clearly donald trump is not interested in doing that. with surrogates like that, who needs enemies? if i was advising the mitt romney campaign, that would give me cause. clearly donald trump is out for personal gain and he is an i'llust were the circui -- talk about my business experience and we can make that kind of connection together. i think that would have been a fairly smart. he is a fairly successful businessman with a big piggyback. nobody muzzles donald trump. host: s.e. cupp, columnist for the new york "daily news."

she's the author of books including "losing our religion" and co-host of "real news." thank you so much for joining us. guest: thank you for having made. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> a look now at our live

coverage today here on c-span. in about 45 minutes deputy defense secretary ashton carter talks about budget cuts the pentagon is considering and the impact on defense decisions and troop levels. the american enterprise institute hosts that discussion at 10:45 eastern. at noon, the cato institute looks back at the 2008 financial crisis. a former chief economist for both h.u.d. and freddie mac speaks. he's co-authored a paper called what made the financial crisis systemic. live coverage. at 2:00 eastern the house gavels in after its week and a half memorial daybreak. they'll consider a dozen bills including one to continue the national flood insurance program for two months while congress negotiates a longer term bill. a measure continuing f.d.a. user fees and creating new ones. >> sunday on "q&a" -- >> i think the problem is with walter cronkite people see him as the friendly man, which he was to everybody, but there is another side of him that wanted

to be the best. he was obsessed with ratings, beating huntly brinkley report every night. he is probably the fiercest competitor ever written about. i have written about presidents and generals, cronkite's desire to be the best was very pronounced. >> best-selling author douglas brinkley on his new biographer on long time cbs news anchor walter cronkite. here on c-span. >> i believe in every book i right, go there. that's the first law i have. go to green bay to find out what it's like in the winter when vince lombardi is coaching there. go live in hope, arkansas, and hot springs find out what it was like for bill clinton. i have never been to vietnam before. how could i write about it without going to the battlefield? i had to go. >> in his book "they marched into sunlight" david maraniss

wrote about two turning points in the vietnam war. one in vietnam, the other here in the u.s. watch his interview online. over the past four years he's been traveling and researching his newest book, "bram, the story wgs "-- barack obama, the story." >> this morning "washington journal" talked with "weekly standard" staff writer jay cost about what he sees as changes in the democratic party. he's written a book called "spoiled rotten" the conversation is about 45 minutes. host: joining from pittsburgh, pennsylvania, is jay cost, he writes for "the weekly standard" and author of the new book "spoiled rotten" how the politics of patronage corrupted the once noble democratic party and now threatens the american republic. good morning. guest: good morning to you. host: you said the democratic party has shifted away from being the party of the people to

one beholden to special interests. what special interest and jump in about how that started to happen. >> yeah, guest: it's a whole plethora of special interest now and it's been a slow process that began really kind of 80 years ago when franklin roosevelt became president in 1933, his political coalition was southern and western and largely conservative. but by the time he left office in 1945, the balance of power within the party shifted to the north. one of the reasons that happened was not simply because of roosevelt's efforts to combat the great depression, but also his efforts to build a permanent democratic majority. and the actions that he took in pursuit of that, in particular using the powers of big government as it had been newly expanded during the new deal. so, for instance, roosevelt brings in organized labor as an interest group in the party. previously labor had been a free floating player and frankly not

very powerful at that in the 1920's. but by the end of roosevelt's tenure, labor is extremely powerful and helps swing the north toward the democrats. you also see him sort of putting the machine cities under his heel, under the heel of the federal government increasingly. so sometimes in the case of tamm mini hall, new york city, that meant destroying it. but other cases the machine in chicago is meant fostering it. even in the case of pittsburgh where there had been a republican machine, by the time roosevelt left there was actually a democratic machine. and of course roosevelt sort of maintained the southern plank of his coalition, particularly the plantation gentry of the south, by giving them all sorts of special carve outs on things like social security and the agricultural adjustment act and also sort of slow walking civil rights. tend of roosevelt's tenure the political success of this really

sort of pigeon hold future democratic leaders. they were obliged to continue this sort of political process that roosevelt had started by trying to bring groups into the coalition, into the party coalition by offering them special benefits, but then also, even more importantly, once they were in the coalition, maintaining their support through special deals in perpetuity. host: how does that play out when you look at president obama? who do you think that he's beholden to and other senate and house democrats guest: what happens the turning point is the end of the 1960's and the cultural social economic revolutions of that period bringing in a whole host of new groups. you have, for instance, the environmentalist movement, the consumer rights movement, the feminist, the government unions, and then in the 1990's interestingly bill clinton does a very good job of peeling big business away from the republican party. at least the republican monopoly

on big business support really starts to disappear. and businesses really start to become free floating entities and the democrats start sort of buying their support in a lot of respects. so when we come to obama, his problem in office, in my opinion is, he has this vast away of interest groups within the party. and all of them support the democrats on election day, all of them work hard for the party, and all of them expect something in return. and the challenge this president has had, and i think it's virtually insurmountable one, is to maintain the support of those groups while simultaneously governing for the public interest. that is the core challenge of the democratic party and that's sort of the thesis of my book there have just become too many groups, they have grown too numerous for the party to govern for the entire public. host: if you'd like to speak with jay cost, here are the numbers 202-737-001.

the republicans 202-737-0002. and independent 202-628-0205. do you think there was a golden age of the democratic party when it fulfilled its mission? guest: i think all political parties have this problem to some extent. after all political parties, their goal is to acquire control of the whole government. they never do that by winning every vote in the contry. they only win a portion. there is this tension both political parties to sort of support and reward their contributors, their donors, their base while also governing for the entire country. and in the book i sort of concede it as a balancing act. it's expected for political leaders, like roosevelt, for instance, to try to take care of his own voters. it's sort of unseemly babe from a broad theoretical standpoint, but when you get into the meat

and potatoes of american politics it's typical. it's all about balance. i think the party was really able to strike a balance through the 1960's. but that it became too difficult , really starting in the carter administration we see this process begin to break down and carter really failing to juggle his party coalition with the need for national policies. and this is something that's continued through the present day. host: mitt romney looks to have the republican nomination because he won texas yesterday. so as he heads into this campaign season with the support of the republican party, presumably behind him, critics say he's beholden to big business. they point to his record on business. they also say republicans, as you say democrats are beholden to their clients. the republicans are beholden to other clients. who are they beholden to? >> that's a fair point in many

respects. i don't think there is any doubt, for instance, that the republican party historically has been the party of big business. that would certainly be criticism that roosevelt launched in 1932 and woodrow wilson in 1912, and william jennings bryant in 1886. that's the point that barack obama is making now during his campaign. i think in many respects it's a fair point. the point of the book, with a not to suggest that the republican party's hands are clean. it was really to tell a story about the democratic party because while both parties, i think, have a lot of common characteristics, there is a lot of overlap in the way they behave, and in many respects they have the same problems. in equally number of respects they are unique. the story of both parties is different. arguing that the democrats have a problem is not to suggest that the republicans do not have a problem. in fact, i think they do and i

think that they have a problem with big business, in fact. host: jay cost, you can catch his morning columns twice a week. fayetteville, north carolina, leon on the democrats line. hi. caller: good morning. if mr. cost, i wanted to tell you that i agree with your analysis in your book. i am a tail end of the baby boomer generation and remembering the 1960's, president kennedy asking not what your country can do for you, but what you can do for your country. it seems that that ethos and that character seems to have dissipated. and lately being the generations, like you say, it's all about what have you done for me. for me. and this country it's not going to work if we don't all kick in. we have -- even with making the connection earlier this morning, we are asking whether or not america should get involved in syria and help out on a global

aspect. i just feel if we don't work together this thing doesn't pan out right. and it's not -- it's about service. the service for our country. the youngest country -- we have a whole continent. everybody's looking at us. like i just said i don't want -- it just seems that we have two mind sorts now. one when i came up with we all kick in. no matter what. and now the other one everybody's come to the table, what about me? what about me? forgetting about the us. guest: i think that's great comment. i think there has been -- the country's always had a problem of what you might call tribalization and sort of a group centered type of politics. that's just something that goes back to the founding of the country. frankly. but i think the challenge -- it's a persistent one with any kind of government that's run by

political parties. that their purpose is to win elections. there's lot of different ways to win elections. unfortunately one way to win elections is to curry favor with individual groups. and it's not a guarantee that political parties are going to try to win exclusively by offering broad national policies . i think it's a challenge that both political parties suffer from now. it's a group centered focus on electoral victory. host: fred, independent caller, florida. caller: i want to make a couple comments. number one, it's important to understand that when the nation was founded those who participated in politics were men who owned property. it was considered the bedrock of whether or not you were able to exercise influence, acquire power for events to happen. now all of the founders were concerned about the development

of political parties because they realized that the purpose of forming political parties was to vie for power. unlike your guest, i don't see the development of political parties as an issue, unlike president washington and others. i think it is a natural outgrowth of what a happens as people come -- of what happens as people come together to use the mechanisms of government in order to further their interest. yes, the democrats have issues in the sense that they are trying to essentially meet the needs of a broad coalition. likewise with respect to the republicans. but this is the american political system. unless you want revolutions, bloodletting, then i think the political party system in the united states has served us well. and if it's going to be revised, it should be revised in such a way that suits our culture. so although i do think your guests made some very good points, i think before he sort

of paints the american political party system with a broad brush as being somehow defective or flawed in some fundamental way, think of the alternative. guest: those are good comments. i think i would make two points in response. the first one is that i agree with the basic premise, which is that political partiesn this country are sort of inevitable and not a bad thing. i think they are, in fact, a good thing. and in fact you can look as early as the debate over the constitution in the fall of 1787 through all of 1788 and you can see the beginnings of these political factions within the country that eventually sort of evolved into the jeffersonian and hamiltonian parties. political parties in this country are pretty inevident able. -- inevitable. that being said, i think there are times in the country when

the competition between the two parties has been helpful and constructive and there has been times it has not been helpful and constructive. for instance, when we think about american history and the american past, we usually think about the founding period, the civil war, and then there's this sort of blank spot in our collective memory between the end of the civil war and really up through until the great depression. that's in large part because the country didn't get much of anything done during that period and they didn't because the two parties were really too focused on small issues that didn't affect the great vast population and were not really focusing the american public's attention on the key issues of the day. so, for instance, territorial expansion, industrialization, the urban crisis. all of these are issues that were sort of festering in the late 19th century largely unaddressed, and they were left unaddressed because the party system had broken down. while i would agree that the

political parties are inevitable and a good thing, i think that they are also prone to be corrupted and broken down, and i think that that's what we have right now. our party is extremely dysfunctional at this point in our country's history. host: why would you think that, jay cost? guest: that's a good question. i think that the first thing i would do frankly is institute term limits. i think term limits would do -- go a long way to cleaning out the established interests within the government. the argument of my book really is this problem of interest group politics appears most notably in congress and in particular the house of representatives. and i just don't think of the 535 members of congress, i don't think any of them are so essentially to the nation's continued functioning we can't have term limits. so that's the first thing i would do. the second thing i would do would probably be to eliminate

-- this is going to sound very contrary to conventional thinking, but makes for good television hopefully, i would eliminate the party primaries, particularly for congressional seats. i think that that's -- the electorate does not pay enough attention to really use the primaries as a vehicle to clean out and monitor incumbents. i think that the old party system of caucuses and conventions, reinvigorating the local parties, would be a great thing. that's sort of a point -- something we forget about now. nowadays political parties are really just like target and wal-mart. they just appear on television and they send us messages through television. we are entirely passive. and when we talk about, the party, we irbleely think of professionals within the party. but 100 years ago, the political parties were mass institutions that sort of cultivated broad participation in this country.

for instance, the election of 1896, voter turnout in the state of ohio hit upwards of 95%. and after the last two election cycles we have been patting ourselves on the back for getting to 65% turnout. that would have been a low effort in the 1890's. and i think one of the big differences was that back then the parties were these mass organizations that brought people into the process and served as not just political organizations but civic and social organizations as well. we simply don't have that anymore. one of the big reasons why is, frankly, the interconstitution of the party primaries has really destroyed the local party organizations. host: john, independent line, good morning. caller: good morning, how are you? i'm 47 years old and i'm just a little bit unhappy with the way my life's been going on for the last three years. it's not just me. i know so many people my age that are out of work.

i have been a security officer for like so many years and it's only been like three years i have been out of work. i have always been a workaholic, i have never been out of work. i have been a hard worker since i was 16. it just seems like people -- i sent out a million resumes and a lot of people keep calling me and saying you have too much experience and i can't give you $12 per hour. i can't give you $9 per hour. i can give you $7.50 or $8. i'm not prejudiced because i grew up in west new york hudson county. i grew up monks every nationality there is. my best friends were spanish and every nationality you could think of. when i was lived in point pleasant beach there was a long stretch of railing and they were all teenagers from the age of 13 through 25, young adults, none were working. and i tried to realize why are

tonight of them working? every single restaurant in point pleasant beach on -- on the boardwalk, there's 50 mexicans in every kitchen. and they are all willing to work for $5 an hour. host: how is your stance on illegal immigrants or ill .immigration translate into how you are going to vote this fall? caller: i don't know how i'm going to vote. politics is very hard for me within the last 10 to 15 years because it just seems like most politicians really don't care about the people. they really don't care. they have this technical talk, every single one of them, i don't understand a word they are saying. they use such large words. the it's not i don't understand what they are saying, they need to speak common english for people to understand what's going on. host: a response from jay cost. see what he has to say.

