kers have seen fit to make of it. i became a member of congress in 1955, sam rayburn was speaker and he impressed me enormously. i think i must surely have formed unconsciously my whole concept about what a speaker's proper role should be from sam rayburn's example and later throughout these years of 32 and all before i became speaker i reveled in the friendship of people like john mccormick and carl albert and chip o'neal and their leadership and example. i'm certain they had an exalted role in my mind of what a speaker it and should be and quite possibly, quite possibly and impossibly ambitious idea of

what a speaker ought to be able to accomplish. not to say that whatever the speaker accomplishes or has accomplished during his term is a one-man show. it most certainly is not and in this room today are people who shared with me the agonies of trying to figure out what on earth can we do in this situation and one of them is david bern. one of them is tom foley and one of them is dan rostenkowski. the speakership under rayburn was something that i guess entered my consciousness as the model of how a speaker should be. sam rayburn saw national needs and he made things happen. he was an activist speaker but he was also the 20 essential

southern gentlemen and he treated all of us like gentlemen. in his view, we all were -- speaker rayburn once said, the chair always takes the word of a member on one occasion when a point of order had been made about a member's representation that he had been in the chamber at a time qualifying him to vote on an issue. the chair always takes the word of a member. and so we all were gentlemen and ladies were ladies. he insisted on fairness, decorum and civility. one of his greatest teachings i think that entered my unconscious mind was that the greatest asset a lawmaker be anywhere in the western world can have would be the ability to disagree without being disagreeable. and those of us who served with him have heard him say that on so many occasions. i have a very vivid memory of

his way of appealing to us. he never threatened. he never cajoled. he never promised any reward for our going along with the thing that was good for the nation. this occurred in my second term my third year, 1957. it was the very first civil rights bill that had been passed by the senate, established by some legislative measure of then majority leader lyndon johnson so that it could be voted upon and passed and could be prior to that time southern groups would always filibuster any civil rights bill to death and since reconstruction times there had not been a civil rights bill passed the house or the senate because they'd pass the house but they meant nothing and members were free to vote however civilization or

popularity would cause them to vote knowing that their vote didn't really mean anything in the house because the senate would kill it. this time it came over like hot molten lead and whatever was passed was real law. it set loose a chain reaction throughout the whole south and almost volcanic lava of hot anger from news media and many letters cascaded in threatening all manner of retribution if we voted for it. rayburn sent a page to get me and bring me up to the podium and i remember exactly what he said precisely the words that he used. he said, "jim, i think you want to vote for this bill. i'm sure you're getting all manner of correspondence threatening you with reprisals if you do but i think you're strong enough to overcome that

and i know you'll be proud in the future years that you did." it was that simple. that's why i loved him. i guess maybe that's why i sort of wanted to be like him and from tip and all the others whom i cared for and served and tried to help, i gained a reinforcement of that notion. when i became speaker in 1987, the nation suddenly was confronted with four crises, four very important problems. and they were the business of the house and of the senate to attend to. one of them was a big big budget deficit. one was a looming trade deficit. the third was a growing social deficit, which for about six years had been accumulating and

reducing the level of support to schools and hospitals and other social activities throughout the country as well as to our infrastructurural demands, that pipeline lifeline of roads and bridges and all those things that services the nation. before i could summon together the kind of a strategic approach that i thought might work, a forest crisis grabbed us by the throat. six weeks before i was sworn in as speaker newspapers suddenly burst forth with the scandalous revelation of the iraq contra activities which was the biggest scandal since the stories that erupted about the break-in at watergate and it involved central american wars which had been as divisive to congress as any issue since the vietnam war

and i could see looming on that horizon immediately a constitutional crisis. we discovered what had happened and that money had been -- weapons had been sold to iran and that money given to contras to try to overthrow the government of nicaragua which congress had veted to disband and discontinue only in the past year and then we learned that these things had been done without any notification of congress and then we learned that that very moment, it leaked out all the papers and be evidential material in writing was being systematically ex punched and done away with before the congress could get back into session and subpoena it there burst forth here among the house members -- thank god we were out of session.

because wherever democrats gathered you'd hear the first rumbles, then grumbles, then growls and whispers became louder that laws had been violated. six specific laws had been flagrantly violated. and the word impeachable offense was creeping in. i wanted no part of that. that could have been the kind of a constitutional crisis that could have thrown us completely off guard, off balance and without any ability to come to grips with these other very serious problems. and so those were the things we had to face. i discussed those problems daily with tom foley, wise and more cautious than i magnificent majority leader, on whom i relied very heavily, tony coelho brilliant and creative,

david bonner, my chief deputy whip whom i appointed was chair because he really was truly respected by all the new members as well as the members of standing in the congress and we needed that help and he provided it in a magnificent way as well as the advice they offered. what were we to do? the budget crisis, well, we had,s in last six years, doubled the amount we were spending on military readiness and military preparedness from about $148 billion in 1980 to almost $300 billion and for the money that was necessary to meet this increased demand, which amounted then to approximately 30% of the whole budget, about half of our discretionary budget, we had

just had a big tax cut in 1981 that inured primarily to investors with the idea it would stimulate investment and stimulate the economy but it was taking $165 billion a year out of the revenues that came to the government, the consequence of all of that together was that the national debt, which was just under one trillion dollars in 1980, now has been almost tripled, was aiming towards three trillion dollars. and we thought something had to be done about that. i realized how hard it was to pass any budget resolution in the house. those who were in the house at that time can remember, they were nit-picking and problems anyone could find some reason to oppose it but you had to have valid reason to support it and i knew what was it going to take if we had to make some

reductions in the deficit. i was blessed by having a man named bill gray who was articulate and wise and thoughtful and was able to lead the budget committee, invited me over two or three times to sit and talk with the fellows as we wrastled our way through these problems and finally came to a budget resolution that would reduce the deficit by $36 billion annually, half of that in new taxes new revenues, translate taxes, not a very popular word. ronald reagan himself when he found it necessary to replace some of the laws in the 1981 tax cut had referred to user taxes that we voted in in 1982, 1983 as revenue inhansers. by whatever name, a rose is a rose and some people don't have the sweet sense of smell that

appreciates the fragrance of a tax. it was not easy. we had 18 billion in new revenues new taxes and we divided the other 18 billion in cuts almost identically between military and domestic expenditures. by hook and crook, we passed that resolution in the house and it went over to the senate and came back and we had a devil's time. mickey will tell you about that vote, that vote in which i assumed the personal responsibility of holding that vote open for about 10 minutes occurred on the reconciliation bill that was in the house and if i had one thing i wish i hadn't done, that would be it. i would not have assumed that

