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airline harrison this sunday night at 8:00 p.m. eastern on c-span's original series, first ladies: influence and image. examining the public and private lives of the women who fill position of first lady and their influence on the presidency from martha washington to michelle obama. sundays at 8:00 p.m. eastern on american tv, on c-span3. >> coming up next on c-span, from washington journal, a look at the dot-frank financial regulatory law on its fifth anniversary. that is followed by a discussion on u.s. drug policy. later, a discussion with transportation secretary anthony foxx at the christian science monitor. >> we are continuing our discussion about wall street reform and the dot-frank act and we are joined by a financial regulations research fellow at the heritage foundation and also

with julio gordon, a senior director of housing at the center for american products. make you both so much for being here. i would like to start with a question, very broad for both of you. how effective has.-frank been? >> i would argue that basically what we have is the same structure that we had prior with more detailed regulation and we had before. and, in addition, many of the mechanisms that have socialized the cost of excessive risk are still there. i think you have a really hard time to make the case that.-frank has made things more safe. you do have some higher bank capital standards in terms of numbers, so you have some higher ratios, but in terms of the actual mechanism that is there you have essentially the same

system that you had prior to the crisis. the only thing we are hanging our hat on now is that the extra 2% of capital is going to do anything to help in the next crisis. >> would you agree? >> i actually think it has made the system a lot safer particularly on the consumer side. the creation of the consumer financial protection -- protective bureau is the best thing that has happened to consumers in this country. it is arty returned more than $10 billion to consumers. on the side of the system overall, regulation too big to fail doodd-frank helped. >> we have been hearing from colors about what the root crisis -- what the root of the crisis was very some people talked about the banks, some people talked about the regulators. what you guys see as the cap list for the crisis?

>> one is misaligned incentives throughout the system including both on the consumer side in terms of the loans that were pushed on people, but also up on wall street and what financial firms were doing. the other issue was regulators asleep at the wheel. we do have better regulations now, regulations tend to only be as good as those doing the regulating. back in very. i think it is -- that can very. ary. >> i don't think we're that far off. in some of the details we would disagree. you do have to look at the regulatory failure as a key component. i would argue that they were not asleep at the wheel, they were complicit in if you go back and look -- we are not that far off.

>> this may be a first on c-span. >> credit default swaps. >> can you explain what that is? >> it is an agreement to change cash flow. you have a different type of cash flow for another counterparty. one might be fixed, one might be variable. you agree to change what you're going to get -- that is the short version. there are different kinds of swaps. if you have a credit-default swap, we're talking about protection. it is more like insurance. i don't think we should call it that, but it is like insurance. it is basically for you to give me some money if something bad would happen. that is not exactly the same thing as a generic swap but it

is a type of swap. that is not too technical. when we talk about the crisis and swaps being a part of the crisis, when we look at these kinds of things, you can go back to 1993, you can go back to a 1996 otc guidance. these are federal banking regulators. not only are they saying -- we know where all of the swaps are in the banks, but they are saying that it is ok, it is safe, and that we are the right people to be regulating the things. they knew. >> the regulation of swaps, or their investigation into them, shows how they were complicit. >> absolutely. the idea that this happened in some shadowy corner of the financial world, is blatantly false. it is demonstrably false. the fed has already admitted it.

it is all public information. if you look at what dodd-frank did to the market, the one swap that cause the problems, is almost not even addressed in title vii of dodd-frank. it had a clearing mandate to fix the swap problem. >> what you make of this? >> it is important to explain this in a less technical term because it is very complicated stuff. we want to think about what caused the crisis, there are two layers of the problem. you think of the layer that hits the consumer and then you think of all of the stuff going on in the financial system on wall street. on the ground level, you had in

particular, a lot of mortgages being sold to people precisely because the financial system up here wanted more of them. they felt like they had figured out a way to completely eliminate risks to the financial engineering, but they were still paying lenders to give them the riskiest loans possible. they would pay lenders more for a riskier loan. lenders went out to deliberately make a riskier loan. you can talk about homeowners who purchased something that maybe they should not have that what you have to understand is that the marketplace was specifically out there selling these lemons because they got paid more for them than for selling a 30 year, fully amortized typical safe mortgage of the type that most people think they are going to get. that was happening because of the second layer, and what was

going on in the financial system where these mortgages were being bundled into pools the pools were being sliced and diced into different layers of risk themselves, then they would do this fancy thing where they took the riskiest layers of those and packaged them into new pools. and then sliced those up also. the credit ratings agencies were complicit in this because they kept giving the so-called least risky slices of these pools very high ratings for being safe when they were not safe at all. on top of that, you have these credit default swaps. this hedging of the firms were doing against those. what was interesting to those of us who work on the consumer side, we knew what was going on

with these predatory mortgages. we were not all that educated about what was happening in the financial system and little did we know, that when all of the mortgages collapsed, which we knew was coming, that it would bring down this entire superstructure with it. in terms of what dodd-frank has changed, regulating derivatives the way that they have is very important. it probably does not fix the entire problem. plus, there are still a lot of regulations that are required that have not been depleted in that area. that is important to complete so we can figure out what work needs to be done. we want to bring in our viewers now. you can send us a tweet. we are on tweet -- twitter.

we are also on facebook. you can send us an e-mail as well. our first collar for this segment will be john from bloomberg. -- our first caller. >> i would like the panel to respond to what my view of the whole crisis origin would be. and that is if there was not money, then all of these problems would not have occurred. if there was not a pump that was turned on, then we would not have all of these other issues relating to who got what mortgages and who should not have gotten mortgages. the origin of what i understood this whole problem started with, was when aig was able to give insurance to when goldman sachs packaged up all of these large

bundles of capital. if they did not have an insurance policy to pay them, and we would not have had the pump turned on and all of the subsequent problems. >> the problem is just -- is much more than aig. it is more than just the money. we can talk about the federal reserve having accommodative monetary policy. think the overall thing is definitely federal policy is geared and is still geared towards getting these kinds of mortgages into the system. that is exactly what it is designed to do. if we say, if we did not have the pump turned on, i am not sure that that is any different from what we are saying. the whole system is geared towards doing exactly that. whether it is monetary policy being accommodative, whether we're talking about setting up the rules so that wall street

firms and banks can be backed by taxpayers in case something goes wrong. the entire system is geared towards getting more of these out into the market. guest: we are a global economy and there's a lot of money that comes from a lot of places. certainly in the 1990's and early 2000's there was a lot of money sloshing around the globe seeking return. we can't blame any one company. but what we have to know is that is always going to be the case. that was the case then and the case now. capital is always seeking the highest return it can get. that is why appropriate oversight and rules of the road are so critically important. that is the only thing that can help prevent this kind of crisis that can realign the incentives and help make sure we don't have five million people lose their homes unnecessarily along the way. guest: a bigger issue is we should not have federal policy to do this.

