have access to quality, affordable health care. it has a right for all americans, and not just a privilege for a very few. in that spirit, we are proud of the work that was done. it was not a compromise. it is not -- it was a compromise. it was not the bill i would have written, but it is making they have been sent to the right to build. thank you and let us take our real people who are here today. [applause] thank you all very much.

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

>> thank you so much. >> the supreme court will hear oral arguments next week in a series of cases about the health care law. they will provide same-day audio monday or wednesday. you can hear every day as they are released. here that is on c-span 3, c-span radio and online at c-span.org. >> they nailed down a date for

when the hiv epidemic started. most of the world was wet moss. in most parts of the world, there is not that much hiv. in some places, it is incredibly destructive. understanding that these two categories exist, it allows you to think, what are the factors to keep this buyers moving and what can we do as a world to end its? >> on "after words," tracking aids. >> in march of 1979, c-span began televising the u.s. house of representatives. today, our content of politics and public affairs, nonfiction books and american history is available on television, radio, an online. >> i saw every one of those youngsters as someone i had a

personal responsibility for. general schwarzkopf felt the same way. we knew they were going into a dangerous conflicts, perhaps. we wanted to give them every benefit that would allow them to come home safely. i am more distressed than any member of this committee could ever be that there are veterans that are suffering illnesses that may be a result of their service in the gulf. i did not know if those illnesses are a result of their services in the gulf. we have to get to the bottom of this to find out what the source of the illnesses were. >> c-span, created by america's cable companies as a public service. >> which the tax filing deadline approaching, testimony from the irs commissioner to the house ways and means committee on oversight. there are 5000 fewer employees

at the irs. some are complaining about long hold times when calling the irs. the agency is asking for an 8% budget increase. this is about one hour, 10 minutes. >> a hearing on the internal revenue service's fiscal year 2013 budget request in the 2012 tax filing season. hard-working american taxpayers have faced incredible challenges over the last several years. many have struggled with unemployment, sluggish economic growth, and doubt about our economic future because of her out of control spending and looming public debt. then tax season comes around. the tax code has tripled in size since 1975. it continues to burden american families and businesses with too many loopholes, rules, and

pages. the average taxpayer spends $250 to comply with the tax code each year. it is a difficult to understand tax code. they have to hire someone else who does. the internal revenue service has the unenviable job of administering and enforcing our convoluted tax code. as we meet today, we are in the middle of the 2012 tax filing season. many taxpayers and employers are willing to meet their tax filing obligations. some have reported experiencing delays in receiving tax refunds and programming errors have delayed 6 million returns, which we will discuss at today's hearing. we will talk about the issue of tax fraud and improper payment. taxpayers are exasperated. they work so hard to consult the tax code.

they see tax reports -- reports of thieves robbing the treasury. there was an identity that rain that committed $130 million in fraud through stolen social security numbers. on top of this broad, tens of billions of dollars of taxpayer money -- on top but this broad -- fraud, tens of billions of dollars of taxpayer money is -- $13 billion in appropriations for the agency, an increase of 8% for fiscal year 2012. this request includes $360,000,000.899 new rules to implement portions of the --

$360 million and 900 new rules to implement portions of the affordable care act. i would like to welcome commissioner "the contenders -- commissioner douglas shulman. i ask unanimous consent from all members that a written statement be included in the record. without objection, so ordered. i will ask unanimous consent that the gao report on the 2011 tax filing season and the budget from the tax season be included in the record. mr. lewis? >> thank you for holding this hearing on the internal revenue service. i am pleased we have the

commissioner before us today. i have serious concern about the effect of recent budget cuts on taxpayers, tax collection, an agency operation. the most recent report to congress stated that the most serious problem facing taxpayers was that the irs was not adequately funded to serve taxpayers and collect taxes. i fully agree with this statement. this year, the agency budget was cut by over $300 million. this cut harmed taxpayers and telephone service. telephone calls have increased by 34%. but the hours phones are answered at increased 20%. over 65% are taxpayers us -- taxpayers seeking tax

assistance. they must wait an average of 17 minutes. taxpayers seeking in person assistance have also been harmed. this is clear from the wait time at taxpayer assistance and clinics. the budget cuts also harm agency operations. because force the agency to lay off thousands of employees. -- the cuts forced the agency to lay off thousands of employees. it does not help tax collection or reduce the deficit. it makes no sense. i look forward to discussing these issues related to the budget for next year. madam chair, i would like to take a moment to thank floyd williams for his dedication to the agency and to congress. he is the legislative affairs director for the irs. it plans to retire this summer.

he began his government service as a congressional page under a senator from arkansas many years ago. the senator from all consol violated the child labor -- senator from arkansas violated the child labor laws. i have worked with many -- worked many years with him on this committee and i know he will be missed. i wish him the best. thank you for your service. with that, madam chair, i yield back. >> thank you, mr. daedalus. i would like to welcome back the commissioner of the internal revenue service, mr. douglas shulman. thank you again for your time today. the committee has received your written statement and it will be made part of the record.

he may begin when you are ready. >> thank you very much to all the members of the subcommittee for giving me the opportunity to testify today. i want to talk about filing season and our strategic initiatives and to the president's 2013 budget, which would give us a much needed increase over the 2012 inactive levels. a significant portion of the president's 2013 budget would restore congressional reductions in irs funding made over the last two years. it is incumbent on all of us in the government to be as deficient as possible and to spend taxpayer dollars wisely. for the irs, that means finding savings where we can and continuing to invest in strategic priorities that allows us to include service in

voluntary compliance. from fiscal year 20 -- 2009 to the current budget, we will have achieved nearly $1 billion in budget savings and efficiencies in court irs operations. these savings and efficiencies reflect and across the board commitment to find better and more efficient ways to get -- ways to administer the tax system. we collect $200 in revenue for every dollar spent on our budget. we also collect $2.40 trillion as of last year. we issued $10 million in refunds to hard-working american taxpayers. our compliance activities brought in direct revenue of $55 billion and we blocked another

$14 billion from going out the door to taxpayers who were trying to commit fraud on the government. in this regard, i want to point out that the administration also proposal for irs funding includes critically important enforcement initiatives that would be funded by a cat adjustment. this proposal makes sense and is a reflection of the president and his administration's believes that irs funding helps reduce the deficit. congress is leading money on the table if it does not in at this proposal, which would allow for deficit reducing -- if it does not enact this proposal. let me talk about a couple of things we have gone over the

last few years that have moved the agency for word to position it for the future and do a better job serving taxpayers and make sure they comply with the tax code. let me start with filing season. e-file continues to grow. this year, we have issued 59 million refunds for a total of $174 billion. that is about the same number as last year. we have deployed several new large technology systems. i would be happy to talk about those as we get further into filing season. in strategic areas, this year for the first time in history, we have moved from a weekly batch cycle to daily processing of tax returns. k-2 delivers on the promise of

irs modernization going back two decades. we are proud of this achievement. we restructure our technology program. we have delivered those initiatives. we also had the highest score ever last year on the american customer satisfaction index rating, which is the overall score we track for a taxpayer satisfaction which interactions with the irs. we scored 73 on this index. we are proud of this achievement in constrained budget environment. our return program is up and running. more than 840,000 paid preparers have registered with the irs. the testing and education requirements are underway. this will be one of the important initiatives in the tax system in several decades. we have also made news in

progress in our battle against offshore tax evasion. we have collected more than $4.40 billion through our offshore voluntary disclosure program. we are getting people back in the system through this and other offshore initiatives. i think we have made significant progress. we have about $1 billion out of our core operating budget through in 2013 budget proposal that we have given. let me conclude my opening statement with one concern that i want to emphasize for the subcommittee. i think it is important for the ways and means committee as a whole. in recent years, it seems taxpayers increasingly face of uncertainty about what the tax law will be for the next filing season. this year, the irs is concerned with the status of the amt and

so-called extenders. if the amt and extenders are not dealt with in a timely fashion, we may have to delay the start of filing season for many millions of taxpayers have we -- as we have done in prior years. i have written to this committee before that it is imperative that whatever action congress decides to take on amt and extenders, that this action happens by the end of the year -- which will still be late by an operational perspective -- to prevent even more widespread destruction of next year's tax filing season. >> thank you, commissioner. i think we will turn to questioning. we will alternate sites with five minutes being given to each member. you testified that an

enforcement and customer service are not an either/or proposition. providing quality taxpayer service is important to help taxpayers avoid the unintentional errors, in advertent non compliance and reduce other burden some post island with the irs. access to live irs assistance is down 65%. taxpayers are waging an average of 18 minutes to talk to an irs assister. the rate of those getting busy signals or who are disconnected is doubled. this is not a new problem. it seems to be a bad trend. since 2004, the percentage of on answer calls has dropped from -- last year the average wait time was 12 minutes.

personally, i have heard from kansas certified public accountants that it was not uncommon to be on hold 20 minutes. this is despite the number of dedicated people answering the phones having increased from 8000 in fiscal year 2007 to 88,000 -- 800 in 2011. despite self-service website options, it seems the irs has placed greater emphasis on enforcement at the expense of service. you told us last year that the lack of service who have questions will only lead to greater non-compliance. can you help me better understand a few things? what actions are being taken to ensure taxpayers are able to

reach a live irs person? given your belief that the irs must deliver enforcement and customer service, do you think this budget request focuses too much on enforcement while sacrificing customer service? does the irs considers this to be an acceptable level of service? >> thanks for bringing up a set of important issues. let me repeat what i told you last year and what i talk about a lot with our employees. it is not an either-or proposition. the need to run service operations and compliance operations to make the tax system work. let me put in context the resources we have this year to put toward enforcement and customer service. we have a $300 million budget

cut, which was $1.20 billion less than the president requested for service and enforcement last year. we had to absorb foreign and other kinds of increases of $200 million in inflation. $66 million was put into our technology account. we had a $566 million reduction in our core services and enforcement accounts. what we are trying to do it is do the best we can with the resources we were given. last year, our level of service was 70%. this year, it is running at 66%. we predicted about 61%. we have routed calls. more people are using automated answering systems.