guest: i think those are very insightful comments there. and i think that he's tapping into a broad resentment that's out there. i think there is a shared sense among democrats and republicans, liberals and conservatives that the political process is breaking down and increasingly the -- our representatives in washington don't speak for us. they speak for somebody else. not entirely sure who that is sometimes. look, and i think that this is sort of -- acceleration after broad trend that really goes back to the late 1960's. in the 1960's when you asked people do you trust the government? most of the time do the right thing. the majority of people would say yes, yes, i do. now if a pollster called me up and asked me that question, i would probably laugh because of course i don't. i think that's probably a majority sentiment out there now. and i think it's a problem that

both political parties have. that sort of trust deficit that exists. i think it will make it extremely give for the next president be it president obama or governor romney to form a governing coalition and govern. it's difficult to do that? a republican form of government such as ours when you don't have the trust of the people. not just the trust of the people in the personalities and the people you see on television, obviously that's part of it now. but increasingly there is a distrust about our institutions themselves. when you look at the job approval ratings on congress, for instance, that's a real warning call. warning signal. i think it signifies that people 's suspicions have moved beyond just the personality that is they see on television and to the institutions themselves. in other words, people are starting to appreciate that these institutions are broken. host: let's hear from mike, republican in maryland. good morning. caller: good morning.

i don't really see that the institution is broken. there are some things about the way the thing works that are broken he -- and largely to me it revolves around the fact that you've got two complete competing political ideologies and only two. one of them revolves around the success of the individual creating the common good, and the other revolves around elite people deciding what the common good is and trying to force everybody into that model. but on a larger scale, it really comes down to that people from the top of society to the bottom have forgotten about the golden rule. it's not hard to treat people the way you want to be treated. and yet when we elect people to public office, and they come instead to look at their offices as ways to increase their

personal wealth, their personal well connectedness, and we can't expect to have any kind of real constitutional government as long as the concept of a moral and religious people has been thrown out the window. host: do you blame one party for that over the other or across the board? caller: this is a hard thing for me to say because i really don't want to lay blame at anybody's feet. human nature has fallen and the fallen nature exists throughout the entire human race all the time. of course that means it exists in the political parties. but from where i sit it seems to me to be pretty well obvious that the founders of this country intended for a moral and religious people to be the basis of representative government and self-government. people needed to be able to

govern themselves if they weren't going to be able to have self-government. host: response from jay cost. guest: i think that this country's always had a problem with graft in politics. and we still have that today. i mean there are studies that show the returns on investments for members of congress far outstrip the -- that of the average investor. to me that's a form of graft. there is this great book called an old book, over 100 years old, written by one of the bosses of tammany hall. he was at pains to distinguished between honest graft and dishonest graft. honest graft, i see my opportunities and i took them. and that is, of course we have a lot of the things that george washington, plunkett did have been since made illegal. you can't do those things anymore. there are a lot of ways that

politicians still to this day can see their opportunities and anne take them. and that's really -- and take them. that's really an endemic feature of american politics. it goes back -- you caller just now was articulating many of the sentiments andrew jackson was making in the 1820's. that's almost 200 years ago. i think the great challenge becomes when do we get to the point in this country where the sort of typical gamesmanship of politicians becomes just so overwhelming and so problematic that the public good begins to be undermined? trins tammany hall -- for instance, tammany hall, for instance, plunkett was involved, what you can say is it kept the trains running on time, so to speak. but that of coirs stopped happening when the great depression hit and suddenly there was this widespread discontent within new york city which led to la guardia being elected mayor in 1933 and that was the end of tammany hall.

we have seen this in the past. the concept of patronage at the federal level where presidents when they win they fire all the people in the government and hire their own supporters. james garfield was assassinated in 1881 because of patronage and that's when we passed civil service reform. the public said enough is enough. look, the country is not functioning very well at this moment and i think most people agree about that. right now i think sentiment about that remain very polarized by ideology and partisanship. if this sort of sense of dissatisfaction continues for the next couple years as it's happened the last -- previous couple, i have a very difficult time seeing the public not sweeping out the established interests. again, it's just something -- in the modern memory we really have no recollection of that happening. but it's happened before. it happened in the 1980's. it happened in the 1930's. it happened in the 1820's t can

happen again. at the end of the day despite this sort of go to washington, d.c., and see all of these sort of these facebook buildings on k street, know that it's chock teaming with interest groups and lobbyists. it doesn't change the fact that the founding document of this country, the constitution, powers the people. it's just the issue of whether or not public opinion gets to the point where the people are prepared to use that power to sweep out the established interests. host: jay cost, author of "spoiled rotten" how the politics of pay trodgeage corrupted the once noble democratic party and threatens the american public. you read about the health care law that president obama pushed to get, signed into law. you say that it was a symbol throughout the democratic party over years that various people tried to fight for harry truman including universal health care reform in his fair deal package. teddy roosevelt's prgive party

called for national health service in 1912. but health care reform turned out to be the democratic party's undoing. even though obama and the democratic leadership in congress wanted to see this go forward. what do you mean by it turned out to be the party's undoing? guest: health care has long been a liberal goal. and it's a noble one. and as a conservative i don't have the same ideological sense of the means by which we can achieve universal health care. i probably even have a different view of what health care should be. for liberals much more so than conservatives their sort of priority in politics is equality. and health care, the provision of universal health care would be a great step forward for equality. and the point of my book was not to critique this and not to go after critique the means by which liberals wanted to pursue

this. the book doesn't have anything to say about single payer, for instance. i'm not a policy wonk. i have my opinions on the efficacies of programs like that, but that's not my specialty. so i avoided that. the problem for the democrats with the health care bill was that in pursuing what has long been a dream of equality -- egalitarian ism, and sort of the great step forward in national equality, the democrats signed into law a bill that treats people in grossly unequal ways. the bill is festooned with carve outs to special interest groups. this is where we were talking earlier about the clinton administration bringing big business in. the health care bill is not just full of payouts for feminists and labor unions, although it is. it does have payouts for them. it also includes payouts for the pharmaceutical industry, the hospitals, doctors, nurses, the

senior citizens. on and on it goes. that's the way they chose to write the bill. the obama administration learned n. my opinion they learned the wrong lessons from the clinton experience with universal health care. clinton had hillary clinton step away from the interest group bickering and congressional input and write a bill with just the experts. and the bill that was produced offended too many interests within the congress and it never even got a vote. what the obama administration did was the opposite of that. what they did instead was open the doors wide to any and all interest groups that were willing to deal. in particular they were very concerned about being -- getting another version of those ads from -- i think it was from

insurance companies in the 1990's, sort of blasting the health care bill. they were very worried about interest groups running ads to undermine public opinion on the bill. so they made deals. they made deals with scores of groups. in fact they were this close to making a deal with the insurance companies even as they were on television blasting the insurance companies for being so evil. they were working behind the scenes to make a deal with them. and the only reason the insurance companies walked was because in the senate finance committee the final draft of the bill had too weak of an individual mandate, which is what forced insurance companies out. host: if i could interrupt you and get a few comments. maverick writes on twitter and says, let's be clear, if you have enough money you can influence policy and politics. thanks to citizens united and wealth transfer. guest: i think the citizens united case is a red herring.

i think that both sides get themselves hung up on these symbolic villains. the right has george sorrows, the left now has the koch brothers. the red herring. the problem in this country and the problem is now increasingly these political action committees and lobbyists in washington, d.c. the average citizen has never heard of. to suggest that this started with citizens united is a red herring. the problems frankly date back to the 1971 federal elections campaign act which the democrats said only wrote because organized labor put pressure on them to do so. ever since then it kicked the door wide open to countless streams of lobbyists and political action committees. the left has their villains. the right has theirs. the real problem is under the radar at this point still.

host: another comment on twitter. partly the press who refuses to ask politicians tough questions. we the people have little access. that's what save republic says on twitter. let's hear what michael has to say in detroit michigan our democrats line. hi. caller: hi. when you cut a billion here, billion there. december, before obama came in, they gave the banks $7.7 trillion. they cry the sky is falling. we need $another $800 billion. sign off on this. he did. they are giving him crap for the $800 billion. they kept that a secret for three years. they gave the banks three years' worth of total american income, $7.7 trillion. you punch that in any computer and it comes up how the republicans gave the banks $7.7 trillion. three year's equivalent.

at the timal americans income in one month's time right before obama came in. why doesn't anybody comment on that ever? guest: i think both parties have a problem with the big banks, frankly. if you look at the tarp bill, the majority of republicans voted against tarp in the house of representatives. the democrats voted for it. if you look at the contributions that obama and mccain received from people working for the big banks, obama outraised mccain by 2 two to one by the big banks. it's not to exonerate the republicans. it's just to say that this is -- businesses are very, very smart. ideologues, liberals, and conservatives only like to play one side and they apologize for one side and do nothing but criticize the other side. business in this country and interest groups and professional associations, most are very smart and they buy access. so they are more than happy to play both sides of the aisle.

host: john, independent caller, brunswick, georgia, joining us. hi, john. caller: hi. how are you, good morning? host: you're on with jay cost. caller: i'm going to comment about the guy that called in and talked about the hispanics working for $5 an hour. he must for goat this country was built on slave labor, lies, and he talks out both sides of his mouth. he's nothing more more than a right wing for big corporations. guest: john, are you a democrat? caller: i'm independent. military 26 1/2 years. host: john, what do you think about the state of the democratic party and the republican party? do you think they are beholden to special interest? caller: what do i think about the democratic party? host: sure. caller: the democratic party, yes. we got a lot of money in politics now. he didn't comment about that about what the supreme court did

about money. money buys elections. host: jay cost. guest: i'm not sure money buys elections. at least not in the presidential level. i think that the way money functions is more subtle. the influence of money in politics. what it really does is that it intimidates challengers, would-be challengers to members of congress. it's a classic example of what happens every time there is a big wave election is that in 2010 you saw the republicans sort of beat a bunch of democratic incumbents and they did so largely through individual contributions, grassroots, so on and so forth. then they get into office and they are going to defend their seats and raise twice as much money and now their money's going to come largely from political action committees. the point of that money is not so much to win an election outright in a campaign ad.

it's really to intimidate would-be challengers from running and make sure whoever does end up filing doesn't appear to have a chance so he can't raise the money. in other words, money works in much more subtle ways. this is where i think that the hue and cry over the citizens united case is misplaced. i can appreciate although i don't agree with the opposition to that case. i just think that it--by focusing on citizens united you miss the real underlying tendencies of how money operates in politics. it tends to be much more subtle. it tends to happen much more often in congress than the presidential level, particularly in the house of representatives. host: don, democrat in detroit. good morning. caller: good morning. i'm calling to protest the washington jaorch commentator from "the weekly standard" to provide impartial observations on the democratic party.

he's actually here to sell his partisan book, but wait you guys are presenting it, this guy's here just to present the facts and nothing but the facts. that's what i wanted to call. host: what do you think about the democratic party? caller: i'm a democrat. host: how do you feel the party has evolved. it sounds like you take issue with with what jay cost is safplgte give us your counter point. caller: specifically he's probably mentioned tammany hall five or six times. i haven't read his book. i can't comment on that. but from the way he's presented it tammany hall was a machine in one state, a republican state, for about 30 years, 100 years ago. he finds it somehow emblematic of the democratic party and the way it works. when that's not true. specifically if you look at institutions like the democratic party in wisconsin and minnesota how it was coalition of farm

groups that came together. and formed the coalition in the late 1940's with labor. even to this day you have the democratic party so-called the farm labor party in minnesota. host: thanks for your call, don. just so you know we are trying to balance out the show. we have a liberal guest coming on next. jay cost, as you mentioned is a writer for "the weekly standard" a. conservative publication. talk about what our caller had to say regarding what he thinks the democratic party represents, labor, which means individual interests not necessarily the unions in and of itself. farm, meaning farmers, the people themselves not just big business. guest: look, i think i would make two points. the first is regarding the book itself, i don't make any claims to be writing without a point of view. and frankly i think anybody who claims to be objective with the capital o is trying to sell you

something. i don't make any claims like that. the point of the book is not argue liberal vs. conservative. the point of the book is to talk about republicanism with a small r. and the extent to which the -- this political party which claims to be a small r republican party actually lives up to its rhetoric. look, i appreciate you know as a conservative liberals aren't necessarily going to buy the argument, but the flip side being that somebody who is not wedded to the democratic party perhaps i'm in a position to critique it. i try to do so in a responsible way. and frankly i think if the caller read the book i think he would be surprised in a lot of respects. the book is not what you would expect, in other words. that being said, talking about tammany hall, why i have mentioned it as many times as i have, he's right in a lot of respects.