extraordinary bill of authority to hold, though it was legal though there were precedents for it, quite that long. i had been told of two members who remain nameless, that someone whit perked to me on the way back to the house gymnasium it was a tie vote and on tie votes you lose and just voted one more and kept voting and people were saying vote, regular order, and trent got in the back of his chair and that's how he busted his chair but i was pretending to be very judicious and my face i'm sure was tomato red. anyway, those guys never showed up and we found a guy in the cloak room who would change his vote and then i what happened the -- whammed the gavel. it was legal but i should have had better consideration for the minority than to do that. it didn't do much good anyway. after all, we didn't get those

additional revenues. i overmatched myself. if i thought i could make a popular, charming, articulate president on his own ground and beat him on the matter of taxes new taxes, i couldn't do it. what we wound up with was at least not making matters worse. we didn't add, that year, to the deficit, and to the national debt which had soared. as a matter of fact, one of the troublesome things about it was that the amount we paid annually in interest had tripled from 50 billion in 1980 to 150 billion which reduced the amount of what we -- so i panned out pretty well on that and probably if anything, we would get a c or a c plus. but we did a little better on

the other deficits. the trade deficit had just begun to be a matter of serious concern to the public but had already had reached long fingers into the pockets of the average american. six years earlier, at the beginning of that decade, we had been the world's largest lending nation and by now, we were the world's biggest debtor nation. we had changed from creditor to debtor from lender to borrower and we had changed to the extent that we were not only borrowing money to finance our interests abroad, americans were buying 175 billion more each year in goods produced abroad than we were selling in american made goods abroad and we were worried about that and we were financing

more debt than borrowing and also borrowing money to pay our national debt. more foreigners owned bonds on the national debt and more foreigners were beginning to buy up real property. i'm talking about banks and newspapers and other things of real worth here in the united states. so we wanted to turn it around. i sat down, eager to do something bipartisan, with some people who were in the business community who had been appointed by the president. john young and a group to look into this matter and they made it a point and felt they'd been ignored and lord hand who swerved president johnson came in and talked to me about that and together we came up with the idea of a national trade conference. ironically, to be held here, in this room. in the county caucus room.

talked with my friend bob michael and bob dole in the senate who was the minority leader in the senate and bob bird and we agreed maybe this would be a good idea, bring in experts from business and from labor and from the academic community. well somehow without intending too much to offend the administration. they weren't used to congress taking the initiative in matters of this kind and they kind of wanted the republican members to -- from joint sponsorship. meanwhile, we had invited all these experts to come on a given day and it was all four of us. i was disappointed but i wanted this because i knew there would be other opportunities expeld find opportunities to make that

a bipartisan effort. we did to the extent of our ability, so many useful suggestions and ideas emerged from this meeting, i realized it would be the business of at least 12 committees of congress, jurisdictionally, and if you want the cooperation of the committees of congress, don't offend their jurisdictions. so what we did then was we called in all the committee chairs and sub committee chairs who would be involved, talked to them about the problem of what we wanted do, including incentives for businesses to be more competitive and so forth and to do those things that would be necessary together with things we would ask other countries to agree with us that they treat labor fairly so it wouldn't be a race to the bottom, opening opportunities for the american businesses to close factories here and open

factories abroad on various wages. things that would appeal to everybody, some things on the republican side were very interested in, some things on the democratic side, all of them useful, to make people treat fairly some intangible things, valuable things such as intellectual properties and so forth, a big, big bill. it turned out to have 12 titles. we called the committee chairs in and talked to them about it, got their commitments and a time table. that became an important element of our efforts. we would give to the big bills and we agreed we had to limit them to a few real leadership agenda items. i think there were six or seven in the first year and the trade bill was one. highway bill was one. and clean water bill was one.

and the budget resolution of course was one and there were a few others. the first homeless legislation we had. but we knew we could push only so far on the social agenda. we passed the bill on april 28 of 1987 and went over on to the senate and snrad for over a year and wasn't reported back with modifications until september -- august, i guess, summer of the next year. we had one provision in it that the president didn't like and that was the provision that said any factory planning to close a factory here and open abroad must notify its employees, its workers 90 days in advance. i see steve charlaovich who was here today, he was helping us in

this matter. as a former official in the labor department and is now a distinguished attorney with real credentials in world trade. and we all it this together. had this provision in the bill which president reagan, with charm and wit and intellectual capacity didn't like. it offended his advisers. he said there's no place in a trade bill. we could have had a confrontation, facing the president on that issue, and may have prevailed. we decided, all of us talking together would be not to do that but to separate this provision out of the bill and make a separate bill of it, pass the trade bill identically with

that separated and pass that bill on the same day as two separate bills. reagan signed them both. so there were ways, the big challenge, i think that confront my speakership in our time was a sort of a balancing act in a way to try to advance a progressive agenda that was opposed actively by popular and charismatic president with a lot of gifts and a lot of public following, while at the same time trying to protect him and from sort of be a bridge between him and his severeest critics on international affairs and that was a big challenge. i don't know how well we lived

up to it. i think on the social deficit and on the trade deficit we may have gotten an a-minus. fritz machine dale may have given us an a. but altogether what we did came out to be about a b. but this big problem hanging over us. what are you going to do about iran contra? different chair men came in to me saying they wanted to set up individual hearings on those portions of the laws that have been vilveted. wow, i could see it coming television bait. that's whearve -- what everybody wanted. the house could have degenerated into a 10 ring circus with the entire public attention driven by the media on the one issue of iran gate. we had business to perform and i didn't see any point in trying to embarrass the president of the united states.

it wasn't necessary. he swore that he had not known of these things and i desperately wanted to believe him and chose to believe him so i sat down with bob bird, leader of the senate, and he felt exactly as i did that it one counter productive to get into an argument with the president about it or try to plame -- blame him. maybe that's not the mood in congress today but he had only two years to go. what will you profit the nation to have a big controversy constitutional confrontation with some people insisting maybe we ought to impeach him. the heck with that. we decided we would have one hearing, not a proliferation of hearings, joint hearing, house and senate and on our side, appointed the chairman of the appropriate committees, jack brooks of the judiciary and lou stokes of intelligence and

chancy pasero of international relations and chairman of military affairs and on the senate side, the same thing, we had reasonable people and i decided lee hamilton, ranking member on foreign affairs and had been chairman of intelligence committee, would be a good chair. he was a fellow who was not confrontational, he was respected by everybody on the house side and senate side and we had a responsible hearing and i whispered to everybody, i asked to serve on that committee, please, i don't want to hear the word "impeachment" or "impeachable" mentioned. yet the truth, get it all on the table, let everyone see it, don't cover a thing up, but i'm not interested in seeing people go to jail. i'm interested in seeing everyone acknowledge what the

lines of duty are in the house and senate and integrity is preserved and the laws are going to be obeyed in the future. that was my view of it. the biggest thing i think that i'm proudest of in all of it began with tom leffler. tom served in congress and we worked together on a few things. i as a democrat, he as a republican and i liked him and trusted him and he came to me with an idea that was new. we had been fighting like cats and dogs about whether to revive moans for -- moneys for the contras to go down and overthrow the nig rag wan government by force. tom was appointed by president reagan to be his emissary to the house and tom sat down, we talked about central america.