people are using our website. as you said, the weight is longer. we can squeeze as many deficiencies out the technology and other deficiencies as we can. comes down -- as many deficiencies -- efficiencies out of the technology and other things as we can. come down to how many people are answering the phones. it wants to use the web, use our automated phone, or call back. then our phone level service is 77% if you take away the people hung up in the first couple of minutes. my view up -- of this as bad -- is that we have taken a lot of action. i am proud that while service is

down, it has not degraded to a point where it could have gone given the cuts. the answer to your last question, which is do we think it is acceptable? i want everyone to contact the irs to get what they need from the irs. this year, everyone is not getting what they need from the irs. we are doing a good job given the resources we were given. >> i am looking at data. the budget cuts compared to the level of service do not always follow. given this information from the g.a.o.. we encourage you to continue to work on that. we would be delighted to work on you with that. i recognize mr. lewis for 5 minutes. >> mr. commissioner, the gl knows there has been a 34%

increase in the number of calls this filing season and a -- the g. at a all nodes that there has been a 34% increase in the number-- gao -- gao knows that there has been a 34% increase in the number of calls. can you tell us what the taxpayers are calling about? >> because could be anything from people wanting to set up a payment plan to general tax law questions. questions about, where is my refund? i filed next friday -- last friday and my prepared told me i would get a refund on wednesday. i could give you a specific breakdown what he calls are. >> thank you. we understand there is a cap adjustment of $700 million for next year's budget for an

enforcement program. what are your plans if the agency does not receive these resources? >> we are still early in the congressional budget appropriations cycle. we are quite hopeful. in the past, we have had broad bipartisan support for that adjustment. the most recent adjustment was for 2006 and 2007 with a republican president and a democratic controlled congress. we think this is a bipartisan proposal. it deflects the administration's believe that prudent investments in the irs are good for debt as a reduction. there should be capped adjustments for our budget. investments force us are good for the long term for the tax system. right now, our position is that

this budget program integrity cap adjustment is good for the system. people should agree with it. we have had good, productive conversations in the house and the senate about it. >> can you tell members of this subcommittee how the $300 million budget that has impacted the tax service this year and which services have been reduced? >> i walked through the notion of 300 million at the top. the impact is greater given where the resources were put in our budget. we have a slight dip in the number of taxpayers served in what in centers. we have had a corresponding increase in the number of taxpayers served in volunteer sites, where we encourage them

to go because we work in partnership with community organizations. our telephone service is down 4% compared to last year. automated calls are up and the wait times are longer. there has been a predictable effect because of fewer resources. with that said, i am quite proud we have been able to mitigate that that by making sure we work smart and we drive deficient -- efficiencies as much as we can. >> thank you. >> thank you, mr. lewis. now we will give five minutes to the representative from minnesota. >> thank you, madam chair. thank you, commissioner, for being here. i want to follow up on a letter

i sent you. you have been talking about this concept of a real time tax system. there have been public meetings on the issue as well. there are benefits to receiving real-time verification. bills like concerned that the cost can outweigh the benefits. having this filing system can lead to a burden similar to the 1099 system. it would have been a nightmare for american employers small and large. if the irs is going to make this real time system work, you will want to have all the data earlier than is required. look at what has been discussed today. he reporting timeline will make it more challenging for reporting requirements for a burdensome process. what are you doing to work with existing stakeholders, the business community to get their

feedback, thereby in as a partner. increased regulatory and compliance costs are a big deal for employers. he mentioned some tax rate issues. this is a factor as well. have you conducted any studies of the increased cost to businesses in changing deadline for reporting information on returns or increasing reporting requirements. would you agree to an independent study. >> that is a great question and an important set of issues. i do one of my job as commissioner to make sure i am helping move the tax system forward sothe combination of cor expectations of us working better and quicker and more timely with tax payers with

advances in technology, there is room for us to think about a feature that works better for people. what really struck me is the average tax payer, if they have an interaction with us beyond just filing, that economic activity in one year, they file the next year, and it can take up to two years to reach out to them. by the time we get back to them, they had either spend their refund or their records and all the memory is gone, whether a small business or individual. the current system as a a burden to people. i laid out this mission -- what if we could clear everything up rather than coming to them on the back end, which is the simplest way to think about this. i also recognize that things you said which is this is something that would affect some of the stakeholders in the tax system,

tax payers, tax preparers, and the way we went about this is the way a public agency should go about it, which is we held a series of public meetings which i posted with stakeholders, the broad range of stakeholders, to get their input. what we heard universally is basically make sense, we would all love that everything worked faster in the tax system, but we need to make sure we were to the details together in a constructive fashion so we do not add burden in the process. what we are doing now is taking the next step and developing detailed decisions about what this would mean. there has been a misunderstanding. we never suggested speeding up or adding more information reporting. we have asked questions about what do people have now, when is it ready, and when can they get

it to us, not is there more or do they have to start what they are doing faster. we asked ourselves, how do our systems work and how -- and when could we did this matching. >> how much will an upgraded system cost? that would be needed to run this system. how many years would it take to build and test? >> way too early. this is a vision where having conversations with stakeholders. the first step is laying out what it would mean. there are a bunch of things we did do right away, which is processing things quicker so we could have quicker engagement. i cannot tell you. there is no blueprint. we have laid out a vision, have had a broad set of stakeholder engagement, and are moving into

the next round of stakeholder pengagement. we will have public proposals, so we will have plenty of time for interaction. >> thank you. >> thank you. we will represent the press recognize -- we will rep recognize the representative for five minutes. >> if you will pass along to each and every one of your imagine thes, i cannot stress they are under given you have thousands of americans waiting to connect with them on the phone, up to 20 minutes, and many of them on happy they have to wait that long. after three minutes most americans tend to hang on in the phone call where they are having to be put on hold. i hope we will get this done in

a smart way, and i do not believe the first thing we want to do is shortchange the agency, which already has a tough task, and that is asking americans to voluntarily paid their taxes. to watch as others do not, it is very frustrating, and we do not want to undermine the voluntary compliance rate we have in this country by americans who pay their taxes. share with all the folks you work with that we thank them very much, and tell that gentleman over there that we think once we think mr. williams for all his service, because he has been a tremendous asset to the american people because of the service he has provided to irs as the go-between between your agency and the conference. we will miss him, and we want to thank you for all the service you have provided over the years.

your initiative on tax preparers. that universe of people out there who are representing themselves as competent, qualified to prepare american tax returns and get paid to do it. we know there are some great ones, but there have been some that have ripped off the american public. it is hard to believe you need a license to cut some 1's here, but in america and you do not need a license to prepare someone's most important financial documents. i am distressed as i listen to what you're saying. you have lost 5000 employees. we know when you do tax compliance enforcement, that dollar you spend to have that investigator and those folks who follow through to make sure people are complying with

payments that you returned $6 for every dollar we invest in you to do that. for us to cut $300 million from your budget, it is distressing, because the last thing we want is stories of how some overzealous tax agent goes and busts somebody's door down. for the most part you have employees who do work to help their fellow americans prepared their taxes. i hope you will sound the alarms, on the ability for us to pay our taxes the right way, voluntarily. my understanding is we now estimate some $385 billion annually is not paid in taxes that are either avoided or intentionally not paid in this country. is that the estimate?

>> that is the tax-estimate for 2006. >> that is more money than we would find you for how many years? >> a lot. >> it is incredible. we have americans who are voluntarily paying their taxes. you have other americans who are not doing what they should at the level they should, so irresponsible tax payers in this country are having to cover those who are not. you can figure out who they are if you just had the compliance money to go out there and find them. many of them make mirrors, and most of those americans are ready to pay their fair share. others are trying to send their money overseas, and we should make them pay their fair share. hope we go out there and do this the right way.

is there any hope with the funding you are getting that you can fulfill everything that we are asking you to do? >> one, it is very much the product of congress to fund us, and whenever they give us we would do the best we can. i am quite proud of this agency delivering on multiple fronts. over the last several years and especially this year, in a decrease budget fireman, trying to balance compliance and service, and we are doing a good job. >> thank you. the time is expired. >> thank you, and thank you, mr. shulman, for being here. we're talking about live with it dollars, and we need to spend them in the best we can. i was reading a report recently from the treasury inspector general for tax administration

found billions of dollars in federal education credits that were issued in error. what i'm trying to get here is to make sure we are giving the money to people who deserve the money so we can use it in the budgetary process to find -- fund those places that continue to do a good job. it is disturbing when i see how much money this represents that was potentially given to those who do not deserve it. i want to read a couple of things out of the report. 1.7 million taxpayers receive $2.6 billion in education credits for students for whom there was no supporting documentation in the irs files. almost 380 thousands of these individuals claimed students were not eligible because they did not attend the required

amount of time or postgraduate students, resulting in erroneous education credits. 64,000 of those erroneously received $88 million and education credits for students claimed as a dependent on the other one's return. 250 prisoners, erroneously received over $255,000, and then it says here that it was identified a valid social security number is required for federal student aid, but not for these educational credits. that blows me away. when we're talking about the child tax credit, that was told us there was not a requirement they have a social security number. i'm not sure how you track that when you do not have a number being used.

i want to try to find ways to help you. what we can do, you the tools you need, so you have the authority we are not going to process this return, it does not have proper information. the social security number seems like an easy thing for me, not sending it to a prison would seem like an easy thing. as well as making sure they attended the classes or leased to attend a college, a valid school member would also help to make sure when credits are being processed you have the information to verify that truly they qualify for those. can you help me out with that? >> thank you, and i appreciate the offer for help. we can always use help. we stepped up our efforts to

crack down on fraud. last year we stopped $14 billion in potentially fraudulent or mistaken credits from going out the door. the specific report you reference, i want to point out a couple things. there was a report a couple years earlier that showed there was huge error rate on the 1099 -- ort to 98 -- or 1098. there is also a recognition that the documents they were using might not have been accurate documents, meaning the education institutions often do not send in the right information, so it is not always clear that the student was there. the answer to what he can get -- if we want to block a credit because we think there is not right in documentation, if we do not have authority, we have to

go through a full-fledged audit, which is intensive and it comes to people. if we see an issue, if we do not have people who follow up, and gauge with the taxpayer, we cannot block it -- because we cannot change the retort. errorhave math's \ authority, we can go forward with that. we requested math error authority. authorization for us to share information with prisoners, so there can be punishment for prisoners, losing privileges, put in solitary confinement, our authorization to share information back with prisons so we can have that dialogue expired at the end of last year. reupping that authorization is something you could do. >> you need to be given that --

is that by law? >> yes. >> do you have the authority to require a social center the number to be on that form? >> certain credits you have to have a social security number, certain tax credits you do not. it is not a requirement. if congress decides that only people with social security numbers can get that credit, and that would have to be up to congress. we cannot stop it because it is not a requirement. >> thank you. >> thank you. >> commissioner shulman, it is good to see you. i want to take a moment to recognize floyd williams for his 15 years of service at the irs, and it is a total of 35 years of government service?

i want to thank you as you move on to what is a good retirement. thank you for your service, and , mr. reed, you're recognized for five minutes. >> i was like to explore -- i try to rely on data when we make decisions, and one thing i have a concern with is my and the enforcement -- on the enforcement initiatives, you have a return for investment. you are familiar with the issue. i believe 2013, you proposed enforcement initiatives will be 1.9 to 1. 2019, the proposed enforcement would be 4.3 to 1.

reports by 2012 there was supposed to be a 7.8 return on investment to a dollar. do you confirm those numbers, those estimates, projections with actual data? if you do, how do you do that? >> let me give you how i think about return on investment and exactly what backs it up. first of all, we are very conservative in the numbers we give you. the people we know do those jobs, a rolling 10-year average on exact enforcement initiatives. if we are going to hire 20 grade 13 examiners for an excise tax, we look like -- we look at a rolling average of how much revenue comes in for those people making adjustments. if you look back at the 10-year

rolling average. those understate the impact, because the real game of running the tax system and the real objective is the two. fort trawlers -- is the $2.40 trillion that comes in. our job is to run a good service so when people call they can answer questions. compliance coverage where there is the most risk so that if you get an audit your neighbors know you get an audit around specific issues and its sharp -- drives voluntary compliance. $12 billion budget, give or take, $2.40 trillion in revenue, every dollar invested brings you 200, or a smaller way to book at is we have turk numbers. last year it was $55 billion.

that is people go out, make an adjustment, people go through the process and bring money to us, so that as a five to 1 return. the numbers you based on this is looking back 10 years, how does that tied to those numbers. >> they are best -- based on actual data so you can confirm the numbers? you are looking at actual data? when the project for two-thirds -- 2013, you will be able to show us the actual data that confirm whether or not you hit 1.9 to 1 return on investment? >> it is very good numbers. it is 10-year rolling averages. this is an estimate.

