Transcripts For CSPAN Capitol Hill Hearings 20110810

east coast. they were processing 6 million barrels a day. under normal circumstances there is some. emergencies exist within saudi arabia. this attack is rattling markets badly for the reason. they feel that with further violence or incivility within saudi arabia, the spigot could be closed. >> we will be we're back with you shortly as we follow the financial implications of this unfolding story. we have with us now a correspondent in the jordan who has more news on the situation in saudi arabia. what are you hearing? >> this is one of shock and disbelief. it was considered to be one of the most secure oil facilities in the middle east, perhaps the war for the fact that it has been substantially damage has taken everyone here. this was a very sophisticated and well thought out attack against part of the world's oil production system. i am being told that the attackers badly damaged at least one of the plants three gas turbine powered generators, one compression train ruptured and exploded, causing severe damage throughout the plant. one piece of good news is that the critical infrastructure at the heart of the plant is believed to be on damage. -- on damage. -- undamaged. >> has anyone claimed responsibility for the attack? >> no one as of yet. speculation that it is related to turmoil in the middle east is rampant. the government of the gulf states have been hardly aggressive in their cut down on dissidents and extremist groups. the attack could be designed to weaken the saudi market. terraced roof like a kite are at the forefront of concern in their -- terrorist groups like al qaeda are at the forefront of concern. there are other possibilities. some observers have noted a blowback against saudi arabia's ongoing insurgency in bahrain, propping up an increasingly unpopular monica there. for now what is all speculation. >> thank you. we will be right back with more coverage of this attack on the world's largest oil processing plant. we continue to have reports coming in. ♪ >> i want to thank you all for assembling here on short notice. this is obviously a serious blow. we do not know what is going to do to saudi production capacity. we do not know what it will do for how long. obviously, given the oil markets and the difficulty with our economy, the impact on our economic recovery could be dramatic. the president needs to be out there. he wants to be out there. he needs to be saying some things that will calm the oil markets and give the american people their first opportunity, a press conference in about an hour. he is quick to what some concrete recommendations as to what he should say. he has some specific questions that we would get to and try to move to this fairly quickly. of what to turn to the deputy national security adviser to give us an update. what do we know that we have not seen on the monitors? >> i direct your attention to the powerpoint behind. we cannot underestimate the importance of this plan. they are responsible for 7 million barrels of oil a day processing. the context, so this is a very serious issue. we're gathering information as we can. in terms of spare capacity, which as you know is used by the cartel to keep in reserve and manage prices, rising oil demand in 2011 has eroded that spare capacity along with the libyan unrest. the attack has altered the output for spare capacity in 2012 and a negative fashion. the plant will need to be shut down completely, perhaps a week or more. our estimates are up to two weeks. after that, we assume even a loss of 2 million barrels a dale processing capacity which would essentially eliminate the saudi spare capacity. as we heard, they are the swing producer responsible for the spare capacity in the market with a global demand passing 90 billion barrels a day in the fourth quarter, very spare capacity outside of saudi arabia. so the owl look for the supply and balance is grim. we're projecting shortages through march 3 production elsewhere in the kingdom will take weeks to come online. any further incidents could lead to very serious shortfalls, and there are commercial stocks available and to some degree commercial inventories can offset this. however there is an ability working with the iea for the u.s. and the early partners to call public stocks into use, and the i e a cannot direct deal anywhere. but there would be an effort made, possibly calling on the u.s., to release some of our stock, and then divert iraqi oil that currently close to the u.s. east to deal with the asian markets. that is what we know today, sir. thank you very much. >> thank you. the president' thinks he needs to address three particular issues at this press conference. one, there will be, given the limitations and disruption of supply, the issue comes up, what about the strategic petroleum reserve? is this something that we should do? what other criteria? how long do we do it for? that is one thing you must know. secondly, we do not know whether this is the first of a coroneted series of attacks to go after the infrastructure, the oil infrastructure, and really put the world of global economy in the toilet, if you will. what are the other areas of vulnerability? do we have options for enhancing security in those areas? thirdly, what are our policy options for impact in the price of crude oil? we already see the price of all headed into the route. what can we do to reassure the markets and reassure consumers? those of the things the president thinks we need to address. let's start with the strategic petroleum reserve. i think probably, let me turn to the secretary of energy to kickoff the discussion, and give us a little bit of background on the petroleum reserve. the criteria of when we have used it and what our options are at this point? >> in terms of the overall situation with a strategic petroleum reserve, this a better around for some 30-odd years, prompted after the oil embargoes of the 1970's. it is a robust supply, the world's largest supply of crude oil, in salt caverns in louisiana and texas, we have 700 million barrels stored. we have it in such a way that there is instant access within days. we can start producing 4 million barrels a day and sustain that for considerable periods of time. the industry has gotten accustomed to having to take that oil into the refinery system, so they know how to mix the blend with their existing refineries in mind. if in fact there is a declared emergency, and that is one of the conditions for the use of the strategic petroleum reserve, it is designed for emergency conditions in which there are feared shortages in which we are shortages. gency conditions in which there are feared shortages in which we are trying to make up for those shortages. another option is the president's determination, another option is what you're talking about, subtle the markets, and which the president can make that decision. which should not think about using the strategic petroleum reserve as a price offset. that is not what it is therefore. there are other sources of oil, and if we start using this as a price offset, we set a dangerous trend. while the temptation is always there, especially with t ike, i recommend we do not use the strategic reserve. we may have flexibility in taking the time to open it up. it takes about two weeks to get in, if that decision is made, but it is pretty close to an instant relief. in the first instance, we do not have a shortage. we have robust inventories in this country. we have got a flow of oil into the country already on its way, so we are not facing an immediate supply crisis tomorrow, this week, or next week. we should keep that in mind. >> if there is a supply shortfall and something needs to be done to make it up, is this of and we would have to do on our own, article other global resources available? how big a pool the we have to draw from if we have to do it? >> generally, if we do something, we should also include the iea. the international energy ex association exists to help, so she we should be in touch with the iea. i would make sure that happens instantly before the president speaks. so we have a dialogue open up and going on. in addition, most of the major companies, state owned companies as well as the international majors, do have their own supplies on hand. most of them would have anywhere from a 30-day supply, in excess of 30 days, which could be part of the overall stock that we have on hand. >> ari fleischer is that counsel to the president. let me turn to you. the secretary has made clear this is not something we used to store shock to price. it is something that we use if the supply is interrupted. will the american people understand that? when the public sees the price of oil going to the groove, how should the president framed this for the american people? their instinct is gone to be the price is going up, do something. >> i think we have a huge problem on our hands is that if we release oil from libya -- libby is a teeny. the press will instantly say, what are not be doing it when you did it previously? i am worried about the direction we're. here in that pressure is building and the press is going to be a huge part of the pressure. the president needs to be working the phones right now, calling the king of saudi arabia, the leaders of saudi arabia, as well as other nations. i am worried about the timing of this news conference in an hour. we did not have time to push this back. the secretary of energy needs to be working the phones. i would not do a news conference. my strong recommendation to the president would be a statement. the problem with having a news conference is the press will already haul in on questions that we do not have answers for, and his part is to reassure the country. taking questions from the press will create a signal of lack of answers. i would change what we recommend to the president to do and push back the timing as well. >> that occur on the press, it is already out there that the president will meet on the press. if we differ it, it increases the notion they do not know what they are doing it. let me -- before turning --sue schwab, let me push back on that. maybe no questions, otherwise looks defense said. it may look like we're not on top of this thread put those nets together, what would be your recommendation? >> the press understands if you were running late, you are running late. i do not worry about that. from his point of view he needs to calm markets, it is the press nastyary's job to take a questions, so send him out later. >> sounds like the voice of experience. [laughter] >> is now the time for -- >> i do not think so, and there's something to be said for being up front with the american people when the president speaks. and when the press is being briefed by the white house staff, it is worth pointing out that in the case of the intervention to address the libby of problem, all that happened was there was a $5 drop in the price per barrel. was temporary. it came right back. all we succeeded in doing was getting a bath to a couple of speculators, in terms of long- term impact it has had, it has not had one on oil prices. there may be something to be said for keeping the opportunity in conjunction with the iea to surprise the market from time to time so you have less of a speculative push up, but it strikes me that the reassurance that is needed with come as much from the defense establishment, how to preclude or is there anything we can do to make sure that this does not get worse? if as we have been told you can have a process clear by march, then you are talking about a near-term problem, and there's virtually nothing that will happen or can happen in the near-term other than people reacting to price pressure and conserving. that will happen. the broader question, and i am looking at the secretary of the treasury as i say that, is the rest of this knocking us back into recession. aren't there things that we can and should be proposing year term, midterm, and then long term, because after this is resolved we will still have energy shortage issues going forward, just by the normal course of economic growth in asia, in the united states, and the world. >> let me ask you to respond to the comment and address the issue. what are the things -- how concerned are you that this impact on the economy and what are the things we can do outside to try to address that? >> we have a weak economy at this point, and the key is to avoid this will shock rippling through into wages and prices and going back into in 1970's type stagflation. a double dip recession here, and then rising prices and interest rates. that has to be avoided at all costs. the way to do that, steve takoma is that we want to do everything we can to recognize this is an international problem we need to get financed ministers together, to coordinate growth-oriented policies so we did not choke growth with these rising prices. the prices will take money out pockets of consumers. they will be spending less. we want to make sure no one reacts in an inappropriate way, and this learns the lessons of the 1970's. we did not want the central bank of england to start raising rates in anticipation that says gone to have an inflation impact. we want to coordinate this, and i would also have ready? i would not propose it yet -- since then by policies to ask congress to lower payroll taxes for employers and employees. i would be prepared to suspend the major budget cutting tax increasing initiatives we've been talking about in association with the debt limit, which we dealt with a couple of months ago. i would have them ready, because we did not aggravate an already bad problem. on the inflation side, there's no reason to think we're going to go into a 1970's problem. we now do not have that kind of inflation mentality we had then, with globalization. there is great downward pressure on raised -- on wages. we have a weak economy, a weakening economy in china and europe, so the pressures are pretty low, and i do not think this particular problem, even if it leads to a spike in energy prices, is necessarily going to spread throughout the economy worldwide. >> are you worried about the impact on this on the dollar? he said now is not the time to raise interest rates. >> the interesting is with all the talk about our growing debt, we have seen in times of crisis, even recently, that there is a flight to the dollar and a flight to u.s.