and he said why don't we do something different. to him goes the credit. he said, why don't you and ronald reagan jointly issue a statement calling on all five countries of central america where there had been more than 100,000 innocent deaths in just this last decade, to come together and jointly vow that they will not violate one another's countries and jointly promise that they will make peace in their own countries and let it be determined by battle instead of bullets. oh, that was appealing to me. see if we can get them all to agree to have a cease-fire within their borders and bring both sides together and give amnesty to those on the other side so that they could have a vote and elect their officials and abide by the will of the

majority. oh, boy, i liked that. and stop fighting. i didn't if it would work so i'm calling people i know in central america, costa rica and the president-elect, the first elected president who was allowed to continue a term of office in 400 years in el salvador. they said they were enthusiastic about it. they thought it would work and they thought ortega would be brought along and they would have a meeting and all put the heat on daniel to see if they could get him to agree to do the same thing in in nicaragua alleviating the necessity of a war and president reagan and i jointly signed this document that i first drafted and george hughes, secretary of state modified and changed here and there a little bit and i agreed to.

got the senate leaders on board. the house -- bob and i, republican and democrat -- invited the ambassador from nicaragua, man named sherman to a lunch in the speaker's dining room and said what would it take in your opinion to get your people to agree to this. to get rid of the advisers from russia and cuba, military advisers to get them out of your country and have free and fair elections, have a cease-fire and give amnesty to these guys that have been making war. he said he would do it. he denied that they'd been doing, the result they'd been doing in salvador. but you've got to stop financing

the invasion of our country if we do it. and so we thought we had the makings of it. on saturday night, they than that moment i was awakened in the middle of the night. i realize there was a profound difference between the administration held of getting other people to along with what people were doing and the concept i had always operated from. there it is in these countries weren't pleasing him and these guys were violating civil rights and doing things they were

disapproveing of. that was one way of doing it. months or something like that nobody in the government has been really to see and talk with him and he's always that's intense and when it came secretary of state wanted to see him and the president didn't want to see him. it was his 42nd birthday and it was snowing for the first time of year i had ever seen it notice and he came up and we talked and i said look you've got -- you've got to do this. you're holding the whole thing up. my idea if you want somebody to do something you have to do

something and come together. you got to hear his side look him in the eye. well so we were hiring them and lowering them as they were saying in football. tommy and were talking about that the other day. they were hiring them and i was lowering them and finally it started to come together and some people in the white house didn't want it to come together. they wanted to fall for it as a good reason and in cases we would be going to war. i couldn't do that. i had given my words some on the democratic side said you're setting yourself up to be ambushed? those guys are going to pull the rug out from under you. i didn't believe that. i believed the president of the united states. and it finally came to pass and

after george bush was elected, he and i sat down before he took office and in my office sat at the round table there and he had a steak and i had a steak and we talked about things different things we didn't agree on we thought of several of them. one of them was the budget. so those were things that we worked on and i said one time and this was the leader the minority or majority leader to be a composite of three things. you have to be quite well speeched and look after their flock. here they have problems in the member that each one of those people, guys and gals represents almost exact same number of

people and was entitled to being attended to respected. i have discovered that the best thing i can do is help sell this is go on television after the president's state of the union message, used those words and see the reasons, nobody think that it was magnificent, i was a bit hesitant to follow in. but the mayor told me that that was the best thing they did. and you've got to -- you've got to be whether you carried out as daddy said the public on the outside guy as well as the inside guy. you got to be an evangelist and then in the third place you

have this. i don't know how much we were but as i look back in amazement and have hope i am grateful that we were given an opportunity, it came about under bush, first president 1990. they had three elections and a lady whose husband had been to the ones that they published out there. a friend whose son i had become aquainted with i had talked to the sondanistas and they'd come. and i do hope some of the things that we're able to do together these days the ongoing effort to see success because i think

the system and the things that we hold dearest. so we all have imperfections and failures. yes, it was.

it's a great honor to have four speakers and three other speakers here. today we had a chance to sit down and talk informally and tell us the other sides of the story on how other -- how pieces of legislation have gotten past in the other years. it's -- i think it's a great opportunity for us to come together and have pieces of this time be recorded from history for us to put something down in the history books that other agents can come back and say that this is how history came together. these are the people that helped make it happen. but we also know that sometimes the job of speaker we're only ring masters. we're not trapeze artist and the

lionars -- lion tamers. we make the legislation move forward we move to this greatcapital. >> i've got to say and watching a number of you reminded me of one of the core geniuses of the american system which is it really is and the position and each of us have been honored first by the districts and then by colleagues to serve the country in the second most powerful job in the country and political job in the country and all of us will admit we learn from each other and stand on each other's shoulders and it's

great to be back and i thought this was a very good day for us to be talking about the nature of the change and constantly nature of the u.s. house and speaker. >> great pleasure for me to be here. of course one of the things people ask is making this possible. we had a great time talking informally because as a speaker i know at lunch a lot of the problems of being a speaker whether you're a democratic speaker or republican speaker and part of that is managing somewhat large contingent of distinguished public servants but strong personalities at times and we shared our experiences in doing that. what he just mentioned is also on the minds of all of us. i thought it was the greatest honor of my life to be elected

for 30 years by my constituent of eastern washington. but greater is being elected by those who were elected constitution is very brief and just and trivia question you don't even have to be a member to be a speaker. but we've never had a speaker it's a great pleasure to be part of it. >> a lot of us thank you.

>> sometimes there are human pro problems that defy human capabilities and i thought it was beneficial to stop and remember everyone of those other languages that have been represented, just almost exactly to realize that person is entitled and an ear if he or she

has something to say. i think it would be the greatest asset of asset and the ability to just dis disagree without being disagreeable. >> i think we're very close to getting an agreement in medicare.

there are details being worked out. obviously we have to get something that can pass in the senate at the same time it can pass in the house. it's a very narrow line. we're trying to get an agreement bipartisan that is very difficult and we're very close juncture of trying to get that but it's also a juncture that could be very far away. we're trying to get it done and we're seeing if we can get it done. but we're not there yet. >> there are many who say that this place is more divided than ever and i'll be interested in knowing the past whether you see that as a progression? >> let me just say, this is being philosophical.

i think there's been a change in the last 40 years when speaker wright first came to congress, you know there was a lot of bow week -- the philosophy broke along the lines of probably geography and whether you were conservative or a moderate as opposed to exactly whether you were necessarily republican or democrat. i think that changed over a period of years. i think there was a real period of change. i think over the last 25, 30 years that that most the splits are really in philosophy come down along the party lines rather than it's conservative or moderate situation.