tammany hall ran out of office in 1933. it was destroyed, by franklin roosevelt himself. that's what roosevelt threw his weight very subtly but clearly behind la guardia. split the vote in new york city to install la guardia as its mayor and he was a republican, liberal republican. then went on to make sure that la guardia had access to the patronage from the works progress administration. the point of mentioning tammany hall, even though he destroyed it he supported a lot of respects, he imported the model into the national government n a lot of respects that's wait the government works. talks about organized labor. the problem that i have with organized labor is not a problem with labor itself but labor is an interesting group within the democratic party. the argument of my focus, increasingly when it comes to choosing the public good and interest of organized labor, the democrats will choose the latter. talk about the farmers. the farmers again have been an

interest within the country, broad based interest for a long time. that doesn't change the fact that harry truman after he won election in 1948, he and his advisors looked very carefully at the returns from the great plains, the farm belt, and he did very well in the farm belt. and so thus was created the brandon plan which was a naked political effort to buy off the farmers of this country. something that harry truman tried to do. so, look, that's sort of the point of the book. the point of the book is that the kemic party -- democratic party increasingly uses the power of government to bring new groups into its coalition as permanent client groups or pay off client groups. this is something that's been happening since the 1930's and it's something that every democrat inc. leader has been obliged to follow. host: jay cost, the author of spoiled rotten, how politics and patronage corrupted the once noble democrat inc. party and now threatens the american republic. he's a writer at the "weekly

standard" and writes the jay column, he's done that for the paths couple years. prior to that he was at real clear politics writing the horserace blue dog. -- blog. covering everything from politics, economy, to what's going on in washington. joining us from pittsburgh, pennsylvania. thanks so much, jay cost. guest: thank for having me. it's been a pleasure. a here on c-span we are live at the american general prize institute. they are hosting an event this morning with deputy defense secretary ashton carter. who will be talking about the us us defense budget priorities. and the impact of possible automatic budget cuts or sequestration next january. thomas donnelly, the co-corrector of the a.e.i.'s center for security studies will provide the introductory remarks which will begin momentarily. live coverage here on c-span.

>> welcome, everybody. my name is tom donnelly. i am the co-director of the maryland wear certainty for

fraternity studies here at the american enterprise institute. i'll get off the stage as fast as i can because you have come to here dr. ashton carter, deputy secretary of defense, who we are very pleased to host today. it was secretary carter's idea that he come and talk to us. i just agreed immediately knowing the good thing when i saw it and i looked very much forward to his remarks. there was a little squip in politico this morning saying that dr. carter was going to vigorously defend the administration's defense plans. i don't know whether that was our leak or his leak, but i'm sure he's more than capable of doing that. when he's done, he's going to run his own meeting and we'll go directly to questions from the audience. maybe i'll stick my hand up, but i won't insist on the moderator's prerogative or anything. i'll just get in with everybody else in the scrum if there's

something i simply have to ask. it's really true that dr. carter does indeed -- doesn't need very much of the introduction. he's not only the number two official in the defense department but his career as a public certificate veant and intellectual has really been quite distinguished and quite sustained. he served in the first -- yes, the first clinton administration as assistant secretary for international security policy. and really a lot of his most influential work has been done when he's been out of government at the kennedy school and do things like the ashton strategy group and things like that. he's the very epitome of a defense intellectual. and thus it's very pleasing to see somebody of the egg headed persuasion rise to the senior management position in the department. please let's welcome dr. carter

to the a.e.i. [applause] >> thank you, tom, for that introduction. and i didn't see the thing in politico. i don't know -- i do appreciate the introduction. i appreciate the opportunity to be here. at a.e.i. it was almost exactly a year ago today that my former boss, secretary gates, spoke to you on the eve of his departure as secretary of defense. in looking back on his tenure as secretary, he chose to highlight two major themes. the first was his effort to turn the tide in iraq and afghanistan. he spoke to you about his laser-like focus on delivering urgent battlefield needs to the war fighter in iraq and afghanistan. when secretary gates first hired

me in 2009, he told me that the country's at war, ash, but the pentagon is not. my job, he explained, was to help him get the pentagon on to war footing, especially in the part acquisition technology and logistics part i was about to take over. that has been my focus as well as his, under his leadership we set up a fast lane to get urgent requirements on to the battlefield unhindered by the bureaucracy. we needed better persistent i.s.r., he said, as did general petraeus, general mcchrystal, general austin, general allen. we worked hard to deliver capabilities like stats with wide area lenses, and more u.a.d.'s that could be operated by a patrol on their line of march. we needed to protect our troops

against improvised explosive devices. i.e.d.'s. we rapidly procured and fielded mine resistant armor protected vehicles, the mraps and police particular underwear to protect troops and better detectors of i.e.d.'s and the homemade explosives and so on. we needed to get fuel, food, and all these capabilities on to the battlefield quickly and this logistic surge was a huge part of secretary gates and my focus. since then thanks to the incredible efforts of the men and women of our armed forces, spresh commanders, and leadership of the president and congress, we were able to end the iraq war responsibly. al qaeda's on the ropes and its leadership is decimated and we have made significant progress in afghanistan. i have been going to afghanistan for well over three years now since secretary gates and i first had that conversation. and i was there a couple weeks

ago and i just have to tell you our troops, our allies, our afghan partners, they are performing exceptionally well and doing heroic things to bring security to that country. i was in the helmund valley several weeks ago where last summer we took such terrible losses. this time i walked around the market. and i went all the way up to the dam, all the way up the helmund river, which was just a distant dream to me six, eight months ago. over the last 10 years congress and the department worked together to get our troops what they needed to operate you effectively and it's led to results. i know people here at a.e.i. provide cutting-edge analysis on the subject of afghanistan and other pressing national defense issues for which we thank you

and we appreciate your work and continueded -- continued support of national defense. the second theme he raised was the strong view we had to take a strategy driven approach to reforming the defense budget. much has changed since that time. congress passed the budget control act which significantly affects our fiscal reality. but our commitment to a strategy driven approach to our budget has remained steadfast. that commitment began under second gates and continues today under secretary panetta under the leadership and guidance of president obama. we focused on the force we need to build for the future and that remains our singular priority. today i want to tell you a bit about our strategy and our budget for the future which we have tailored to meet our strategy objectives. -- strategic objectives. before going to some specifics, some general points. i know congress has gone through its mark. and on that i just want to say

that every dollar the united states spends on old and unnecessary programs is a dollar we lose from new necessary strategic investments. as secretary panetta said, if we had an open bank account we would keep all of it. but we don't have an open bank account. so when something is added to our budget that is not needed, we are forced to take out something that matters. from force structure, readiness, modernization, for from the health of the all volunteer force. when we are forced to hold on to older, cless capable systems, so others can pick one item or another that they favor, but we have to balance them all. and we have a responsibility to sequester. i want to say one word about that awful prospect up front.

people ask are we planning for sequestration? the secretary of defense has said no, we are not. mayber later in the summer o.m.b. will have to request we look at it and determine what steps can be taken. i don't want to mislead you here. planning has a certain rational tone to it. but congress in writing the budget control act did not design sequester to be rational. sequester was supposed to be the trigger, a trigger so irrational that the prospect of it would drive and force the leadership to do what was needed. which is to put together an overall budget package for the nation's finance that is could win wide support. sequester was designed to be irrational. and indeed aspects of sequester defy reason in any reasonable management of a nation's affairs, including its defense. as secretary panetta has made

clear on numerous occasions, a see querser would have devastating -- a sequester would have devastating effects on our readiness and work force and disrupt thousands of contracts and programs. moreover, under the law d.o.d. would have limited flexibility in how the cuts would be applied in fiscal year 2013. so both the size and nature of sequester would nullify the strategy for the post war force of the future that we so carefully put together under the president's guidance a few short months ago. man gearally from my -- manage -- managerally, our military and civilian program managers would face absurdities that result from the arbitrariness with which see questions racial would -- see questions racial would -- sequestration would take effect. and managers throughout the government not just defense but

nasa and d.h.s. and h.h.s. everywhere would find it impossible to cope with this kind of irrationality. this applies to managers in the defense industry as well. our partners in providing weapons systems to the force. we remind you that the quality of the weapons systems produced by our defense industry is second only to the quality of our people in uniform which makes our military the greatest in the world. irrationality and uncertainty are subjects of concern to the defense industry and i certainly share industry's concerns about the sequestration. this is not the way to do defense planning and budgeting. instead we need to take a rational, strategic approach to our budget. and that's what we are doing. so let me explain our defense strategy and budget and why we built the budget the we -- budget we did. i have to back up for a moment. this is is a time of great

consequence for american defense because two forces are coming together at the same time. the first is obviously the budget control act. but the deeper, more fundamental force is the force of strategic history. for a decade our department has been riveted of necessity on two wars of a certain kind in iraq and afghanistan. one has ended, the other has not, but will. thanks to the hard work of our men and women in uniform and our international allies and partners. through these wars over the last 10 years, by developed cutting-edge capabilities and counter surgency and counterterrorism. those were the skills we needed. we learned to do them exceptionally well. and we will retain those key skills going forward. but as the wars wind down, we must look up and look beyond to

what the nation and this world need next. we have the opportunity and really the obligation to pivot our defense to the new challenges and opportunities that will define our future. while we have been fighting, the world has not stood still. our friends and enemies have not stood still, the technology has not stood still. now we must meet these changes. and really in someplaces catch up with them. to do that we must let go of the old and familiar and grab hold of the new to build what chairman democracy called the joint force of 2020. . and the point i'm making is we need to make this transition even if we had all the money we

wanted. but, of course, we don't have all the money that we want and there is a second great force impinging upon us which is the budget control act. i just want to remind you of the magnitude of the budget control act's effect and the need we have to make this adjustment and cons assistance with the force of strategic history. the -- just to remind you the facts, the base defense budget is not decreasing. overcoming years, but neither is it continuing to rise in real terms as it has over the past few years. and as we planned for it to do as recently as a year ago. the difference between our plans pfer the budget control

act -- before the budget control act and the plans imposed on us under the budget control act is the famous $487 billion over 10 years. an adjustment of about 9% of the total that we planned, which is a very substantial adjustment by any measure. and to that we must add the magnitude of the reductions in overseas contingency operations or supplemental spending that correspond to the winddown of the war in iraq and eventually in afghanistan. so those are the numbers with which we are dealing and this is the moment which we find ourselves to deal -- which we find ourselves. to deal with the two forces we knew we had to do several things. first is to put strategy first and then budget.

president, secretary of defense, the chiefs, the service secretaries, and so forth spent much of the fall meeting constantly building off the work that secretary gates had begun the summer before and culminating and decisions made by the president to try to scope out what the defense strategy of the united states should be in this new strategic era, and you saw the strategy we put out pictures in early january and then a little bit later the budget. and the reason was the strategy was our guide as we made this large budget adjustment and the sequence was critical. second thing that we -- second rule we observed was -- i put it in secretary panetta's terms which is everything on the

table, everything on the table, no sacred cals, including many things we have not looked at managerially for many years in the department for the simple fact that we didn't have to. so everything on the table. the third principle we applied -- and this is important -- we did not proceed by subtraction alone, by taking things away but by building towards that force. the image i always have in my mind is an ice sculpture. you can either watch the chips fly away or you can watch the shape emerge. we always made sure we watched the shape emerge which is the force of 020 which is what we are trying to -- 2020 which is what we are trying to build towards. so that's what we did and the

result was a strategic package and was a balanced package in three parts. first part was a continued discipline in how taxpayer dollars are spent. i won't say too much about that in this audience. many of you heard me speak about this in my previous job, but we need to continue the relentless pursuit of better buying power for the taxpayer and the war fighter. this is necessary for two reasons. first of all, to the extent we can, we would like to absorb any reductions in the budget, in the budget control act without diminishing military capability. so one would like to find efficiencies where one could. can't tell you that we can find all defisheses but we can find quite a -- deficiencies but it's quite a bit. the second is if we are going to retain the confident of the

taxpayer that their money is being put to good use in defense. that confidence is essential for us to continue to enjoy the funding from the taxpayer that we really need to defend the nation. for both of those reasons we need to keep at it and that's why we proposed things like another round of base re alignment and closing, brac. people say, how can you do that? and the answer is, how can i not do that? how can i not propose the cutting of tail and only the cutting of tooth? how could i justify not protecting bases? i couldn't conceivably do that. i realize it's not popular but it's one of the things that we felt when we said everything

was on the table, brac was on the table. so the better use of the taxpayer dollars. our second part again i won't go into here because i think it's of less interest to this audience but it's of essential importance which is to take some steps to slow the grolte in personnel -- growth in personnel coasts in the department. so we made some proposals that are measured and we think it's necessary. the view of all us and the joint chiefs was that this approach was the right one. but the third part of the budget package was the one is of most interest to this audience and that is the part that was tuned to the new strategy. if you look at the new

strategic guidance that we issued in early january, i always say this is what you would have written down, too, if you had the same question. not rocket science. pretty straightforward answer to the question. well, after iraq and afghanistan, what should we focus on now? but it was important that we write that down and say it and that we guide our budget move accordingly. i pick a few of the pieces of strategic guidance, two out of the five or six that were in there. the first i'm sure will be very interesting to this audience is what we call the rebalancing toward the asia pacific region. and a logic behind that is very simple. it is this. the pacific region has enjoyed peace and stability for over 60

years and in that climate first japan, then korea and even, yes, now today china have had an environment in which they could develop economically and politically without war or conflict. that's not a birthright. that is something that was guaranteed, reinforced by the pivotal military power of the united states in that region. we are going to continue to play a pivotal military role in the east asia pacific region so we can keep on keeping on with that good thing. it's good for us and it's good for everyone in the region. that's what we're going to do.