-based assets when there is a world crisis. there is not a lot of other places to go. this is not on to cause a run on the dollar. we will probably seek yields stay low, and it is important to make sure that ben bernanke and the fed did not try to raise interest rates in anticipation that this will shock is on to lead to higher inflation. to keep interest rates near 0 and have that kind of coordinated interest-rate policy on the g-seven countries as well. >> if we just say now is not the time and the goal is to reassure the market, it seems to me it unleashes it. the question is, is there something we can do to show that a slow release is a -- >> thank you. you almost have to consider question one and two together, because we have to have some judgment as to whether or not this is the first in a series of attacks or not. it be interesting to hear from the director of national intelligence as to what his view is on that stage. that will be an devolving picture. in the meanwhile, we do not know at the moment. the president will probably say i do not know whether this is part of a coordinated series of kind of thing.t a one- i think we ought to do something soon and visibly to beef up that assistance effort to reassure him, both the saudis and the markets, that we're on to do everything in our power to help them protect those facilities against future attacks. those of the two things i would suggest in connection with this issue of whether this is a one- off thing, or the beginning of a series of attacks. >> let me ask john hannah, what do we know? this is the first of the series? should we be expecting more in the next weeks? >> the attacks just happened this morning. it is still very early in the crisis. the entire intelligence community is all hands on deck trying to get to the bottom of this. the initial read out we do have from our experts and from our people in the region is that the attacks does feature of the hallmarks of an al qaeda operation. there are several aspects that leave substantial uncertainty, and the secretary of state is right that if the president decides to go out, he will need to be very careful in assigning any responsibility for this attack. i do think however, based on our initial soundings in saudi arabia itself, in addition to sending a boost of confidence and sense that we are on top of this with the american people, and reassurance to the american people, i think our allies in the region are trying to beat that for much as well, and i think the president is on the haft have that in mind in any statement he makes. the attack was planned and financed. the helicopter pilots appeared as protocol and access codes. assistance from within aramco not be ruled out at this stage. how aramco record is its people, much less the entire saudi security establishment, is quite updated to our intelligence committee. although the saudis have made progress in stepping out outcry that, as you know, the disintegration of central government in yemen has allowed hawkeye that in the arabian peninsula to once again forced their in 2011. u.s.-led anti-terrorist efforts have stalled because of the lack of the strong partner inasanaa. some elements of the military have been in open defiance of the government. western intelligence agencies have detected increased chatter among extremists in to those 11. the focus of intercepts has believed to be attacks in u.s. and europe. we have also been monitoring would sides -- web sites, and last month we had a posting from the leader of al qaeda in the arabian peninsula, specifically threatening to target will and economic infrastructure in saudi arabia, specifically. it is not clear where the helicopters were sourced from, but access to such equipment opens the possibility of state support in the region. having discussed al qaeda as a possible perpetrator of the attack, i do not -- we do not have anything strong on this yet, but the issue of iran can never be: -- ruled out. the attention in the region surrounding the uprising in bahrain and the crackdown has raised the temperature between the iranians and the saudis, shiite-sunni tensions, and while thes hiites are a majority, only 10%, they're almost all concentrated in the saudi arabian eastern provinces, where all the oil is for sure is located, and we do not have to go too far back in history, the saudis were implicated in an attack on americans at cobar x in saudi arabia. we are continuing to work very hard. we will come back to you when we have anything more credible. >> secretary of defense, do we have an assessment of where the vulnerable points are in terms of the oil supply, whether it is saudi or elsewhere, and do we have -- and the chairman make comment on this -- the existing contingency plan of assistance we can provide to the saudis and other key countries as a hedge against this is the first of a wave of attacks, or someone decides to take advantage of this opportunity to hit the wall for in for chartres again? >> -- to hit the oil infrastructure again? >> this is only a onetime attack and we are taking measures in connection with the rest of the world to toughen up the defenses. if you look at that top-10 question -- countries from which the oil comes from, russia, united states, saudi arabia, canada, mexico, iraq, and kuwait. although we did not have a formal international system that says everybody goes oil defcon ii, we should be in touch with all those countries to ensure that all of us are taking individual measures we need to protect our critical if archer, and each country knows what it's critical infrastructure is. then if the united states is filling it with those countries who may be more limited in their ability to help themselves, and in that territory, i would say saudi arabia, where we have the potential arrangements with and uae, iraq, and kuwait, who together could use some assistance. the other aspect, once the oil gets in a tanker, a has to get to the country that consumes it, and that is the area in which the united states has the greater capacity. their other countries who can help us to ensure passage through straits, said there cannot be a successful attack at those points. my advice would be that the president tell us, and we have already started some of the actions, to ensure that the world oil supply is safer today than it was the day before yesterday, when this attack took place, and that will require a lot of work through embassies come out with military relationships, and then i would turn to the chairman the overall this position of our kurdish forces and how we might have to move them to fill some of the gaps, and especially to make sure that the oil tankers are safe for a while here until we sort this thing out. >> i agree with the secretary. from a this positional standpoint, there are battle groups in the regionone right outside the straits of hormuz. we have requested the secretary to put another battle group that could move into that region. we have forces there present, and we are in contact with them. we have been advised to prepare a disposition where we can go to the gcc states for a request of activity in there. we have contacted the omanis to ask for use of the bases there and contacted others that asked for permission for diego are syria -- garcia. i will go back to the secretary's point and say thetwo is our concern, and that is, is their right to be a fall of on this activity? i would like to interject that from a military perspective, it has economic issues. alternately, if we did get into some escalated situation, we would meet that fuel for assurance. i think a statement that the sp ro is ready. force weis we are in good shape. >> there seems to be an emerging consensus that while the president ought to talk about the spro, our only strategic petroleum reserve, but what is available internationally, and indicate that it is available for an interruption of supply. at this point, so there is a bit of a backstop in the market of our ability to help assure supply, but your recommendation at this point would not to be invoked a spro release at this time. is that the consensus? >> one of the problems with repeated use is the more you use it the less value it has in terms of the price impact. frankly, using it the libyan situation, where it was crisis oriented rather than emergency oriented, already devalued it, and using at it again, unless a true emergency would further devalue it when we needed it. i lived through the second oil shock when i was president carter's chief executive adviser, and one of the things i want to make sure the president does not do this time which we mistakenly did before was to policies which will aggravate the problem. for example, trying to artificially reimpose gasoline price controls or have odd-even days to try to restrict driving. those will only aggravate the problem, create more panic in the market, so let's learn lessons and not make the situation worse. >> i have been watching fox news. the stock market is down 700 points already this morning. west texas features are up 15% already, and as we were watching markets earlier in the summer, these are going to translate into the pot over night. we are looking at $6 a gallon gasoline when people go to their pop tomorrow. the president is going to get killed over this. i am understand that libya did not work when we released from the spro, there are other issues the get to the reassurance of the public that i worry about the most said the president is in the strongest position to address this. if he does not take any action, we're looking at economic conditions today, we are right to cut the legs out from under the president tomorrow in terms of him being able to reassure the people. there is one other elephant i need to raise. it is outside my lane, but i did hear the report didamaan isn't the issue whether iran was involved in the attack. we have to be careful here because if there is any evidence iran was involved, now deals with an act of war. another reason the president should not take questions because he will be asked by the press to rule out iran, and we did not want to raise that to this presidential level yet. i am worried about that issue with iran, but i think it has to be an action on the spro. >> if we cannot do spro, did not want to do spro, there is tension between shown there is action on top of this, and we did not know whether this the first of the series. we need to leave a little bit because we may need to go back to get a second time. is there something else we can do in the short run? the third question, the things we can put in place now to relieve this vulnerability over the longer term? point.ri's what can we do t? >> ari's point is it cannot buy something with nothing. even we did not have all the information, the president is going to have to lay a set of activities. it seems to me he can explain why not going into the strategic reserve now makes sense without taking it off