2013 might not be exactly that, but over a 10-year. it's will average out to be that amount. >> in 2012 there was projected to be a 7.8-1 return on investment. what was the number for 2012? >> i do not think you want to look at these things as your point in time. what you want to encourage us is get the right resources that will drive the right taxpayer behavior. these numbers are ones we consult with g a zero, zero and be on. we are very comfortable with these numbers, and we have ongoing dialogue. >> my understanding is their concern is you're not using actual data to confirm those projections, that you are giving to us.

>> i would not characterize it that way. we can work with methodology and have staff conversations. >> you are working with g zeroao? >> yes. >> i appreciate the work to do. it is a tough job. >> we need to be accountable for delivering results. >> again, welcome, and does the irs have resources with the budget to tackle new enforcement responsibilities? resourcesve the available to take on new enforcement responsibilities? >> earlier i was saying we tried to do the best we can with the budget that congress gives us.

we have a big job to do when we try to balance across the board all of the things that we do. we have requested in the 2013 budget some new resources for some of the new legislation that has come through, and we're hopeful we will get that. >> in reducing -- reviewing the 2013 budget proposal, this saddles the irs by shifting out of all tobacco tax and trade bureau duties related to alcohol and tobacco to the irs with no funding allocated in this budget. is that something that he you have had internal discussions with others in the administration about? >> i am sorry. what are you referring to in the budget? >> 2013 budget proposes giving

you an additional enforcement responsibilities by shifting alcohol and tobacco tax and trade bureau duties to the irs. >> i should get back to you on this, because i do not think there is a full shift proposed. we have been reimbursed in the past to have investigators helped with some investigations. >> if you could give be some clarification i would appreciate it. one other question. it has come to my attention, i have gotten a number of letters, we have seen recent press allegations that the irs is targeting certain tea party kurds across the country -- tea party groups across the country, delaying approval for tax-exempt status. can you elaborate on what is going on with that? can you give us assurances that the irs is not targeting

particular groups based on political leanings? >> thanks for bringing this up because there has been a lot press and a lot of moving information. i appreciate the opportunity to clarify. that may start by saying, yes, i can give you assurances. we pride ourselves on being in a non-political, non partisan organization. i am the only -- me and our chief counsel -- are the only presidential appointees, and i have a five-year term that goes through presidential elections so we will have none of that kind of political intervention in things that we do. for 501-c4 organizations, organizations cannot need to apply for tax exemption. they can hold themselves out as

these types of organizations, and file a 990 with us. organizations that have been in the press are all ones that are in the application process. it is very important to emphasize that all of these organizations came in voluntarily. they did not need to engage the irs and a back and forth. they could have held themselves out, file out990, and if we had seen an issue gauge, we would have done so. they need to be primarily engaged in promoting the general welfare of their community. they can be involved in campaign activity, but it cannot be their primary purpose. when people apply for 501-c4 status, we engage them in questions about making sure that we can understand their primary

purpose around this and other sorts of engagement. what has been happening has been the normal back and forth that happens with the irs. none of the alleged tax payers -- and i cannot talk about individual taxpayers -- are in and an examination process. they are in an application process that they moved into voluntarily. there is no targeting. this is the kind of back and forth when people apply for this status. >> is is fair to say there has been no change in irs practice with regard to what triggers audits and so forth with regard to tax-exempt organizations as a whole? >> as a whole, we have audits based on risc, criteria, coverage requirements, etc. in the area of political activities, just to make extra

sure that folks are very insulated, we have a committee of three career professionals who are not based in washington, d.c., at any time an audit will be triggered because a potential political activity or there is a referral from a member of congress and other things that could be viewed as political, three actually first looks at it so no single individual can launch an audit. it has to be an agreement amongst three. the decision then would be made for an audit based on resources, risks, and it would be shipped out to an auditor to do that. that has been the practice for many years for anything to do with political activity, and that is the practice now. >> i think you for the answer. do you want to inquire? >> thank you.

i want to shift the question just a little bit, or the issues we have been dealing with. i have a lot of lgbt clients or constituents. they have been approaching the about the problems of dealing with the irs and how to file their income taxes and are having the experience of having more than one source give them a different answer. so they are not quite sure -- and they are spending some of them twice as much as a married couple would spend to get their income tax done. they have gotten married under the law, but suddenly the irs -- when they ask questions about certain things it is just not clear what the answer is. i am wondering, is there any single place or should there be

a single place where they can call and find out the answer to question or someplace in the irs or somebody takes this issue and begins to give definitive answers? >> great question. i am aware of the issue, and we have tried to do a bunch. it is a very complex issue for these taxpayers, because -- these taxpayers have a different legal status under federal law. under state law that offense but the income, but under federal law they have to file separately because allow the federal laws. we recognize there is a lot of confusion, and so we actually consolidated and put a group together to work and put out a whole set of frequently asked questions that answered a lot of

these questions. we have realized that as laws have changed around the country this has been an issue. we have been engaging with the community around this, and we have clarified a lot of questions. until you have state laws and federal laws recognizing couples the same way, this is going to remain difficult for people, because some of the things people have asked us to do we cannot do under the law. >> when they are filing their income tax federally, i suppose if you have different things at the state level, a federally if they are doing it together -- they cannot do it together? >> it all depends. different states have different domestic partnership laws, but states often piggyback on federal returns, but recognizing couples as couples his different depending on which state and also federal laws are

different. >> said the piggybacking off the federal tax return works in reverse at the state level. they are going to have to change some state laws to make this rational? >> to these tax payers filing. we make sure we do our job, which we have a set of taxpayers with specific issues, we did out reach, and we try to clarify what we could clarify. >> if i had a question, what number what i call to get the answer? >> you would dial our 800 number. >> and that number should get you to somebody who would give you the same answer day after day after day? you will not get two different answers? >> we hope. >> i appreciate that. it is an issue i hear from the

district a lot and i want to know and we will see if there are things we need to do. >> with your indulgence, mr. becerra as a follow-up question. >> commissioner, two weeks ago i sat down with my tax preparer and went over my taxes in preparation to file. he has been doing this forever. he is licensed. he said to me, i was always supportive of what you were doing with regard to the taxpayers trying to get us to be a more defined group said -- because he gets folks who come in to correct taxes that had been filed and properly by folks who prepared these things cannot charge people money, and it is the wrong way.

he asked a question, it seems to me like a lot of question -- people who have done this for a long time are the ones being asked to go to the process to certify we are competent. i said to him, my sense is that everyone is going to be at some point touched by the irs, moving toward try to certify that people are certified to be competent representing themselves as qualified preparers of tax returns for money. i am wondering if you could tell us with the status is of the initiative to try to help did that bird-dogging, the oversight of tax preparers, and response to the questions of who is being contacted out in the tax preparer world by the irs to follow up? he said he had to go through some courses or programs to test his qualifications and so

forth, so if you could give us a quick sense of where things stand. >> similar to what i talked about with the real time system, this is a big initiative. we have multiple public hearings around the country, without regulations with public comment, so we have had a lot of engagement, so this is about partner during which to prepare community to make sure taxpayers are served well. we have 840,000 people apply and receive preparer identification numbers. about 60% of those were not already and enrolled agent or a lawyer. enrolled agents -- your preparer and cpa's you already had higher level

qualifications, had already gone through their set of competency testing, already had ongoing continuing education requirements, we are not requiring to take the tests because they have already taken the tests or have continuing education. your parents should not have had to take a test if he was an enrolled agent. we have 840,000 people signed up. last fall he started administering the competency examination, and we have been under a people through that. one of our promises was to the american people, as we were not going to cut out prepared services, we wanted to make sure people could still get service, and there are a lot of competent preparers who have been preparing returns for up to 30 years who have not taken a test. we gave them three years to pass the test. people are now starting to pass the test. he did not become a registered

prepare until you pass the test. now people are starting to move to the tests, and we have had several thousands who have taken the test and we expect that number to grow. we have started approving continuing education providers, because this year continuing education requirements kick in. we're well on our way. the last thing i would say, this filing season, we had the processing of things everything faster, and had better date at analytics. we were able to look at prepares who had problems with their returns, go out to them immediately in late january with this is, letters, phone calls, and start in cage to prepare our community to make sure they are treating taxpayers well. we're pleased with this initiative. >> thank you very much. >> they, mr. chairman.

i apologize for being late. we appreciate the work you are doing. a lot of issues are pending. we had a chance to review the report, and you at the irs are paying attention to that. i see some of the disturbing trends in the report, the inadequacy of funding. in particular there were concerns about funding cuts and the inadequacy of resources. what that means to the ira's ability to address the noncompliance issue. the concern is only going to grow wider. if there is a lack of confidence in the irs when it comes to compliance, it is only going to exacerbate the situation. do you agree with the report with regard to enforcement of noncompliance? >> wie ad budget cuts and we try

to do the best we can. we have not talked about compliance. clearly, we are doing exams this year and we have to triage and do less collection activities. than otherwise would have come in. the big trend i am worried about is if we do not stem the tide in the 2013 and 2014 budgets, you get to a point where there is enough news about compliance rates being so low that a lot of people are wrong to pay their taxes because they are honest americans and want to pay in to the society that they feel benefits that. if people want to push the envelope, and what to cut corners, if they think we are not on the job, they will do so. the general comments about you cannot have a long-term trend

of degrading compliance resources, because that starts to hit voluntary compliance, is accurate, and the specific of just less funding means less dollars in the door. >> we're approaching the second anniversary of the passage of the affordable care act. one provision allows tax credits, 35% this year. it is supposed to go to 50% in 2014. there are moments back home when small business owners complained about the complexity of that credit and having to fill that out. what is your opinion on that, and is that an item where the irs or us working with you can simplify the process to make it easier for small businesses to qualify for that credit? >> yes, it is an important tax credit for small businesses. it helps them off for paying for health coverage for their workers, which is a key

component of the affordable care act. it is a very complex credit. we have heard from a lot of practitioners and small businesses that the face dodge out around that and other issues have made here hard for people to understand if they can hit the sweet spot where you get the credit and sometimes discourage people from taking advantage of the credit. the president's budget actually has a supplication -- simplification proposal in it, which makes it hopefully much more attractive to small businesses, and congress passing that would be beneficial, and -- >> you think that makes a lot of sense? ayotte yes. >> in 2014, the exchange is going forward with the individuals in the exchange market. is the irs making preparation

for that? >> yes. we're making preparation. we're on track. the majority of the work we're doing and the people we have had to hire his to build technology systems to interact with the state exchanges and the federal exchange said that an estimated 30 million people can get over $400 billion of tax credit. i testified yesterday before our appropriations committee, and what i said to them is i understand there is heartfelt policy debate about the affordable care act and that there are members of congress who do not like it, there are some who like it. the bottom line is come 2014, there is going to be a lot of constituents and every district who expect the credit when they show up at the exchange, and we need to get funded properly in 2013 to prepare for that. we're spending money now based

on operation is that came to the bill, but we when did he -- but we will need to get financial support. we are involved in moving the money to make the law work. >> thank you, mr. chairman. >> the broader question, the complexity of the tax code, gives impetus to all of us to look at tax reform. it is something we should do in a bipartisan way. commissioner shulman, thank you for preparing with us today. be advised members may have additional questions they can submit to you in writing, and those questions and your writing will be made official part of the record. with that, we will conclude the subcommittee hearing. [captions copyright national cable satellite corp. 2012] [captioning performed by national captioning institute]

up until lat >> the supreme court will hear oral arguments next week in a series of cases over three days about the constitutionality of the health care law. you will be able to hear a same- day audio of the proceedings as it is released. the first day, monday, the

question before the court, is the health care law -- the health care what constitutes a tax, does the supreme court have jurisdiction? >> this weekend on american history tv -- >> the fdr memorial was three- plus designs before they got to a final plan. we should not be afraid of looking at this issue because we are building something for the centuries. we want to get it right. >> with the eisenhower memorial opposed by that family, a committee discusses the marmoreal for our 34 president, part of american history tv this weekend on c-span3.

ben bernanke returns to his former profession as a teacher with classes at george washington university this month. to date's class focuses on the recent financial collapse, with him telling students that that rate policies did not contribute to the housing bauble. this is about an hour and 20 minutes. >> let's get started. i would like to welcome ashton's bachus as well as our -- i would like to welcome our students back as well as the fact of it. it is anything like tuesday, this will be a great session. chairman bernanke.