so i think that tends to make the house a more partisan place. but, you know, there are great partisan battles and that's how we make the legislation and the debates we have and that's what the ruls we have when we get done is that difference between trying to come to a conclusion and an agreement between two different philosophical polls whether it can pass and whether it can get through the house and through the senate and signed by a president and still hold together is what it is. thank you very much.

see c-span's full collection of events and speeches from late speaker jim wright of texas. log on any time at c-span.org. on capitol hill tomorrow loretta lynch will testify to congress for the first time since being confirmed for attorney general. she oversees the justice department budget. we'll have it for you live on c-span and voters in the united kingdom make their choices for

parliament. david cameron is seeking another term and labor party leader is the challenger. we'll have extensive interviews from more than 60 locations across the u.k. and political analysis from i-t.v. and that gets underway 4:55 eastern. they were wives and mothers. some had children and grandchildren who became presidents and politicians. they dealt with the joys and trials of motherhood. the pleasure and sometimes chaos of raising small children, and the tragedy of loss. just in time for mother's day first ladies looks at the personal lives of every first lady in american history. many of whom raised families in the white house. lively stories of fascinating

women and illuminating, entertaining and inspiring read based on original interviews from c-span's first lady's series. first ladies is available as a hard cover or e-book and makes a great mother's day gift for your favorite bookstore or online book seller. next international monetary fund managing director christine la guard and janet yellen discuss events leading up and during the crisis national and international effects and safeguards in place now to prevent another economic downturn. this is hosted by the international monetary fund and institute for new economic thinking. it's 55 minutes.

>> the financial sector is vital to the economy. a well-functioning financial sector promotes job creation innovation and inclusive economic growth. but when the incentives facing financial firms are distorted these firms may act in ways that can harm society. appropriate regulation coupled with vigilant supervision is essential to address these issues.

unfortunately in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage leverage, interconnect iedness and maturity escalated to dangerous levels. the result was the most severe financial crisis in economic downturn since the great depression. almost 9 million americans watched their jobs roughly twice as many lost their homes and all too many households ended up water on their mortgages and overburdened with debt. to be sure some individuals and families borrowed unwisely. but too often financial institutions encouraged the behavior that resulted in such excessive debt. i'll discuss some important reasons why the incentives facing financial institutions

were distorted and the steps that regulators are taking to realign those incentives. before discussing the incentives that built up, i'd like to highlight that the important financial sectors make. financial institutions channel society's scarce savings to productive investments this by promoting business formation and job creation. access to capital is important for all all firms, but it's particularly vital for start-ups and young firms and which often lack a sufficient stream of earnings to increase employment and internally finance capital spending. research shows more highly financial

systems. they have improved opportunities for households to participate in asset markets and diverse identify their holdings and and helped household maintain living standards when suffering job loss and other unexpected contingencies. in technological innovation that increase the ease and convenience with which individuals make and receive payments. the contribution of the financial sector to household risk management and business investment as well as the significant contribution to economic growth has been documented in many studies. such research shows that across

countries financial development up to a point has disproportionately benefited the poor and served to alleviate economic inequality. actions by financial institutions have the potential to inflict harm on society. instead of promoting financial security through prudent mortgage underwriting the sector prior to the crisis facilitated a bubble in the housing market and too often encouraged households to take on mortgages they neither understood nor could afford. recent research has raised bubble in the housing market and too often important questions about the benefits and costs of the rapid growth of the financial services industry in the united states over the past 40 years. a combination of responses to distorted sin seven actives by

players throughout the system created an environment conducive to a crisis. overreliance on fragile short term funding by many institutions let the system vulnerable to runs. excessive risk taking increased the probability that severe problems would materialize. moreover regulators and the structure of the regulatory system itself did not keep up with changes in the financial sector and were insufficiently attuned to systemic risks. insufficient liquidity and capital interacted. it funded to fire sales of

financial assets and losses reducing capital levels and heightening liquidity pressures. culminating in the near collapse of the system in late 2008. market perceptions that some institutions were too big to fail. financial institutions also had an incentive to engage in regulatory -- complexity is the largest banking organizations enter mediation outside the traditional banking sector grew rapidly in the year of 2007 leaving gaps in the regulatory umbrella. in conflicts in the incentives facing managers, shareholders and creditors may have induced banks to increase leverage.

to strengthen the resilience, the federal reserve and other banking agencies substantially increased the requirements. they are significantly higher. in capital requirements now focused on the highest quality capital such as common equity. in addition to risk-based standards, bank holding companies and depositories face a leverage requirement. also significantly higher standards both risk waited and leverage ratios are being applied to the most systemically banking organizations. higher capital standards provide large complex institutions with

an insincentive to reduce the footprint and employing annual stress tests to weather a severe downturn and distress of counterparties. and importantly continue lending to households and businesses. firms that do not meet these standards face restrictions on dividends and share buy backs. as a result of these changes for the largest banks, tier one common equity the highest form of capital has more than doubled since the financial crisis. prior to the crisis institution incentives to rely on short term borrowing to fund investments were distorted in two important ways. first many investors were

willing to accept a very low interest rate on short term liabilities of financial institutions or on securities without demanding adequate compensation for severe but likely risks such as a temporary loss of market liquidity. perhaps they expect government support or considered luke quiddity a remote possibility. second they shift their holdings once concerns arose created a fire sale dynamic that amplified the market values causing unanticipated spillovers on to other institutions and across markets. recently implemented regulations aimed to quiddity a remote possibility. second they shift their holdings once concerns strengthen luke quiddity. it requires banking

organizations to hold sufficient high quality liquid assets to meet their projected net cashout flows during the 30 day stress out period. the new process set supervisory expectations for risk management and evaluates institutions' practices against the benchmarks. a proposal for a metastable ratio would require better liquidity management and horizons beyond that covered by the liquidity coverage ratio. a proposed capital surcharge to the largest firms would discourage overreliance on short-term wholesale funding. the sec as adopted changes in regulations that may avoid future roads on prime lending market funds and reforms in the tri-party repo market with

reduced risks associated with exposures. in the aftermath of the crisis, the congress passed the banking regulators with challenging and changing perception that any financial institution is too big to fail by ensuring that large banking organizations can be resolved without harming financial stability. steps are under way to achieve this objective. in particular, banking organizations are required to prepare living wills. plans for the rapid and orderly resolution in the event of insolvency. regulators are considering requiring bank holding companies have sufficient total loss absorbing capacity, including long-term debt, to enable them to be wound down without government support. in addition, the fdic is designed -- has designed a