the table. you do not want to take it off the table. a needs to be out there as an option. there are other things like that that he could allude to in addition to laying out what he is going to do to secure to the extent possible the market so you do not get further destruction. if this is a problem we believe by march we will have gone through, people, when gas at the pump goes up to $5.50, that is going to have a significant impact. if people know that here is what is happening between now and then so as to bring it down again without imposing artificial -- did not want to impose anything artificial -- there's nothing you could do in the near impact. market prices will have an impact, so that will have an impact. the question is, can he talk about the near-term and use this the start leveraging mid term and longer term so we did not end up in this race again? i think it is worth started to talk about, what are the things we can and should be doing? i do not know about refining capacity and having a discussion with oil companies -- there is some things like that that he could talk about, but longer term, we need to be talking about things like suspending regulations related to canadian oil stands, the pipeline from canada -- why should canada be talking about shipping it to a show when they could be shipping it here? regulations having to do with nuclear, having to do with permitting natural gas, having to do with offshore drilling -- the president can talk about these things and hear our options, and he will speak to the country again in a week when we have had a chance to look at what kind of impact we can have. in the long term, reassured of the market and show we are thinking about it, we have a lot of options on the table, but near term, not a whole lot you can do. >> the news says the global spare capacity says with this incident be down to 2 million barrels a day. is that a real figure? is there something we should be doing to go to opec members, but not opec members? remember the majority of production comes from non opec members, to see if we can generate more spare capacity, because that is a good signal to the market if we is stimulation to find convince members of congress that is time to get off the time and really put the message out there to produce more domestic product to meet the needs of the nation, to grow our economy, to create american jobs, and all the powerful signals. does that happen overnight? no, but equip the president to say that we need to produce 10 million barrels a day in this country. as go back to producing that as a start and deal with alternatives and open standards down the road, which is another set of solutions, so that we are not dependent on oil per say. we need to go to a 10-year time horizon and walk back to that immediate future. i think that is time to engage the oil companies to get them involved in getting some of the messages out there about how they see the future prospects. starting with the message that there is no sort it appeared we need to keep coming back to that in the near term. that is the strongest, most powerful message that we have. there is no shortage. we do not know how much damage has been done yet, but in the region, there is such a brain trust, and there is such a set of skills, that knowing how the redundancy of these facilities and the original designer set up, once we do a damage assessment, then we can perhaps put some powerful messages out there about how long it will take to get back into normal production. maybe it is a month, maybe this two or three months. unless there is something new that we did not learn this morning, they should not be a long-term shutdown of this facility because of the redundancy in these refineries from the get go. we combine those says of messages, we have a longer-term more or old and we will ever need, it is a matter of releasing our domestic capacity to go make it possible. i think that to avoid the temptation of topping up your tank, but i think we can send messages of assurances out there that people in a much better place than they might be today. >> with all due respect, there is not a starter sticks to the supply and demand will always balance out at some price. a longer-term, there is space shortage to the extent that prices are going to continue going up. this is a quick look at what we are in for over the next 10 years. no increase in ul -- u.s. production was a stop the fact that china is growing at 9.5% a year. and others will grow, and even developed countries a 1% or 2% consumption would rise dramatically. it seems to me that at minimum, in the near term, maybe we can stop it but the pressures will go up. and the president ought to be making the point that we're dealing with this in the third term, but we're talking to the oil companies and refineries and we're going to not let ourselves be in this position five years from now. there is an inevitable trajectory of price increases. >> that i want to turn to john. short run we have to address what he is doing. medium-term, there is all that we need out of the ground. >> longer term we need alternatives to oil. we need to diversify our energy supply. oil. we need to diversify our energy supply. >> we need to mention this cable from our ambassador who just met with the saudi oil minister and the president and ceo of saudi aramco, it is not too different from what we have heard before, but they now have a specific estimate it will take about 10 days to replace the damaged equipment and the plant will be reopened within 10 days. and then, they figure until they fully repair facility, processing capacity will be about 5 million barrels a day as opposed to the normal capacity of 7 million barrels a day. finally, interesting point here, they say they are not asking for any further assistance at this time and that they see this as a strictly internal matter, which says to me to the extent that we offer any kind of assistance, we got to be careful to do it discreetly. >> i agree with everything that has been said about short and medium term, including suspending regulations for domestic drilling. we are not addressing the international aspect. oil is a global commodity, and we have to coordinate what we do with our key partners. on the production side, to send a positive signal to the market, we should be closely coordinating with key energy producers, canada, russia, brazil, have them send signals they are prepared to use all their capacity, they are prepared to accelerate their near-term production, to coordinate the energy side but also the economic side so we have a coordinated message on keeping growth-oriented policies on the fiscal side, and solve this problem ourselves. in fact only about 10% of saudi oil actually comes to the united states. the vast majority goes to asia. we need to look the president needs to get on the phone with some of the key leaders to make sure we have a message to the oil markets from key producers who may be willing to say they will try to wrap up whatever capacity they may have. >> that will be a job for you, secretary. i agree that we need to get on the phone. we also need to get time on the plate. but the american people figure out that it is a global market, that is not going to work politically. he will have a real problem with that trip we have to find a way to get full -- we have to find a way to get china into play. i want to do this now. i am a little worried about starting to move the forces. if there is something really to be done in terms of enhancing security and saudi arabia, we will probably have to do it discreetly. we have to show we are on top of the problem but not produce panic which will make it worse. let me turn to the two of you. what will you do, and what would you recommend to the president? should he talking about it at all? and is there anything we want him to announce either to show we are being prepared to head off another attack were basically to show solidarity in the region and allies in the region that we are with them in this crisis point. what would you recommend to them? >> i think the actual actions should be as we discussed -- with countries we now have the facilities so we know what they are doing here we have offered any assistance that we can. i think we need to have enough forces available both of aden, that we can react quickly and there. as the chairman said, we have a considerable amount in the area. without making it a major deal, i think one thing that will not help the president with the press conference but i think it is very important -- an attack with helicopters and paramilitary tactics was not done by a couple of guys in a jeep or on the internet. there had to be a place for this team was gathered or practice where it took off from. we should put a little group together with representatives from state and the defense department and the intelligence agency to examine the two possibilities. even if this thing was planned and conducted out of yemen, or it was done out of i ran. i think we ought to put two groups together to look at what our security responses it should be in those two different cases. i am sure we will find out who these people are, where they came from. we need to be ready with a range of options not only military, but also diplomatic. certainly, economic to deal with stopping activity from continuing. that is in the staging area that was in the country that clout or updated it to happen. in the meantime, i will let the chairman check the details. i think it ought to be prudent movements that are not a rush to call in troops from liberty and put them on planes or get ships on the way that our three months early from their deployment dates. they are proven from where we know it reassurances are required accurate >> let me ask deputy national security adviser to stand up. really start a 24/7 operation. so that we can try to get a head of this. i think we are running out of time. i will try to summarize briefly what i think is the message of this group. anything else people want to put on the table before i do so? anything else he needs to hear? >> i do think we need a balanced international and domestic prices. i do nothing which it announced removing troops. i think some international reassurance that in a subtle way -- probably the secretary can do this. we are aware of the vulnerability is that this has caused. i do not know how we do this critic should be obvious. we need both the domestic musses that was articulated and a good strong international alert to this issue. >> right. i have something in from my station chief in the emergency cable. there was renewed turbulence in iran after the attack this morning. a group of men were arrested. all members are iran muslim majority. protestors have returned to the streets in very large numbers. attacks on suny shopkeepers. iran reporting that one officer was killed and several wounded. this is a developing situation. let me stress again, our continuing concern is about the situation in saudi arabia and in the eastern province. there is a possibility of instability. our state department has been on the ground. they have security under control. that is almost a sign they don't. i do think we need to be worried and keep a watchful eye. i think the heart of the president's messages and what you just read. i think the heart of the president -- >> this is the processing capacity at that refinery. >> so until it has been fully prepared, it will be 5 million barrels per day compared to the normal capacity of 7 million barrels. >> my point here is that the most calming message the president can get is an attack took place, and damage was done, but it did not affect the majority of saudi production. give the facts and give the numbers. what we have is if you're in the marketplace. if the president can speak, pass the information, call markets. yet to me is the most reassuring thing a president can say. >> if this is to believe that they can replace the damaged equipment and the pass will be opened in 12 days. >> i have already sent a message that we bought an extra half hour news conference, we will have an opportunity to get this to the president. let me just summarize what i think where we are. in terms of town, we want a realistic assessment of where we are in the nature of this crisis. he has to be candid in in terms of fact. i think john is to started the core of this message. it is at this point something that has a discrete limit to it, something 10 days or so. things are being done to restore capacity. hopefully, that is a calming message that will cut the possibility for panning. and then he has to talk about some concerns. we do not know who is responsible. we