this is not the first time this has happened. you go back to 1918, i believe, we started a federal push toward getting more people in holes. -- homes. herbert hoover was in the better homes association and the federal went out in a private-public partnership which is like a fannie and freddie thing and promoted the idea if you had a home it was a good thing and we had a housing boom and it crashed. you don't need federal policy pushing the social ideals on people. you look at this last crisis, the home ownership rate was around 64% to 65%. it was like that from 1968 to the 1990. bill clinton and republicans were just as much to blame but

bill clinton and jim johnson said we will get it up to 70%. that is completely arbitrary and counterproductive and a lot of people -- julia said a lot of people didn't realize this but a lot of people did realize how it would end. you can go back through clips and "wall street journal" and many places -- many people were talking about how it won't end well and it didn't. guest: here is where we have our first legitimate real disagreement. this is not about pushing home ownership. there was nothing about pushing home ownership. the predatory loans the ones you heard about where people were underwritten the so-called no income and no assets, the ninja loans, only 10% of those were to first-time home buyers. most of them were refinancings. there have been many times in our country's history where we

expanded home ownership safely. after world war ii is a great example. it is funny norbert mentioned a rate of 64% to 65% because that was not the rate from 1918. it was well under half of the american public until the g.i. bill and the federal housing administration helped returning war veterans buy homes which created the strongest middle class this country has ever seen. home ownership is an important way for the average family to get the benefit from the kind of financial investments that usually only really rich get and build wealth. it has been the single most effective way for families to build wealth and pass it down generations. the specific number of home ownership rate is something of a distraction because honestly if you break the population up into different categories, the white

population for example has always had home ownership rates well in excess of 64% and still does. what brings down the rate is people of color have generally been locked out of the home ownership market and have far less wealth and less able to pass on wealth to children. so it is not about home ownership policies. this is about bad federal policies that incentivize what i call home buyership rather than home ownership. selling somebody a loan you know they can't possibly sustain is the kind of thing that harms all of us. host: let's take another caller john from johnson city, tennessee, on the republican line. john, go ahead. what is your comment this morning? caller: yes. i see a lot of people buying houses here again in our area that have part-time jobs that happened the same way before the crash, and my comment is about

we have an actual credit union here that is pretty large that actually pays dividends back to the members. why are the banks allowed to give those loans more freely? it seems like the credit union is more stringent. and one other question with this new trading on wall street that is so fast with the computer and we just saw hacking recently. what will that do to our financial status, too? guest: credit unions are under a slightly different set of rules than depository institutions, traditional institutions. but i don't know that there's anything in particular that with

-- would make them be more free with the loans than other banks. i don't believe that is them the case although it may look that way. maybe -- off the top of my head there's one credit union and not a lot of other banks in that community and maybe it would look that way. but i don't believe they are more freely lending. as far as the high speed trading, it is actually, the high speed trading is not really new. it changes all the time but that's been going on for quite a while. i'm not sure that there's any particularly new danger that that causes or that present. you always have that sort of cybersecurity issue going on. i think that is present all the time. guest: i will address the access to mortgage credit issue. one of the most important things

dodd-frank did is put in a new system that says for anybody making a mortgage first you have to check to make sure that the borrower can pay back the mortgage. it sound like basic common business sense but what was happening in the run-up to the crisis was that lenders were lending without checking to make sure someone could pay back the mortgage over the length of the loan. a loan doesn't just end the day after you sit at the settlement table and close the loan. it goes on for the entire term of the loan and no one was paying attention to that. not only were they not paying attention in the underwriting but what we all know now called the mortgage servicing system, the account management was in terrible shape and much of the foreclosure crisis could have been prevented if mortgage servicers had done a better job helping people work out situations as they do on the commercial side but were unwilling to do on the residential side. with the new dodd-frank loans actually credit has been significantly tighter than it was before the crisis.

some small banks and credit unions have some exemptions from some dodd-frank rules, something they lobbied hard for and received and in fact are trying to get more exemptions. but by and large lenders all have to adhere to the new rules about making sure the borrower has the ability to repay. host: the new consumer financial protection bureau addresses and has a purview over some of these issues you mentioned such as mortgage servicing et cetera. here is what senator cruz will to say. it is a regulatory deal has restripped american consumers and businesses of their freedom of choice and has limited their access to gallon all in a name of we know best attitude.

host: mr. michel, do you agree with senator cruz's statements? guest: i'm closer to ted cruz. you have consumer complaints that can be addressed by the federal trade commission, department of justice and state attorney generals. if you have fraud those institutions are designed to root out the fraud, to address the fraud. why do we need another government agency and why do we need one that has essentially a blank check to do whatever it wants? that is is not really sort of a sound democracy principle, i don't believe. so, i do agree with him on that side. i want to go back and address one thing. i hear this all the time how the ability to repay, nobody cared about the ability to repay. if that's the case we have to ask why. what would be a good business

strategy for a business to say i don't care if the customer can pay me. guest: they could pay at closing. guest: i'm getting there. why would you do that? it is because you know there is some other institution to pick it up. you don't have to care. that is a horrible way to do this. you can look at the housing goals -- and people say it is not the housing goals but there is documented evidence that fannie and freddie went and got the lower quality loans specifically to meet the lower tier of the housing goals to do this. they specifically did. guest: you veered into heritage land. i want to say something about the cfpb. i disagree strongly with what senator cruz says. the cfpb is the crown jewel of dodd-frank and this is the first time you have had a federal

financial regulator working for you. this regulator has helped almost 20 million get their money back from people who have tried to compete them. it has recovered almost $11 billion for individual consumers. when was the last time your a.g. did that for you? this is the first institution that has put consumer protection first before bank profits. the other bank regulatory agencies have what is called a safety and soundness mission which is a good thing. you want to keep the system safe and sound. i wish that had been what they were doing. but what was happening before the crisis was safety and soundness was basically equated with short-term profits and as long as the banks were returning quarterly profits the regulators were complicit and nobody was really caring. the condition that consumer

protection is opposed when that is the basic building block of a sound financial system overall. if you are making safer loans everything else throughout the system is likely to be safer. just to this question of fannie and freddie and housing goals here is why lenders were able to make loans that people couldn't repay. this is a system, the securitization system -- you have heard that word. that is where you bundle loans into bonds and sell off the bonds to investors. if you were a mortgage broker working for a lender here is the way it happens. the broker went out and sold loans. the broker got paid more to put a consumer in a higher rate

loan than the consumer qualified for. that was through yield spread premiums. then the broker got their check at the settlement table, went off and they had no further investment in the loan. their interests were no longer aligned with the homeowner. the lender took the loan but maybe the lender held it on their books for a few weeks or a couple of months before they sold it to wall street. now the lender had cash and they had no further interest in how well the borrower was doing in paying back their loans. the person who wall street who bought the leaned securityized it never even owned the loan. they just put them in other corporate structures that they then sold to investors. now the investors were left holding the bag and they really, a, they did a pretty bad job of evaluating the credit risk.

but also they had the credit rating agency saying there bond is triple a rated. that is what our nation's pension funds invest in, triple a is supposed to be this real seal of approval. turns out the credit ratings agencies, who pays them? oh, those people bundling the loans together who never even own them. that is what is wrong with the system. host: you have a response? guest: the triple a part i don't know where to start with this. the triple a security part there is documented evidence of this, the triple a tiers of the mortgage backed securities basically did pretty well as they were supposed to. so you have tiers of risk. the lower tiered is the one that we have the problem with. that is where the problem started. it is a gross oversimplification to say the ratings agencies did something nefarious. nobody knows the future and to blame them is ridiculous. they are paid to do what everybody else is trying to do which is gauge what the default is going to be.