and so if you look at what we did managerially in dealing with the consequences of the budget control act, the pacific posture increased relative to that elsewhere. some specifics and the navy, our navy is going to remain about the same size and grow somewhat in the outyears but we're doing a big change about newer ships for older ships. so not only are we protecting our investments in the navy overall, but this is the important point, we are shifting the naval presence to the pacific. you'll see that go on over the next several years. that's carriers, it's destroyers of a couple kinds, it's attack submarines, the new combat ship all going into the pacific theater.

go to the air force. the air force, we did decide to make some reductions in air force tactical error squadrons by removing some of the older or single purpose aircraft. that to make room for newer aircraft but we made no changes in the tact error posture in the asia pacific. none at all. in addition to that, we are continuing on, despite the budget control act, with the stealth bomber, with the tanker and with a host of other platforms all going forward despite the budget environment. say something about the marines. the marines in the asia pacific region. there will be something more about this later. reduction in marine corps

in-strength reflecting the winddowns in iraq and afghanistan. no reduction in marine corps presence west of the international death line. none. and -- international date line. none. in fact, we will see more marines out in east asia. why is that? because the marines won't be in afghanistan. they are going to be at their stations. we have a new rotational presence in australia that we're building. marines presence in guam. definitely going to make that move now, and so marie -- marine corps presence in the asia pacific also. finally, we sustained or launched new capabilities specifically for the asia pacific region. i mentioned the new bomber. didn't mention yet the virginia payload module for the virginia class submarines, conventional

prompt strike and a host of upgrades in radars, electronic, protectional electronic warfare, new munitions of various kinds and on and on and on all not only protected but enhanced going forward. so i wanted to give you some of those particulars because i know that's one of the strategic principles that was most interest to an audience like that. take one more and then i'll -- that's it. the other one really derived from the president himself who had a very good instinct in this regard. he kept saying to us, make sure that you don't follow the last in first out rule, that you don't pull up the things that are most shallowly rooted, namely, your new things, because that's the easiest thing to do. i want to see that we are enhancing the capabilities that are going to be part of our

future. and what are they? well, cyber, for example, we will spend more on in the future. we need to. we have lots of opportunities there and we will. certainly aspects of our science and technology base so we continue to invest in the future and not consume feed corn of tomorrow. special operations forces including counterterrorism which we gotten very good at over the last 10 years. we need to keep being good at that. certain of our space initiatives. all our major space initiatives going forward. host of unmanned aerial systems, navy, air force and army. all of those things enhanced, and, of course, when you do that something else is not going to have that opportunity to be enhanced, something that's older and part of a legacy. but that's what we needed to do and that's what we did. so those -- in outline is how

and what we did to try to adjust the budget to the strategy. now, in the time since when we released our budget plan and today, congress went through its mark. and i want to emphasize the package that we submitted is one that was not only strategic but the thing i want to stress is carefully balanced. we're building the force we need for the future. we made decisions within the constraints of the budget control act. we had to. and when additions are made to that package in one area, we out of necessity have to take mg out elsewhere. -- something out elsewhere. it's the rule of the game. that's what it means to be once you have a budget a zero-some game.

so all of the package could lead to an unbalanced portfolio . for example, a hallow-ween of the force. and i want to specifically call out a cup of things in that regard. first, tricare. i mentioned that we did not believe that compensation could be exempt in this climate. health care costs consists about 10% of our budget, and we want to give our troops and retirees the very best health care at the lowest price in the country and we do. but in order to deliver high-quality health care we need to control spiraling costs, so we made some modest proposals, respecting tricare and we need these savings to balance and maintain investments in the military. we need them. we understand it's a difficult step to take. we think it's a fair one and the right one.

let me talk about aircraft retirements. we're looking to retire some old single purpose aircraft in favor of newer multiaircraft like the new bomber and the new tanker. and i mentioned that we had proposed making some of those changes in the tactical air forces. we need to be able to make those changes. to keep older aircraft online would impede the air force from becoming the air force of the future that we need, and that would be unfortunate. so as it affects the tact air force, the changes that we made we think were well-advised, and they allow us to make the transition to the future in the air force that we seek. that's with respect to tact air. with respect to lift, we -- all

of our modeling shows that we have excess intertheater strategic lift. we need to make sure that our lift capabilities are allocated correctly and access to intertheater lift is not -- we can't afford it. we don't need it. we also have excess in trust theater lift. this affect the c-130's in particular. and the c-130's have an important use, not only to our contingencies of importance overall national defense but also in defense support civil authorities. very important role in defense support civil authorities, so they need to be present in adequate numbers for our contingencies, and they need to be at useful locations within the country to provide proper -- appropriate support to civil authority. where they are is of less concern for national defense,

and we're prepared to be flexible in that regard and the secretary has even indicated that he is prepared to be somewhat flexible with respect to the numbers of c-130's even though we have excess. but overall we need to be able to retire older single-purpose aircraft and aircraft in excess of need, and that's what makes rom for the new. -- room for the new. likewise with the navy, if we hold on to older ships it will come at the expense of the new. we don't want to hold on to older ships because we have to pay to modernize them, pay to man them, pay to operate them and they are not as capable as a new ship would be. so our shipbuilding plans call for a somewhat larger, the end of our 10-year period but decided more capable navy and

that's the plan we would like to follow. we say something for army and marine corps. army and marine corps are two services that are facing the most titanic transitions as the iraq and afghanistan wars wind down because they have been so deeply and wholeheartedly committed to those two conflicts. and they're trying to make a transition from this necessary focus on counterinsurgency or coin over the last decade to a wider spectrum of capabilities that we need for the future so they are the dominant ground force, full spectrum combat capability best in the world future. that's what we want. so we are not going to size the army or the marine corps for long protacted stability

operations any longer. we're not going to retain the large rotation forces that we have needed to constantly rotate brigades in and out of iraq and afghanistan. we're not going to retain it not because we are abandoning coin. as i said we are going to retain that important and hard one excellence in coin, but we don't need the bulk of the force structure. you can't predict the future. obviously no one wants to get in another war like iraq or afghanistan anytime soon, but the point so we are predicting the future. the point is if we did we would mobilize the reserves and rebuild and we would have by definition time to do so. if there were another large long counterinsurgency war that needed to be fought. so that is not force structure that needs to be retained in being, and that isn't what we want or the army or the marine corps want. they want to be able to take

down that in strength somewhat and make investments in creating the full spectrum force of the future. that's what we need to do, and if we're prohibiting from making those reductions in army and marine corps in strength it frustrates our opportunity to help them make that transition from the decade they've been in for the decades we need them for in the future. i hope that doesn't happen. so in conclusion, we're in all of our services and in all of our activities in national security, embarked on a strategic transition following the wars in iraq and afghanistan. this is just the beginning. this ship is making a very big turn, and we need to follow through on our plan and keep moving toward the future. it's an important job to do. transition is going to take some time but you can see the outlines of where we're going. secretary panetta, chairman dempsey guysed it and president obama scrubbed it -- devised it

and president obama scribbed it very -- scrubbed it very hard and all the members of congress i speak with every day and whom envision i speak of, the same opportunity and really the same obligation to the war fighter and the taxpayer to pivot or strategic aprofe. we all see it. we just need to do it. as we work out the details we look forward to working with each and every one of them and with each and every one of you in this room on the process every step of the way. so i thank you for your attention and for the wonderful work that this institution does. [applause] >> this allows me to introduce one program note that i forgot to mention at the beginning and also to put myself at the front of the question. if you'll indulge me for a second. first of all, just to remind

everybody of secretary will run his own q&a session. there are ground rules that sue plant even that. that -- supplant even that. put your compelling statement in the form of succinct question. i will now give an example of how to do that. mr. secretary, you described a process of transition, the ocean liner metaphor you used. obviously the term that you've embarked on is incomplete. so i'd ask you to both look ahead and cast your mind back to both past job and your past experience in the 1990's. do you foresee a transition that's necessary within the defense industry that would parallel what you've described and what do you think that

would look like? >> i do, and it's a very important question. my colleagues in the defense industry are thinking along exactly the same lines and almost without exception are steering their companies in that position so they will continue to serve our needs in the future in a different way they have in the last 10 years. i say a few things about -- i said already that the defense industry is second only to our people, our defense industry is what makes us a great military power. therefore, a technologically advanced, vibrant and financially successful defense industry is in the national interest. and we want to work towards a defense industry and the future that continues to be as great as the one in the present and the past. we in the main leave to market

forces the adjustments in the defense industry that will necessarily come aztec nothing changes, as missions change, as the transition unfolds because the speaker theory says that's good and that's what we want. we do keep our eye out for things that could be deliterious to our string. one would be the short-term financial perspective impinging upon our industry that came into the housing market, certain aspects of the financial services market so we can't afford to let that thing happen to our defense industry so we are aligned with the long-term investors in our defense industry in terms of long-term health, productivity growth and so forth. second, we'll be looking as we make changes for any parts --

any skillsets that are now in the defense industry that if we allowed them to go away would be very difficult to or time consuming. those i -- we have an obligation to sustain, and i've invited my partners in industry to identify those opportunities for us. that's an example of something we didn't do in 2013 but as we put together the 2014 budget we definitely want to look at those holes and within the reasons of our budget constraint make those kinds of investments. so we want to work together with the industry upon which we depend so much so that they make the transition with us and that they're here to make the greatest military in the world

10, 20 years from now. so i appreciate your question. if there's anybody from the industry here in the room, thank you. and please go back and tell your people thank you. we don't take you for granted. we appreciate what you do for national defense. >> amy butler with "aviation week." since 9/11, and you talk about this transition, there's been a lot of money point of order into i.s.r. resources for any number of reasons. can you walk us through what the pentagon is for reconciling the i.s.r. forces in the future given the fact that the quick reaction systems which are unique and what not, and also at what point, if you haven't already, will you start shifting funds from the current i.s.r. programs that we know of today toward new sensors and/or new platforms maybe that can

penetrate such that we need for the future? >> both good questions. let me take the second one first. that transition -- that -- you're calling a shift, has begun. actually began a couple years ago, and i'm limited in what we say about our future i.s.r. capabilities, but trust me that we're investing in the future. with respect to the ones, you're so right we put together quickly under the pressure of combat and which have been so amazingly successful. they do pose a managerial issue before the war because they weren't necessarily designed to last. they don't have the futures that we want that will be part of an enduring part of the force. the air forces had to work

through a very complicated process. we do intend to make them an enduring part of the air force's force structure but we had to figure out how to do that. it wasn't just the air frames. it's how to crew them over time, how to train the crews, where to put the crews and so forth. likewise, for the liberty fleet, liberty fleet also very much a quick reaction type of fleet. those are the turbo props with a lot of i.s.r., so forth on them. also essential, and we are going to keep a portion of that fleet. there will be things that we built up for the wars in iraq and afghanistan that are not worth keeping in the force structure because they'll be outdated or they're not suited to more contested air environments. afghanistan is obviously not a contested air environment. you just fly around and do what you want. that won't be that case

everywhere in the world. so that's an example of a big transition in the air force. by the way, it has the man to unman transition aspect to it. there is a lot of adjustments begun on at the same time. >> thank you. professor at the university of california and i'm here with our students. i'm sorry we didn't bring our weather with us. as a veteran of the undersecretary acquisition office in o.s.d. for many years, i hear themes of old problems that still exist. as you meet today's situation. we have a concern in my time in the pentagon with the notion of cost growth and reductions in programs and stretchouts. so in managing the challenge of the future, the mantra of the old days was guard the front gate, stabilize your programs

as much as you can in order to meet the goals of reducing cost growth and delivering on time. we tried to manage the number of major systems through the front gate. we tried to manage cost growth and systems by controlling class 1-e-c change orders, baselining. that's my editorial comment. my question is in brg your budget, to -- building your budget, to what response are you -- >> wayne, we absolutely are. by the way to your students i hope you decide to make public policy what your life's about. nice to get up in the morning and be working on things that are bigger than yourself. we need good people. i hope you take an interest in it. it has a very direct effect. i mean, i -- particularly with my 18-l background protect well-managed programs. if you have a program that's not doing well, that's