should avoid putting a blight on al qaeda but recognize it as possibly them. this might be a first of a series. therefore, the message of reassurance in terms of the security standpoint that we stand with countries in the region. we are taking steps within to enhance their ability and to protect other infrastructure. we stand ready to offer that help. i think the things we have talked about operational lead and making sure we have adequate forces, he does not talk about it. but he sends a strong message of reassurance internationally before our allies. i think he must also talk about a warning for others but to try to explore this information. but there it is al qaeda or the explorers or other actors of the market like chavez. this is not a time to try to gang up on the international economic system in think a little warning might be helpful. i think we decided that we do not suggest he make a release at this point. he should talk about the availability of our reserve and international reserves and correct it -- private sector reserves. we will be coordinating with them so that if there is a supply shortage, we can move and promptly. that should also help to reassure the markets i think internationally, we need them to be reaching out to companies with the same messages. we need to build in the message that the secretary of the treasury said. we need to keep an eye on global growth. this is not a time to respond by raising interest rates. we need a coordinated pro-growth policies, artillery if this is the first of a series. finally, i think as we talked about short, medium, and long, this powerful message the secretary talked about in the medium term, this is what we will do in the short run. in the medium term, we have to get oil out of the ground. a lot of this or that we control. we have to make the message of a comprehensive energy policy so to can get off of the course of dependence on oral. that is where we are. we will get the messages to him. it is your call, but i think this is particularly important enough that we ought to keep getting ready for an actual speech on this subject. i think the press conference will not be enough to establish the president's leadership. >> sound okay? >> one thing i would say, and i say it has to be done in a measured way, it does offer a way to fold this thing in to remind the american people about the war we happened in. we just passed the 11 anniversary of september 11 without heightening the alarm to munster to fold into the larger context of the challenge we face going forward that continues to exist. the death of an london -- the death of osama bin laden did not remember what happened to president -- it is too early. let us collect facts. >> we should also encourage whether it is api or some of the majors to send a message of insurance out there. >> we will look to you to take the lead on that. i will go to the president and passes for the press conference. he needs to hear directly from you on what your views are. we will get the deputy committees to get it. they will develop this on a real-time basis. thank you very much. >> moments ago in a press conference held after today's regularly scheduled meeting, iran and venezuela announced in a joint press conference that in the middle of one of the most severe sustained rises in energy prices in recent memory, that they are jointly cutting their production of oil by 15%. totaling 800,000 barrels per day. the meeting has been expected to result in several opec members bringing additional capacity online to cover the temporary loss of production capacity in saudi arabia. following last month's attack on an oil processing facility there. today's unexpected move will most certainly cause further disruption in a world economy already reeling from sharply riresing fuel prices. oil prices which started today at over $170 per barrel are expected to rise dramatically with many experts predicting prices over $200 a barrel as the news hits oil markets. our gnn correspondent and -- ann goodwin, ann, what can you tell us about this? >> simon, this action by iran and venezuela was announced at a press conference following yet another rancorous meeting here today at opec world headquarters you recall that opec's june 8 meeting which was expected to yield a significant increase in production resulted in no official change in hoe peck production quotas. after a group of nations led by iran and venezuela refused to pump additional oil. today's meeting actually broke up after an acrimonious and heated exchange between saudi arabia's oil minister, ali al niemi and representatives from iran and venezuela. >> ann, can you tell us what the issues are here? i assume that this has something to do with events in bahrain and elsewhere in the gulf. >> it's more complicated than that, simon. ali al niemi has asked all opec countries to recognize that it is in everyone's long-term economic interest to discard production targets immediately and produce at the maximum possible rates while the processing plant is operating at reduced capacity. iran's representative countered saying that it was time for the world's oil-producing countries to recognize that they had a moral responsibility to use their power to protect the millions of people that are suffering at the hands of western oppression. libya, algeria and venezuela apparently agreed with the minister. the iranian representative also lashed out against the united states, accusing the american government of aggressive actions toward iranian naval vessels in the persian gulf. and of manipulating global oil markets through the release of oil stocks earlier this summer. >> so effectively, these countries are using their oil supplies as a weapon. >> well, that's what some analysts are saying, simon. as you know, iran has been deeply critical of saudi arabia's military support for the ruling regime in bahrain which the iranian president likened to a genocidal attack on the shia people. the instability in bahrain which is similar throughout the past year took a turn for the worse over the past week as the violent confrontations between the sunni government and the shia protesters have moved to a new level of intensity with saudi and bahraini security forces taking fire from the demonstrators. to make the situation worse, as we reported several days ago, a u.s. nache destroyer was involved in an extremely tense incident in the persian gulf with iranian ships suspected of smuggling ships into bahrain. >> what exactly does that mean? >> it means that they believe and many experts agree that they have the power to hold the global economy and particularly oil consuming countries hostage until they get what they want. the iranian spokesman said they would not restore production to normal levels until all foreign security forces had exited from bahrain. the exact quote was "unless the americans and europeans want to return to recession and economic turmoil, they should encourage the regime in saudi arabia to let the people bahrain express their political opinions in a free way. any further violence against the people of bahrain must be avoided and all foreign governments must leave bahrain immediately." >> ann, can you stand by for a moment? i want to turn to adam dell, our correspondent reporting from the new york stock exchange on wall street. adam, you just heard our report from vienna where we are being told that in effect, iran and venezuela intend to hold our economy hostage until we do what they want. how much power do they have? what kind of effects can this economic weapon have on major oil-consuming economies? >> well, the press conference ended about 10 minutes ago and already the price of oil has gone from $180 per barrel to $197. no one here knows how high it will go. but i can tell you for sure, the people here are more than very worried. stocks are falling. and if the market continues -- concludes that the u.s. economy which everyone agrees is already on the verge of falling into a deep recession is in fact going into a deep recession, no one really knows how bad the situation can get. >> so what you're telling us, adam, is that this economic weapon is very powerful. that these two countries have the power to inflict real pain on our economy. and on the well-being of our nation. >> that's exactly what i'm telling you, simon. but you have to keep in mind that what we are seeing here is a confluence of different forces. without the attack on abdad and iran and venezuela would not have this much power. but given the lack of spare compast in the oil market and given the already precarious nature of the economic recovery, major oil-consuming countries like the united states, china, and several european nations are facing a devastating outlook. from the perspective of iran and venezuela by the way, this move is sure to be a pure money maker. >> how do you mean? >> simon, the rise in oil prices are sure to eclipse the value of any production these countries take offline. with prices this high they will make more money while selling less. >> well, it certainly looks like we are in for a difficult situation in the coming weeks and months. stay with us for more coverage of this developing story. >> thank you for meeting on short notice. get >> thank you fn short notice. i ink the president's press conference was fairly successful in getting through the first hurdle of this. as we spoke in our last meeting, the former ability of the world economy coupled with the tight world supplies and lack of spare capacity is a problem. it plays into the hands of oil suppliers like venezuela and iran who use that leverage over the world ecomy to pursue other objectives. that looks like what we have got today. john, you can let us know whether this is iranian conspired or not. iran is now through their announcement of the cutbacks of production. the price of peace is to back out of their rain and let iran take it over. the saudi reaction -- the saudi reaction to that. we are creeping power depends on petroleum and the countries that do it are either unstable or hostile to our interests. that is the process we are seng plad out. the president has to give an address and the talk a little about that. his guidance to me is that he needs to clarify the significance of the event, he wants to add some policy things from us. he wants to show his way to the american people on how we will get to this challenge. let me start again by turning to the debt piddle -- deputy national security adviser. dave, where are we at this point? >> just to reemphasize, prior to the announcement, gears were really grinding. we had essentially no spare capacity. it will use actual shortages. now we have supply and demand imbalance is moving through the rest of this winter into spring. cold weather is forecast in north america. we have the keating pressure. this is a serious problem which will essentially lead to significant demand destruction going forward. at this stage, the idea of government stopped and a drdown is portant. s why the show prices will peak at $200 per barrel. it will not come down below $150 until april. i should point out in previous discussion last month, we talked about china. this does not include chinese stocks. estimates are that the chinese have 100 million barrels in their stocks. this only represents drawdowns from i e a, member countries. any sehas done some analysis that shows the 2012 economic outlook is grim and. will be slipping into a sharp recession. baseline assumption of 3.5% growth in 2012 now down to 1.7%. the basic assumption of 8% unemployment up to nearly 10%. an inflation rate in 2012 as opposed to the 4.5. the economy recovers somewhat in 2013, partly due to the fact that world prices dropped. primarily command -- severe relocation. etty bleak picture. that is all i have. >> the president asked us to look at 3 inches. he wants to know about the impact of the crisis, what do we say about what men as well and i run are doing. specifically, what are we doing about the rain? given to the blackmail, or let them critter the economy. second, economic impacts. what will it do to our economy? what can he say to the american people thate is doing about it? what can we do about it? finay, looking a little bit forward, and what did he say to the american people that we are doing to get our country out of is situation and get leverage back in our hands rather than being in everybody else. let us talk about foreign policy impacts. let me talk about you and ask or the saudis are on this and what is your thinking about what we should do and what the president should say about -- >> i have -- as far as saudi arabia is concerned, too thought occurred to me. first, we