spillover effects would certainly be a benefit. the cost of capital would likely rise, as a consequence of that, and that would have some potentially offsetting effects. i am not so sure it is quite easily a job winner. >> mr. johnson? >> as long as we are putting this in medium-term fiscal consolidation, over five, 10 years, if the financial markets

believe you have credible plans for controlling the debt and bring down that, yes, i think there is ample scope for measures that would encourage short-term job creation. but i would caution against focusing solely on that. experience in europe, including in the last days and weeks, tells you that country's been previously thought they had an impeccable credit rating can come under this criticism quickly. put it under fiscal consolidation. >> ms. olson? >> i think there is definitely some value in doing whatever we can to make the system more rational, something along the lines of what you're talking about. >> thank you. thank you, mr. chairman. >> thank you very much, mr. chairman. thank you and chairman camp for

to win what i hope will be more than just one meeting. as we talk about all of this, and we clearly are having important hearings and discussions on tax reforms, which clearly needs to happen -- and we look at how we need to create tax incentives for small businesses and large multinational businesses, how we create incentives for american jobs in this global economy, and how to create incentives for american families to be about to plan themselves and chief import goals for the families like home -- and achieve important goals for families -- which have been under attacked -- in fact, the majority of families have seen what has been housing in the housing market, so on and so forth, and it has been difficult, obviously, for families on a number of fronts,

but there is another area in the code where we encourage people to say -- and that is through the pension protection act of 2006, and i am wondering, dr. desai, if you may respond to the fact that congress has allowed them to automatically enrolled in retirement plans, but that allows employees to opt out if they desire. the goal was to encourage savings. the wall street journal reported earlier this week that while more people were not contributing to retirement plans, many of them are making contributions that are actually less than what they would otherwise would be with the typical 3% default. i'm wondering if you have suggestions or if and if you have suggestions on how we could improve this provision to encourage greater savings after we focus on pensions, which are another important part of

economic security for families. >> i think you are right to turn the discussion towards savings. that is one of the most important metrics, especially given the history of the american citizenry of the last several decades. you were also right to put your finger on pensions, which are important piece of the savings picture. briefly, i think one of the revolutions and the last couple decades has been about behavioral biases. when you give people default options that allow them to save easily, that he is an incredibly powerful device. in the design of pensions and legislation around pensions, paying attention to default provisions and paying attention to making it extremely easy for

a person to save is a very important part of this. one would be remiss without mentioning the broader point, which is the distortion to saving impact that his primary in nature to income tax -- that is primary in nature to income tax. and it provides a bigger lever on that that would otherwise be available. >> thank you. >> thank you, chairman camp and chairman baucus. meeting inember the 1940, but -- [laughter] but i certainly do welcome this meeting, where we not only have republicans and democrats acting and looking civil, but we have the house and senate coming together. even though they are close by physically, people did not recognize how seldom we have a

chance to see each other. this panel is extraordinary, and i think all of us, especially our chair, is excited about the possibility of tax reform. it takes this type of cooperation in order for us to move forward, and it takes a better understanding of equity and debt in order to develop a system that is fair and equitable. having said that, there is a big elephant in this room, and it is called the debt ceiling. and until we get that out of the way, it will be impossible for us, and a bipartisan way, to deal with this very serious problem that everyone admits is really dampening our economic growth by not having a more fair system with lower corporate rates and closing loopholes.

having said that, i wonder, mr. chairman, if i would be out of order if i took advantage of our great panel here to ask them, is there anyone here who sees any connection at all in terms of increasing the debt ceiling, as we have 17 times, to make certain our great nation pays our debt, and the solution to the budget problem that we have, which of course involves revenues and cutbacks and spending? as economists and people who understand these serious problems, is there anyone here who thinks there is any connection between dealing with reduction of our debt and authorizing the president to increase the debt ceiling? and if you do, i wish you could

sheriff with me in 30 seconds. -- and if you do, i wish she could share it with me and 30 seconds. having seen that the response -- >> i hope it sets the stage for debt ceiling negotiations. >> but you don't see any connection between increasing the debt ceiling and dealing with how serious the problem is with the national debt, do you? >> they are all important steps. >> i know it is important, but really, as a professional who has worked with the internal revenue and served presidents in the past, do you see a connection between the two, aside from politics? >> i think are important policies that have to be addressed. you have to address them on the spending side and the revenue side. it is important that the fiscal house in order. >> you believe we could hold the

question of debt and spending and revenues with denying the president the opportunity to pay our debt? you see a connection? what administration did you serve on there? >> president bush. >> ok, thank you. >> ok, we now recognize senator nelson. >> i believe we're on to fritter away this opportunity to get tax reform done because of the debt ceiling, but if we had our druthers, the senate budget committee has said it even do a $4 trillion package and $2 trillion could come from eliminating 17% of the tax expenditures over the next decade, which amounts to $14 trillion. so if you were to cut 17% of those tax