strategy known as single points of entry to resolve the systemically important institution in an orderly manner. the crisis revealed risk management at large, complex financial institutions was insufficient to handle risks that some firms had taken. compensation systems all too frequently failed to appropriately account for longer-term risks undertaken by employees. and lax controls contribute it to unethical and illegal behavior by banking organizations and their employees. the federal reserve has made improving risk management and internal controls a top priority. for example, the comprehensive capital analysis and review which includes a stress test i mentioned, also involves an

evaluation to ensure that firms have a sound process in place for measuring and monitoring risks they are taking and for matching capital levels to those risks. also, supervisors from the fed and other agencies have pressed firms to improve their internal controls and make their boards of directors more directly responsible for compensation decisions and employee conduct. as i noted, the financial crisis revealed weaknesses in our nation's system for supervising and regulating the financial industry. prior to the crisis, regulatory agencies, including the federal reserve, focused on the safety and soundness of individual firms as required by their legislative mandate at the time. rather than the stability of the financial system as a whole. our regulatory system did not provide any supervisory watchdog

with responsibility for identifying and addressing risks associated with activities and institutions outside the regulatory perimeter. the rapid growth of the shadow non-bank financial sector left significant gaps in regulation. in response, dodd frank expanded the mandate of the federal reserve to allow it to consider risk to financial stability and supervising financial firms under its charge. within the federal reserve, we have reorganized supervision at the most systemically important institutions to emphasize a horizontal perspective, which examines institutions in a group and in comparative terms focusing on their interaction with the broader financial system. we also created a new office within the fed to identify

emerging risks to financial stability in the broader financial system, both bank and non-bank financial sector, and to develop policies to mitigate systemic risk. dodd frank created the interagency financial stability oversight council, chaired by the treasury secretary and the federal reserve is a member. it is charged with identifying systemically important financial institutions and systemically risky activities that are not subject to consolidated supervision and designating those institutions and activities for appropriate supervision. it is charged with encouraging greater information sharing and policy coordination across financial regulatory agencies. my topic is broad and my time is short. let me end with three thoughts.

first, i believe we and other supervisory agencies have made significant progress in addressing incentive problems with in the financial sector especially within the banking sector. second policymakers, including those of us at the federal reserve, remain watchful for areas in need of further action or in which the steps taken to date need to be adjusted. third, engagement with the broader public is crucial to ensuring that any future steps to move our financial system closer to where it should be. active debate and discussion of these issues at this conference and in other forums is important to improving our understanding of the challenges that remain. thank you. [applause]

dir. lagarde: thank you very much. and thank you for being here with us today. i would like to say thank you to annete. thank you for organizing this, convincing us this was a worthy project, for setting the bar pretty high. janet, you took us through a vivid walk down memory lane by explaining again what the financial crisis had been and how it was addressed. i would like to go a little step further back. not to the roman days. voltaire in the 18th century.

voltaire was a keen observer of society. he is known to have set about bankers, if you see a banker jump out the window, follow him. there is certainly money to be made. [laughter] dir. lagarde: a window could be the subprime or something else. i will come back to voltaire in a second. i fully agree that important progress on regulatory reform has improved the resilience of financial systems. i also welcome the continued vigilance of the fed and other institutions. yet, as we all know, in too many places financial stability is not well entrenched. our recent global financial stability report, issued under the leadership of our mcm department, finds financial

stability risks are rising, rotating from banks to nonbanks from sovereign to non-sovereign. to bank solvency to market liquidity. back to voltaire. i wonder whether he would have said, make sure you follow the banker. he might have said follow the financer. migration from the banking sector to the financial nonbanking sector. there is still work to be done to address incentives in the financial system. indeed, action that precipitated the crisis were not so much fraudulent as driven by

short-term profit motivation. this suggests we need to build a financial system that is more ethical and more oriented to the needs of the real economy. a financial system that serves society, not the other way around. today, what i would like to do is focus on how to induce a change in the culture. of the financial sector. how to better align incentives with societal objectives. in doing so, i think we need to look at the regulatory environment and also the individual accountability. let me start with rules and regulations. today, more than six years on, regulatory frameworks still face several challenges that precipitated the crisis. what have we done? a lot, as janet has just expired. but the job is not completed.

the phenomenon we observed will continue to be a work in progress. think of the rules that are not tight enough and oversight not strong enough, which is why we need further progress on the too big to fail institutions. think of the culture of compensation based on short-term gains rather than sustainable profits, which induces greater risk-taking and short-termism. in 2010, when the fsb, with good leadership, try to identify what the compensation system should be to avoid short-termism that was a heated debate. i'm not sure we concluded in an effective way. so how can we address the problems? we have done, at the imf

in-depth at the 2013 global financial sector report on how compensation and government structures can reduce risk-taking behavior and realign incentives in the financial system. let me highlight two key takeaways. first on compensation -- incentives related to compensation practices need to change so that the rules are not so much tied to myopic actions and excessive risk-taking. our work showed that compensation packages can be structured to favor the long-term performance and soundness of the firm of those who work for them. for example remuneration should become -- and in some cases it has become -- should become subject to possible cancellation and callback provisions in cases of misconduct, performance

downturn, and certainly in cases where the institution will require direct support of taxpayers. another way is to give shareholders bondholders, a stronger voice in compensation structures of top executives. there have been clearly positive steps in that regard. our analysis covering a sample of with an 800 tanks from -- banks from 72 countries suggest that shareholder faith on pay is becoming more widespread. in 2000, only 20% of banks allowed shareholders to cast a nonbinding on management conference is. today, 80% had in this policy. we have seen some encouraging steps recently by the sec.

proposed changes should make it easier for shareholders to determine if executive compensation is aligned with the firm's performance or not. as a reformed lawyer, i have to say those principles have to be constantly revisited. the tendency of experts like me is to work on the rules and make sure there is a nice way around. again, it will be a work in progress and that should be the case. second, changes in government structures also matter. the finding in the crisis was in the internal control and risk management systems of institutions. think of the london whale, for instance. in many cases, financial risks were more or underestimated. in the particular case of systemic risk, they were not well understood at all.

failure happened at both the management and board level. one way to address this failure is to establish a clear distinction between management on one hand and the board on the other area --. another way is to ensure qualification and skills of board members through rigorous criteria. and to make sure is also a work in progress. i sat on the board of ing many years ago, and the business of the bank was changing so quickly that constant training programs were necessary for us to understand what was going on. it was the beginning of the keybank and -- e-banking.

training training and education. regulation alone cannot solve the problem. whether something is right or wrong cannot be reduced to whether or not it is permissible under the law. what is needed is a coulter that induces bankers to do the right thing, even when no one is watching. ultimately, we need more individual accountability. good corporate governance is forged by the ethics of individuals, and that involves moving beyond corporate, rule-based behavior to a value-based behavior. we need a greater focus on promoting individual integrity. virtues are molded from habit developing and nurturing good behavior over time. education, training. one clear solution is to set a strong tone at the top of the

institution. as the chinese say, the fish rots from the head. starting a culture where ethical behavior is rewarded and unethical behavior is not tolerated but sanctioned. you will forgive me. but i believe very strongly that more women leaders would also help. there have been many studies -- [applause] dir. lagarde: many studies have shown that female leadership is more inclusive. probably a little bit more risk-adverse. but there might not be something that wrong in being occasionally risk-adverse. i do not mean to be excluding anybody, by the way. but what would have happened if it had not been lehman brothers but lehman sisters?