have to continue to bear in mind that they are the largest supplier to the international markets. we do not want to do anything that would alienate them. i think what ever we do in terms of our dialogue with them on the subject, i think it should not be public. it has to be quiet. we have to see if there is some way out of this under the impasse with respect to the situation. i would above all placed a goal of avoiding some kind of a public breach with saudi arabia. for policy and political reasons and because of their critical position as the major supplier of oil to the international market. notwithstanding the withdrawal of ts saudi production by the venezuelans. we have an analysis in our embassy caught all of the iranian situation well. it shows that he faces a very bad domestic situation at home. he met will be tryi to fabricate this crisis to enhances on pitical standing in a country with a culture. is this something that can perhaps be through some strategy waited out in some kind of a way? >> what is the intelligence tell us about whether this crisis and iran is mafactured by the i iranians. he is there any way we can use that evidencto you hear what the iranians on the defensive? >> there is no question when at at least in the latest reiteration,he shiite unrest was that really triggered. is that a coincidence? i do not know. it began happening on the same day. here it is not to say that there is not legitimate nicolas --koz there is no doubt that the iran hands specifically to -- there special forces operation that they are actively fuelling some of the unrest. we had them dead to rights on the smuggling of weapons to the militants. it ismportant enough that this does come in a context in which iran isngaged in a much broader his campaign against united states interests and assets in the region. pat is on weapons smuggling and particar. for several years we had them dead to rights on weapons into iraq, specifically these weapons as well as the projectiles that are killing american forces. that has only been as we withdraw the drawdown of u.s. forces. by the end of 2011, we also earlier this year -- british forces intercepted a ship of rockets moving from iran into afanistan. they are actively working with clear syrian counterparts to crush unrest in syria and preserve the hacking. iran continues to deliver weapons and missiles capable of hitting israel to hezbollah in lebanon. we have the irgc now operating on all cylinders, this economic component is their declaration of war against the united states. and that is just the latest sign we have that the iranians are pursuing a comprehensive strategy to weaken the united states and the middle east and damage our economy. they for a long time with u.s. sanctions that have been signicantly amplified since 2010. have said that they do have capabilies of striking back against the united states in the west and imposing economic pain on us. and i think our judgment is that's what we're seeing come to pass as part of the very strategy in which iran sees itself as engaged in very much of a -- almost an existential struggle with the united states. >> i want to ask this question and throw it open, whas our leverage on iran? right now leverage in iran that will make them ronsider the strategy they're playing in about a raun -- in bahrain to make them rethink their effort to put a gun at the head of the international community? so i want to talk about leverage on iran, what do we have? let me start -- i want to start actually, john, with you on the diplomatic side, but then i want t go on the economic side, and then i want to get, mr. secretary, at the end what we have in terms of the military. let's run through, if we can, what leverage do we have on iran to make them reconsider their policy? and i put on the table both leverage from the outside but also what we might be able to do t encourage dissent whin iran to preoccupy this regime. so secretary of state, let me start with you. >> first of all o on the side of positive levere, we have precious little because we've been in an embargo situation with iran economically for decades now, so there's not much on that side of the leverage, at least of our own. there certainly are economic relationships between allies of ours and iran that we might be able to influence in some way and there are even economic relations with competitors of ours, if you will, such as china, which we might in some way be able to leverage. i think the area where we have exerted leverage and could perhaps consider ratcheting it up in some way is in the area of sanctions against their economy which we know both financial and commercial, which we know have started to have me affect and maybe there are ways we could look at to increase those. and then of course we have the implicit threat of some kind of more coercive efforts, the potential use of force in certain types of situations which we've always been very careful abt indicating, but we've also been careful not to remove it entirely. off the table. so that's something that's also ther >> let's see if we can add to that list. secretary of the treasury, and then the economic advisor schwab, lease. >> the secretary department through my steward levy, has been very effective in supplementing the fourth round of u.n. sanction which is were aimed at the nuclear program of iran with u.s. and european sanctions and that is in fact been aimed in part at iranian imports of gasoline. they import about 40% o the gasoline needs. and what i think we can do here on the economic side is ramp up both u.s. and european sanctions on that imported oil. for example, as of may of 2011, iranian imports of gasoline had been cut almost 50%. we can now go to the chinese who have been frankly back-filling some of that and say, look, this iranian cut and venezuelan cut hurts you as much indeed perhaps more than it hurts us, because you're increasingly relying on iran for your oil and gas. therefore, you should join us with a very stern message to them and a willingness to support a ban on all imported oil and refined product. even with all their huge reserves, their refinery capacities are limited. they do have to import, as i've indicated, a substantial amount of gasoline, so this would be a logical next step. frankly, in the short term, this could spike the crisis even more but we have to take that risk if in fact we're certain that iran is behind this attack. but in addition to send them a signal that they can't simply take hdreds of thousands of barrels off the market. this is for me reliving a bad reality show because in the late 1970's when i was working in the carter white house, we had a five million barrel per day reduction in the production of iranian oil from the world market. it caused 120% incase in 12 months between february of 1979 and's february -- in oil prices. we've got to be able to send the market a signal we're not going to allow this again. again, i think china is key. china has a lot of leverage here and ty'll be hurt as much as we. >> let me turn to sue for a minute and then i want to hear from the secretary of defense. >> i agree absolutely with the secretary of state, secretary of treasury in terms of using leverage but we should also talk about venezuela and having colombia, argentina, per chile, and in particular brazil putting pressure on venezuela at this point. i thk we can use the g-20 to, at minimum, do no harm. if you look at the makeup of the g-20, we have a number of major producers including the u.s. and including saudi arabia, including canada, mexico, russia, and having countries pledge not to launch policies in terms of export bands, saying we're going to step up in terms of production that we are going to allow market forces to, at minimum, market forces to reduce consumption, the do no harm plus using the leverage we have. >> let me pick upomething from the secretary of state, don't we want to internationalize this problem? this is not a standoff between iran and the united states. venezuela is the united states. this is two oil suppliers threatening the entire world economy and the bad guy in this is clearly the ringleader is iran. and is there a role, john, of taking this to the g-20, something you menoned last time, as a way of both consuming countries can all get together? it's a way of putting pressure on china which we talked about needs to be done, going to the security council, having a gsks-20 meeting. let's try to internationalize this thing. this is a threat to the whole global economy and iran is the villain and we ought to be focusing pressure on iran and those that are thrown intot. isn't that the thematic we should be doing on this? >> yes. no sanction can be effective if it's only the u.s. >> right. >> and as mentioned in our first meeting, having first the g-7 finance minister so we get the major industrial democracies to make sure, steve, that we take coordinated stimulus action and second, broadening very it quickly to the g-20, both to the economic impact but also with respect to iran so that we have a forum, as sue mentioned, where we can deal with the venezuela problem, because venezuela, even if we get china to help on the imported gasoline, venezuela could also back-fill the needs and we have to make sure they don't. we have to internationalize it. >> mr. secretary, let me quickly hear from the secretary of defense, the last piece of this. is there some military leverage we have? can we put pressure on iran kind of the old-fashioned way? what kind of options do we have? >> the military hammer we've had hanging over iran for several years has to do with their nuclear program, and we have never taken off the table the option of taking military action to prevent iran from attaining a nuclear weapons capable -- capability now. last time i looked at the evidence from the intelligence community, the situation was still ambiguous. iran had all the components of a nuclear weapons capability, but it still kept the situation ambiguous, whether it had it or not. but i certainly think that the elements are there to reroute -- or to flash that stiletto, should we choose to. but as far as military actions more related to the crisis at hand, i think there are two things we should consider, we're in the midst of a drawdown of our forces, both from iraq, which lies to the west of iran and from afghanistan which lies to the east. i would recommend that we have the chairman take a look at those deployments and determine if we want to continue with the previous plan which was premised on a quite different iran from the iran we seem to be facing today. so i certainly think that the adjustments, our redeployments out of those two countries we share a border with iran are something we should look at and those could be used for pressure >> let me ask this, let's ask you and the chairman to look at that, slow down drawdowns, whether there's some additional deployments we want to make in terms of signaling to iran this may not be a free run, and let me ask the d.c.i. to look with c.i.a. and d.o.d. about whether there's some covert options, things we should look at to cause some druptions that will raise some questions in the iranians' minds. let's take a look at that. let's move, if you will, to the broader challenge. we talked a little bit about what we want to try to do diplomatically to try to rally the world to save the global economy but that's what's at risk here. what else should the president say to help us get through this economic crisis and ease the impact of the american people. mr. secretary? i think there are some, again, powerful messages for the president. in some respects, iran and venezuela announcing that they're cutting back production is actually a fait accompli of what the sanctions have done to iran. iran is cutting back production because they don't have the capability of maintaining production. i think we should equip the president with the message that sanctions are working. we've known for a long time that iran's ability to keep their production going depends upon international help, international equipment, supplies, particularly higher technology capability. and they don't have it. they're running out. so they are in decline. we've known hugo chavez and pen avesa has been in decline for some time. the incompetence that now overwhelms penavesa and is amazing they've sustained production as much as they have thanks to the large ventures we have in venezuela. it shouldn't to a large supply. these folks have been mismanaging their oil fields for a long time in venezuela and show the incompetence of venezuela is the problem here and pull a rug out from mr. chavez with respect to ahmadinejad with