>> it is very helpful to try to put the recent crisis and the ongoing recovery in to an historical context. last time we talked about the origins of central banking going back to the bank of england and the debates of the 19th century. the origins of the federal reserve and the federal reserve 's first great challenge which was the great depression. we drew some lessons from the 1930's that will be relevant as we discuss more recent events. today i will pick up the history after world war ii, talking about important episodes after the war, but i will be getting in today to the beginnings of the crisis.

for the latter part of today's lecture, and all next week, it will be about the crisis. now, as we go along i want to make sure you keep your eye on the ball thematically speaking. the two basic ideas, the two basic missions of the central bank are first, macro economic stability, maintaining stable growth, keeping inflation low and stable, and of course, as you know, the principal policy tools for maintaining macroeconomics stability is monetary policy. in normal times the fed or central banks will use the open market operations, purchases and sales of securities, and markets to move interest rates up or down, and try to create a more stable macroeconomic environment. that is an important part of any

central bank's mission. the other part of its mission is financial stability. central banks are focused on trying to ensure that the financial system is functioning properly, and they want to prevent if possible, and if not, to mitigate the effects of a financial crisis or financial panic. we talked about the lender of last resort function, the notion that in a financial panic the central bank can follow its role of lending freely against good collateral at penalty rates, and providing short-term credit to financial institutions, a central bank can offset the effects of a run or a panic and the accompanying damage to the financial system and the economy. let's move ahead and talk about the history. we left off in the world war ii, which ended the depression which led to a sharp drop in unemployment as people were put to work building munitions

answer been the home front -- and serving the home front. when of the aspects of wars is how wars finance, and normally they are substantial by borrowing. this is not a surprise. u.s. national debt was built up quite substantially during world war ii debate for the war, and the fed in cooperation with the treasury used its ability to manage interest-rate to keep interest rates low so as to make it cheaper for the government to finance world war ii. that was the role of the fed during the war. after the war ended, the debt was still there. but government was still worried about paying the interest on the national debt, which was a very high level. there was pressure on to the fed to keep interest rates low even

after the war, but there was a drawback to that which is if you keep interest rates low even if an economy is recovering you are risking overheating and the company -- overheating and economy. by 1951, the fed was concerned about inflation and prospects in the united states, and after a series of negotiations, the treasury agreed to end the arrangement and let the fed set interest rates independently as needed to achieve economic stability. that agreement was called the fete treasury accord of 1915, and it was important because it was the first clear acknowledgment by the government that the federal reserve should be allowed to operate on an independent basis. today around the world there is a strong consensus that central banks that operate independently will deliver better results than those dominated by the

government. a central bank which is independent can ignore short- term political pressures, for example, to pump up the economy before an election, and in doing so he can take a much longer perspective and get better results. the evidence for this is quite strong, and as a result, major central banks around the world are typically independent which means they make their decisions in respect of a short-term political pressures. and 1960's, the primary concern of the fed was macroeconomics stability. you'd see a picture of the chairman their, from 1951 to 1970, 19 years. he was the leader of the fed. chairman greenspan's term ended at 18 years 6 months, and he

unfortunately did not break the month -- break the record. in that case we have had two chairmen who account between them more than 37 years of leadership at the fed during the postwar period. monetary policy during the 1950's and early 1960's was simple. the economy was growing, as after the worst, the u.s. economy was dominant. the fears about renewed depression had not come true. as a result, a lot of grit was occurring. what the fed tried to do was follow was a lien against the wind monetary policy which meant that when the economy was growing quickly the fed tightens to try to restrain overheating. when the economy is growing more slowly, the fed lowers interest rates, crete's expansionary stimulus in order to avoid a recession. william martin very attentive to

the risk of inflation. you see a quotation there from him. "inflation is a thief in the night." he tried to keep inflation and growth stable, and indeed, despite the fact that the 1950's were more tumultuous than you might think, their work after all a serious war in korea, a couple of recessions during that decade. it was basically productive and prosperous decade as the economy went back to civilian operations after the end of world war ii. however, as usual things were not to remain completely trouble-free. starting in the mid 1960's, for a variety of reasons, monetary policy became too easy. after a period of time, and

after given the fed did not change its stance, this easing monetary policy led to a surge in inflation and inflation expectations. you see a graph of inflation, from 1960 to 1964, inflation averaged over 1% a year. it picked up during the vietnam period. even higher in the early 1970's. by the end of the 1970's, the inflation rate peaked at 13%. inflation was a growing problem started in the mid 1960's and into that 1970's. an important question, why was monetary policy so easy as to allow inflation become a problem in the 1970's? one issue was a technical issue, which was that monetary policy

makers became too optimistic about how hot the economy could run without generating inflation pressures. by keeping inflation and little but hire you would be able to get that better performance, the higher employment level, and in the prosperity of the early 1960's, the fed began to follow that approach. there was quite a subtle issue here, which was economic theory and practice in the 1950's and early 1960's suggested there was a permanent tradeoff between inflation and employment, the notion being if we could keep inflation a little bit above normal we could get permanent increases in employment, permanent reductions in unemployment, and that was the view taken by many economists during that time. it was milton friedman who wrote

in the mid 1960's that this has got to cause trouble, and he argued that increases in inflation may give you a bump in employment, caused an opponent to fall for a while, but that is what to be transitory effect. the analogy might be to a candy bar. hideki candy bar in the short run, it gives you a burst of energy, but after a while it just makes you fat. monetary policy was analogous to that, and friedman argument, and he turned out to be quite prescience, that it tends to creep out of plumb it too low we up increasing inflation. there are debates today about whether or not there were political pressures put on the fed. this was a period of government

deficits, and the government was trying to deal with vietnam, the great society, and that may have influenced the fed's behavior. now, this said, you cannot obviously sustain inflation without monetary policy being too easy. another famous quotation, nation is always a monetary phenomenon. there were a bunch of exacerbating factors that made it difficult to offset the increase in inflation. there were a number of shocks to prices of oil and food. a striking example was in 1973, october, the war in the middle east broke out. in retaliation to a u.s. support of israel, opec, the

organization of petroleum exporting countries, found some cartel power, put an embargo on oil exports, and in the in a short period of time, in the early 1970's, the price of oil almost quadrupled. very sharp increases of will prices and gas prices. people were lining up at gas stations to make sure their gas tanks were full. there is a system of even-odd rationing. if your license plate was even, he could only goes on tuesdays and thursdays. it was a serious issue and there was a lot of unhappiness about gas prices than as there is of course today as well. fiscal policy i also mentioned. fiscal policy was overall to use during the late 1960's and early 1970 prostrate the vietnam war and other programs increase government spending and increase

deficits which put additional pressure on the capacity of the economy. another element that -- wage- price controls. when inflation got up to 5%, president nixon introduced wage price controls, a series of laws which forbade firms from raising their prices. there were exceptions and there were all kinds of boards to try to find exceptions. it was an unsuccessful policy. on the one hand, prices are at it service stat of an economy. putting controls on wages and prices meant there were shortages and all kinds of other problems. in addition, as milton friedman put it, it was like dealing with an over heating furnace by breaking the thermostat. the fundamental problem was the fact that there was too much

demand, driving up prices, and simply, passing a law which said people could not raise prices does not address the problem of excessive demand. the controls kept inflation artificially low for a couple of years, made it harder for the fed to figure out what was gone on, and when they collapsed because they were creating so much -- so many problems in the economy, inflation surged like a spring was released at the end of the wage-price controls. there were a lot of reasons supporting the increase in inflation. here's a picture of arthur burns, the chairman of the fed in the 1970's and the quote is, in a rapidly changing world, the opportunities to making mistakes are legion, which are certainly true. i think one way to think about this whole episode is that

after world war two, and the end and the conquest of the depression and prosperity that they saw, economists and policymakers became a little bit too confident about their ability to keep the economy on an even keel. and there was the term fine-tuning, the notion the fed and other fiscal policy and other government policies could keep the economy more or less perfectly on course and not worry about bumps and wiggles in the economy. now, that turned out to be too optimistic, too huberistic and learned that in the 1970's when the efforts of the policymakers resulted in the lower unemployment rate which was the original goal but a higher and very sharp increase in inflation. so i think one of the themes here and this probably applies in my complex endeavor, oh,

humility never hurts. there was a reaction to the increase in inflation in the 1970's. and the key person in this period is chairman paul volcker who remains to this day an influential figure in economic policy discussions. to deal with double-digit inflation, i should say first that president carter, whoese re-election was in serious threat by the poor reflection of the economy appointed paul volcker to be the new chairman of the fed and in part did so because president carter thought that volcker was a tough central banker who would do what was necessary to get inflation under control. and paul volcker who stands '8" and smeeks big cigar certainly created an impression of somebody who is willing to take

strong action and perhaps it wasn't a total coincidence. so paul volcker came into office. he was only in office for a few months when he determined that strong action was needed to address the inflation problem, and in october of 1979, he and the federal market committee, the policy-making committee of the fed instituted a strong break in the way that monetary policy was managed. it's not really necessary to go into the details of what that break was and how it worked. basically what it did was allow the fed to raise interest rates quite sharply. as you know, raising interest rates slows the economy and brings inflation pressures down. paul volcker said to break the inflation cycle we must have credible and disciplined

monetary policy. and it worked. in the years after this program began, inflation fell quite sharply. you see from 1980 to 1983, inflation fell from about 12% to 13% all the way down to about 3%. so relatively quick decline in inflation that offset the problems of the late 1970's. so in that respect, the policies of the 180's were quite successful, they achieved their objective bringing inflation under control. however, nothing is free and one of the effects of these policies was to raise interest rates quite sharply. i do remember vaguely, i just got out of graduate school 1981, 1982 and i do remember looking at the possibility of

buying a home and being informed the mortgage rate for 30-year mortgage was 18.5%. so interest rates were quite high, and as you might expect, that brought down economic activity and affected inflation as well. so if you look at the graph, you see this is the unemployment rate. the high interest rates which were necessary to bring down inflation also caused a very sharp recession. and in fact the unemployment rate in 182 was almost 11%. even higher than we saw in the most recent recession. so there was definitely a very negative side effect from paul volcker's activities. now, i think an interesting aspect of this is that the political pressure, you can imagine, on the fed and chairman volcker was intense. during this period, it was common practice to mail to the