you cannot possibly know for certain what that is. the only thing you can use statistically is previous information. all the previous information said it would do what it did do. guest: in the last answer you said that everybody knew this was coming and honestly a lot of people knew it was coming so why -- guest: there's a difference between knowing it is a bad idea and won't end well and stamping something with a c rating when you have no empirical evidence to use to give something a c rating. host: the next call is william from harrisburg, pennsylvania, on the democratic line. william, would you like it join the conversation? what are your thoughts? caller: first, i hope you give me time to speak. number one, i'm 62 years old. since i have been a working consumer there's always been regulation. the problem and the root is

they deregulated just about everything in the financial institution. plus they deregulated a whole bunch of other things. they created a need society based on greed. i have been using consumer protection and it worked for me all up until the 1990's when the republicans took over in congress and the final push of deregulation. and bush, he just added more deregulated stuff. so, the fact is if you have regulations to look over and watch these people that are supposed to give you money and all that to make sure you pay it back, we wouldn't have this problem. so, both people on your panel are correct on both sides. the problem is the deregulators

created a society that we are now a scam society. so those politicians, regulators, et cetera, basically they all should go to jail. guest: thank you for your call. i have heard this and dealt with this for years now. there is -- and julia probably will shake her head no. there was no significant deregulation at any period since at least the 1930's in the united states. financial markets, banks, nonbanks, are the most regulated of any industry. it is a myth that we have significant deregulation. people talk about the monetary control act where we got rid of interest rate ceilings. we did because they were higher than what the banks can charge. that is not deregulation. that is removal of price control. people talk about the common

refrain is something like we let banks buy stock. we didn't let banks buy stock. we let depository institution holding companies affiliate with an investment banking institution. both of those were highly regulated. people say there was no capital on the investment side. rule 15-c-3-1 is a liquidity rule and one rule. all these guys are highly regulated. guest: the question is not regulation versus deregulation per se. what the caller is saying and i agree with is there's been a culture of looking the other way in favor of profits. and one thing the consumer financial protection bureau has brought back to the system is someone out in that world specifically looking out for the consumer. if you get scams now you can complain right to the cfpb and

look into it for you and you just go on the website and do t. you don't have to fill out any fancy forms or get a lawyer or do any of those things. you can go directly and get help from a federal agency right here in the nation's capital. it is really important to talk about something ted cruz is just wrong about in the quote you mentioned earlier, which is that this is some kind of rogue agency with different power than any other agency. the bank regulators by and large are independently funded. what is interesting is the regulators who regulate jpmorgan chase and citi and bank of america, you know how they are funded? they are furnished by the banks that they regulate. which seems. guest: and appropriations. guest: there's no meaningful appropriations that relate

overall to the o.c.c. budget, to the budget of the fed. all of these are independent agencies and it is really important for a bank regulator to be independent because let me tell you those banks have lobbyists in congress from here to eternity, and if you were to subject the cfpb to congressional projections every one of those banks would be in their congress person's office with their wish list and you can bet that wish list would go into the cfpb appropriations. keeping the cfpb's funding independent is the most important thing we can did to help consumers. and it does not give cfpb some undue authority. in fact, in terms of authority cfpb is more constrained than any other agency there. before they put out any regulation they have to put it through a panel, a special panel

that evaluates its impact on small business. and then if other regulators think the cfpb has gone too far they can actually get together and change what the cfpb has done. that is not something we can do for the feds. host: the reason we are talking about there because there is the fifth anniversary of the dodd-frank act. republicans have put forth efforts to amend or even repeal the act that are democrats who feel it didn't go far enough this. is a clip of hillary clinton discussing where see feels it falls short. [video clip] hillary clinton: we have to go beyond dodd-frank to many financial institutions are still too complex and too risky. and the problems are not limited to the big banks that get all the headlines. serious risks are emerging from institutions in the so-called shadow banking system including

hedge funds, high frequency traders, nonbank finance companies, so many new kinds of entities which receive little oversight at all. stories of misconduct by individuals and institutions in the financial industry are shocking. hsbc allowing drug cartels to launder money. five major banks pleading guilt to felony charges for conspiring to manipulate currency exchange and interest rates. there can be no justification or tolerance for this kind of criminal behavior. [applause] hillary clinton: while institutions have paid large fines and in some cases admitted

guilt, too often it has seemed that the human beings responsible get off with limited consequences or none at all even when they have already pocketed the gains. this is wrong. and on my watch it will change. host: that was hillary clinton talking about the need to go beyond dodd frank. we are speaking with julia gordon and norbert. do you think we need to go beyond dodd-frank? guest: first i want to say hillary is absolutely right about what she says. there is still lots of work remaining to be done to make the system safer. i want to focus on one particular part of that clip, which is the travesty of justice that nobody went to jail. we didn't go up against the executives who we know knew what

they were doing. they have built a system where it can be very, very hard to go after them. i know that there was certainly a lot of effort to go after them. but we have to make sure that in our system we have laws and rules of the road that are able not only to hold larger institutions accountable but that can hold individuals accountable for bad decisions. i would say one unfinished piece of business has to do with executive compensation. we just keep paying these people to rip us off. and that is something, even when you can't put somebody in jail, you should at least be able to not continue to compensate high-level financial executives at these exorbitant rates when what they are doing is

specifically out there either harming the american people or harming the financial system? guest: i think we are mixing separate topics. in the first place we are talking about criminal liability and that is fine, let's talk about criminal liability. if you have done something criminal then you should be prosecuted, of course. that is completely separate from dodd-frank. and the compensation issue is separate from that. to say these guys have specifically opened a business to rip people off, businesses don't run that way. if we are talking about the fact that things didn't go right it doesn't automatically follow that because somebody lost money there is a criminal liability. that is not at all the case. guest: i'm still stuck on businesses are not run to rip

people off because i can give you a long list of businesses, pyramid schemes that are based on ripping people off. guest: a legitimate business. guest: people thought bernie madoff was a legitimate business. do you believe jpmorgan is a scheme? guest: they have been involved in unsavory activity. >> andre from ohio on the republican line. what are your thoughts? caller: i agree with what the panel is saying and also agree with what a lot of callers are saying but a lot of consumers don't have knowledge of what finances mean and what their

currency is backed by. in 1970's currency was backed by gold and then oil and now we see a drop in oil but a spike in the u.s. dollar because of what going on. the strong dollar what is killing multinational corporation and the new interest rate it will raise that rate and they are not going to make the profits they want to make. so that is why they are worried about don't raise it now. but what i'm seeing with the dodd-frank act is a lot of consumers don't know how to actually do their finances. they really don't sit down and don't do their books and. carefree and feel safe around you talk culturally how it affected minorities and others of gender and religion it has broken down and being targeted in a humanistic way. our country will sink in if we don't open the markets equally and free to everyone. host: let's get one more call before you respond. that is chris on the independent

line from florida. caller: good morning. i think it is so rich when hillary stands there and lectures people about regulations. during the housing debacle numerous arms on how george soros, who is a primary benefactor to hillary clinton profited handsomely on the backs of the collateralized debt and homeowners that lost money and so forth. i'm wondering if mrs. gordon thinks the regulatory environment that allows people to short the market and make money on the misery of americans is a good thing or bad thing. guest: let me take the questions in the opposite order. lots of folks made tons of money in the subprime mortgage market,