respect to the fact the sanctions are working and pull the rug out fromim as well, put a point to we're taking big actions and tape and bailing wire is not holding it together. >> could this be the end of opec? >> i think they've done serio damage to themselves within opec where the more rational producers, like saudi arabia, like nigeria and some others who really see oil as value -creating for their nation rather than a political weapon, yeah. i think this could -- whether it's the end or whether it's a serious dent in their ability, they could always change government in venezuela or iran ancome back in and be part of the mainstream. but i also think going back to our earlier discussion, we equip the president with some powerful domestic messages and i think we keep reirating those powerful domestic -- for example, as everyone knows, i've taken issue with the secretary of interior's decision with respect to the gulf of mexico. it's time to put the gulf of mexico back to work. i mean, we're not doing what we could be doing to help ourselves in regards to the gulf of mexico. in addition, an overall program was just announced yesterday to bring the various departments together to try to ease the regulatory burden on individual companies and how they're operating by coordinating federal efforts. let's accelerate that. let's look for enablers in terms of domestic production because every enabler is the creation of american jobs. and in terms of the economic impact, if we could portray a massive job creation scheme through domestic production of our own resources, that's a very positive message. i think, also, we have to come to grips with, and is this the right time, to sit with some of the major n.g.o.'s who take issue with the hydrocarbon production that we have in this country and see if there isn't some way to help the n.g.o.'s understand that their resistance to the reality that we are in an oil age, it's not in the past, help us help ourselves, and if we want an alternative future, we can move to an alternative future faster by not going into economic recession by prohibiting the production of hydrocarbons. >> i want to get to this messaging issue but i understand there's some breaking news just coming in. let's turn to the screen. they're going to put it up here in t situation room. ♪ >> welcome back to gnn where we are covering welcome back to gnn where we are covering breaking financial news. agencies is expressing concern about the sustainability of the u.s. debt position today amid what is perhaps the most severe oil shock in modern history,ierce of a deep recession and sharp worsening of the u.s. debt to g.d.p. ratio are undermining confidence in america's ability to meet its obligations. this month's spike in oil prices has sent u.s. equity indices tumbling by more than 10% over the past year and led to expectations regarding u.s. economic growth in the fourth quarter of 2011 and the first quarter of 2012. a recent gnn poll earlier this week found broad sentiment among economists the u.s. is headed for another recessionary period. the united states triple-a credit rating was the focus of attention earlier this year while legislators debated raising the u.s. debt ceiling. rating agencies put a negative outlook on the u.s. long-term debt and some prominent investors made widely noted moves to reduce their exposures to u.s. treasuries. we go now to our financial correspondent adam dell who joins us from new york. adam, what can you tell us? >> i can report now that two of the three credit rating agencies have issued public statements today warning that the current trajectory of the u.s. economy is cause for concern from their per secretive. >> what -- perspective. >> what promised this -- what prompted this move from the rating agencies? >> it's look at the u.s. economy as we're headed towards what looks like a deep recession before we've gotten back to our feet from the last recession. it's also about risk posed. and consumer spending is expected to fall sharply and next as gasoline prices eat into household budgets. u.s. businesses will suffer as well, shipping and logistics companies, airlines, and some of the automakers, just some of the industries that respond to a spike like this. >> as the industries suffer and the economy ticks back towards recession, unemployment will rise and federal tax receipts will decline. at the same time credit rating agencies fear spending son safety nets like unemployment insurance and food will rise again. baseon this the agencies cited a wsening debt to g.d.p. issue as their core concern. >> the natural question is, does this mean the u.s. is headed towards a downgrade? the united states has been rated triple-a for as long as there have been ratings, hasn't it? >> i think we can nowxpect the rating agencies to engage with the federalovernment and ask for some sort of serious plan for moving forward. the previous financial meltdown and recession, the u.s. essentially doubled and not all was directly related to the recession but agencies will like lie want assurances to enter another period of exploding federal debt. the key question facing the united states will be given the known budgetary obligations, can the united states achieve the great rates required to pay down the debt, particularly if it means so vulnerable the debilitating energy shock we have. and the other industrialized nations have more intensive economies than the united states. france ranks below triple-a and requires a 1/3 less energy to the u.s. single unit of g.d.p. >> before before you go, give us the consequences of a downgrade, however likely or unkely that may be? >> if the u.s. were downgraded it could create a vicious cycle. many investors in u. treasuries like pension funds, money market funds, endowments and insurance companies are required to hold a certain percentage of their assets in triple-a rated securities. a downgrade would thus automatically trig area sell-off. no is sure how much debt will be affected by that but analysts on wall street are working overtime to try and find out. >> thanks for that reporting. so to summarize where things stand at the moment, oil is now trading above $190 per barrel, rating agencies voicing concern over u.s. debt on a sharply reduced outlook for economic growth and there seems to be little the policymakers can do to unwind the problem in the short term. the president will address the nation from the oval office tonight. you'll see it here live on gnn. ♪ >> well, we've gone from a bad dream to a nightmare. we've got a debt and long-term spending problem that's confronting the country that we can get out of only if we can get the economy growing and revenues up. and yet our economy getting -- getting our ecomy going and revenues up depends on an oil market that is now being taken hostage by iran and venezuela. so we've got to give some guidance. i think the bar went up. what the president needs to do tonight, i'd like us to address three things. one, we need alan to absorb the short-term impact on this. secondly, we'll need a plan to address the downgrade issues and finally, we need a plan on energy. to avoid the repetition. seems to me that's what the president needs to talk about. and it seems to me the president's job got a lot harder. what is your initial reaction? what a your thoughts to how he should try to frame this? >> well, with all respect to the conversation we were just having, we're gng past the president's grave yard. this is unsustainable. the president is about to lose his re-election. we're heading into an election year. look at the trend, since november and the attack on saudi arabia, oil has been above140 a gallon, $185 now. it costs people $100 to fill up their mid size vehicles, more than $100 to fill up their s.u.v.'s and we're heading into a recession and even with that reception, the perception of it is bad enough. this is how bad michelle balkman is beating the president in all the pol. newt gingrich, newt gingrich -- >> is that a surprise? >> newt gingrich is even with the president in all the polls. e.j. dione wrote a column that says not only does the president sound like jimmy carter, he's increasingly looking like jimmy carter. none of what we're talking about is going to solve the real-life problem the president has. we need to think much bigger, change the subject and present something brand-new to america so the president is seen as leading our way out of this to big things, not traditional leverages that we may have. i think the solution is to go back to what happened for america in 1940, 1941 before we entered the world war when we were seen as the armament of democracy and we started to get the world ready t solve a problem. we need to do that now with energy and become the armament of energy. and i think there are only two ways for the president to go. they are polar opposites and we need to make the recommendation to the president for which one of these huge courses of action to take. and we need to announce we're going to open up america and take tracts of land that were previously totally closed, anwr, offshore oil, domestic oil and open them up to make america the armament of energy. wee going00% opposite direction and make america green once and for all and go in the direction of wind to solar and the other things that are now increasingly economicly possible because of high oil prices. anything ee is just lost in the margins of history and we need to put the president on track for something so big the country gets excited behind the new mission he's established. i meant that about the reference to 1940 and 1941. this is a chance to do something big in advance of something globally catastrophic where america leads the world out of it. and i think those are the only two courses to take. >> you put them as alteatives. let me ask the sectary of energy, are they alternatives or can they be complementry? >> they're both ends. we have a short and medium term which only can be met with more hydrocarbons. with all the cars we have, nobody is rushing out to buy batteries tomorrow because cars aren't available. so we have to make room for the next 10 or 15 years, healthy supplies of domesti hydrocarbon energy and the whole pathway for the green economy. those can happen simultaneously. we've only been twittering with the green economy because the efforts have been so small. we can paint a much bigger picture of what that looks like but wehouldn't do it at the expense, not a decade and a half or even two decades of the hydrocarbon reality we face. you can't fly airplanes on wind power. it doesn't happen. yocan't move trucks across the highway with all the goods that you carry with biofuels. it's just not there yet. so we have to rely on the historic. there's a lot of what i said a few minutes ago about creating this whole jobs agenda and enables thousa go after domestic production and can list out year by year by year exactly how much capital the oil industry or the other industry with gas producers are going to spend. it's not billions, it's in the trillions that we could open up for this country. and those are big jobs, high-paying jobs. it's commercial for big oil here. "a reality that we have just been hiding and not talking about literally for decades, and let's reopen that up. >> let me ask the group. in our area it's a problem, but yeah, how did we let this happen? how does the president ask the question, you know, we've known we were dependent on oil for 20 years, everybody has talked about energy independence. how come we're at this point? why haven't we done more? >> i think that the situation here is that the reality is really less grim than the perceptions. but the way this thing is wired together, something like a less than 1% withholding of oil by two countries that are using against the united states can have far more influence on the economy and stock market and all those things. and we have allowed ourselves to be worked slowly into a very delicate position with this international oil market largelcontrolled by countries who are at best neutral towards the united states, at worst end antagonistic and it's delicate that one quiver here can shake the whole thing. so we've got two real choes here. we can become less dependent on that system by decreasing the oil intensity of the country. and i think the reason we got here was we allowed the oil intensity to increase while sort of holding the geopolitical structure together well enough so it didn't really hurt. but i think $200 a barrel really hurts. and we've got to make some structural changes to not allow that geopolitically fragile system hurt us and to look at the basics, which i think we can control