overrunning, that's behind schedule, that's not going well, you are -- there's a presumption against you in this environment. and i say that to all our program managers in government and all my colleagues in industry as well. you need to make it possible for us to continue to have you do what you're doing for us. and if you -- if you're running up the bill by a few percent every year, we cannot sustain that. so you are presumptively on the block if you are a poor performer. and some of our really well-performing programs, we are protecting them, not just their existence, but making sure they stay at an economically efficient rate of production, whether they be munitions or aircraft and so forth, but i won't name the stars, but you know we obviously have programs that disappoint us and frustrate us,

but we also have programs that perform very well. they deserve protection because they're going to deliver more combat capability per dollar than the ones that are poorly performing. and the worst thing you can do is bring back rates of production to the point where they are economically inefficient. that's truly the future. managing is an important part of it. i'm sorry. can you wait one second? my distinguished predecessor, secretary wolfowitz. >> paul wolfowitz, once upon a time i had your job and i know how difficult it is, i should leave you alone, but this is a friendly question. to ask you to look in the future a little bit, it's famous that when dick cheney was being confirmed as secretary of defense the word iraq didn't appear once in his hearings. i believe -- not sure with rumsfeld's hearings, but he certainly had to search very

hard to find the word afghanistan. so it's pretty hard to know what's coming up next. having said that, i know you thought a lot both in your job and the previous ones about terrorism. my question is, one, would you rank that as high up in the probabilities? do you think we're doing enough about it? and to what is the defense department's mission or is it between agencies or falling between cracks? >> terrific question, and you're reminding me that i actually forgot to say something which is in my list of protections which is counter -w.m.d. with respect to bio, reading into what you said, paul, if you're concerned about the potential of the biosciences to create threats in the future, not only with existing

pathogens but i think the real revolution lies farther in the future, but certainly so, it is a defense problem. it's going to be a defense problem. they will be used in war. they will be used in terrorism, and any time anything at that scale emerges, people are going to expect us to play a role. we have a substantial investment in that area. at the moment it tries to balance the legacy stuff that is naturally occurring pathogens and looking it he frontier as well tries to the extent we're able to and you know you've been part of this to get our feelers out there in the world so that we're engaged with the community of researchers in this field and to the extent possible with those in the past created stocks of pathogens and some

make sure they stay out of trouble and so forth. it's very important. and while we're mentioning the biosciences, another thought that comes to me, if you don't mind, the biosciences are going to be the revolutionary sciences for the -- in the next generation even as information -- i know this is trying. everybody says this is true. information technology was for the generation just behind us. and in addition to posing new threats, one thing i wanted to say is it has given us tremendous opportunities as well. we in the department of defense and, paul, i'm sure you know this well, have sadly over the last 10 years become pioneers in several fields of health

care. t.b.i., p.t.s.d., prosthesis and so forth. and as hard as that expertise has been it's there and it's available for everyone else to use as well. if you go to hospitals and you go go to the centers of excellence as well, be proud to take care of our own wounded warriors but that's progress that everybody can benefit from. sorry. >> good morning, sir. the army, especially the institutional army, had a very rough time getting their acquisitions done well over the past 12 to 15 years. given the stakes over the next five years, the reset, replacing the mm 13's, etc., etc., how confident are you that the army has fixed itself

and that it will do a good job and what are you doing to ensure that happens? >> well, you are right and i think everybody in the army and everybody associated with the army acquisition would say they are disappointed in the performance over the last decade, determined to do better. i know this is true of john mccue and heidi shue and the whole team over there. that's -- at my previous job it was a big priority of mine and my successor, frank kendall, i know will be working especially with the army to improve their trade craft in acquisition and also to put forth -- put together their portfolio of investment for the future. and this is a big change for the army. i said before the -- the army has -- is making the most difficult and largest transition of all the services just because they have been

really up to here in iraq and afghanistan now for 10 years. and so in acquisition and in everything else how they define their mission, how they organize and so forth, ordierno and mchugh are taking a really fundamental look at that. and secretary panetta and i have wanted to make sure they had the time and the strategic patience from us to make the changes that they need to. it will take some-time just because of the magnitude of it but it will be reflected in acquisition as well and it really needs to be because they -- they missed -- there's a lost decade there for the army and i think it's widely recognized. it's sad. >> thank you.

jeff of "air force times." there have been problems with the f-22's oxygen system where there are limitations where they can fly. i want to know is the d.o.d. confident in the aircraft if another war broke out today that it could order into battle? >> i think the answer to that is clearly yes. that's the judgment of the air force. that was the judgment of the secretary in allowing the deemployments to go forward. we did, however, and secretary panetta did this -- was very concerned about the ibog's issue. wanted to accelerate the fix for that. wanted to make sure while they were training for operations, if need be, that the safety of the pilots, the aircrews was taken into account mostly by taking sure -- several operational things, but importantly by making sure there was an air field near enough that they could get to

if they began to experience any of the symptoms associated with this problem. so the answer is, yes, the aircraft will be used operationally if need be, but also yes, we are concerned and have been concerned of the ibog's issue but i think the secretary is getting us on track to fix that. the tie. yeah, the tie. he's not used to having a tie on. >> thank you very much. i'm mike with professor glass. my question entails, we talked about single purpose aircraft. i know this is probably a sensitive topic. the a-10. upgraded with new aviation onics. is a-10 an aircraft that will

serve in the near future in 2024 that you are talking about or can it be replaced by suitable replacement aircraft? >> well, i think the reason why we were able to reduce the number of a-10's is that we can do unlike 20 years ago the a-10 job from other aircraft whereas the a-10 really does that, does it very well but that's all it does and so it's simply a matter of putting your money where you have the most capability. and that's what lies behind the decisions of the a-10. that is an example of what i was talking about. >> you just mentioned the u.s. planning sending more carrier to the asia pacific region. so will that include china --

>> repeat it. >> do you think that might irritate china and, also, the other question is on south china fleet under the mutual defense treaty that the u.s. -- with philippines, that the u.s. should come to the aid -- if the philippines were under attack? so if there is any possibility that we will see the u.s. troops appear in the south china sea if that's the case? thank you. >> with respect to the first about china, just go back to the point i made earlier which is that the peace and prosperity that all have enjoyed in the east asia pacific region, including china, which is important economic partner of ours, so the question is, what is the environment within which that

good thing, which we've had going for 60 years, will continue? one ingredient in that, really a pivotal agreement, has been the american military presence in the east asia pacific so we want to keep that going. we think that's good for us but we also think it's good for everyone in the region as well. with respect to maritime disputes in the south china sea, i think we've been pretty clear about our outlook on that. these are things that need to be addressed peacefully, and that's the position we've taken right along. i think that's the position of principle and pass and, you know, the secretary of defense says i left the pentagon talking to shangry -- shangrila. i know he will be asked the

same in the next few days. >> one more. >> one more, sure. >> thank you, mr. secretary. it's a great review of the u.s. defense strategy. as the secretary leaves for the region, in china and india today, what do you think his message will be for india? because china is growing militarily. the u.s. budget is going down, and china's military budget is going up. and this will be a special message for india. what do you think the u.s. and india will have? do you expect any special signings between india and the secretary during his visit? >> we have going on with india so i'm sure there will be a number of things with the secretary's visit that he'll be putting in motion or concluding

or whatever. we have i think the number is several tens of exercises with the indian military. i think that's reflective of the fact that we are destined to draw closer to a country that shares so much in the way of its characteristics and its values. i felt this way for a long time with india. i just met with a group of indian thinkers about security affairs a couple weeks ago. they were here in washington and told them the same thing. you look around the world and india's one of those countries that you know is a kind red soul to the united states -- kindred soul to the united states for the future. so building that ground is essential. we have been ought -- we have

been at that now for 10 years, and i know that secretary wolfowitz played an important role in that. that's just been growing and growing and growing. of course, those of us who are enthusiastic about it, as i certainly am, and i know secretary panetta is and secretary clinton is. only want to see it go faster and faster. i think i'mk. one more. the gentleman in the glasses. >> thank you, sir. mike with cnn. you briefly did discuss sequestration, but i wanted to ask whether it happens or not, it does seem to be kind of a possible reality -- what are the concerns you're hearing from the defense industry as a whole about sequestration and

what are you -- >> the same things i mentioned that our managers in the government are. this is something that is both by its size and its nature -- i use the word rational. completely irrational from a management point of view. for those of us that tried to keep this complicated program on track, you have people working. you have a flow in your factory or whatever. you got it all planned out. we've agreed between the two of us. we got in a place where we think we got a good thing going, a program that's delivering the capability we need. it's economically paced and so forth. boom. in you come and it makes a managerial mess out of all of the things that we tried so

carefully to put on a steady footing. our partners in industry and us. that's why it's so, you know -- i use the word irrational. it is. managerial irrational. next to you. we'll make this one the last. yes, ma'am. >> my question is about biofuels. in both the house and the senate marks of the national defense authorization act, they essentially would make it impossible for the department of defense to buy another gallon of biofuels in fiscal year 2013. i want to get your response to that and also any word on if this would affect plans for a great green fleet or any other department of defense -- >> well, obviously we asked for the freedom to do that and we would prefer to have the freedom to do that so that's a simple answer to your question. i'll say something more broadly about energy.

we are big consumers of energy in the department, and we do play a role in the nation's overall energy strategy. we do things -- anything we do has to be in the interest of defense. in the first instance. but the three ways that we participate. we do useful things for defense that might be useful for the country's energy situation at large are, first, we do do some r&d. we don't try to compete with the department of energy in scope or size or quality, really, for that matter. we can't but there are certain areas where we have needs that are distinctive to us and where

we need innovation and the only way to get that innovation is for us to sponsor it ourself. secondly, we are frequently able to partner with the department of energy and provide installations or ranges or something else for them to try out their own r&d, and that's fine with us. if we can do that that's fine. and then third, a few areas and carefully selected areas in which we by following our own need, defense needs act as a first adopter of a technology that might later prove of wider use. might. i give you an example. high energy density batteries. everybody's talked to the troops knows the depth of 1,000 ounces and how they complain about carrying around all this electronics they carry around. the hardest part is the batteries.

if we can get a higher energy density battery we would play pay a lot for it. more -- we would pay a lot for it. more than you would pay to put in your flashlight and that would be a perfectly legitimate investment for our troops, and it may be that if we made an investment of that kind over time that technology would mature, the price would come down and it would become competitive in the commercial marketplace. in which case we would have fostered an innovation of greater use. good thing. defense has done that in many, many fields for many, many decades and absolutely fine. but we part with the first principle is anything we do has to make sense from a defense point of view. we are the department of defense, and he has -- and that's how we justify our investments. >> i want to thank you, sir. >> thank you.

>> i hope you feel like you got away without suffering too many casualties. >> wonderful group of people. thank you so much for the opportunity. [applause] [captions copyright national cable satellite corp. 2012] [captioning performed by national captioning institute] >> we'll let you know when live coverage will continue in just a few minutes shortly afternoon with a look back at the 2008 financial crisis. former chief economist for h.u.d. and freddie mac, kevin villani, will talk about whether the financial crisis is systemic from the cato institute. until then, from moments ago, president obama signing the re-authorization of the export-import bank. congress approved the renewal bill. it is the governing vehicle to promote u.s. exports. again, the signing ceremony just happened at the white house within the last couple of

minutes. [applause] >> thank you. thank you. thank you very much. everybody, please have a seat. have a seat. i want to begin by recognizing the members of congress who are here today, all of them did outstanding work on this legislation. in particular want to thank steny hoyer. congresswoman mahoney as well as congressman miller who helped make this day possible. their leadership, their hard work made this bill a reality. we talked a lot recently about the fundamental choice that we face as a country. america can either settle for an economy where just a few are doing well and a lot of folks are struggling to get by or we can build the kind of economy

where everybody is getting a fair shot and everybody is doing their fair share and everybody is playing by the same rules. and part of building that broad-based economy with a strong middle class is making sure that we're not just known as a nation that consumes. we've got to be a nation that produces, a nation that sells. our middle class was created by workers who made and sold the best products in the world. our communities and our economy have always done better when we shipped more goods than anybody else. stand for that phrase, made in america. and i want us to be that nation again. i want us to be that nation in perpetuity. two years ago i set a goal of doubling american exports over five years. today with the trade agreements that we signed into law with the help of some of these same

members of congress, we're making historic progress. soon there will be millions of new customers for our goods and services in korea and colombia and panama. that way even though we got some hyundais over here we will have some chryslers and fords and chevys in seoul that are imported from detroit and toledo and chicago. so i will go anywhere i can in the world to create new markets for goods and we are also not going to stand by when our competitors aren't following the rules. we brought freights in china twice the rate than the previous administration. we set up a trade enforcement unit to investigate unfair trade practices that are taking place anywhere in the world. anytime other countries skirt the rules or put our workers or businesses in an unfair position, we're going to take

action. we're also making sure that american businesses have better access to the 95% of the world's consumers who live beyond our shores, and that's why the bipartisan bill that i'm about to sign is so important. by re-authorization support for the export-import bank, we're helping thousands of businesses sell more of their products and services overseas, and in the process we're helping them create jobs here at home and we're doing that at no extra cost to the taxpayer. over the past few years i met with a lot of business leaders and a lot of workers across america, from companies like boeing to dal chemical and other companies that are interested in accessing foreign markets. they told me how critical support from the ex-im bank is. as head of the bank shes we owe thanks to fred, who is here on stage, for doing such an

outstanding job. just to give you a couple of examples. boeing relied on support from the ex-im bank to strike a deal selling more than 200 planes to one of the fasters growing airlines in the world, -- fastest growing airlines in the world and that translates to thousands of jobs here in the united states. as long as our global competitors are providing financing for their exports, we got to do the same. so i'm glad that congress got this done. i'm combreafl to members of both -- i'm grateful to members of both parties who came together and put the interests of the american people first. now we got to do more. obviously the world economy is still in a delicate place because of what's going on in europe and the fact that some of the emerging countries have been slowing down. it is absolutely critical for us to make sure that we are full speed ahead. i've been traveling around the country talking about a to-do list for congress with some

commonsense ideas that historically have had bipartisan support to help continue growth and job creation. just like the bill i'm about to sign, those policies can help strengthen the economy and put more folks back to work. we shouldn't have to wait until an election to do some of this business. couple of points. number one, it still makes no sense for us to be giving tax breaks to companies who are shipping jobs overseas. great news, there are companies that are moving jobs back to the united states. we are more competitive than ever. our workers are more productive than ever. . we want to help provide incentives for folks to make those decisions. so it's time for congress to take tax breaks away that allow for deductions moving jobs overseas and instead cover moving expenses for companies that are interested in bringing jobs back to america.