fed bits of two-by-fours and on the two-by-fours they would say stop killing construction or save the farm or whatever it might be because the high interest rates were having very negative effects on the economy and i have a few of these on my desk just to remind me, you know, that inflation is a concern and that we always have to pay attention to price stability. but this is also an example of why independence is important. if paul volcker had been re-elected, perhaps he wouldn't have been able to sustain this policy, but instead he maintained an independent monetary policy. he received at least sufficient support from president reagan and from the congress and he was able to carry through the policy which again succeeded in bringing inflation down. now, during the 1970's,

obviously output and inflation were very volatile. we saw how much inflation moved around and i didn't mention but there was a pretty sharp inflation, also, from 1973-1975 after the opec embargo, and then of course there was more volatility in the early 1980's as volcker brought down inflation and as the economy went into recession. now, paul volcker left the chairmanship in 1987 and he was replaced by alan greenspan who, again, held the position for almost 19 years from 1987. as the quote suggests, one of the important accomplishments of greenspan through most of his tenure was achieving greater economic stability. as he says, greater economic stability has been key to impressive growth and standards of living in the united states. so in fact, there was so much improvement in the stability of the economy that the period has

been -- come to be known as the great moderation. as opposed to the great stag nation of -- stagflation or inflation. this was a striking phenomenon, the great moderation. the first picture here shows you the variability of real g.d.p. growth. so the graph covers the period from 1950 all the way up essentially to the present. the line just shows you quarterly growth rates in g.d.p. so a sharp line, a sharp peak shows an increase in g.d.p. growth, a negative decline shows a fall in g.d.p. growth. these are quarterly numbers so you can see the bouncyness, periods of growth followed by periods of slower growth. the yellow bar is a one standard deviation band, a

measure of the average volatility of g.d.p. growth quarter to quarter between the period of 1950 and 1986 -- or 1985, i guess. and you can see that g.d.p. growth was pretty vareable throughout the period. there's a lot of volatility in the economy and a number of recessions including the severe ones in 1973 and 1981. now, amazingly, starting from about 1986, look at what happens to g.d.p. variability between 1986 and 2007 or so. the varlte is much less and it shows a standard deviation band for this latter period and is very striking how much more stable the economy was over this 20 or so year period. this was true not only for real g.d.p. growth but also true for inflation. so, again, the same picture

basically, the line, the vertical line in the middle of the graph splits the time period from pre-1986 and post-1986. the graph shows inflation quarter by quarter as measured by the consumer price index. again, the tan bar shows one standard deviation average volatility of inflation in the pre-1986 period. you see the huge spikes in inflation in the 1970's. and then in the post-1986, you see much more stable, much lower volatility. so both growth and inflation were much more stable, and really quite remarkable extent and something economists commented on quite frequently. that was so-called great moderation. now, why was the economy so much more stable between the

mid 1980's and the mid 2000's? well, there's lots of research on it, lots of issues, lots of papers. i think there's a good bit of evidence that monetary policy played a role in creating better stability, in particular volcker's contribution was even though his short term efforts to bring down inflation in the early 1980's led to a high recession, led to a lot of pain, there was a payoff and that payoff was an economy which was much more stable with low, stable inflation, more stable monetary policy, more confidence on the part of business people and households, and that contributed very importantly to broader stability. so you remember that the -- friedman pointed out there was no long-term tradeoff between inflation and unemployment by

keeping inflation a little higher, you couldn't permanently lower unemployment. but in a different sense -- which is true. but in a different sense, low and stable inflation over a long period of time does make an economy more stable and supports healthy growth and productivity in economic activity. so low inflation is obviously a very good thing to have. and the reduction in inflation that occurred in the 1980's was really a global phenomenon. a lot of countries had inflation problems in the 1980's but all around the world, even developing countries brought down their inflation rates quite considerably and that has been a positive for economic growth and stability since the mid 1980's. now, not all of the great moderation was caused by monetary policy, there are other factors no doubt playing a role. i mentioned just general structural change in the

economy. an example would be that over time, firms have learned how to manage their inventories much more effectively. the practice of so-called just in time inventory management is a practice where by instead of having large stocks of inventory onhand, firms only acquire inputs when they need them to produce. and without large stocks of inventories onhand it reduces an important source of fluctuations in the economy because if demand slows down, you have a big inventory, then you don't do any more production for quite a while until you run down that inventory but improves management of inventories. it's just an example and many others could be cited of better business practices and factors in the economy that made things more stable. it may also just be the case that there was better luck that we had fewer oil price shocks and other things happening, and that, too, may have contributed

to the great moderation. but as those previous pictures showed, i hope it's clear that it was quite a striking change in the way the economy operated after the mid 1980's. ok. now, this takes us up, then, into the mid 200's. so now finally we can begin to talk about financial stress and recent developments. just a final word about the great moderation. one of the other aspects of that period is that there weren't any big damaging financial crisis in the united states. there was a stock market crash in 1987 but it didn't do much damage. a more significant event was the boom and bust in the dot-com stocks in the late 1990's, and that touched off a mild recession in 2001, but in

one of the inferences that people took away from the great moderation was not only was the economy more stable but the financial system seemed more stable as well. and as a result, financial stability policies got deemphasized to some extent during this period. let's turn now finally to the prelude to the financial crisis. and what i'll do today is just talk about some of the initiating triggering events, particularly the housing bubble. again, as i said, we'll get next week into more details about what happened during the crisis and the federal reserve's response. one of the key events that led ultimately to the recent crisis was a big increase in house prices. so the graph on the right shows prices of existing single

family homes where january 2000 is indexed to be 100. from the late 1990's until the early 2006, house prices across the country increased by about 130%. you see that line going straight up, a very sharp increase in home prices. and at the same time that was happening, or perhaps a little later in the process, the lending standards for new mortgages to buy homes were deteriorating. now, clearly, a big part of what was happening to create the housing bubble or the increase in housing prices was psychology. after all, the late 1990's, was a period, you know, of a lot of optimism about tech stocks and stock market more generally, and some of that optimism, some of that psychology no doubt fed

over into the housing market. so there was an increasing sense that house prices would keep rising and that housing was a can't lose investment. i lived in california for a while and earlier than this but it was a period during which house prices were rising and all everybody ever talked about at cocktail parties was what's your house price now and how much money are you making on your home and kind of made working unnecessary because all you had to do was just keep checking the real estate listings. so there was a lot of excitement and enthusiasm about the fact housing prices were going up and making everybody rich. at the same time that this was happening, the standards for underwriting new mortgages were getting worse and worse which in turn was bringing more and more people into the housing market and pushing up prices even further. so let's talk a bit about the

mortgage quality and what happened. prior to the early 200's, home buyers were typically asked to make a significant down payment, 10%, 15%, maybe 20% of the home price, and of course they had to document their finances, their income, their assets and so on in great detail to persuade the bank to make them a loan which in many cases might be, you know, four or five times their annual salary. unfortunately, as house prices rose, many lenders began to offer mortgages to less qualified borrowers, so-called nonprime mortgages, and these mortgages often required little or no down payment and little or no documents. i say prime rather than subprime and they were the lowest quality mortgages in terms of credit of the borrowers but were other

mortgages that were called a-a and other mortgages that were also not up to the traditional standards of credit underwriting, so i say nonprime, what was happening again was that essentially that lenders, mortgage lenders were moving further down the credit spectrum, lending to more and more people whose credit was less stellar. you can see this in a number of different ways. on the left side of this picture is the share, the percentage of mortgage originations, that is new mortgages created that were nonprime, that is either subprime or alt-a or some other lower quality mortgage and you can see the very sharp increase particularly in the middle 200's, in 2006, almost 1/3 of all mortgages that were originated were nonprime.

another indicator of the duration of mortgage quality and the right figure is the percent of nonprime loans with low or no documentation. if you think about this, this is kind of perverse. if you're going to make a loan to somebody whose credit is shaky, who doesn't have a down payment and maybe their fica score is low and so on, you'd think you would want to ask them even more questions about their income and prospects but in fact it went the other way. and you can see by 2007, 60% of nonprime loans had little or no documentation to describe the creditworthyness of the borrower. so there clearly was an ongoing deterioration of mortgage quality. now, this situation couldn't go on forever. this picture shows the house -- sorry. this picture shows the debt

service ratio as house prices went up and up and up. the amount of income or the share of income being spent on your monthly mortgage payment went up, and as you can see, eventually the mortgage payments became quite large share of personal disposable income, finally reaching the point that the cost of homeownership was high enough that it began finally to dampen the demand for new houses. and as we see, that service ratio collapsed going after that basically because interest rates came down. but the main point here is that high interest rates -- sorry, high payments on mortgages final will -- finally meant there were no longer new home

borers and new home purchases and the bubble burst. here's a picture of home prices. you can see again the sharp increase from the late 1990's up until about 2006, but from 2006 until today, house prices have fallen more than 30%. so there's been a very sharp decline in home prices across the country. now, one comment about this picture, if you look at this picture, you might say to yourself, oh, my gosh, we have a long way to go because you see, house prices today are still a good bit above where they were 15 years ago. but remember, these prices are in dollar or nominal terms. there's no adjustment for inflation. so even if there was 2% of inflation a year, over a period of 15 years, that would raise prices by 30% to 40%. so if you adjust this for inflation, you get that house

prices now are coming much closer to where they were before the beginning of the bubble. now, the house price collapse had some significant consequences. one consequence is that many people who had felt rich because their home had gone up and they had a lot of equity, suddenly found themselves under water which means that their mortgage, the amount of money they owed was greater than the value of their home. so this is a negative equity. so this is an upside down situation where the borrower is in fact has negative wealth or negative equity in the home. and you can see that starting in 2007, the number of mortgages that were in negative equity grew very sharply. currently there are about 12

million to 13 million mortgages out of a total of about 55 million or so in the united states, so roughly 20% to 25% of all mortgages are now currently under water. that's a very big change from the situation we saw before. at the same time, given the decline in house prices. given that a lot of people borrowed more than they could afford, the decline in house prices led to a big increase to mortgage delinquencies and people not paying on time and ultimately the bank taking over the property and that's called a foreclosure and then reselling the property to somebody else. so this is mortgage delinquencies. you see in 2009 there were more than five million mortgages in delinquency, which is about, again, almost 10% of all

mortgages it. so a very, very high rate of delinquencies. now, of course what we just looked at was the effects of the house price bust on the borrowers and homeowners and those are quite serious. but of course there's another side to this which is the lenders, the people who made the loans. and obviously with something close to 10% of mortgages in delinquencies, banks and other holders of mortgage related securities suffered sizable losses and that proved to be an important trigger of the crisis. now, there's an interesting question here, in 1999, 2000, 2001, we had a big increase in stock prices, including but not only dot-com or tech bubble prices, and that -- those prices fell very sharply in