both going long and then going short. what is really important is you want to fix the system so no one is profiting from the misery of americans on either side of the trade. i agree with that and hopefully dodd-frank has done a lot to advance that. to the first caller's point, i want to thank you for making two important points. one is that we don't do a great job in this country with financial education and especially folks who don't come from money often are not as educated about how to safely engage in purchasing mortgages or taking out student loans and the like. i go back to the cfpb which is doing a tremendous job getting really clear understandable language out there to the public

to help you. they have this initiative called know before you owe which is a really important initiative to help people who are potentially getting mortgages. but we need to go much further. when families are getting into the biggest financial commitment they are going to ever get into they do need professional help. most people will only buy a house for the first time once and maybe refinance but this is not something you do every day and you become an expert in and it is important to have the appropriate kind of financial counseling and advice available to families for these big decisions. i think something that is really important right now in fact is the department of labor has proposed a rule again doing something that you would think was so sensible that with already be done but that is financial advisors have a duty

to work in the best interests of their clients. that is something that is really important to put in place as well because i don't think we can get every single person to be an expert on mortgages. this stuff is complicated and abstruse. what we need to do is when you are engaging in any kind of big commitment, whether a mortgage or student loan or even buying a car that you have the appropriate education and information available for the transaction. host: one area you can agree? guest: i think people need to do more to educate themselves. i'm a former educator and worked in a public institution eight years doing that, teaching finance. i know there is a lot of misunderstanding out there. that is the first time i have heard that the cfpb was the beacon of light to fix that problem. that is interesting. usually i think that these

government programs end up with more detail than what we need and duplicate things that are out there. there are lots of programs that are available. truth in lend something supposed to help people. now when you go to buy a house the stack of paper is this high. nobody reads that and understands it. i don't know that that fixes anything. guest: that is somewhere where we are going to agree. the financial education is important but i don't think any consumer should be expected to get through that stack of papers on their own no matter how many pamphlets we have out there. that is why it is so important to have appropriate professional advice. when you buy a house you are required to get a professional inspector to come and check to see that the foundation of the house is sound. you should similarly have the ability to have a professional make sure the loan is sound.

host: this comment from twitter. you wrote recently in forbes too big to fail is still unsolved. you said it will explore why dodd-frank failed to accomplish one goal ending too big to fail. taxpayers are as much at risk of getting stuck with the tab for future bailouts of megafinancial institutions. can you explain what you meant? >> if you look at what dodd-frank has done title one has essentially said these are the companies who regulators think if they fail they are going to cause a crisis. we know who they are. in addition to that we go to a title 2 of dodd-frank which is orderly liquidation that says we will take the parent holding company and wipe them out to make sure the subsidiaries keep going and only do that if we can certify the fed and fdic there is no private financing available to fix this. what does that sound like?

if you go to title 11, it reworked the emergency lending authority saying you can only do broad based lending programs. and people on the left will say that fixes the problem but half of the programs that the fed funded in the last crisis were broad based most directed a of at bailing out the primary dealers. that is now codified. there is no gray area. you know exactly what they are going to do. that is the same thing that happened last time. host: do you think too big to fail should be fixed? guest: absolutely. the problem when we talk about the details of this system or how we are pushing mortgages or the fed aspect of bailing out firms the whole problem is we are socializing the cost of doing business. julia doesn't like businesses or that is the impression i get so we want to have all of these

products out there and want companies to provide these products and if anything goes wrong we want somebody to pick up the tab and right now that is the federal taxpayer. that was the case before dodd-frank and that is now the case. that hasn't changed. guest: first of all, i think that is really not fair, the comment about business. i do think that the too big to fail aspect of things is where we still have a lot more work to do. i definitely agree with that. just to go back to our friends jpmorgan chase we were talking about, they have $2.5 trillion in assets. there are moments when i'm not sure how many zeros are involved in that. it is hard to imagine what you do with an institution like that. what dodd-frank has succeeded in is making those institutions and

the environment they operate in somewhat safer, better rules with respect to capital and risky assets and that sort of thing. but i will completely agree we have not moved all the way to demonstrating that we have these so-called living wills that these institutions are supposed to have. we have not yet figured out if they have plans in place that we think will actually work or really what will happen in the event there's another crisis, maybe some exogenous shock that happens and that is work that definitely remains to be done. i'm less concerned about some of these too big to fail entities but i agree that they are still too big to fail. host: next from capital heights, maryland, a call on the independent line. caller: good morning. that is one thing i feel that both guests are kind of like

hiding the real aspect of what is occurring. i'm going to give my personal experience with purchasing a home. before that i want to say this in case i get cut off. it is against the law for banks to loan money and for banks to loan their money or a creditor's money so they can't make loans. it is against the law. now let me talk about my personal situation. i purchased a home and i sat down with the people at closing and wells fargo was there, i was under the impression wells fargo was paying for the home for the previous owner for me and that i was to repay wells fargo for the loan they gave to the previous owner to turn over the rights it me. i signed the promissory note and deed of trust. my signature was on the

promissory note and deed of trust. that is what i was under the impression of what happened. there is a hidden aspect to the transaction that they try to keep secret and that is what i want to talk about. what i found really happened was when i signed that promissory note that is a security instrument. let me tell you what happened first. host: you will have to keep it quick. caller: they sent me a letter saying that is when at the raised my eyebrows and did a freedom of information act to wells fargo to get all the information i could and that is when i got a copy of the promissory note and deed of trust. when i saw the promissory note and deed of trust the promissory note was endorsed by the vice president of wells fargo and deed of trust was stamped on there. what i found is the promissory note was referring it money.

host: we will have to leave it there. we will take one more caller and that is patrick from new jersey on the democratic line. caller: thank you very much for taking my call. i want to make a couple of comments related to mr. michelle's comments saying that credit default swaps were not insurance. they were to be covered the investments of the mortgage securities that were invested. a lot of the problems with the credit default swaps the risky mortgages were put into hundreds of different credit default swaps instead of maintaining in one. the problem with the credit default swaps is a 7% default rate in the mortgages they would all crash. mr. michel stated the businesses

are not in the business of ripping off the consumer. if there is a 7% default rate and it causes the entire credit default market which was capitalized at $54 trillion, the banks did not have the capital to back that up. and they did have a business model which was to rip off the consumer. guest: so, i said that i wouldn't characterize the credit default swaps as insurance. i'm making sort of a technical point that i didn't need to make. i don't disagree with the characterization of what the caller said though. my point on businesses is that if you go into business and your idea is i'm going to rip everybody off you are probably going to go out of business relatively quickly. i don't think that is anything that anybody or any reasonable person with dispute. that was my point. again, the system was designed and still is designed to back

you up if you take on too much risk. so you have a system that was predicated on it is ok if you take on too much risk, don't worry about it. that is exactly what happened. there is no surprise here. host: our next call is bill from depuy, new york, on the independent line. caller: good morning. i recently read a back robert morris the financing of the american revolution and robert morris invested in real estate in the 1790's and blew the market up because there was no regulation. and that was the first time financial crash in this country. and through the 1800's there were a number of financial crashes in this country and everybody knows about the crash of 1929. that is is when f.d.r. and joe kennedy decided we have to do something to end these financial

crashes. and a bill kept the investment banks and commercial banks separate. when george bush sr. and the republican party pushed to eliminate glass-steagall and pressured clinton to sign the bill and he had 29 democrats to push it through. so, now when you talked earlier about should wall street banks be backed by the taxpayer, that is exactly opposing glass-steagall under f.d.r. and we will continue having crashes as long as you allow the wall street bankers to influence it. guest: thank you for that call. i think that it is really important to note that we did have regular financial crises until the depression happened and we had the new deal and we