number two, congress should give every responsible homeowner the opportunity to save an average of $3,000 a year by refinancing their mortgage. we are starting to see a little bit of stabilizing in some of the housing markets around the country, but that continues to be a significant drag on our economy. but when families are able to take advantage of these historically low rates, it makes a difference. it puts money in their pockets or may help them rebuild some of their equity. it gives them more confidence and the housing market stabilizes hurt. we have done everything that we can do administratively to help some portion of homeowners around the country refinance, but every responsible homeowner in america should have the chance to save money. that's not just good, by the way, for the housing industry, that's good for all businesses because it means consumers are going to be out there with a little extra money in their pockets. number three, congress still has the opportunity to do more to help small business owners who

create most of the new jobs in america. so we want to give them a tax break for hiring more workers and providing those workers higher wages. fourth, congress should extend the tax credits for clean energy companies that are set to expire at the end of the year. this is something that a lot of members, both democrats and republicans, should be able to appreciate because wind power, solar power, biofuels, those aren't partisan issues, that's a job sector that is growing across the country but right now there is too much uncertainty because we haven't gone ahead and locked down some of these tax credits. these companies are putting folks back to work and they are helping us break our dependence on foreign oil. there are members, again, of both parties that support these tax credits and tens of thousands of jobs are at stake. so i think it's very important for us to make sure that we move forward on that.

fifth, i'm going to speak to this on friday, congress should create a veterans job corps so we can put our returning heroes back to work as cops, firefighters, park rangers. we just observed memorial day, an extraordinarily moving memorial day. we were down at the vietnam veterans memorial commemorating 50 years since that difficult and challenging war. one thing we learned from that was that we've got to treat our heroes with the respect and dignity that they have earned. and our veterans are some of the most highly trained, highly educated, highly skilled workers we've got. these are americans who want to keep serving now that they are back. so we got to make sure when they come home they come home to new jobs and new opportunities. so there are a number of things that my administration can do on our own and we are going to keep

on doing them, but it gets a whole lot easier if we get help from congress. this is a great example, a great model of what can happen. america has come through some tough times together. it's going to take more time than any of us would like to get to a place where all of us have fully recovered from the worst recession in our lives. there will continue to be hurdles and there will continue to be head winds that we can't fully control but there are plenty of things we can control and there's plenty of solutions within our reach. there are steps that we can take right now to speed up this recovery, to help create jobs, to restore some of the financial security families have lost. it's within our control to do the right thing and do it now. so my message to congress is, thank you and congratulations on authorizing exim-- ex--im bank. i hope this will be a model for

the kind of progress we can make in the months to come and years to come. with that it is my great pleasure to sign this bill into law. [applause] [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> two stories, one is the financial crisis -- >> live now to the cato institute where they are hosting a discussion on the 2008 financial crisis. we'll hear remarks from kevin villainy -- villani, chief economist for both the department of housing and urban development and freddie mac. he recently co-authored the paper what made the financial crisis systemic. just getting under way. live here on c-span. >> testimony from 700 people. they had millions of pages of

testimony and they produced a report on what caused it. basically it was, they were charged to study 22 specific causes. they found evidence of all sorts of causes. confluence of failures, mostly related to private label securitization. and the one thing that they exonerated was the political housing goals. they exonerated, they found that fannie mae and freddie mac were led into this market by the private label market. the wallace diagnosis is diametrically opposed to that of the financial crisis commission. that is nothing else counted, it was the sinny quo none, without which nothing, which the entire crisis related to the existence of housing policy. and fannie mae and freddie mac were the implementers of that policy they led the way and h.u.d. is the mission regulator

own prudential regulator extended those housing goals to others in the market, including the private libel, and so everything else would be a symptom of what happened when that happened. so, in some sense the financial crisis commission was set up to emulate the pecora commission, it was established during the great depression and purportedly it would investigate the causes of the financial crisis of the great depression, but in fact it was a report that implement a long-standing agenda which all related, the implementation of glass-steagall, which brought us deposit insurance and the separation of commercial banking from investment banking. even though the evidence suggested that that had nothing to do with the depression at that time. i will argue that that sewed the

seeds of the current crisis. under the wallace condition, if you understand how the housing goals work, nothing else matters. i just reread that report. my discussion today is basically going to agree with the wallace dissent. i agree with one point in the financial crisis commission report and that is that the prudential regulation failed pervasively. i'd even add, there is a new book out, the guardians of finance, it's failed chronically in doing that. so the one thing we have to understand, if those two things alone could cause the financial crisis to be systemic, then that's all we need to explain it. everything else will be a symptom of what happens when you get a crisis that bad. it all starts with the housing goals. what are the housing goals? the housing goals were in the original 68 act, they were implemented first in the 1970's,

but fannie mae wanted no part of those housing goals, and i can remember the arguments we had with them at that time, to try to convince them they weren't binding anyway. whatever they did they already met the housing goals. but they were looking ahead and in 1992 we passed the ironically named, federal housing enterprise safety and soundness act. which was more about implementing housing goals than it was about making these organizations more safe and sound. the whole die was that these goals would eventually become more binding with lending quotas to lower income households that would eventually reach 50% to 70%. the second thing that we did in 1994 was we put a formal requirement that they target an increase in the homeownership rate from 65% to 70%. that seems very modest, but the u.s. at this time already had the most liberal lending requirements among any of the market economies. so the question was, how are they going to be able to get

there? this i stole from marning when he was in italy. it was basic graph. even though they said their goal was to promote ownership. they never did. homeownership rate was stuck at about 65% going back to the early 1970's when fannie and freddie were down to zero. they grew their market share to 50% and the homeownership rate stuck at 65%. it wasn't at all clear how the homeownership rate was going to get to 70. the question is how does fannie and freddie subsidize borrowers so we can increase the homeownership rate to 70% and to make loans more affordable for low-incombo rowers? there is the -- low-income borrowers. there is a theory that says for any firm, bank, finance company, for any pool of mortgages your total funding cost is the same regardless of how you decide to

fund t. dead, equity, anything else. makes perfect sense. more the risk the higher your funding cost will be to fund that risk. now, the well-known exception to that, which turns out to be fundamental for understanding the mortgage markets and securitization was tax. that is debt is deductible and equity returns arpt. so there is a big difference in cost. the second biggest exception is that with agency status, no matter how little equity you have, or how low -- how much loan risk you have, your debt costs aren't going to go up. so the key to their funding is, they can fund an unlimited amount, basically the government's cost of funds, no matter how risky get or how little capital they have. this is what's supposed to generate the money that's supposed to fund the subsidies. this gives rise to what the "wall street journal" called the public risk for private profit model. essentially you are providing

subsidies through finance. now, politicians love this because there is nothing on the budget that they have to justify. and private firms are exempt from political contributions so it works both ways. one of the commission staffers wrote papers on this 20 years ago that said, this is not uncommon. this is basically what a monopoly charter of the king did for the previous 1,000 years. give a monopoly charter and they are going to favor certain entities. what fannie mae and freddie mac did basically for the three decades from the 1970's, 1980's, and 1990's, is leverage a lot. about 100 to one. that leverage according to my calculations generated about $10 billion a year in tax savings and $10 billion a year in financing cost savings. that money was sort of split. the borrowers got a better deal, 25 to 30 basis points. they probably got about half the subsidy. the other half went to share rolled holders and management -- shareholders and management and back to congress. the key thing about all of this

is it worked well but you can only leverage to infinity. you can only drive capital to zero. the magnitude of subsidies you can derive by giving them a capital advantage is going to be limited. and the 70% homeownership rate, we implied a fairly big expansion of the market from where it had been at 65%. because they had loan limits and affordable housing requirements, it meant that they were going to have to expand the market going down market, to subsidize lower income households. so basically by the year 2000 we had the financial institutions leveraged 100 to one. we had borrowers putting very little down so they will leverage -- they were leveraged a lot. the it turns out the only ones in capital with the mortgage system and private mortgage insurers, can you see none of this have had much impact. it still isn't clear how we get this homeownership rate up. there is a lot of papers and i

see peter wallace is here. thank you very much for coming. he's written most of the papers. there is a ton of data about the quality of mortgages when we get to the year 2000. the previous decade this all worked well. fannie mae's stock price quadrupled from 1990 to the year 2000. by the year 2000 we had already been in the housing boom for about three years and the pool of potential borrowers was weaker. i only want to point out two elements of their characteristics. one, the down payment requirements basically had been replaced because these purchase money second mortgages could be -- bypass the private mortgage insurers and they could be funded in the capital markets or fannie mae itself was buying. so we no longer had the borrower with any stake in the game. a lot of these loans had teaser rates which means they didn't have to pay the full monthly payment and they didn't have to have enough income to qualify and they could refinance after the teaser rate was supposed to

go to flit indexed rate. the borrowers worked only so long as house prices continued to rise. they didn't care what they paid for the house price because they were putting no equity into it. what that essentially leads to is a go for broke model. that is these were loans that people should have known to be risky on the front end, just looking at the characters to the borrowers with high leverage, and we know at the back end with the benefit of hindsight they lost money. this was a period, the first five years of the last decade, of relatively low profits. and the losses that they took subsequently actually offset all of those profits. so it was a losing proposition right from day one, january 1, 2000, in my view, for reasons that i think were predictable, and that's because they were funding high risk loan return mortgages with that pool which is something that was different than their success story for the previous three decades.

what was on the mind is not -- we can't clearly know. they were either excessively optimistic, some say they were, or they were pushed by the housing goals, or they didn't care if they took losses later because that came later. the private label securitization system did the same thing. they were making loans. these loans didn't have enough yield to compensate for the risk. and when we look back in retrospect, we know that the triple b securities they issued during this five-year period lost about 30% of the value due to default. so this was a bad bet as well. you have to ask yourself, why were so-called private label securitizers also willing and able to make a bad bet for five years? now, i actually found this graph on the internet and realized it was in the wallace -- they say a picture is worth 1,000 words. this could be worth 10,000

words. this is just the plot of house prices against the scale of 100. you can see that the biggest peaks had been at about 120 to 110. in the 1990's, hi real estate development business building oceanfront homes in lajoiea, didn't go well. i had the same attorney as mitt romney and i closed it down. in 1999 my contractor came back to me and said let's get started up again. i said, look, it's 1999, it takes two years to get a permit, by the time we have a house built it will be three years, by the year 2002 we'll already be on the bound side of this market. which we would have been if we had fallen historical trends, there had never been a bubble bigger than that. of course i was wrong, but the question is, why did the bubble grow, first to five times, and then to 10 times the size of the biggest bubble in history? if you can understand this, then

you know everything you need to know about the subprime crisis. what happened was in 2005 they continued to go. now, losses -- losses that ensued were much deeper. that is by 2007 we know that that cohort of loans, the net loss, the entire pool is about 60%. it's still growing. you can't tell me people thought they were good loans when they made them and almost everybody defaults and there is almost no equity when they do, this is where i say they may have been going for broke, the moral hazard of taking a high-risk strategy in the early years, but they were going broke in these years. that is you know the business is under water, you just know that nobody's called you on it yet. they haven't made you declare bankruptcy and so you take all the cash out of it that you can until somebody finally closes you down. and fannie mae and freddie mac, i have a brief anic -- anecdote,

back in the 197 o's when i was at h.u.d., i was supposed to be the credential regulator. of course that was only supposed to be 1% of my time. it was like with one eye shut. they weren't going to be serious with credential regulation. they had a lot of people involved with making fannie mae and freddie mac get housing goals. it basically amounted to me making one telephone call a year to the c.e.o. it went something like this, david, how you doing today? great over here. it's fantastic. as i look at the books you are about $10 million under water. he says, yeah, but, who cares, we can issue all the debt we want. our debt costs haven't risen' we can compete with anybody in the market. what difference does it make? i said david, how many financial analysts and economists do you you have? i think there's one guy down there writing newsletters. how about legislative affairs and people in charge of the care and feeding of h.u.d.? oh, my god, there must be 50, 0. they have been growing like

crazy. that tells you what you needed to know about these entities. so why, this is the end of my story then i'll explain how it happened. but why it happened, why did the financial crisis become systemic. even through all this period never reached the homeownership goal. got up close to it, about 69%. never reached 70%. there was a new criteria that was imposed in addition to all of the other affordable housing goals, the mission regulators said, you've got to maintain at least a 50% market share against the so-called private label securitization. so fannie mae and freddie mac were cooperatingle with the p.l.s. they funded almost half of it. they did this to meet the housing goals because those securities counted for the housing goals. at the same time, they were competing with them for market share because they were required by their regulators to do it.