[laughter] dir. lagarde: against this background, i hope to see more work done on governance and change in risk culture. the firm will always be a strong supporter of regulators and independent supervisors. we will continue to do so. i would like to see institutions themselves take up this matter. shareholders and bondholders too. there should be a drive in the private sector for better alignment of risk and incentives. this applies to advanced and emerging economies. indeed, emerging economies can learn a lot from the pitfalls of their event counterparts. on this point, we released a study of a few days ago that re-examines financial deepening from the viewpoint of emerging markets. a key finding is that the gains from growth and stability from

financial deepening remain large for most emerging markets. but there are limits to the size and speed. when financial sector development outpaces the strength of framework, there is excessive risk-taking and instability. the experience in many countries, including the united dates -- states, have exposed the dangers of solutions that grew too big too fast. regulatory reforms can increase the benefit from financial development well reducing risk. i am sure many of you have heard and some may have set, excessive live -- regulation will refrain from innovation. i have heard that many times. but based on that study, the fear that changed regulatory

frameworks would hamper innovation and stifle growth may be misplaced. on the whole the same set of principles that increases financial debt contributes to greater stability. better regulation leads to greater possibility for development and stability. let me step back and highlight the important distinction between financial depth and financial inclusion. especially as we strive this year to deliver an important milestone, 2015, the year of development. the year of financing for development. the year of sustainable development growth. financial systems around the world are quite sizable. but they exclude many individuals. many individuals, many firms

from financial services. i resist the temptation of asking you to guess how many people are actually excluded. 2 billion people worldwide remain without a bank account. 2 billion people do not have a bank account. now, there has been improvement because it is 20% less over the last three years. but still, 2 billion is a massive number. moreover, financial exclusion is far from being in low income countries or emerging-market issues. in the united states, surveys find some 8% of u.s. households are unbanked, 20% underbanked.

our own analysis that will be released in the autumn finds that financial inclusion is particularly important for women. empowering them economically and allowing them to invest in education, which they do more than male counterparts. there is room for improvement, market penetration. globally, a staggering 42% of women lack access to basic financial services, compared to 35% of men. this gap is bigger if we consider financial services. yet, desirable as it is as an objective, financial inclusion is not without risk. particularly if it leads to

risk-taking. our forthcoming analysis shows that if supported by good regulation, good supervision and independent supervision financial inclusion can go hand-in-hand with financial stability. in conclusion, the financial crisis has exposed many lessons. overarching lessons are that building sustainable and inclusive growth hinges on collaborative effort, requiring supervisors to work together. it includes building resilience in all countries and realignment between cultures and societal objectives. a final point. i have heard many times over it would be so much better if bankers were boring again. you know what? i fundamentally disagree with that because it takes the view

for that, for bankers to finance the real economy is boring. it is not my definition of boring, and it should not be hours. assessing risk properly, transforming maturity between savings and investments and overtime is not a boring activity and should be regarded as a high-value activity. if the definition of boredom is working for the real economy and the definition of excitement is just making a lot of money, i think we have to change a few things around. thank you very much. [applause] chair yellen: i wondered if you would tell us a little bit more about what is being done around the world to improve regulation

and supervision. i know you have active programs. it would be good to hear what your involvement is. dir. lagarde: we operate at different levels. we operate at the global level. lease each other regularly. those a -- jose is the representative. we set on various committees but often meet in switzerland and try to bring a perspective that is not so much a central banker's perspective or the supervisor's perspective, but a global perspective. we are also trying to bring to those meetings the views and voices of those who are not necessarily representative. i am thinking about emerging-market economies, low income countries. and i think that is a critical role we have to continue playing. at the local level, there is a

lot of activity going on when we do the annual audit of the economy of our 188 members. often, experts and finance joined the teams. that is taking place when we do the article 4 review. we also do something highly valued by the membership, the financial sector assessment work done by a specialized team. they will go under the skin of the banking and financial sector and give a candid third-party assessment of where the risks are, what the policies should be , and it is a good health check that is valued by membership and published as well.

it gives transparency to the review we do. that is pretty much it. i try to dissociate what we do globally and at the national level. can i ask you a question? chair yellen: would you like to take turns? that is fun. dir. lagarde: i know what i want to ask. i do not do financial advertising. now that the banking sector has been much better recapitalize, you mentioned the quality of capital required, the overcharge on large players, liquidity ratios, leverage limitation

there is a lot to be said about that. i think there are quite a lot that have applied. there is a development of shadow banking. they do not like shadow banking because it feels a bit weird, doesn't it? they prefer the financial nonbanking sector, which is probably more inclusive. you have some helpful people but also massive risks. shouldn't regulations go beyond the banking sector? shouldn't there be more supervision, particularly if some of those players were to call on taxpayers? chair yellen: that is a great question. i think absolutely. the financial crisis clearly revealed that, even outside the federally regulated taking sector we had risks that were very similar to the risks we

have traditionally had. an example is lehman brothers and bear stearns. probably the greatest trouble during the isis -- crisis. they were not regulated organization, and the risks they were taking were similar to the risks that have led to runs on banks in the past. the repo market, lending market funds, all of these markets developed important sources of credit for the economy and also had characteristics so that when trouble developed, there were runs on these markets. in some cases, the government did come in, step in.

it is important we keep an eye on and appropriately regulate shadow banking. i think we are making progress. financial stability oversight council is charged with designating non-bank institutions as systemic and putting them under federal reserve supervision. so far, they have designated fou r nonfinancial companies and eight financial market utilities and play a key role in the payments and settlement systems. these have been designated and are supervised and recognized to have systemic risk. we have adopted new regulations we saw problems in securitization. so many securitizing did not

keep risk on their balance sheet , did not have skin in the game. we will put in place regulations to make a difference. money market funds the sec has put in place new rules for prime institutional funds that get rid of fixed value. they will have floating mid-asset values. we will reduce chris -- risk there. that is something that could create financial stability risk we need to watch. the tri-party repo market, which is a major source of short-term wholesale funding, that contains risks we have taken steps important steps, to mitigate. central counterparties, our

thrust of reform has been to try to move as many derivative contracts as possible into simple counterparties to have them cleared by counterparties. that is something to reduce risk and complexity and enhance financial stability. these entities themselves become systemic and clearly need supervision. something you have mentioned in imf work is that we have a major growth of open-ended mutual funds where you have funds investing in highly illiquid assets, but investors are promised immediate liquidity. if there are loans on those

funds, you have a maturity transformation that can give rise to substantial moves in asset prices. you highlighted that and we are focused on that as well. dir. lagarde: the liquidity illusion. chair yellen: yes yes. let me come back to you with a question. the regulatory reforms taking place in the united states and britain and elsewhere, there may be spillover to emerging markets. i wonder if the fed is doing work to see what the impact might be on other countries. dir. lagarde: we do that thanks to the global role we play and the national level involvement we have.