in terms of supply and demand. >> secretary of the treasury. >> i want to focus on the economic impacts because i've just been given a report the dollar is continuing to fall and hedge funds are selling a dollar short and that we've been asked to meet with moody's immediately. now, the fact is it this persists for any length of time, we are in the potential of my being the first secretary of the treasury since alexander hamilton to have to announce a downgrade of the dollar a and if the president is the first president, more importantly, to preside exactly over the political impacts that are mentioned. but economically, a downgrade or even the threat of a downgrade will inevitably lead to higher long-term interest rates. and you can do all the efforts you want with ben bnanke and the fed to go back t purchasing more bonds. it's very difficult to effect long-term interest rates which are market-driven. so we have the real risk, steve, of going into a double-digit recession now. we need to do, therefore, the following and it's a very careful balance. first we need a short-term stimulus by a payroll tax, holiday or a substantial reduction in employer and employee payroll taxes. second,e've had these continuing impasses on the debt limit. we just went through this over the summer and only put a band-aid on it. you know, winston churchill said the american people always the right thing after they've exhausted all alternatives. we've now exhausted all alternatives. this could be the shock that gets us to a deficit reduction package. now, mind you, it needs to be a long-term one in impact. if we were to do that immediately now, it would send a terrifically positive signal to the market that finally this crisis brought us to a genuine deficit reduction, long-term package dealing with our structural deficits, putting entitlements and t revenues on the tle. and third,and the third is the s part. china, which has always been hoping that their own currency could be an international reserve currency, and that oil is trading dollars that the dollar tanks, they, and the rest of the world economy will suffer. we need to get the g20 to put out strong statements of support for the dollar backed up by administration action dealing with the deficit so that we do not let this iranian situation, which is only a blip in the amount of oilut has major psychological impact, we need to send a message from our international partners that they have confidee in the dollar and our capacity to handle the structural deficit. we need to demonstrate quickly. i would have the president in his speech tonight say he is going to ask congressional leaders to come to the oval office tomorrow morning and reach a deal on the deficit. maybe this spread it will shock us into the action we should have been taking over the summer. >> to balance this a little bit, i agree that these are long-term solutions that need to be started today. no doubt about it. concerns me is the -- what concerns me is the -- if that is disrupted in some way, all of the gains would go for naught. the concern for me is theifth fleet headquarters is in bahrain. we need to see where that is going to be operating from. the idea that iran could make us leave would be important but not operational lee. -- operationally. i feel like the sanctions have the been ineffective. the next step would be an embargo or blockade. those are acts of war. i am not suggesting we do that " we need to prepare ourselves for alternatives the threat from iranian small boats has been there before. it is still there. i am worried about a maneuver that would escalate this in an unforeseen ways. we need to start thinking behind the scenes with our allies in the middle east for alternatives. to the speech tonight, we are short on a time. i want to focus on the energy possible. stuart has outlined things well. if the president is going to outline an energy plan, to get us out of the vulnerability we are in, i want to have some comment on what that is starting with sue and then john. >> i think would be worth the president pointing out the two things -- we have met the enemy and he is us. we are the largest consumer of oil in the world, one-quarter of the global -- comes to the united states. that is twice what the chinese consumers. most of that, 70%, is for transportation. let's start with those data points. we can start backing into solutions. one of the things worth pointing out is that one of the reasons saudi arabia has calibrated its capacity so that you did not see this kind of price hike. they did not want to see the world going to recession but also did not want market forces d a market prices to stimulate the kind of innovation away from hydrocarbon, away from oil that we now have the chance of generating. i agree with the secretary of energy on the expanding domestic production side it but i think one, expand. second, to the extent that the prices at the pump, i am not sure what that is. i do know that between gasoline prices and heating oil prices, the average household income has gone down by a $137 billion. we need to be in a situation where there is a motivation. the price at the pump will contribute to this. motivation to buy fl efficient vehicles that are sustained. oducers and consumers will need to know this is not just a temporary aberration. the prices will stay high. we need to develop alternative sources of energy, whether that his nuclear, natural gas. we have a lot of natural gas in this country. we have seen that in terms of prices. how can we translate that into more energy self-sufficiency? >> in 1974, the oil shock gave impetus to the creation of the iea and the whole idea of stockpiling. against future shocks of this kind. i am wondering whether opec has run out its string. what we would not want to take them on in a diplomatic confrontation, maybe there is a way of getting the saudis and other friendly oil producers to sit dn with us in a different context like a meeting of the key consumer and producing nations where we could include russia and north america, canada as well as the oecd countries. it seems to me that architecture of our energy diplomacy, find some new formulation where we would be able to create a somewhat friendlier atmosphere to the major enomic interests we are trying to pursue. >> a part of that effort has to recognize that oil is traded in dollars. i think we need to have the ben bernanke organized a central bank support for the dollar so that it is not plunge d hurt everyone. this has been done before. it can be done. we showed the hedge funds that they cannot sell our dollars short. that has to be an economic and energy policy. >> in terms of how we consider going about this, there is a consensus in the intelligence community that we are in for a protracted situation in the middle east. 2011 is not going to go away anytime soon. and yet, all of our mainstream energy forecasts all depend on substantial production growth from the middle east, from saudi arabia, iraq and other states to make -- meet future oil demand. whatever strategy we put together, weave to take into account the restraints that are going to exist on any short-term increase in the production capacity globally. >> and what i think we have ard tonight and the guys " run by the president. i want to start where we already started. we have to do something bold. the president has a real challenge and an opportunity to become a great president. something brand new for america but also the president leading the world out of the economic crisis, providing leadership out of the energy crisis. 3, we nee energy. as part of that leadership we need to sketch out a comprehensive plan. on the economic peaciece, the dollar. we have to get the central bank to lead an effort to defend the dollar. the president has to avoid a double-dip recession. some of stimulus measures, you want to put people to work. you have to reduce the cost of labor to give them an incentive. of course, this is an opportunity to say we need to get a deficit-reduction. call for a meeting to try to get our hands around the deficit-reduction. third, we talked about internationalizing this problem. calling for international groups to come together, the g7, g20 kind of approach. that showed of the crisis we face is mobilized in the international community including countries likehina and putting pressure on iran and venezuela and those people in the international system. -- putting the international system at risk. the president needs to put out a comprehensive energy plan that is molded beyond what we have seen in the past. opening up the domestic markets. getting hydrocarbons out of the ground and into the market, decreasing the intensity of our dependence and other matters. on the transportation sector and in which is where the oil consumption is, moving toward electricity which allows us to power cars from a variety of sources. petroleum is only 1% of what we use in terms ofhe generating electricity. it diversifies to other sources and non petroleum -- we have to do all of those in a big way. part of the international is moving beyond opec. opec is no longer for stabilizing the economy. it is a vehicle for assaulting the economy. we need to move beyond opec. the president needs to call for a different set of approaches to dealing with the economy. it is a challenge for the president but it is an opportunity for the president to lead the country and world to a better place. that is the message we take to the president. comments? suggestions? >> i would add one other thing to your excellent summary. when the suit was -- when sue was in her other position, she negotiated three free-trade agreements. it would send a signal that our political system is not dysfunctional. that is what it has been showing during this debt limit problem. if we could use this crisis to get that done and put in the payroll tax cut and the long- term deficit reduction package, it would send an axle and message. when there is a crisis america rises to it. this is a time when congress needs to do that. that would be another element that adds to the pacge. >> amen. >> the president has to be clear with the american people that while is going to provide this leadership on a national and global basis, this is a problem that has festered too long. we are behind the mall. it is going to take a long time to keep these things moving. it will be a rough times for america and the world until it gets down. not a great message but that is where we are. i will take that to the president. thank you very much. >> on time and on message. [laughter] >> thank you very much everybody. well done. [applause] i am the voice of doom. it is no doubt comforting to know that when the warning occurs everybody on television will have a british accent. [laughter] this is the point at which we allow this terrific team to come out of character and abandoned the roles that they are played over the last couple of hours and talk about the experience of securing out this sand -- stimulation -- simulation. we're doing this at such an extraordinary time in washington with the debt crisis been discussed hour by hour at t white house and on capitohill. stuart, do you leave this thinking differely about those conversations and about how, the extent to which the united stes is flirting with grave danger? >> yes, it is something that i have realized. but the simulation emphasizes that this may have some impact on the the talks that are going on now. this is a short-term palliative. successive presidents have talked about energy independence and energy security. here we are back at it again in 2011. it gives me a sense of urgency. the key is whether it is urgency for the congress, the administration to come together now to avert a problem before we get a downgrade which will send the economy into a tremendous spiral. we talked about a seconds double dip. itould be a second great recession. >> we will be opening this up for questions and a few minutes. feel free to thinkbout what questions you would like to ask. i was struck by the fact that when you ended part one of the stimulation -- simulation and you listed the ideas you're going to take to the president, the last thing on the list was developing a comprehensive energy policy. isn't the lesson is that this has to rise up the list and that it cannot wait for the fictional events to occur before policymakers actually grant but? >> i think tt is the takeaway. this is a time to be bold. it is true tha the country faces enormous challenges. but enormous challenges tend to make great presidents. what i would say to president obama and all of those poor trying to run for president is, this is a time for