2000-2001, and a lot of paper wealth was destroyed by that. and in fact, the amount of paper wealth destroyed by the decline in dot-com and other stock prices was not radically different than the amount of wealth destroyed by the housing movement bust. and yet, as you know, the dot-com bust led only to a mild recession. the 2001 recession went from march to november, only its months of recession. unemployment rose but was not anything nearly so dramatic as in the 1980's or more recently. so here we had a big boom and bust in asset price but without too much real serious or lasting damage to the financial system or the economy. now, in the recent case we had a housing boom and bust, if we

were looking back at 2001, we would think well, that's going to cause a slowdown in the economy but probably won't be that serious. and that was one of the views we were discussing in the fed in 2006 as we saw house prices decline, might this not look like -- might this be more like the 2001 episode than something different? and yet of course as we know, the decline in house prices had a much bigger impact on the financial system and the economy than the decline in stock prices. and i think to understand that, it's important to make the decision -- the distinction between triggers and vulnerabilities. the decline in house prices and the mortgage losses were a trigger. they -- to use another metaphor, it was a match thrown on kindling but there wouldn't have been a him consolation if there weren't a lot of dry

kinder around. and the housing bust in some sense was set afire. in other words, there were weaknesses in the financial system that made -- that transformed what might otherwise have been a modest recession into a much more severe crisis. now, what were those vulnerabilities? what was it about the financial system of the united states and of other countries as well that transformed the housing boom and bust into, again, a much more serious crisis? again, we'll talk about this in much more detail next week but just a preview, there were vulnerabilities in both the private sector of our financial system and also in the public sector. in the private sector, many borrowers and lenders took on too much debt, too much leverage. and one of the reasons they might have done that was because of the moderation.

there were about 20 years of calm conditions and people became more confident, more willing to take on more debt. the problem with taking on too much debt is that if you don't have much margin if the value of your asset goes down, like the value of your house, then pretty soon you find that you have an asset which is worth less than the amount of money you borrowed. a second problem, very important problem, was that throughout this period, financial contracts, financial transactions were becoming more and more complex, in ways which i'll describe, but the ability of banks and other financial institutions to monitor and measure and manage those risks was not keeping up. that is, their i.t. systems, their resources they devoted to risk management were insufficient for them to understand fully what risks they were actually taking and how big the risks were. so if you had asked a bank in

2006, well, suppose house prices fall 20%, they probably would have greatly underestimated the impact of that on their balance sheet because they didn't have the capacity to measure accurately or completely the risks that they were facing. risk they wer. a third problem, which will come back to again, the funding said financial firms rely very heavily on short-term funding, which can have a duration as short as one day. most of it is less than 90 days. like the banks of the 90 the century that were relying on deposits and making loans, they had essentially had a short-term liquid form of liability, which we will see is subject to runs.

aig use the credit default swaps to sell insurance to investors. basically what they were promising is if you lose any money on these collateralized debt obligations or whatever these things are, we will make good. as long as the economy was doing well and the financial system was doing well, they were just collecting the premiums on the insurance and there was no problem. once things went bad, them being on one side of all the bets they were exposed to enormous losses which had very serious consequences. those are some of the problems

that occurred in the private sector. we spoke a little bit about the public sector. there were also serious problems there as well. first, the financial regulatory structure had been changed a number of times. basically it was the same structure that had been created in the 1930's during the depression. now look at the insurance products they sell. the office of strict supervision and looked at the small banks

that they own. nobody was really looking carefully at this problem that i was just describing. as i will talk about, another group of firms was the government sponsored enterprise and fannie and freddie which did have regulators. for reasons i will explain, they were very inadequate. the regulatory structure had lots of holes and it. there were many important firms that proved to not have good oversight. even where the laws provided for regulation and supervision, it often was not done as well as

it should have been. while this was true across the whole range of agencies and parts of the government, let me talk about the fed. the fed made mistakes on supervision and regulation. i would point out that in our supervision of bank holding companies, we did not press hard enough on the issue of measuring your risk. i mentioned before that a lot of banks simply did not have the capacity to thoroughly understand the risks they were taking. the supervisors should have pressed them harder to develop the capacity. if they did not develop the capacity and should not a taken these risky positions. i think banks supervisors did not press hard enough on this. that turned out to be a serious problem. another area where the fed

performed poorly was and consumer protection. the fed had some authorities to provide some protections to mortgage borrowers that would have reduced at least some of the bad landing that occurred during the latter part of the housing bubble. for a variety of reasons, that was not done nearly to the extent it should have been. in 2007, when i became chairman we did undertake some of these protections. it was obviously too late to avoid the crisis. were there were authorities and powers, they were not effectively used. that obviously lead to some witnesses. a final and more subtle point, a

lot of agencies like the fed or the office of thrift supervision typically have just a specific set of firms. the problems that arose during the crisis for much broader base than that. it transcended any single firm are strong -- small group of firms. they transcended the entire system. essentially what was missing here was enough attention being paid to things that could affect the system as a whole as opposed to individual firms. nobody was really in charge of looking to see whether there were problems related to the overall financial system or the relationship between different markets in different friends and that could create stress or even

a crisis. those were some of the vulnerabilities and the public sector. we're going to come back to -- we are to come back to the vulnerability is and how the play out next week. let me conclude by talking about a controversial topic, which is another aspect. that is the role of monetary policy. many people have argued that another contributor to the housing bubble was the fact that the fed kept interest rates low in the early part of the 2000's following the recession of 2001. when the economy got very weak and there was very small job growth. when inflation fell very low, the fed cut interest rates in 2003. the federal funds rate down to 1%. there are people who argue that this was one of the reasons that house prices went up as much as

they did. it is true that low interest rates, one of the purposes of low interest rates that monetary policy achieves is to increase the demand for housing. we want to understand the crisis because going forward we want to think about what we should take into account only go into monetary policy. what extent should we be thinking about things like housing bubble woman make monetary policy. we look at this in great detail. there has been a lot of research outside of the fed. i want to warn you there is no consensus on this. you will probably hear different points of view. the evidence that we have done within the fed suggests monetary policy did not play an important role in raising house prices

during the upswing. i want to talk a little bit about the evidence on the question. one piece of evidence is the international comparison. people do not appreciate that the united states, the boom and bust in the united states was not unique. many countries around the world had booms and busts in house prices. the booms and busts or not very closely related to the monetary policies of those particular countries. for example, the united kingdom had a house price boom that was as big or bigger than that of the united states. monetary policy was much tighter in the u.k. and the united states. there is a bit of a puzzle for the monetary theory of the house boom. another example, germany and spain both share the euro. they have the same central bank. the have the same monetary policy. germany's house prices remain

absolutely flat throughout the entire crisis. spain had an enormous house price increase, considerably larger than that of the united states. the cross national evidence raises at least some concerns. a second issue is the size of the bubble. it is true that changes in interest rates and mortgage rates should affect prices of homes. there is a lot of evidence to look at that over a long period of time. when you look at how much interest rates change including mortgage rates and how much interest rates move, based on historical relationships and can only explain a very small part of the increase in house prices. in other words, it was way too large to be explained by the relatively small change in interest rates associated with monetary policy in the early part of the 2000's. the final piece of evidence i would raise is the timing of the

bubble. any economist who is well known for his work on baubles, including the housing bubble, argued that the housing bubble began in 1998. that was well before the 2009 recession and before the cut in federal reserve interest rates. moreover, house prices rose sharply after the tightening began in 2004. the timing does not line up particularly well. what the timing does suggest, there might be a couple of other possible explanations. 1998 was right in the middle of the tech bubble, the tech boom. it could be that the same psychological optimism, the same mentality that was feeding stock prices may have been feeding house prices as well. another possibility is -- it has been pointed out by a number of

economists is in the late 1990's, there was a serious financial crisis called the asian financial crisis that hit a number of asian countries and other emerging market economies as well. after the crisis was tamed, one response was that many countries -- emerging market countries began to accumulate larger amounts of reserves. there was a big decrease -- there was a big increase in demand for assets including mortgages that came from abroad as countries decided they need to acquire more dollar assets. i think interestingly, probably the strongest correlation across countries that you can find to house price increases as capital inflows, the amount of money coming in to buy mortgages and other safer, or at least perceived to be safe assets. that timing would fit with the 1998 or so beginning.

those are some arguments against the view that monetary policy was a big important source. i emphasize economists continue to debate the issue. it is a very important issue. going forward, we also have to think about the implications of lower interest rates on the economy and on the financial system. in particular, currently just out of caution, we are doing a lot of financial oversight and a lot of regulatory oversight to make sure the best we can add nothing is getting and balanced in the financial system. here are a few references to take with you if you want to get into this more. the bottom one is a speech i did a couple of years ago that summarizes some of the evidence. my speech is based very heavily on the second paper which is the result of all the internal federal reserve research. there is a paper there that

makes the point interest rates did not move enough to move house prices. the also made the point about capital inflows. a recent survey comes to the conclusion that there was no connection. again, i emphasize this is something that continues to be debated. what were the consequences of the crisis? we will talk more about the crisis next time. the economic consequences were severe. here is a measure of financial stress. you can see what happens in 2008. a sharp increase in the financial markets. stock market plunged. we had been talking about the first decline there.

since 2001, that was the very large decline in tech stocks. notice the decline in the stock market, the most recent one was even bigger. home construction. you can see a sharp decline there. home construction fell before the recession because it was a trigger of the crisis. looking to the right you can see it still has not really begun to recover. finally, unemployment rose very sharply, and pete around 10%. it is currently falling down to about 8.3%. in the next two lectures, we're going to get into the crisis in more detail. we will talk about how the housing boom and bust and the vulnerabilities in the financial system led to the worst financial crisis at least since the great depression and possibly even worse in the depression.

how the fed responded to the crisis. in lecture for, we will talk about the recession recovery in the aftermath and the policy responses there. that is what i wanted to cover today. we do have a few minutes. i would be happy to take questions. what do we not take the microphone? >> in the previous lecture, we discussed how it led to double that. today we are discussing that policy in the 70's -- how do we know when the right time is? >> well, it is challenging. it is one of the reasons we have

so many economists and models. everything we can use to try to figure out what the appropriate number is to tighten or east policy. it is not an easy thing. forecasting is not very accurate. we as provisionally to keep making adjustments as we go along. the 1970's was particularly difficult because at that time, inflation expectations were not all tied down. one thing that happened then was that if gas prices went up, people began to expect higher inflation. then they began to go and demand higher wages to compensate for the higher prices. then higher wages would feed the the higher prices and so on. nobody had any confidence that the fed to keep inflation low and stable. a very different situation now,

and this goes a lot to paul volcker and greenspan as well, most people are pretty comfortable that inflation will stay reasonably low despite the fact there are ups and downs. that helps a lot because with inflation staying low, the fed has more leeway. if policy is easy, that will not feed into a spiral that will create a bigger problem of the road. keeping inflation low was one of the great accomplishments of chairman volcker and greenspan. an important objection of banks around the world. it is a difficult task. the 1970's were difficult because it was so volatile, any kind of pressure from gas prices quickly fed into wage demands

and into other prices. it was much more of a difficult situation. >> [unintelligible] with all the different research conducted, in your role as chairman, if you were chairman now -- >> i am chairman now. >> if you were chairman and 2001, the think it was the correct thing to do? although you do not think it affected the outcome. cox the very first -- the very

first speech -- i was a governor at that time. the very first speech i wrote when i became a governor in 2002 was about bubbles and financial regulation. the theme of my speech was, use the right tool for the job. the problem with tying interest- rate policy to asset prices is like using a sledge hammer to kill a mosquito. the problem is, housing is on the one part of the economy. if interest rates are dedicated to achieving overall economic stability. we estimate that in order to have stop the increase in housing prices, interest rates would have been raised dramatically in a period where the economy was very weak. inflation was falling towards zero. generally speaking, the right

way to use monetary policy is to achieve overall macroeconomic stability. that is coming you should ignore financial imbalances. what we could have done -- what the federal reserve could have done is to be more aggressive on the regulatory side to make sure the mortgages being made for better quality and were appropriately monitoring their risk and so on. one of the lessons of spoke about today was to not be too sure of anything. be humble. for that reason, you should never allow the possibility that if all of our regulatory interventions do not achieve stability in the financial system that we want, at the last result monetary policy might be modified to deal with that. a again, because monetary policy is such a blunt tool

that the fax the economy. if you can get a focus laser type of tool, that will be much better for everybody. >> those are the current monetary fiscal policy. as borrowing more send us down the same road of overconsumption of borrowing that we had in the first place? >> first of all, we would like to get a better balance in general. monetary policy stimulates capital formation as well. it also tends to promote exports. we would like to get overall, over time we would like better consumption investment and exports as well as spending. those are the main components of final demand.

with that being said, we are now way below where we were before the crisis. consumer spending is that recovered. it is still quite weak compared to where it was before the crisis. private debt has come down. you mention the global imbalances. we're talking about the current imbalance with the trade deficit the united states has. it has come down significantly. if anything, it has moved too far in the short run because we lack a source of the man to keep the economy growing. again, i agree that just as every country needs to have an appropriate balance of consumption capital formation, exports, and government spending, that is an important task for us going forward. right now i terms of debt and consumption, we are still way low relative to the pattern before the crisis.