had a lot of things come in. glass-steagall was not the only thing. fdic insurance was incredibly important. the federal housing administration was incredibly person. there was a lot of regulatory and other types of apparatus put in place it help stabilize the system and it remained quite stable until recently. i know we heard earlier that there has been no deregulation. there's been roll backs of certain kinds of regulations. there's a lot of rules out there and it is hard to know when you reduce the number or what. but there was a significant roll back both in some actual laws, you know, glass-steagall being one of them, as well as a different attitude on the part of the regulators. i should say that this is not -- i will not blame this on just

the republican party. i think that everybody in government was complicit with this. there were the occasional regulators that tried to stand up to this. brooksly bourn trying to stand up to and saw what was coming on the derivative side but generally the boys club was not interested in hearing that at the time and shut that down and went on. i do think it is important to get regulations right again. would restoring glass-steagall by itself solve the problems? these problems are extremely complex and we need a lot of the different things that we worked on in dodd frank and need to continue working on to make sure our system is safer and less prone to crisis. no one can say there won't be another crisis. there are things that you can't

anticipate that happen that may or may not originate in the financial system. but the important thing is to make the system as safe and resilient as possible. so that we can avoid crises when possible, and when there is a crisis have some kind of orderly process to help mitigate the impact of the crisis. that is not just on the too big to fail unwinding level but again on the consumer level. for example, if consumers could restructure the mortgage loans in bankruptcy you may not have seen a lot of foreclosures that you saw and every foreclosure had these ripple effects that brought down the value of their neighbor's homes even when their neighbors were still paying their mortgages. so, you really want to build these kinds of fire walls or fire breaks into the system so

that no one shock or crisis can bring down the whole thing. guest: the first thing is i think that sound wonderful but what we normally do is get into a lot of trouble thinking we can design the system that it will be safer and we usually create pressure points we didn't expect and find out we screwed something up. back to the call, excellent book that i would recommend is by george benson please check out that book. you can go back in the 1700's and robert morris instance that the caller brought up, the banking system in the 1700's was completely different than the one we have now. it was largely public banking before the nation was founded so it is wholly different. we have always had this populist hate toward banking and finance in the united states and it has created and just an incredibly bad system. you compare our system to

canada. canada has never had a banking crisis. we have had almost 20. glass-steagall didn't stop them. we had a crash in 1987 that had nothing to do with the s. and l crisis. we had this one. the reason i recommend the book the glass-steagall idea is largely a myth. there is some empirical evidence that the banking firms that will the type of company we had to read the securities firms that had -- the banking firms that had securities affiliates had lower fill your rates than those that did not. you can go back and look throughout the history in the book. somebody says, the investment banking, that is what rot the system down. somebody repeated and somebody else does. that is all that went on to read glass-steagall is largely a myth. greg on the independent line from

massachusetts. caller: i want to ask julia who audits the federal reserve? and i also want to ask about the consumer financial bureau. i know honda just signed a federal agreement but i'm looking at the agreement from london honda's point of view. host: is there the london air bag recall you are talk -- the honda air bag recall? caller: no the consumer bureau got $25 million from honda for illegal practices. how do i tphoeknow there consumer financial bureau isn't going to be used as a political tool by one special party? guest: i think that the biggest way to protect the cfpb from being used by one special party is to keep it out of the congressional appropriations process, which is where that

often happens because individual lobbyists are able to put things into appropriations bills just like right now senator shell pweur is attempting to -- shelby is attempting to roll back big chunks of dodd-frank through an appropriations bill which is supposed to be about just funding the government. i will say auto lend something an emerging area of a lot of sharp practices and the cfpd and other agencies really need to be on the lookout for what is happening in sort of straight auto lending like the loan you get to buy your car as well as what is called auto title lending which is sort of like pay day lending where you pledge your car title in order to get some cash. that is another area where there is a lot fof -- that is a business that is set up

specifically designed for the consumer to fail where at the tend it make more money by seizing the collateral than by the borrower performing over time. so it is really important to think about auto lending. to go back to the fed, i will note the head of the federal reserve right now january from the time yellin -- janet yellin frequently goes to the congress for oversight but it enjoys great deal independence. again, the independence is important to avoid particular lobbyists lobbyists, but sometimes in the past particularly i think under alan greenspan who was seen to have magically mastered all the levers of power and had it all under criminal there was a lot

of dark under control there was a lot of deference that there probably should have been a little more, to go back to the auto thing checking under the heard. host: senator shelby's bill was mentioned. do you agree and can you tell us more about what it would do? guest: i don't agree with the characterization that it would roll back big chunks of dodd-frank. what shelby's staff did is went through the house is of and senate and looked at bills co-sponsored or passed the house or one of the committees with a large majority and i believe there are seven -- i could be off on the number. i think i did a forbes column on this. there are six or seven that passed the house unanimously some by voice consent. they were all like tweaks at the margin

margin. one of them is a manufactured lending thing. one is a rural designation thing. there is something like 30-ish different definitions of what a rural geographic location is. so one thing is aimed at fixing that. those are the kinds of things that dominate that bill. there are some bigger things. there was some g.s.e. related stuff that technically doesn't have anything to do with dodd-frank although it would be pretty big. most of them are just tweaks at the margins. host: we have a call from louisiana on the republican line. go ahead. caller: i have three basic questions. number one could you clear up the glass siegel thing. that is the one that bill clinton did and should have vetoed in november of 1999. what were they trying to accomplish? can you define that? number two the jenny mae's didn't have a fallout in 2008

and freddie and fanny did. and for mrs. gordon i don't know if you remember the difference between red lining and predatory. the answer was 2008. 2008 when you didn't get a loan because you didn't qualify, they would jump up and down and call it racism. then after 2008 they changed the story to predatory lending practices so the bank would get a better commission. he forced them to have that. could you elaborate on that? thank you. guest: thanks for your call. i'm not sure i understand the last part of the question. i can talk about red lining which is a practice that actually was created by the federal housing administration the government agency that now is the most frequent channel for people of color to get first-time mortgages.

when that agency was started they very much chose not to ensure mortgages -- insure mortgages in black neighborhoods and was called red lining because they would take a big map and take a red pencil and draw a line around where they didn't want to lend. that had nothing to do with the credit worthiness or lack therefore. guest: it credited an urban pocket. guest: interto address the fanny and -- i want to address the fan kwreu fanny and freddie question. we do have some unfinished work which is reforming the housing finance system. that is important. fanny and freddie remain in federal conservatorship which is not a status they should be in for all of eternity around i hope congress, which had some bipartisan agreement last year around some important principles there should get back to work on

that. host: we are almost out of time. guest: i will try to address the caller. the freddie and fanny versus jenny mae it only securitizes government backed mortgages and freddie and fanny do not. the glass siegel thing the whole glass siegel issue is a split between the types of firms that can affiliate. if you are a holding company you can't have certain types of financial firms. host: that is norbert michelle and jul >> on the next washington journal, a look at the v.a. system. also the american association of people with disabilities.