so when the private -- i call them p.l.s.'s, went for broke in the first half of the decade, fannie mae and freddie mac went for broke in competition with them. when they went broke in the next three years, fannie mae and freddie mac went broke. now, i have one slide left on fannie mae and freddie mac and we'll talk about how that private label securitization market worked. had there been no private label securitization market, fannie mae and freddie mac still could have caused the crisis because they had no way of generating capital subsidies to get the homeownership rate up to 70%. it's possible that politicians would have relieved them of that goal and ignored it. with private label securitization going over the cliff, the market share mandate was going to force them to do this. there's been a lot of defense that is have since been offered for fannie mae and freddie mac. one is that they followed.

when i tried that excuse, what did do you? everybody else was doing it so we did it, that excuse didn't work very well. but if everybody is jumping over the cliff to the death, would you jump over? i said no. fannie mae and freddie mac weren't followers, they were leaders in this whole effort except for one period in 2004 when prudential regulation did for the only time trump mission regulation and it did so because they had had what i think were the two biggest gap financial scandals in the history, and so the financial regulator put a capital client on it. as soon as that was removed they led the way. now, the second defense was from a mission regulator was, well, ok, so i pushed him over the cliff, but they would have done it anyway. hi them convinced there were tremendous profits to be made in this market. i found evidence of the profits, but that was the notion that they believed that there were profits. i say it was a suicide mission.

they were more likely to find 70 virgins in that suicide mission than profits for the loans they were making when we are talking about 2006 to 2007. so the excuses really don't wash. the much tougher question is, why did private label securitizers and how could they survive for eight years in what we now know to be a loss business from day one? and the unanswered question is why didn't the regulators stop them? how could they achieve comparable levels to compete when we know that was set by the government? why didn't the smart at-risk investors stop buying the securities? if the smart guys stop buying, you can't fund them, the market will be shut down. how could everybody for eight years make up front book and cash frosts and the money was -- cast profits and the gloin was in opposition. why didn't the speculators stop them? if can you answer those five questions you'll know why the p.l.s. was allowed to go on for

so long. the short answers are it had nothing to do with market discipline and failure. there were no -- was no market discipline. markets had been replaced by regulation. across the board. you either have one or the other. then we had bad regulation in each case. the affordable housing goals really trumped prudential regulation and the regulators didn't stop them. and then i'll show why and how the s.e.c. and bank regular lation arbitrage created sim large leverage to these -- regulation arbitrage created similar leverage to these. the smart money was replaced by dumb money. and then it was the regulatory accounting that allowed them to book fake profits, forced them to book fake profits that kept this whole model alive. and in the end you can't short the government which was what was driving the house prices up for that whole period of time. so, basically what i'm going to give you now are really the confessions of somebody who is a

former freddie macer, but mostly a former private label securitizer. how did the private label securitizer capital requirements set? anybody know? the financial crisis commission didn't tell you. they don't know because they are very opaque. one of the reasons they are opaque is private label securitization wasn't created, it was created for ginny may the government agentcy, and they didn't need capital requirements. the government backed it. other countries just used debt and equity. the capital requirements are more straightforward. the primary legal distinction is other types of funding are financings and the securitization was an act that failed from day one. i know a lot of times i'll do this briefly. remember i told you about that tax problem that equity was taxed. the whole reason they created the ginny may security was because they needed a vehicle --

they wrecks e-from all state laws and regulation that is would allow it and nobody else to buy pass those laws and create -- bypass those laws and create -- but they weren't exempt from the i.r.s. and they said we are going to tax all those tax flows and the only way they got around that if they had a passive trust they could pass it through. so they created what investors said was the worst possible instrument of all time. 360-monthly cash flows and you didn't know how much interest and principal was coming. it's not what investors wanted to buy. the origins of private label securitization, during the 1970's and early 1970's, we were working on legislation which would allow the private issuers to do exactly what the public was doing. that is avoid tax and also manage the cash flows in any way they wanted. i remember the view, we have a loft guilty people here.

i moved to freddie mac where we were e-e-and we did the first mortgage security that m different traunches for different investors. it violated the rule because we took the same cash flows and made $10 million in profit. investors were willing to pay more. when i went to imperial, a mortgage backed loan, had this pool of underwater mortgages so i did a financing that was financing for gap, but it was a sale for tax because i wanted to accelerate the tax laws and be able to write that off, it was cheaper financing than deposits. why? because you overcollateralized it. but they say if you overcollateralize one thing you should be undercollateralizing something else, it didn't. i was undercollateralizing deposits and that's where the arbitrage comes from.

i said you know those junk bonds you sold us? i'm going to turn them into triple-a securities. he was a little apprehensive at the time. we did the first bond obligation which did that. we'll see later that these techniques are what the investment bankers use in the last cry sifments then we did the first asset back kwlaterlyized loan obligation. all would be later called c.d.o.'s. the key to the last one was we did the first cash flow bond. before that the rating agencies had required you to post collateral in market to market. this was the first one in which they rated the bonds and said, the cash flow from the underlying mortgages has to be able to be sufficient to cover the interest on the debt and that's where the way all the securitizations were done after that. then in the 1980's we had the basil risk requirements. having deposit insurance lowered your capital requirements from what had then historicically

market rate from 16% down to 8%. banks have a dueling charter but regularerty to arbitrage cut it from eight to four because they had a 4% capital requirement for whole loans. beyond that if you securitized it you could get the same cash flows down to 2% capital. now with the set death costs not going up, if you increase your leverage eightfold, then you increase your return on equity eightfold. what? you magnifying everything with leverage. if you lose money you lose eight times as much money instead of making eight times as much. the regulatory ash taje was all there in the 1908 -- arbitrage was all there in the 1980's. basically the lesson was it was exactly the same thing as freddie mac and fannie mae. could you issue all the debt you wanted. no matter how risky the loans were or how much capital you had because you were using another form of the agency status they had backed by deposit insurance

with that leverage. your loan rates weren't going up. get to the first subprime debacle, the legislation was passed and that provided more opportunities for regulatory arbitrage. basically what wrass allowed was multiclass securities, there are a million ways to do this, traunching by credit risk, the simplest one is having a senior security, a double-a, triple-a, mezzanine security, and everything below investment grade we'll call equity or re-- retained interest. they were doing it with subprime loans, but interestingly they weren't eligible for finance by fannie mae and freddie mac because they had bad borrowers but they supposedly had a loft equity in the house. my first day on the job i'm meeting the c.e.o. of the bank subsidiary, i'm the holding company, and they are bragging about the profitablity of these

securitizations. i look at it and i say, ok. it's profitable, but where did the mortgage go? i just look at the balance sheet. the mortgages are gone. who owns them? he said, well, the investment banker bought the retained interests from me on the day that the deal closed. i said, well, how could he pay you enough to buy them? i know those things aren't worth much. we promised to buy them back the very next day at the same price. i said, well, the good news is, i saided bass news is that's called parking and that's what michael milken went to jail for. the good news is his cell is empty and i hear it's attractive. when the books closed at the end of the year they will come and get you. my job was to get that junk off his balance sheet by the end of the year. believe me i was in new year's eve trying to close a deal because i couldn't sell it without taking a huge hit. i had to spin out a publicly traded, traded on the new york stock exchange, which i remained the management -- retained the

management rights torques and coy park it in a friendly place with a wink and nod saying don't worry. you'll take losses but ail make it up later. the reason the regulators have done this is there was a chicago savings and loan doing the high risk subprime lending and they were doing double leverage. retain the residuals and they would be leveraged 10 to one. by the time you do this you get the ratios up to about 1,000 to one. on subprime loans it magnifies the losses. the regulators stop it from everything else. they had a loophole that said if they purchased interest, that regulatory capital doesn't apply so the investment bankers figure well, we'll buy them, sell them, and return retained interest in the purchase interest. what happened was there was no point of keeping these loans on the books. the regulators hated them on the books because they were lousy loans. so we spun out the finance company, traded it as a finance company on the new york stock

exchange. we put the ownership, we created charities and the lawyers and account yachts create add sliver of ownership that was so small it was worthless. we took a loss on the tax -- for tax purposes for contribution to a charity, and that's where the assets went. they disappeared from anybody's books. the finance companies held the retained subordinated interest, and then they funded the senior interest. you could fund the senior interest anywhere i told you banks could buy this with only 1.6% capital. even in the 1990's, banks had what they called structured investment vehicles which allowed them more leverage. that was 1% capital. this all started because everybody, economists, commission politicians in the 1970's said g.s.e. securities were liquid. the g.e.s. securities for 30's years. they are marketibility but they are not lech bid. the whole structure of these s.i.v.'s were extremely fragile

because they are issuing paper and they had to put back to the bank. all it was was another form of arbitrage that cut the capital requirements down below 1% to fund these pools of mortgages. so then funding subordinated interest was all you had to do -- left. and you could go to the junk bond market and stock market. every three months. each time you do a securitization, you are reporting profits but you are not getting any cash out. and so you can only go to the market, junk bond market if you had book profits. where did the book profits come from? well, these retained interests were hypothetical cash flows. that is if everything went right, then five years to 10 years down the road we are going to see some cash back. and the s.e.c. did two things, you can present value those earnings to report the profits now, and of course you are postponing the losses because you don't have to take loan loss

reserves against the bad assets because nobody knows where they are. you did another thing, we want you to discount those cash flows at 8%, which was virtually risk-free at the time. all the profits came from s.e.c. accounting. and when i used the market rate, the market rate on those securities for the retained interest was 35%. when you use that the profits disappear. i had my finance guys run models of cumulative default loss and they said everything's going to default from day juan. -- day one. i said, how can i keep on generating these profits? i had to book the consolidated earnings in my books, as c.f.o. i didn't want any part of that but i was forced to by the regulators. the one thing coy do was get my board to sell the stock. the shorts are going to be out there, bringing the stock down, it's going to crash. they agreed. for almost three years. they got madder and madder because the stock just kept on going up in price and they were

missing the bullet mark. they don't believe why i was selling. finally i'm having a drink with my largest investors, and i say, well, tell me off the record, you are my biggest investor, you know i'm selling this stock, this new york stock exchange company, every time i sell you buy. what is it that you know that i don't know? he said i know that i get a management bonus every year based on my performance and i have been getting bonuses on riding the bull market and you haven't because your boss hates you and my investors love me. i said yes, have you looked at the value of those residuals very closely? he said, let me introduce you to my russian physicist. dimitri explains models 6 cash flow, credit loss that blew our models away. i said dimitri, what's the bottom line here? he says, they have been losing money says day one they are going to default on the securities. i said if you know this, why are

you buying? he said, well, i'm still making my bonus, we'll dump it after the end. the shorts can't short because i am bigger than they are. i have more buying power than they do selling or shorting power. they didn't make it to year-end. what happened? russia defaulted. when they did that the securitization markets froze up. when they froze up we didn't have enough cash to keep this company going. the shareholders started selling the stocks. the bondholders stopped funding the company. within about three months every single publicly traded subprime finance company declared bankruptcy. and the investors blamed the russians. nobody could see this coming. and the s.e.c. hired goldman sachs to mark down the value of the assets. they marked them down to zero and marked the security down to 50%. and then they hired all these lawyers to come sue me, how could you book these earnings? i had to explain to them your guys made me.