>> the latter part of your lecture was about monetary policy after the dock, bubble and how interest rates were kept low. -- dot com bubble. to look at it from another point of view, what is your take on the argument that the low interest rates caused a private investors and banks to make riskier trades because of the low interest rates of the time and how that also could have been a trigger to the crisis? what's that is a good question. i think there is some effect of lower interest rates and risk taking. very similar to the previous question, it is about getting the right balance. generally speaking on most dimensions, investors become

very cautious. that is where they have been for much of the recent past. you want to get an appropriate balance between the amount of risk being taken. this is yet again another reason why financial supervision and regulation needs to be played in a row. with the institutions, banks -- we need to be looking directly at the firms and making sure they are managing their risks appropriately. it is a question of what is appropriate for the job. >> the housing bubble shows how clearly one thing led to another, with rising prices and eventually a fall. when you were observing the economy in the 2000's, what did you think would happen to the rising house prices and the house bubble? did you think it would eventually pleaded to recession?

i know there is a book called "the big short" where investors were shorting that. what is your take on that? >> the decline in house prices itself, by itself was not a major threat. when i was the chief -- i was the head of the chair -- i was the chairman for president bush. in 2005 we did a analysis of what happens if house prices came up. we concluded we would have a recession. we did not anticipate the financial crisis. we did not anticipate it would have a broad based effect on the system. what i became chairman in 2006, house prices were already declining. two weeks after becoming chairman, i did a testimony that

said house prices are falling. that will have negative impacts on the economy and we are not sure of all the consequences. the fact that they've might come down, that was always a possibility. the hard thing to anticipate fully is the fax on the decline of house prices would be so severe compared to the dot.com stocks. effective mortgages, the soundness of the financial system and created a panic which in turn led to the instability of the financial system. it was not just decline in house prices, it was the whole chain. there was a bipartisan push

for home ownership spurred by president clinton and carried down by george bush. to what degree could be argued that that contributed to the erosion of credit standards? what's another controversial question. there was some pressure to increase, ownership. there was the american dream aspect of owning a home and so on. home ownership rose during this period. to put it all on the government is probably wrong in this case. most of the worst loans were sold through private sector securitization. they did not touch fannie and freddie. it went directly to investors. fannie and freddie did acquire some prime mortgages, but actually that was a little bit later in the process. i think there was some of this going on everywhere.

clearly the private sector without any encouragement from the government was a big player in the decline of mortgage underwriting. >> i think one of the hallmarks has been year commitment to transparency. i think that benefits all of us in the room. i am wondering if you think too much transparency could actually damage credibility of the central bank, if it could get things wrong i guess. >> a little off topic because we did not get to transparency. generally i agree that transparency is very important. it is important for a couple of reasons. i spoke already about the importance of a central bank being independent. if a central bank is independent, making important

decisions that affect everybody, obviously it has to be accountable. people have to understand what it is doing, why it is doing it. what is the basis for the decision. accountability is important for the central bank to be transparent. i testify all the time, i give speeches, i have town halls and other meetings like this. i think it is important for me to explain what we are doing and why we are doing it. that is one reason for transparency. the other is that over time, there is an increased understanding that most of the time transparency in the monetary policy were better. for example, if the federal reserve communicates that its future actions would be x or why and convey the information to markets, the markets may respond to that by building those expectations and to interest rates and may have a more powerful effect on the economy.

communication also reduces the uncertainty and helps increase the impact of monetary policy and financial markets. i have time only for one more question. >> my name is jay. my question is in regards to instability and inflation expectations. you mentioned the importance of long-term economic growth. given the massive amounts of liquidity pumped into the market recently, how has the fed been able to make an impression expectations so low? but we are right to have to come back. let me ask to try to stick on the particular topic. on the last they will talk about current monetary policy. let me just answer the following in a brief way. i think we owe something to our predecessors in this respect, chairman volcker in particular

and also chairman greenspan. they got inflation down and kept it there. people they used to what they see. in a world in which inflation remains low year after year, people have become more and more confident that the central bank, the fed, or whoever will keep inflation low. it has been very striking that even though we have had movements in oil prices and other shocks to the economy, a deep recession, everything from most of the. , inflation expectations have been very well tied down to 2% range the fed is trying to hit. thank you very much. next week will go into the crisis. [applause] >> this has certainly exceeded my expectations. we are grateful that you stayed until 2:00 yet again. as with tuesday, i know there

are still questions that students have. why did you not send one or two questions to the blackboard side so we can talk about them not next week but the following week when we have our discussions. had a great weekend. we will see you next week. [applause] [captions copyright national cable satellite corp. 2012] [captioning performed by national captioning institute] >> the supreme court as an oral argument next week in a series of cases about the health care law. it will provide same-day audio monday through wednesday. you can hear the oral argument each day in the afternoon. expected around 1:00 eastern with coverage on c-span 3, c- span radio, and c-span.org. >> the genetic scientist that

finally nailed down a rough day to win the hiv epidemic starts. in most parts of the world there is not that much a chevy. in some places there is a ton and it is 6 -- it is incredibly destructive. understanding these two categories exist allows you to think, ok. what are those factors that keep the virus moving and what can we do as a world to end it? >> author craig timberg tracks the history of aids. >> this weekend on american history tv -- >> it was three plus designs before they got to the final plan. i think that we should not be afraid of looking at this issue because we are building

something for the centuries. we want to get the right. talks with the eisenhower memorial designed opposed by the family, a house subcommittee discusses the moral of the 34th president. -- memorial of the 34 stock president. trucks in march of 1979, c-span began broadcasting the house of representatives to households nationwide. a today it is available on tv, radio, and online. >> i do every one of those youngsters that somebody i had a personal responsibility for. >> we knew they were going into a very dangerous conflict. we wanted to give them every benefit that would allow them to come home safely. i am as distressed -- and more

distressed than any member of this committee could be that there are veterans suffering else's back have been the results of their service in the gulf. i do not know if the zero buses are a result of the service and a golf or not, but i think we have to keep that as an operating hypothesis' until we find out otherwise. >> c-span, created by american oppose the cable companies as a public service. -- america's cable companies as a public service. the house dabbers -- devils and

on monday. -- gavels in on monday. this is about 25 minutes. the speaker pro tempore: for what purpose does the gentleman from maryland rise? mr. hoyer: mr. speaker, i ask unanimous consent to speak out of order for one minute for the purpose of inquiring of the majority leader the schedule of the week to come. the speaker pro tempore: without objection. mr. hoyer: i thank the speaker and i'm pleased to yield to my friend, the majority leader, mr. cantor. mr. cantor: thank you. i thank the gentleman from maryland, the democratic whip, for yielding. mr. speaker, on monday the house will meet at noon for morning hour and 2:00 p.m. for legislative business. votes will be postponed until 6:30 p.m. on tuesday and wednesday the house will meet at 10:00 a.m. for morning hour and noon for legislative business. on thursday, the house will meet at 9:00 a.m. for legislative business, and last votes of the week are expected no later than 3:00 p.m.

no votes are expected in the houson friday. mr. speaker, the house will consider a few bills under suspension of the rules which will be announced by close of business tomorrow. the house will also consider h.r. 3309, federal communications commission process reform act, ahored by congressman greg walden of oregon. and the house will consider and pass a budget resolution. mr. speaker, welso expect to take further action on our nation's infrastructure with authority expiring at the end of next week. finally, i'm hopeful that the senate will clear the house's bipartisan jobs act bill today. i look forward to the president signing into law. i thank the gentleman from maryland and i yield back. mr. hoyer: i thank the gentleman for the information with respect to the legislation that will be condered next week. i note that he talks about the highway bill, the infrastructure bill that the -- that is pending.

obviously we had expected to consider that bill on the house floor on our side, at least, we are -- our expectation is that it was going to be a number of weeks ago. it has not come here. as i expect we are talking about an extension of some period of time. we are concerned that you rightfully, personally and as a party made it very clear that certainty was an important aspect of growing our economy. that's a proposition on which i agree. i think you're absolutely right. i think that we need to create certainty and clearly we need to create jobs. i said this morning, mr. leader, to the press that i'm sure you get it as well that the public says to me, when are you guys going to start working together, when are you going to get something done in a

bipartisan way. the senate has done that, i say to m friend. the senate has done it in an overwhelming fashion. they had 74, there would have been 75, but mr. lautenberg was absent, was for the bill. 3/4 of the senate voted for what was a very bipartisan bill and as a matter ofact, half the senate rublicans essentially vod for that bill. it had, as you know, a technical flaw in the bill and that it had revenues which need to be initiated in the house of representatives. representative tim bishop of new york has introduced the senate bill which has overwhelming support in the united states senate and very frankly in my view would have at lst 218 votes in this house, at least 218 votes in

this house if it were put on the floor. the speaker has said in the past that he is committed to letting the house work its will. obviously referring to open amendments process. but obviously if a bill doesn't come to the floor, we have no opportunity either to amend or to vote. that's been one of our problems, of cours wh the jobs bill that we hope would have been brought to the floor that the president proposed. that has not been to the floor. i ask my friend, rather than continue to delay, and both sides have done that on the highway bill, to give that competence of which you have spoken and others on your side of the aisle have spoken i think absolutely correctly, in order to give the confidence that we can in fact act, that we can work in a bipartisan fashion, i would ask my friend whether or not he would be prepared to

bring, as the majority leader, to bring the bishop bill to the floor which again is the senate bill, supported by 75 members of the united states senate, half of the puican caucus in the senate, and which will give some degree of certainty for a highway program that clearly is also a jobs bill. which will have an impact on almost two million jobs and maybe another million jobs along the way. we think that's the way that would be good for our country to proceed and it would send a message because i think it would get bipartisan support if we -- if you brought it to the floor. that it would send a good pleanl to the country, that -- message to the country, that, yes, from time to time we can work together. very frankly, mr. leader, if we did that it would be consistent with every transportation bill

that we've passed since 1956 under dwight eisenhower where we worked together in a bipartisan fashion. this is the first time that i' experienced a partisan divide. i mean, people have had differences of opinion. a partisan divide on the highway bill. as you know, senator boxer and senator inhalf came together and agreed. that's a pretty broad ideological spectrum of the united states senate. they came together, they agreed and they led the effort to pass that bipartisan bill. i would very much hope that, mr. majority leader, that you could bring that bill to the floor and see whether or not in fact it could pass. i think that would be good for the country and i yield to my friend for his comments. mr. cantor: mr. saker, i thank the gentleman and i would respond by saying to him that, no, i'm not prepared to bring that bi to the floor because i differ with him in his assumption that there would be enough bipartisan support to pass that bill in the house.