at the global level, what has been striking for me is how we have been able to bring together regulators and supervisors who sometimes did not have a chance or did not pay attention to what could have been or what were loopholes, arbitrage. we play that role of bringing together those that are changing rules. i remember vividly a meeting with other central bankers and supervisors, discussing what set of rules was going to be at issue for another region with different regulations. i think we play that particular role. in terms of spillover, what we have observed lately is, because of the different model induced by new regulation as a whole we

have observed a change in the banks themselves, where their size has reduced, a lot of the subsidiary branches in the entire world -- remember the days when banks were saying we are global. they would have a map of the world with a lot of points to say we are there, the map will look a lot different today. that has caused them to form regional banks prepared to grow and prepared to take over with a large players were downloading essentially, to satisfy requirements. there has been that particular spillover aspect. the third role we try to play his help emerging-market economies, low income countries

adjust to the change of regulations. the set of rules that will help them deepen their financial market and make it more inclusive, the study i just referred to would show that deepening and inclusive financial sectors are actually not mutually exclusive from stability and growth provided there is the right set of rules and supervision in place. we work hard on those principles. back to me to ask you a question. i am going back to my point about the alignment of incentives. with societal purposes, you talk about the danger of distorted

incentives in the financial sector. there are critics out there who will argue low interest rates are distorting incentives and leading to build up of risk to financial stability. what can you tell them? chair yellen: i think this is a very important question. what i first have to say is that low interest rates in the united states, the federal fund rates has been at zero for an unthinkable six plus years and are seeing interest rates at zero or negative levels in other advanced countries. there is a reason for this. the reason is we really think this policy is necessary to help our economy move back to full

employment and achieve objectives. in terms of financial stability meeting those objectives actually has a favorable effect. low interest rates have supported job creation and economic growth, helped households in the united states engaged in balance sheet repair to be able to pay down debt. they are in a much sounder position. but it is true that in a low interest environment, we need to be sensitive and watch for risk to financial stability. low interest rates can certainly incentivize investors to reach for you. it can incentivize them to take on leverage positions to create

financial stability risks. i guess we are doing two things -- we are monitoring to see if those risks are developing. and to the extent we see risks developing, we are trying to take action where we can. but we are speaking out more generally about the risks we see developing. a couple of examples, in the market for leverage loans, we have certainly seen reach for yield and deterioration in underwriting standards. that is something we have been highlighting for a number of years. and supervising institutions underwriting these loans, we are trying to ensure that underwriting standards are higher to diminish risks.

we have also seen a compression on high-yield debt, which certainly looks like a reach for yield behavior. i guess i would highlight equity market valuations are generally quite high. they are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are low, but there are potential dangers there. in interest rates obviously long-term interest rates are at low levels. that would appear to embody low premiums, which can move rapidly. we saw this in the case of the tantrum in 2013, a sharp upward movement in rates. you have divergent monetary

policies around the world. we need to be attentive to the possibility that, when the fed decides it is time to begin raising rates, term premiums can move up and we can see a sharp jump in long-term rates. so we are trying to, as i have said, communicate clearly about monetary policy so we do not take the markets by surprise. in addition to that, i would say low interest rates can create risk at financial institutions. when banks are flaunting their margins compressed, there is incentive to take on additional credit risk. if interest rates move up, that can create risk. in our stress test, we are looking for that and analyzing

their ability to withstand that. insurance companies, pension funds, are subject to the same pressures in a low interest rate environment. they find it hard to meet return targets. so regulatory agencies are monitoring insurance companies and pension funds. overall, i think risk to financial stability needs to be moderated, not elevated. i say that because we are not seeing any broad-based pickup in leverage, not seeing rapid credit growth. not seeing an increase in maturity or mission. -- transformation. i would call those the

precursors of a financial crisis. these are things we are focusing on carefully. dir. lagarde: if i'm a follow-up, i know we are about to run out of time, compared with the situation in 2007 we were being told there is search for yield, but it is pretty much under control. to the point where they found out they did not have legal ground, legal basis, to address them in court. are you a better equipped today? chair yellen: i think we are better equipped today, simply because in money market funds and repo markets and so forth we have improved regulation so those things function better than they did.

what was happening in investment banks, there were many stand-alone entities that were not banking organization. now, we have much higher capital and liquidity standards, and that applies to all major broker-dealers and investment banks. i think there is a great deal that we missed before the crisis. and i believe we are better positioned now with better tools. dir. lagarde: i see them saying time of. thank you very much for your patience and for listening to us. thank you. [applause] [captions copyright national cable satellite corp. 2015]

[captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] >> coming up on c-span, defense secretary ashton carter and general martin dempsey testify on the 2016 defense budget and threats to national security. then, a look back at speakership of former congressman jim wright , who passed away today at age 92. later, elton john urges congress to continue combating hiv-aids worldwide. >> on the next "washington journal," the institute of justice's fred patrick joins us. then jake horowitz will talk about trends in juvenile

incarceration and reducing recidivism. then lester spence will look at racial and socioeconomic factors creating division in america's inner cities. those conversations and your calls and e-mails. our show is live at 7:00 a.m. eastern, 4:00 pacific on c-span. >> here are a few of the book festivals we will be covering on c-span2's book tv. we will visit maryland for the gators bill -- gaithersburg book festival with martin frost and david axelrod. we will close out may at book expo america in new york city, where the publishing industry showcases upcoming books. in the first week in june, we are live for the chicago tribune lit fest with lawrence wright and your phone calls on c-span2's book tv.

senator cochran: the committee will please come to order. today, we review the budget request of the department of defense. we are very pleased to welcome secretary of defense ash carter

and general martin dempsey of the u.s. army. this is the final schedule hearing of the year on the 2016 budget request. the subcommittee recognizes the uncertainty of the current fiscal environment and the impact it has on the department of defense and its planning. we also appreciate the complexity of building the first year 2016 budget request, and we look forward to comments from secretary carter and general dempsey on how we can support our men and women in uniform and our national security interest. we are pleased to recognize dr. carter on his first appearance before the subcommittee in his capacity as secretary of defense. mr. secretary, we look forward to working with you. i also want to recognize that this will be general dempsey's final appearance as chairman of the joint chiefs of staff.