the impact of the americans with disabilities act. and a discussion on the issues facing the u.s. and cuba now that relations have resumed. we will take your calls and look or your comments on facebook and twitter. washington journal, live every day at 7:00 a.m. in his weekly address, the president discusses the effects of the dodd frank banking rules. senator james in half of oklahoma -- james inhoff has the republican response. president obama: it has been seven years since the worst financial crisis spread from wall street to main street. a crisis that cost millions of americans their jobs, homes, their life savings. it was a crisis that cost all of us.

it was a reminder that we are in this together. all of us. that is how we battled back. together. we still have work to do, but we did prevent this second depression. we have created 13 million jobs, the housing market is healthier, the stock market has more than doubled, restoring savings. americans of all stripes have buckled down and it worked to bring this country back. we had to do something more. we had to make sure that this crisis never happens again. that is why five years ago this week we enacted the toughest wall street reform in history. new rules to protect businesses, consumers, and the entire economy from irresponsibility that threatened all of us. five years later, here is what the reform has done. wall street reform turned the

page on too big to fail. now in america, we welcome the [applause] pursuit of profit or it if your business fails, we shouldn't have to bail you out and according to new rules, we won't. those days are over. wall street reform allows us to crack down on the worst types of recklessness, big banks making risky bets to pay executives. thanks to wall street reform, there is a consumer protection bureau with one mission, to protect american consumers. already they have gone after credit car companies, lenders, and they have won, putting nearly $11 billion back into the pockets of consumers who had been cheated. it is working and we are working to protect more families. this week we announced we are cracking down on the worst practices of lending on military bases, so that military troops and families to not get trapped

in debt. as long as i am president, i will keep doing what i can to protect consumers. none of this has been easy. we have had to overcome lobby campaigns and special interests in congress. they are still trying to attack everything that these reforms accomplished. they are hiding rollbacks of key protections and bills, they are blocking cops from doing their jobs. they claim the reform is bad for business. this does not explain 13 million jobs in the market. it is only bad for business if your business model depends on recklessness that threatens the economy or irresponsibility that threatens working families. we cannot go back to the days where banks wrote their own rules.

if anything comes to my desk -- i will veto it. we have worked too hard to recover from one crisis to risk another one. in america, we should reward drive and innovation and fair play and that is what the reform of wall street does. it makes sure that everybody plays by the same set of rules. if we keep moving forward, keep building an economy that rewards responsibility instead of recklessness, we will not keep coming back, we'll come back stronger than ever. thanks everybody. have a good weekend. senator: i have the honor of serving as the chairman of the senate environment and public works committee. passing a long-term transportation bill has been my top priority since coming to that committee. it is one of the most important issues congress deals with. that is why barbara boxer and i made it the topic of our first committee meeting hearing that

we had in january. there is no such thing as a republican road or democrat road, this issue transcends political fights in washington because the transportation system is our constitutionality responsibility. we recognize transportation and its importance by giving congress the responsibility to establish and regulate interstate commmerce. thanks to president eisenhower the national highway system was created and continues to serve as the backbone to a strong national defense and economy through the movement of servicess. this was but with a 50 year design life, now 60 years, now beyond its warrantees. maintaining eisenhower's vision

requires a continued partnership between the federal government and the states. we are considering it this week. senator barbara boxer is a proud liberal. i am a proud conservative became together with a liberal to work together to ensure that this is a strong partisan bill. it will be passed out of our committee unanimously on june 24. it has key components to make sure that transportation increases by 3% over the next six years and provides long-term funding certainty. we have also streamlined regulation and enforced new security measures so that taxpayers know how their money is spent. advanced research and innovation in transportation, so that we

can have a globally competitive infrastructure system in the u.s. this act is about putting america back on the map as a place to do business. unfortunately since 2009 congress has passed 33 short-term passages, this results in dollars being spent only on maintenance and basic tasks like filling potholes. we have slowed building projects. today 54% of our roads are rated mediocre or poor. one in four bridges were are significant repair. we are unable to keep up with the current traffic. the 20,000 miles of our highways -- that is significant -- due to congestion, 5.5 billion hours and 3 billion gallons of gas were wasted in traffic in 2011. these numbers will continue to skyrocket. we have a new congress and a new republican majority.

and it is time for this trend to end. the drive act is a solution. it is the solution. a bipartisan solution. it provides the needed long-term funding certainty so that major construction projects can get off the ground, projects that aren't possible with short-term extensions. it will signal to job creators that america's economy is not only going to grow, but it needs to be sustained because the infrastructure will exist to support it. with the drive act we can build eisenhower's vision by maintaining the ability of goods and services necessary to make our economy go forward. the bottom line. there is an old documentary nobody reads anymore, call the constitution. it tells us what we are supposed to do. we are to defend america, to build roads and bridges, and this is exactly what congress

will accomplish by passing the drive act. >> c-span gives you the best access to congress. live coverage of the house and hearings and and news conferences. event that shape public policy. every morning, washington journal is live look to the is and journalists in your comments by own. c-span. created by america's cable companies. >> they were matter and antimatter orindaer. >> he is always to the right. works anything complicated confuses me. >> filmmakers talk about their

documentary, open best of enemies -- "best of enemies." >> today, i believe there is someone saying the numbers are dwindling, talk about hot topics. topic number two. whereas then, i don't think that was the norm in tv at the time. i don't think the guys needed that. >> the moderator, a distinguished news man was really kind of and marist by this. he disappears for sometimes five or more minutes at a time. today, you would not have a moderator not jumping in every 30 seconds. really everybody at abc stood back and let the fire burned.

>> on c-span's q and a. >> now a discussion on the rise of synthetic or designer drugs and strategies including legalizing the drugs. from the cato institute, this is 1.5 hours. mr. preble: good afternoon. i am the vice president for defense policies at cato. i want to thank you for being here today, and thank you to the staff at cato and those of you watching online. the topic today is timely.

news organizations as recently as yesterday in a front-page story have talked about the proliferation of synthetic or designer drugs that produce psychological and physical effects similar to those of traditional mind-altering drugs. mind altering effects policymakers have really scrambled to outlaw substances that can regain legal status with a modest change in chemical make up. some of those masquerade as such innocuous products as air fresheners or potpourri. the question we are debating is can these new mind altering substances be outlawed without resorting to tortured legal rationales? are there alternatives to a

prohibitionist strategy or could policymakers better promote public safety by requiring strict production standards but not attempting to ban their use? in this recent analysis for those of you watching this is also available online, this new study examines the issues that we will be talking about today and i'm pleased to welcome him here his remarks will be followed by eric sterling and jacob hornberger. a few words about my friends and mentor ted. ted is a senior fellow for defense here he served as the director of foreign-policy in 1995 and is vice president for defense and foreign policy studies from 1995 through 2011.

this includes the fire next door, mexico's drug violence and danger to america and bad neighbor policy and those are directly relevant to this topic more probably toward a prudent foreign policy for america. he is a contributing editor and serves on the editorial boards and is the author of more than 600 authors and policy studies and his articles have appeared in "the new york times", wall street journal los angeles times, foreign affairs, and many others. he is a frequent guest not just here in the united states but also in europe and east asia and elsewhere. and with that i introduce you.