and from all that i know about what's in the senate bill, there is a lot of disagreement over how that bill was constructed as far as house members are concerned and i would say to the gentleman, our plan is very clear. we have been outspoken on this, we do not want to disrupt the flow of federal transportation dollars which is why we'll be bringing to the oor next week a bill to provide for an extension of 90 days so that perhaps, as the gentleman would like, as would i, we could come together as two bodies and two parties on an agreement to provide more certainty. but as to the gentleman's suggestion that we need to be doing this to be consistent with what has been done historically, i ulsay to the gentleman, he knows as well as i that we are in very, very difficult economic times. we have never faced the kind of problems that we face today as a country from a fiscal

standpoint. and unfortunately transportation funding is no different. we're just out of money. and so we're trying to take the approach that most american families and businesses would take and that is to try and spend within our means, to come up with some innovative ways to look at transportation needs and demands in the future and our being able to meet them. and we look forward to working with the gentleman, mr. speaker, in a bipartisan fashion to try and affectthat end. i yield back. mr. hoyer: i thank the gentleman for his comments. but i will say again to the gentleman, you know, we've been down this path before. we've been down this path before where the senate was able to reach a bipartisan agreement on legislation very important to jobs, the economy and to the confidence of america. and that biparsan piece of legislation would have enjoyed the support i think certainly the overwhelming majority, almost unanimous support on our

side and a bipartisan agreement. i don't mean a democratic proposal from the senate but a bipartisan agreement that came from the senate. and that dealt of course with payroll taxe, extending those. and ultimately we did that. we took that bill. but i would say to my friend that the speaker indicated he wanted a bill on this floor. i've been asking you for a number of weeks if it was going to come to the floor, for approximately a month now. that bill hasn't come to the floor. we all know it has to come to the floor because there's very substantial disi agreement within your party -- disagreement within your party about that bill. everybody talks about it. we understand that. i say to my friend that he and i do have a disagreement, i think it would enjoy bipartisan support on this floor if you brought the bishop bill, the senate bipartisan bill to the floor. but the only way we're really going to be able to find that

out, not by me saying i think -- you saying, i think it wouldn't, there's a very easy way to see whether it would and that is to bring it to the floor next week. the gentleman is absolutely correct, i don't think there's anody hopefully that wants to disrupt and have literally hundreds of thousands of people thrown out of work or not have opportunities for work. we know the construction trades in particular have been very badly hit by the lack of construction that's going on. so you can have your opinion, i can have my opinion, but there is a way to determine whether or not in fact we can get bipartisan agreement and that is, as i said, the speaker has indicated, let the house work its ll. the only way the house can work its will, having been majority leader, is for the majority leader to bring the legislation to the floor for a vote, then you may be right, i may be right

, but we will know, it won't have to be speculation, we will know, and if i'm right and we pass that bill, then next week before march 31, before the expiration of the current highway authorization, we can send a bill to the president of the united states and he will sign the senate bill. don't know that he will sign a bill that, you know, is still languishing in your committee, because we haven't seen the final parameters of that bill, because it's obviously pretty controversial on your side of the aisle. so i would hope again, if you want certainty, we have an opportunity for certainty. we have an opportunity with a bipartisan bill that the senate's passed. i don't know why we're rejecting that bipartisanship. i know we have, as a matter of ct, the gentleman says, well, this is a unique economic time. he's right. it seems to me that's a greater

argument for trying to embrace bipartisan agreement and move forward with giving certainty to the construction industry, to states, to municipalities, to counties on what is going to be available to them to plan and to pursue infrastructure projects critical to commerce and to their communities. so, i regret that the gentleman s indicated that that's not of an option that he will consider, but a short-term extension seems to be the continuation of uncertainty, not the alaying of uncertainty. i don't know whether the gentleman wants to make another comment or not. mr. cantor: mr. speaker, i would just say to the gentleman, i guess we're going to agree to disagree. we're dealing with the reality that we don't have the money and we're trying to fashion a path forward that both sides can

agree upon. obviously we cannot agree upon that next week with all the differences that still exist. which is why we are creating the construcof a 90-day exteion, then giving us the possibility to get into conference with the senate to try and produce a longer term transportation funding bill. i yield back. mr. hoyer: i won't pursue it any further, mr. leader, but you've been unable to get agreement within your party on this side of the house -- of the capitol for well over a month. i hope you can get there, i hope -- i would hope youould get there in a bipartisan fashion so that mr. rahall and mr. mica could agree on a bill, which has been my experience in the 31 yes i've been here. it's not my experience this year, that hasn't happened. but almost invariabley and i think for the years you've been here you've experienced that as well. let me ask you now with respect to the budget, do you expect the budget to come to the floor you?

indicated that and if so would that be wednesday? mr. cantor: mr. speaker, the gentleman is correct. we will be beginning debate on the budget wednesday and likely concluding that debate and vote on thursday. mr. hoyer: normally as you know, we've had alternatives made in order. we of course want to make in order an amendment which will guarantee that medicare will be available to our seniors and that we will not decimate medicaid which we think is appropriate for our seniors and we also want to make sure that we have revenues that can sustain health care for seenos -- seniors, education for kids, help for our communities. will the gentleman be able to tell me whether or not in fact alternatives will be made in

order by the rules committee that would be offered either by the minority ranking member of the committee and/or others as has historically been the case? mr. cantor: mr. speaker, i'd say to the gentleman, yes, we expect that to be the case. obviously i disagree with his characterition of our budget. we are in fact saving the medicare program in a bipartisan fashion. i yield back. mr. hoyer: was there a bipartisan vote in the committee on that? i thought it was a totally partisan vote in the committee. was i incorrect on that? mr. cantor: will the gentleman yield? mr. hoyer: yes. mr. cantor: the gentleman knows very well of what i refer to, that the disproportion at cause of our -- disproportionate cause of our deficit has to do with health care entitlements and we actually, as the gentleman knows, last year and this year are proposing a solution, a

plan, that doesot resolve the issue overnight. but it puts us on a pooth towards balancing the budget -- path toward balancing the budget and this year our budget chairman has worked together with the senator from oregon on the gentleman's side of the aisle in the senate to propose a solution that responds to some of the complaints about the path that was taken before. and again it is a bipartisan solution, it is a plan to save medicare and unlike the gentleman's party, nor his president, or his president, we are actually proposing a solution to the oblem and saving the program for this generation and the next. so again i am sure the gentleman disagrees with my characterization, i with his, but to answer his question, to get back on track as far as the schedule and the fashion in which these bills are going to be brought to the floor, yes,

consistent with precedent, we will be allowing full substitutes to be offered on both sid of the aisle. mr. hoyer: i thank the gentleman for his comment. last thing i would ask the gentleman, am i correct that the agreement that was reached between our parties, which led to the passage of the budget control act in a bipartisan fashion, does not reflect the subs -- substance that have agreement as it relates to the discretionary spending number for fiscal year 2013? senator mcconnell is quoted as you know as saying that was an agreement that was reached and that he expected to be pursued. he was not referring to the action of the budget committee, but he was referring to the agreement on the discretionary number. am i correct -- am i correct that that number is not being distribute agreement that was reached in order to get a bipartisan vote on the budget

control act, which we passed, which made sure that this country dinot default on its debts for the first time in history, am i correct that that number is not the number that is reflected in the budget? i yield to my friend. mr. cantor: mr. speaker, i respond to the gentleman by saying it is our view that the agreement reached in august at the top line was that, a cap. and we all know we've got to do something about spending in this country and the top line or 302-a within our budget resolution will reflect that top line provided in the budget resolution for the second year of the budget that we posed last year. again, we view it very much that we need to continue to try, at least try to savetaxpayer dollars when we're generating over $1 trillion of deficits every year. and i think the taxpayers expect no less. i yield back. mr. hoyer: i thank the gentleman for his comments but i will tell the gentleman, if we're going to

have negotiations and we have one number and you have another number and we agree on a number and then we pass a bill which reflects that number, put it in law, it doesn't say it's a cap, it says that will be the number. . as we pass a budget we say that will be the number. this is the law. as was observed by others on the other side of the capitol, but i observe it here as wellif we are going to have those kinds of negotiations, it's sort of like the guy comes up to you and says, look, i got something to sell you. you want to buy it? and the guy says, yeah, let's negotiate on price. you come to a price of $100, and then you come to settle and the guy says, well, that was my top number. i'm going to give you $92 for that item. you don't have amooting of the minds -- meeting of the minds as the contract requires. very frankly, nobody on our side

and frankly i don't think anybody on your side that negotiated the deal, i don't mean that didn't vote for it, and as a matter of fact i know for a fact the speakerer, and i belie yourself, were quoted that was the number, we ought to stick with it. clearly mrrogers believes that was the number that was agreed to. we are not going tbe able to agree on things if all of a sudden it comes -- that was a notional thing we did. not an agreement. a lot of our people voted on that to make sure, a, we didn't go into default as aountry, and b, that was not the number we wanted. it clearly was not the number your side wanted, but it was a number we agreed upon. it seems to me that if we are going to try to keep faith with one another and with the law that we passed, that we should stick with what we agreed to. i understand that we want to bring the budget deficit down. as a matter of fact on this side

of the aisle i have made those comments and i have been criticized by some on my side as you well know. yes, we do need get a handle on the budget. were going to have a real debate on the deficit and debt. and i have been working very hard on that. we are going to have a debate on whether or not your budget does that. we have had disagreements all the years i have been here on that, and performance has not reflected from my standpoint that the representations ma have always worked out. perhaps on either side. but i regret, i regret deeply, mr. majority leader, that we have reached an agreement, based upon that agreement this house took an action t took a bipartisan action, and it passed a piece of legislation that was critically important to make sure that america did not go into default. d now we see sevemonths later, cross fingers, we really

didn't mean that, it was a cap. nobody on our side, and there was no mention in the law, nor was there any mention inhe negotiations, that that was a cap not a number. unless the gentleman wants to say something further, i yield back. i yield to my friend. mr. can'ter: thank you. i just say to the gentleman this is somewhat of an academic discussion given the senate is not going to pass a budget. i remind the gentleman again, it takes two houses to go and reconcile a budget, and it tes two houses, to parties, to go forward. we look forward to working with the gentleman. i told him it is our belief that we need to respond to the urgenc of the fiscal crisis and do everything we can to bring down the level of spending in this town and look forward to working with the gentleman towards that end. i yield back. mr. hoyer: i look forward to next week debating how we bring that deficit down. i yield back the balance of my time. the speaker pro tempore: t