general dempsey, you have served with distinction sense 2011, and this committee is grateful for your contributions. we will miss your valuable insight when your term comes to an end in october. the committee also welcomes mr. mike mccord, the undersecretary of defense and chief financial officer for the department. i'm confident that mr. mccord will provide the committee with useful information as the subcommittee formulates the 2016 defense budget. thank you for appearing before us. your full statements will of course be included in the record. i will now turn to a friend and vice chairman of the committee senator durbin for his opening remarks.

general dempsey: thank you, mr. chairman. secretary carter, glad to see you. mr. mccord, thank you as well for being a part of this. a special thanks to general dempsey for your many years of service in the united army and to united states in terms of our national defense. you have risen to the top rank within the white house and administration as chairman of the military side of our defense, and i appreciate all the talent you brought to it and your dedication. i wish you the best wherever life takes you with your wife, children, and grandchildren. you will now be able to enjoy a lot more. secretary carter and general dempsey, it is important for a -- us to hear your advice on a number of pending issues. the first is a threat of our own creation called sequestration. there are threats to increase defense spending mainly to shift tens of billions of dollars from

the funds in the base budget to overseas contingen i believe this effort is not the right way to address the problem. while i support avoiding sequestration, congress must address budget shortfalls and do it responsibly. moving base funding to the war accounts adds to our problem instead of fixing them. the department of defense cannot operate efficiently if we move from one crisis to another from year to year. this manufactured budget crisis comes at a time of quickly changing global security. our military is operating all over the globe. operations in afghanistan, africa, stability in the pacific, responding to russian aggressions in eastern europe. since last year's hearing, we have added operations in iraq and syria to a busy operational tempo. there are a number of issues i would hope to get to in maintaining our edge and medical

research, ending what i believe is an expectation of service members by predatory for-profit colleges, making certain that the department of defense can keep track of contractors working for them, and lastly -- keeping in mind general dempsey's insistence that we get our people right, there were an estimated 28,000 service members reported sexually assaulted last year. this number is sadly up. half of those individuals experience retaliation. we need to make more progress that requires strong commitment. this is a daunting array of challenges. i look forward to your testimony. senator cochran: thank you senator. secretary carter, you may proceed. secretary carter: thank you. vice chairman durbin, members of the committee, thank you for inviting me here today. mr. chairman, i want to

especially recognize the sense of civility and courtesy with which you conduct all that you do, including the leadership of this committee. it does not go unnoticed, least of all by me. it is much appreciated. vice chairman, i will make sure that we get to the issues that you raised, both in a private conversation and just now in the course of this. thank you for your leadership. thank you all for thinking -- thanking my friend and shipment, martin dempsey. i will miss him. i know all of you on this committee share the same devotion that i do to the finest fighting force the world has ever known, and to the great defense of our great country. i hope that my tenure as secretary of defense will be marked by partnership with you on their behalf.

i'm gratified that this committee, as well as the three other defense committees recognize the urgent need to halt the decline in defense spending imposed by the budget control act. president obama and i deeply share in that recognition. indeed, i want to recognize your colleagues for saying that sequestration threatens our military readiness, our presence and capabilities of air and naval fleets, our future technological security, and ultimately the lives of the men and women in uniform. the joint chiefs have said the same and specified the kinds of cuts that they would have to make if sequester returns. over the past three years, the defense department has taken over three quarters of a trillion dollars in cuts to its future defense spending.

the magnitude of these cuts would stress the most capable planners and programmers. the stresses have been made even greater because of the sudden and unpredictable nature of the cuts, as well as continued uncertainty around sequestration. as a result, dod has been forced to make a series of incremental inefficient decisions, often made well into a fiscal year after long prolonged resolutions are resolved. moreover, even as budgets have dropped, our forces have been responding to unexpectedly high demand from a tumultuous world. as a result, i believe our defense program is now unbalanced. we have been forced to prioritize for structure readiness over modernization taking on risks, capabilities, and infrastructure that are far

too great. this is a serious problem. high demands on smaller force structure mean that the equipment and capabilities of too many components of the military are growing too old too fast. from our nuclear deterrent to our tactical forces. meanwhile, in each of the past several years, painful but necessary reforms proposed by dod, including many significant reforms, like a limiting -- eliminating overhead and infrastructure, making adjustments in compensation have been denied by congress at the same time that sequestration looms. we are starting to see this double whammy. once again, in markups of legislation this year. if confronted with sequestration level budgets and orders to reform, i do not believe that we can simply keep making

incremental cuts. as i have said before, we would have to change the shape and not just the size of our military, significantly affecting parts of our defense strategy. in recent weeks, some in congress have tried to provide dod with its full budget request for fiscal year 2016 by transferring funds from the base budget into our accounts for overseas contingency operations or oco, meant to temper the -- fund the temporary costs of overseas conflicts in iraq and elsewhere. while the budget total we have requested is needed, the avenue it takes is just as clearly a road to nowhere. i say this because president obama has already made it clear that he will not accept a budget that locks in sequestration going forward, as this approach does. and he will not accept a budget

that severs the link between our national security and our economic security. legislation that implements his budget framework will therefore be subject to veto. if we do not come together and find a different path by fall, when a budget is needed, it will put our department and our troops in an all too familiar and difficult position. we will yet again have to make hasty and drastic decisions to adjust to the failure to have an adequate dod budget. decisions that none of us want to make. the joint chief and i are concerned that if congressional committees continue to advance his idea and do not explore alternatives, we will be left holding the bag. that is not where i want to be in six months. since the oco funding approach is not the kind of widely shared budget agreement that is needed, we can see now that it will not succeed. moreover, the one year oco

approach does nothing to reduce the deficit. it risks undermining support for a mechanism, oco, which is meant to fund incremental cost of overseas conflicts. most importantly because it does not provide a stable multi-your -- multi-year horizon, this is managerialy unsound. our military personnel, and their families, deserve to know the future more than just one year at a time. m, our defense industry partners too need stability and longer-term plan not end of year crises or short-term fixes. if they are to be efficient and cutting edge, as we need them to be. last, and fundamentally, as a nation we need to base our defense budgeting on our long-term military strategy. and that is not a one-year project.

this funding approach also reflects a narrow way of looking at a national security, one that ignores the vital contributions made by the state department justice department, treasury department, homeland security department, and disregards the enduring long-term connection between our nation's security and many other factors. factors like scientific r&d to keep our technological edge, and the general economic strength of our country. finally, i am also concerned on how we deal with the budget is being watched by the rest of the world, by our friends and potential foes alike. it could give a misleadingly diminished picture of america's greatest strength and resolve. for all of these reasons, we