>> thank you very much. it is certainly correct that this is a timely topic and it seems like every time you make turnarounds there is a major news article about synthetic drugs and the alleged threat to public health and safety in my study focuses on designer drugs which is a subset of artificial substances that mimic the effects of traditional mind altering drugs. they had been around for a number of decades and we are certainly familiar with the methamphetamine phenomenon which has been around for longer than three decades. if you go back to the 1960s

over the use of lsd this is not a new issue per se. but what we have seen in the past five years or so is a new family of synthetic drugs and those are the ones that i call designer drugs and there are two major categories and one synthetic marijuana often chose high the name of spies or k2 and bath salts that mimic the effects of cocaine and also flakka is probably the best known of that category. as is indicated a lot of the designer drugs are marketed as perfectly legal substances,

everything from this to pet food, most of the substances are labeled not for human consumption. let's just say that people have disregarded those warning labels with a vengeance and the increased use of designer drugs most of those are coming from production site either in mexico or suburban sites in china and then shipped over to the united states and other markets. as the levels have risen the news media stories have also surged often with headlines about the dire threat to public health and safety.

there's no question that there has been a surge of use in designer drugs. just accessing the data to emergency rooms will show that there has been a tremendous surge over the last five or six or seven years and that the drug prohibition argued that this poses an especially serious threat to children. the official of the drug enforcement administration says that the biggest population are 12 to 17-year-olds. the rationale is because these drugs until recently have had an

aura of legality and that they were very easy to get and children were prone to use them. i was extremely skeptical about that argument. children and usually by that we are talking about teenagers have had very little trouble getting access to explicitly illegal substances over the years. i assure you within 15 to 30 minutes you will know who the local drug dealers are and the students know who they are and they can refer you very easily. many of us can testify for personal experience that it was never difficult to get our hands on liquor even though theoretically we were barred

from access to such dunces until the age of 21 years old. i can testify my own experience that i drank more from the ages of 15 to 21 then i have since that time. easy access argument falls apart pretty easily. what about that most users are designer drugs are 12 to 17-year-olds. well, again we don't have great data on this as of yet. but it pertinent to note that the druggies generally is a special menace to children and a common theme of prohibitionist for decades.

and yet the mental health services administration confirmed the findings of earlier surveys that the use of marijuana and other illegal drugs is predominately an adult vice. well in excess of 80% of users over the age of 18. and there is very little preliminary as it is indicated that this is different than those substances. they don't seem all that popular among teenagers to begin with. natural marijuana is still by far their drug of choice and the

university of michigan monitoring the future study in 2014 found that some 35% of high school seniors reported using marijuana during the previous year and that figure has been remarkably studied over the past two decades. it's a personal thing with me and i get annoyed every time i hear teenagers and especially those in their late teenagers described as children. high school seniors are either already adult or already 18 years old, or they are 17-year-olds on a sharp threshold of adulthood and we want to keep that into perspective. moreover if we look at drug use among teenagers the synthetic drug issue is not all that big

and figures from the 2014 unit of university of michigan study found that the use of marijuana actually declined steadily among all surveyed from 2010 and among 10th graders, reported use from the previous 12 months is the synthetic marijuana it went from 11.4% less than 6% and this is not a system with a very of an epidemic. ..

this has been a problem with traditional drugs, not just synthetics. you getting draw votes -- you get a dose, you have no idea how strong it is. whether it is safe or lethal. the same thing with the purity aspect. you may have drugs that are contaminated with other substances. highly toxic substances. that is an inherent problem with

the prohibition system. prohibition doesn't solve those problems, it makes them worse. trying to out law synthetic drugs is a area -- fool's errand. even highly conservative societies have not unable to stem the use. eyesight -- i cite two examples. russia and iran. in the case of iran, they even execute drug traffickers. yet both societies have experienced a significant rise in the use of synthetic drugs. in iran, that is placing more traditional drugs.

in russia. it is displacing heroin. now synthetics are the drug of choice. so even these highly conservative, highly repressive societies have not been able to stand out that kind of drug use. when you consider our of maximum-security prisons -- what are our chances of keeping them out of a free society? the answer is we have no chance of doing this. and what do we do? do we ignore the problem? not necessarily. there are things we can do. but the goal should be to channel the trade in these substances as well as other currently illicit drugs into

legal channels, into the hands of reputable businesses, and that means requiring standards of labeling and dosage so that customers know what they are getting. and then as citizens of free societies, a need to make decisions. a percentage of the population seems to have a great desire to get high one way or another. people have been sniffing glue and paint thinner for decades. we're not about to outlaw those substances either. we certainly would not be effective if we tried. again, the focus on a harm-reduction policy, one tries to channel as much as possible into the hands of reputable businesses, guarantees accurate labeling and dosage, and then allows people to remain free to make their own decisions for

good or ill. nobody said the ability to make these decisions will always ensure wise decisions. one thing we can be sure of is that prohibition of synthetic drugs, prohibition of these designer drugs, it's not going to work any better than prohibition has with regard to alcohol in the 1920's or early 1930's or with marijuana and cocaine in the decades since then. we should not apply the same failed model to this new phenomenon. thank you. [applause] mr. preble: thank you, ted. now let me introduce our two distinguished commentators.

eric sterling has been the president of the criminal justice policy foundation, a private nonprofit that helps educate the nation about criminal justice issues and failed global drug policy. mr. sterling was counsel to the house of representatives committee on the judiciary from 1979 until 1989, where he was a principal responsible for legislation. he has processed the emergency amendment in the 1984 crime control act and the designer drug enforcement act of 1986. he was a principal in developing an act of 1988, part of the anti-drug abuse act of 1988 that brought many of the precursor chemicals under dea jurisdiction, including the ban on the manufacture and

distribution of certain three-necked round-bottom flasks. i do not know what that is. three-neck round-bottom flasks. mr. sterling serves on the board of directors of families against mandatory minimums and marijuana majority in the voluntary committee of lawyers and a number of other boards. eric received a b.a. from haverford college. he graduated from hurricane island outward bound school in 1968 and led wilderness canoe trips and climbed the matterhorn in 1979. i cannot top that. our second commentator is jacob hornberger.

he was a trial lawyer for 12 years in texas. he was an adjunct professor at university of dallas. in 1987, he left the practice of law to become director of programs at the foundation for economic education. he has advanced free markets around the country and on a number of shows, including those on fox news, and he appears regularly on other shows. for that, eric, take it over. mr. sterling: thank you for that introduction, and it is an honor to speak to cato. i started attending sessions such as this in 1981.

my thinking was shaped by the speakers i heard at cato. and to be asked to speak to cato is really a high point for me. this question of synthetic drugs we are addressing a tremendous deja vu for me professionally, should be a deja vu who for libertarians. this is a copy of "inquiry" magazine from february 1984. the title is "the war on drugs is over: the government has lost." the author is now a senior political writer.

he lays out in this article essentially the story you are facing right now dealing with synthetics. i want to give him credit for being so prescient. he noted early on that in california research on synthetics drugs like heroin has already been done. we will be awash in deadly synthetic drug substitutes. it is important that the drugs we are talking about are quite harmful in contrast to drugs like marijuana and heroin. heroin, legally obtained, safely

injected, does not lead to crime, it does not cause tissue damage, it does not lead to insanity. it is addictive and users have to manage constipation. heroin users survive and can live productive lives with a safe form of heroin. the story found these analog synthetic problems is not a new one, it is an old one, that pcp spawned pce and other analogs that were equally dangerous. there was a synthetic heroin available called -- and it was one of the drugs that is subject to the mandatory minimum penalties that congress enacted in 1986.