what was different from what was already happening when we get to the year 2000? the borrowers were much worse. they have already shown you the evidence of that. the regulatory arbitrage, that's much worse. the investor distortions were much worse. the credit losses greater. the profits that they could generate were bigger than they ever wore, and they were cash profits and fannie mae and freddie mac joined the party. there's a lot different not the same. for the senior investors the -- there was a huge global shortage of senior securities, triple-a and double-a based on regulatory driven command. they said everybody should be buying double-a and triple-a the investment bargers did what i did, let's take the junk. and we'll make it into triple-a. it's easy, you overcollateralize. you take a mezzanine piece, the

webbing wit had to get bigger. they went from 2/3% up to 2%. they were tiny and not enough to stop anybody. everything got funded. everything was getting put into c.e.o.'s during this period. we got up to 80% of the p.l.s. being put there. freddie may and -- fannie mae and freddie mac are funding about half of that because they meet the housing goals. now, the hedge funds. this is the long story i don't think has been told. i can't say too much. this is the dumb money story. hedge funds get a management incentive that said 25% of the up side over and above a risk free rate and i don't pay back the down side. like the manager i was telling you about but it's worse. state and local retirement funds, their advisors had a similar upside incentive and no downside risk. even the pensioners would get -- many pensioners would get an extra year pension benefit if the performance was good. on the downside, the taxpayers

guaranteed it. so they had a go for broke mentality. if you think about it, almost every state and local government assumes they are going to earn 8% real adjusted. the market rate on that, treasury tips, was only 2. somehow they think they are going to make three times what the market rate is, four times, and they never do. so this money is pouring into the hedge funds. they have to spend it somehow. wall street expands vertically. they see the hedge fund business being a good business to manage. they start sponsoring hedge funds. the s.e.c. comes along and they say, investment banks can leverage at twice what commercial banks were. 40 to one. that's not counting their off balance sheet things. the investment banks started to buy up the loans and buy up the lenders because now they can put the securities that they don't sell right on the balance sheet. this whole stuff about the proprietary accounts really had nothing to do with that. they were doing what i did in the 1980's and 1990's, they had

to park these hard to sell assets someplace. and who determined the price? the s.e.c. says, well, we'll leave that up to the traders. the traders could book what i would say were virtually worthless assets, they booked huge yield on them they hadn't earned and get multimillion dollar bonuses a year. $10 million a year. but nobody's made money yet. the commercial banks provided all the leverage. they were doing an on-balance sheet and off-balance sheet for the triple-a, double-a securities, they also leveraged up the mezzanine and joinor pieces at the investment banks. everything is highly leveraged. shadow banks got a lot of attention. they did nothing wrong. they were just victims -- they weren't regulated but bought commercial paper. all they issued was commercial paper. they were issuing way too much based on the same regulatory arbitrage stories i'm talking about. the huge trash profits all through this period, even though as we have said we know the loans are bad. and we can see how everybody

could make cash profits, but the only one i'll highlight is these excess bread securities. that was created because had you a very low yield on the triple-a driven in part by fannie and freddie, and you could assume a very high yield on the underlying loans even though they weren't going to pay it. so you create add security. as long as house prices kept on going up, and the defaults were postponed, the subordination clauses triggered cash disbursements. by the end of this period the cash 3r069s -- everybody is making profits and everybody's got plenty of cash to keep the model going. so what happened was they just kept on producing 2002 to 2007, everything went into c.d.o.'s and other securities, the hedge fund money doubles again. it quadrupled and doubled in the first half of the decade and double again. most of this is state and local

money. there is virtually no smart money. they are funding 95%, 98%. they are saying they are taking the zero rifpblgt it was most of the funding. they didn't know it. the last question really is, we'll wrap up, why didn't somebody stop it? short yourself. it was technically feasible. you could do this with credit default swaps. this got a lot of negative attention but it seems to me that it almost worked perfectly. the cbs wrts were written by mostly too big to fail banks. but a.i.g. the insurers didn't write them. thrift subsidiary regulated by the treasury, eventually mr. geithner's responsibilities, was writing the credit default swaps. and there was acie metric capital treatment. the fed was giving capital relief to the buyers of capital

default swaps, so long as they were posting an equal amount of capital. i doubt they were because they don't work it that way. i would say this, supposedly according to chairman bernanke and secretary geithner, they paid off 100% of the credit default swaps at par and they wouldn't lose a dime on the bailout of any of these financial institution that is wrote them, including a.i.g. i don't see what the problem was. there was a huge price disconnect because the price the s.e.c. had them booking at value of the assets at was twice what they were worth. that didn't make a difference until somebody had to sell. when bear sterms had the hedge funds, was the first time anybody sold and they were only half the price of what they were booked at and the whole market crashed. the last question we have is why weren't the shorts short shortly after the whole bubble started in 2002 or 2004, why couldn't they stop it? flst a lot of people say it was

irrational exuberance, everybody thought house prices were going up. a, that's no evidence in my mind that anybody behaved irrationally here. everybody behaved rationally based on the incentives. there is no theory that says that's true. even the leading economist who is a behavioral economist, says, even if everybody's irrational, the people who short scrurtstotally irrational. it doesn't take anybody else to be rational, only the shorts. why didn't the shorts short? there is a great book on that, they were shorting the government. you can't short the government. we thought we learned that 20 or 30 years earlier. i thought the funniest line in the report was they exoriginal rated fannie mae and freddie mac. the yields on their debt didn't go up. of course it shouldn't. the government is backing them. so this time is different is the title of a book, by adding three

words to the title, 800 years of financial crises, this time wasn't different. it's always the same thing, it's always been public fiscal policy folly that causes financial crisis, and the state and local governments are only a minor player because the mezzanine share was so low. but as i say, the liabilities are all greek to me. except i'm from california which is mostly spanish. california is too big to fail and too broke to bail. that's the same thing that spain is facing right now. we have already been through all of the problems of having these off balance sheet liabilities that don't have any capital and what happens when the risks just get too great. so the only prescription is to enforce capital requirements. you got to have capital to back these risks. there is no reason to have them. they are going to have market capital. why have a monopoly?

if they had the market capital requirements what's the point? we all know a monopoly isn't supposed to be good. that's getting discussion. ginnie mae and the home loan banks, ginnie mae didn't fail, but f.h.a. is deeply under water now. it's not going anywhere. once you shift that risk from fannie mae and freddie mac, you are putting it into another government part. who knows how they'll bail that out. the home loan banks, never failed because they overcollateralized. that's why when they went into indy mack, the home loan banks had half the collateral. there was nothing left for the fdic. so this is my last slide. securitization should go because it's inherently under capitalized. i would say that the capital requirement should be transparent, covered bonds have somewhat more capital requirements. they tend to have overcollateralization just like

i did in my first bond deal because the investors don't trust the regulators, the quality of the capital or the quality of the loans that an institution is providing, so they want excess collateral. that's -- you got to have capital someplace. i think we'll wrap that up. take questions. >> thank you, kevin. let me again note that both the papers from which this presentation derived are available online. i think walk you through it slower than that. that was a tremendous amount of detail. you wait for the microphone when you have a question and certainly let's keep it in the form of a question rather than a comment. >> so your answer to the question what made the financial crisis is regulations? financial regulations.

and if this is the answer does it enable or force traders into this? >> i would want to clarify. my answer is that fannie mae and freddie mac didn't perceive themselves subject to a bankruptcy constraint so only they had the market power to keep that bubble going for as long as it went. if it had just been private label securitization, then you would have seen the same thing happen that's happened in the 1990's. the shorts would have won that battle early on. not right away. took a while, but how many people here in washington knew about the financial debacle of the 1990's? my point. it didn't make washington because it wasn't systemic because fannie mae and freddie mac weren't in it anti-bubble collapsed. so it's the price bubble. you have to keep on focusing on the price bubble. what could cause prices to continue to go up? not that everybody thinks housing prices only go up. it's the power of the government

that doesn't stop in a bubble. and they couldn't stop because the regulator said they had to maintain a 50% market share. i am saying the bad regulation on the part of the private sector so-called private sector, which was really public label securities, fed them. and because they were competing with them, they just kept them going beyond the point of no return. does that clarify it? >> in the course ever your presentation -- of your presentation which is an excellent one covering most of the ongoing crisis, which actually goes back to 1966 according to henry coughman, do you realize that -- coffman, do you realize that in your description of the bank's activities that you have really invalidated what peter said? because the too big to fail banks are part and parcel of all

of this. they were in all these transactions, and they also have indulged in capital arbitrage at every point. so looking forward you have -- this is what j.p.m. is about. how do you factor that in that -- have you identified the same phenomenon among the too big to fail banks that did you with fannie and freddie? >> yeah. that's an excellent question. i would say that too big to fail is a huge problem and going from fannie and freddie that are too big to fail, if they put the same political risk on the banks and then they level them up the same way, from a regulatory perspective they have allowed this to happen. it's not only pervasive, it was chronic. the banks are way overleveraged. the fed has papers on arbitrage

going back to 1992. they never stopped it. it would be no better. now t. one might hope that the political pressures that could be put on a fannie mae and freddie mac as government sponsored enterprises would be less in terms of the banking institution, that that is they would have to put political pressure to say we don't want to be pushed to make bad loans. i understand the risk and i think you want to try to have a securitization market that relies on the underlying loans that has as many issuers as possible so you are not focusing all that risk. the home loan banks have been considered one option to do that but they are systemically important. you can shift the risk there and they would fail. >> i didn't see a lot of discussion in your presentation about record low interest rates being a factor in the housing bubble. and traps even poor monetary policy on the part of the federal reserve.

i was hoping you could talk a little bit about that. >> sure. as i said there's 1,000 stories. this was one of the stories. interest rates are very low, but what i'm focused on is the housing. if interest rates were low, the bubble could have gone anywhere, excess credit. this is the reason why it went into the housing bubble and it took a housing bubble to make that work. now, it's not just the loan, but the triple-a, double-a financing was extremely low due to regulation. again that create add spread that drove the privatibility -- seeming profitablity, more cash they took out, seeming to make profits, the bigger the losses were going to be at the end of the day, but you didn't recognize losses until prices started to plummet. >> if i could add, you certainly saw during the same time the housing bubble similar booms and busts and the shopping mall market, office market, so the point that kevin is make something of course these other markets went boom and bust but

did not become systemic and did not bring the system down. they did not have a financial crisis because office market prices declined. that cost a number of small banks to fail. those are the policy differences. absolutely. >> so, kevin, going back to your an ict dote, conversation with david maxwell, how would you have recast that conversation now knowing what you know now? or would you have said, yeah, david, i think you're right? >> i was on a task force about that time, policy task force, and when the savings and loans were under water -- the reason savings and loans were under water they had no choice but to make fixed rate loans and funded with short-term deposits and then monetary policy drove

interest rates up. mortgage rates got to 17%, 18%. they were all under water. the treasury solution to the savings and loan problem was to raise their taxes. take away the tax benefit which wouldn't have saved them. the real problem was fannie mae was going to be allowed to go for broke. and savings and loans were told to go for broke, too. work your way out of this problem. we won't tell anybody that the capital is neighboring. but the savings and loans were told to go for broke in real estate. i did it in junk bonds and was successful. the ones who did it in real estate and development got wiped out. it was a big markdown in those bonds. i don't know. what would we do differently? there was never a good time. when the reagan administration came in, i contacted the down civil economic advisors and i said, now is the time to do something with the fannie mae problem before it explodes. of course the housing market was depressed with interest rates went up.

this isn't a good time. so there is never a good time. >> why did he put them in conservativeship >> i didn't read his book. you have to ask him. i think the chinese said, these are government. if you think they are not government, we own a lot of them wee, telling you these are government. they didn't have any choice but to do what the chinese said, right? if they wanted it more explicit the government will back them -- government securities, nobody could say, oh, they are not backed now. in the 1980's i tried to point out that are was sponsored by the government. it wasn't backed. they p-h a picture the next day, when they figured it out, they had a picture of the chairman of the home loan bank system, if government of the -- in front of the government seal, to put that

picture out to make sure everybody understood, yeah, we are going to be behind them. even though it started as just being sponsored form of insurance. they couldn't walk away at that point. they are too big. >> that's an important point to emphasize. prior to the literal 2000's, the foreign purchases of fannie mae securities were small relatively minor. you saw during the bubble that increased to about almost a fifth. the calculation, wrongly or rightly on the part of treasury was if we did not honor fannie and freddie, the question given the number of treasury secretaries have, will i note without any legal authority to do so, gone overseas and said they were backed by the federal government. we created that perception. worth noting that under secretary snowe they tried to set a procedure to limit that issue by freddie and fannie and that procedure was reversed when mr. paulsen took over.

>> doctor, randall o'toole at the cato institute has identified another area where housing -- somewhat unique, that is a lot of state and local governments imposed land use restriction that is limited the supply of -- the supply of new housing. so i'm just wondering how that integrates into your analysis here? >> i think that if you look at that graph of house prices and then you look that in terms of where there were land use or they call it the planned community, you would find the price rises were much bigger where the supply was restricted and much less where you could build all you wanted. that's an average. it was clearly true. i agree totally. >> you stud kwlid the -- studied the federal reaction to the financial crisis and you know

with the cod-frank, given what you know -- dodd-frank, given what you know now what will happen next? >> dodd-frank was 2,600 pages. i think we are talking about the tens of thousands to 100,000 pages of regulation. i can tell you any one page of regulation had to have three law firms. no two law firms would agree on what the regulations meant. you have to have a third one. nobody's going to be able to figure out exactly how to be in regulatory compliance. i have said that the volcker rule, which is intuitively banks shouldn't be betting with depositors money, but the volcker rule was based on proprietary trading. what i told you was it had nothing to do with either glass-steagall, which were sales and trade activity, and it had nothing to do with the trading and hedge funds, they were parking assets there. and they were parking the assets at twice their value based on at twice their value based on s.e.c.