a drug, a demerol synthetic -- there was an analog of that called mppp. the synthesis is tricky and it was being made improperly with a contaminant, and people are now showing up at hospital emergency rooms with signs of parkinson's. they do not understand that this is a dynamic that flowed out of prohibition. the alternative to finding heroin, opiates has been an old one. there was something called -- where drugs were combined and people trying to combine drugs

and get high that way. any efforts to stop this -- one problem is there is a literature about how to make drugs, and jack mentions that a number of these articles were wrong. we even had backyard chemists botching the job of following recipes from precursors of the internet. jack concludes his article and says, what can dea do to stem synthetics that it has not already tried? congress passed a bill.

it was interesting to see the chemical industry was unable to recognize it. they are now going to be regulated by dea and the approach is going to be different. it was interesting for me as a staffer trying to see how the interest groups might respond. here is an interest group unable to mobilize what the motivation is for this new approach. we see that drugs -- the precursors are still getting into mexico, the united states. so jack asks -- these are the consequences of busting more labs in the united states. we saw the increased power that the sinaloa cartel has had. he said license lab equipment.

the synthesis of methamphetamine required that a particular piece of lab equipment called a three-necked round-bottom flask, a standard lab piece. congress banned it. but congress did not ban the four-neck round-bottom flask. all you need is to put a plug in it. a chemist in california is known for the reintroduction of mdma commonly known as ecstasy into popular society. a scientist who was interested in the exploration of drugs.

i knew him. i was telling him the story of the flask. he said it was hysterical. sasha was the one who cracked up regarding this. finally, if you cannot license lab equipment, then in the future, everyone who has access to a library, and that does not happen. there are harsh penalties for these drugs and analogs, and jack quotes a mentor of mine the clandestine synthetics may well soon swamp markets and

deliver the coup de grace to a dying international system. international drug system. the plain truth is in a society technologically advanced as ours the government cannot keep people from experimenting. the government crackdown has always been of the process and fouled the market with drugs of uncertain. potency. we see these things called synthetic marijuana. the law still punishes harshly the production of high-quality marijuana that can be produced without contamination. legally regulated marijuana markets in colorado and washington that were putting in laboratory controls. in maryland where our regulations are going to require that every batch be

tested by an independent testing laboratory. we can produce safe high-quality cannabis and eliminate the market for synthetic marijuana. these things called incense and bath salts are clearly intended for human consumption and it seems that the prosecutors say to hell they're is nothing we can do and have not been sufficiently creative and getting the targets of these investigation. why does a gas station so something by the cash register called incense or bath salts fact it is inconceivable to me that you can't send in a sufficient number of well-trained informants to get the clerk to make some kind of statement that indicates that the clerk understands this is for human consumption. and so i will conclude by

saying the government is struggling to go along. in 2012 congress passed the synthetic drug -- excuse me. the synthetic drug abuse prevention act of 2012 as though that is going to happen. they added the schedule 15 specific classes of canada netted compounds, 15 specific cabinet. [inaudible] mimetic compound that was specifically banned as well as 1111 of the kind of chemicals sold his bath salts which set up the opportunity for additional kinds of compounds to be sold. the public's demand to get high, to relieve pain

whether it's from the mentally ill or the mentally -- intellectually curious that is going to take place and the public remains a risk until these guys are properly regulated and controlled, sold by lessons laboratories, come with appropriate kind of warnings thank you. [applause] >> thank you. it is great to be back here at the cato institute to participate in the program. done such great work advancing liberty. it is a special honor to be on this panel. one of my real life libertarian heroes. a special honor to be here discussing his paper. as i was reading through this paper and listening to tell

his remarks and eric's remarks as well ii think the central message that was coming through to me throughout all of this was just the utter futility that no matter what the drug warriors do, no matter what they do it's not going to change anything. is a classic case of just utter futility. and i was thinking back to an open letter written in the 1990s six years after this article americans talking about. an open letter by milton friedman that appeared in the "wall street journal" to bill bennett who was the drugs are at that time. friedman said to bennett the same sort of thing that had says in this paper. bill, you know i beseech you. and this war on drugs 25 years ago because it will not accomplish what you hope to accomplish. it will only bring death,

destruction and a loss of well-being for the people of society. and then he cites a column that he wrote 17 years before the1973 when the drug war is really getting wrapped up. and in that article he made the same.that had makes in this paper about designer drugs. pointing out that crack cocaine was developed as a response to the government crackdown on regular crack -- regular cocaine eileen. because it was so expensive the black market brought into existence crack cocaine, sheep, more addictive and it went on to ravage people in the inner cities, especially african-americans. here you have this program that is utterly futile.

why wouldwhy would it surprises? just look at basic law of supply and demand the government enacts a law this is no one is permitted to take drugs. their expectation is that everyone will obey. we just made it illegal. well, life doesn't work that way. when you make a peaceful activity illegal that people want to engage in is a high probability that people are going to continue engaging in that activity despite what the law says and especially for drug addicts of people that just enjoy taking drugs. and so they violate the law. then you putthen you put out of business all the reputable businesses pharmacies pharmaceutical companies and you turn over the distribution network to the unsavory types the

people that did not give a hoot whether someone dies or not. and so the drug warriors get angry so they go after the drug lords in the drug gangs and you have to incarcerate them on a regular basis. but all that that does is generate high prices exorbitant profit that induces more people to get into the business, including regular ordinary people who see a chance fora chance for a quick score and of course never dreaming of what it can't. now, if the consequences of this war or benign. if it was just a matter of giving something to do, jobs for federal judges and prosecutors and dea agents deputy sheriffs, that would be one thing. okay. let them have there jobs but it is not like that. there are tremendous adverse effects from this thing. you have got the corruption

of course, bribes among the judiciary and the prosecutors and law enforcement asset forfeiture laws for the cops are stealing money from people. you have got the massive infringement on civil liberties the bashing down a people's doors, shooting of innocent people shooting there pets, massive invasions of privacy and it just never stops. a few days ago some us officials said about the drug war that just escaped from a mexican prison that man has destroyed thousands of lives and we're going to get him back in the jail. well, that may be but the fact is that the drug warriors have destroyed hundreds of thousands of lives if not millions with

death and destruction and, of course, overfilling the penitentiaries. thethe penitentiaries the biggest business in america primarily because of the drug war. i grew up on the border in laredo. so when i was in high school andin late 60s when the drug role was starting to be going have friends whose lives were destroyed. but we always went across the river on dates and had a great time. it was a a nice place to grow up and have fun. tourists were flooding the border area to get a taste of old mexico. not anymore. but they said today is this drug war is just so destructive. it has destroyed the fabric of mexican society. now. out of my friends ever go across the river anymore. it's too dangerous. one of the consequences, i'm

glad ted brought this out his paper, this concept of overdose. we hear at all the time. someone dies of a drug overdose. in virtually every case it's never a drug overdose. that's what they say. the real cause is the corrupted drug, the polluted drug that is a direct result of the illegality because the drug lord, the drug gang they couldn't care less if someone dies. they certainly don't have to worry about a lawsuit as they would in an unhampered market economy are pharmaceutical companies are careful. they put the seals on the casually well and are careful because they no the one death will cause a massive large -- massive loss of market share bankruptcy,share bankruptcy, and the lawsu