boldness. we are locked in too small things. we're not talking about major leadership. the american people are looking for it. that is what they want to see. i agree with you. we are late on this. we have known this was a problem for 20 years on the energy side. we talk about energy and the -- energy independence. each year if it's worse and worse. >> you were playing the role of the counselor to the president. you were raising the political issues that the president had to face. to what extent do those concerns and constraints mitigate against the possibility of a comprehensive strategy? >> especially with a divided government, it mitigates it tremendously. there are severe handicaps. if the president decides to open up america and have a bellion in his political base because of the democrats will say let's go cream. how quickly is it is achievable? republicans [unintelligible] the same thing with the debt limit. these are the handicaps' we have. in the end, after exhausting everything, we do the right thing. churchill was right. that is open question. it handicaps' both parties. governing from the center is the hardest thing to do in washington, d.c. >> sometimes there are two ways to get a consensus. it is to boil it down to the lowest common nominators. -- common denominator. but sometimest is good to go big. this time it is go both. that way you may be able to generate a consensus and enthusiasm. >> i wanted to ask you about the issue of [unintelligible] ari and others were making the point out, how could you not be prepared for the fictional crisis that was rolling out in the saudi arabia. in a sense, if it were better designed for dealing with lower level global relations rather than seismic issues, what is the take away from that? >> having been at this for a while, i thinkhis approach should be a life insurance policy only. it is only in case of death. anytime you start manipulating it for other purposes, you dilute it. then it becomes like a faucet. turn it on, turn it off. that is not what it is therefore. i think that takes discipline. bold is important. courageous is ao important in terms of the decisions that need to be made. from where i sit in the untry, the most courageous decision would be a those made without regard to reelection but rather what is right for the country in terms of resolving these big issues. last political tactics and more the substance of what is courageous. the country has to do with these issues. >> can that happen in this town? >> probably if the crisis is big enough. i think we are on the right track. [laughter] the crisis came and the talk came. it creates an opportunity. so the question for us is can we anticipate this and make those kinds of decisions before a crisis ases. i am not brimming with optimism on that score. >> what strikes me in this simulation is the inability of our national security instruments to solve this problem in a satisfactory way. our armed forces, a powerful as they are, cannot get this particular problem. our diplomacy, skillful as it may be, it drives me back to doing the tngs we can control in our own country in terms of our own energy resources and conserving every barrel that we do news and then looking at becoming less dependent. we have been using some tools to do this. we have spent huge amounts of money. we have a served. the problem lies with them. it is something we need to do at home. we can do that. we do not control opec or iran. we do not controlaudi arabia. we control the things we can do in this country. i think we need to look inward to solve this. >> i presume you would agree with that. we have met the enemy and he is us. >> you have to wonder if we cannot get beyond no-brainers like the debt limit or the free trade agreement, how can we come to grips with this in the absence of a crisis? there is nothing that -- once the crisis has started, we are in deep, deep trouble. how do you gerate -- we talked about courage. we need talk about leadership, leadership, leadership. there are some things that are important enough to risk losing your job. whether you are elected or appointed, i think being honest with the american people about these issues, the american people can take the real story. it is going to require a longer- term solutions. we were scared so much of what had been goingn -- spared so much of what had been going on. the congress had passed a stopgap measures. we did not talk about subsidies. some of the mistakes that were made in the 1970's were mentioned. but we we largely spirit. -- spared. so a lot of us need to step up. >> the crisis -- you need a crisis to motivate you. you have options before you get in the crisis and you have options after. but in the crisis, your options are few wis. one of the tricks about a crisis is to be able to articulate a sustained agenda that peoe can buy into and they can be executed over the long term. but when you're in the crisis, you are precooked. key iss point, the education of the public. everybody is for deficit reduction. but when you put the component parts on the table, we're going to have to have limits on social security, discretionary spending, on the taxes, the fact is we cannot afford the structure we have built in the today's tax limits. we have to come to terms with that. it takes a bold politician and it takes the public to believe that in which they do not believe. they have this theoretical sense if we just make a few cuts here and there we can solve it. the same with energy. a sustainehonest dialogue to explain where we are is difficult to do before the cris. when there is a crisis, perhaps it is easier. can we take these actions to avert a crisis? in a democracy like ours, so open, it is very difficult. it takes a high level of education of the public. >> a quick footnote, whichid not talk about the private sector. we talked a little bit about ngo's. we should be talking about what can the private sector be doing? i happen to set on the fed -- rve on the fedex board. fred is walking the walk. he is doing. to the extent that we can see a consensus to build a long-term lan in conjunction with ngo's and have that as a force multiplier, that would be a tremendoenefit. >>et's open it up to questions. we have a couple of microphones out there. back there and there. anyone from the floor with a question or comment over and what you have witnessed over the past few hours. we have someone right over there. a gentleman over there. >> i'm with the association for the study of oil. i would like to follow-up on your conversation with a dual strategy of being more bold and aggressive about a green future. it seems politically a economically essential to have a strong economy. we should link the two. i would like to hear about a grand bargain where we open up the gulf of mexico and tired those resources to investments in accelerated strategy, the practical details of what th would look like, what would be acceptable to a different sides of the equation. >> you made the point about and aing out to the ngo's talking about a future with hydrocarbon. >> i think with a profit in leadership, that bargain is, where companies produce oil. let's open it up and at the same time, part of the deal is, let's change the royalty rates. let's change the royalty scheme. the industry does not want to hear that. the best deal in the world is producing oil in the united states of america. regimes elsewhere are fall -- far less lucrative to the oil companies. let's change the royalty rate and a change production and let's use of tho and royalties for the next generation of energy, the new technology. the so-called green energy. that deal could be struck. i think getting the ngo's on we're going to find methods that are going to pay for the green energy sector. all of the sudden you have democratic forces coming together in coalition rather than in opposition. that may be a dream too far but i think it possibility. >> we are in a situation now. challenge -- chad is number one in the production of solar panels. a lee the famy in new england is opposed because of aesthetics, putting a wind farm in t bay. there is always a checkmate in our system, and perhaps it takes a crisis to allow people to say we have got to put aside these kind of narrow parochial views and let it all hang out, regular production, alt manager, nuclear, all this test be done, but it requires the people to be sacrificing and be willing to allow these things when there are some risks to be taken. >> i want to get your take on the simulation. >> this notion that we ha known about this problem forever, we have not discussed the huge economic impact on t united states, a greater way in which we're held hostage, but the national security impact of this. i mean we have sat around that table and especially after 9/11, and what came out of that region of the world, and to some extent or other are hamstrung about what we can do. there are restraints on u.s. national security flexibility and the policies we can bring their on the middle east because of this link back to oil, the opec, and the kind of stranglehold it has on the global market, the commodity that is truly the central to our way of life. knowing that, as long as we have known that -- one is just talk about how incredibly urgent this problem is and how little we have done about that. >> one more question from the floor. a gentleman from back there. >> what is most striking about this event today is en we did our first shock wave, 2005, 2006, the conclusns were strikingly similar -- big ideas, big plans, we got to do this, we're sitting on our hands -- basically we had no options and crisis was not an option, just as it is here. that is not dealing with the immediate needs of our present. oil prices were probably $25 or katrina, and cap, pre- we came up with speculation all at $100 a barrel and we talk about what it would do to our economy, and this recession was not about oil prices. it was something much bigger. since then with oil prices much higher we have had unprecedented economic growth, but our deficit has grown up to three times, perhaps. what we ought to be reflecting on is where we have come from, where we are, and are we really going to do something when it becomes a problem, because you cannot have $200 a barrel oil. i said that as a provocative thought, an observation of putting that into context. >> having worked on a presidential campaign, the thing that will stir action is that price of the gas at the pump. that is what creates pressure on politicians. i cannot conceive -- where i lived costs $4.50 aallon to fill up on premium. i suspect we are ose to the point where the consumer is at a rebellion stage, and that is the event that forces action, and it comes from the individual, and politicians respond. we are close. >> one more question. >> thank you. this has been a fascinating morning. one issue that did not come up that i kept thinking about is somebody is making a tremendous amount of money off of this shock wave that is happening, and is there any thought around whether that is the global oil industry or financial companies? is there some role we need to be thinking about, his fun, people who are speculating, that amplifies is a supply crisis, but not as urgent, as oppos to when you look at the impact on wall street. i am curious if the secretary of the treasury thems. schwab has any though on that. >> in the 1970's, when we deregulated the price of oil, would put in a windfall tax. take all that money, and put it in the payroll tax reduction or the deficit reduction, or some part into alternative energy. not on a permanent basis, just to deal with this extraordinary saturation where you will have a lot of companies, not because they want it, but because the market will p that in. another thing sue and i were discussing is the have one of the gasoline price, some based so you do not get what fluctuation. this crisis may end, we would go back to $2.50 gallon. if you had a base under will price, and we got through this in two ministrations where we had our heads handed to us if we did it -- 100% of it, you put a base on, it sounds like a signal of the market that they can go out and buy energy efficiency. there are some thoughts of how to deal with the extraordinary is attrition. >> i would say most sadly in this scenario, most of the economic benefits are going to russia, of venezuela, iran, saudi arabia, they are going to producers. yes, there is some spinoff, but by and large, it is not a speculator is so much as the producers, and they get that premium and they get that rent. that sue isspoint making," dealing in the short term to deliver live market signals so we do not forget after two years that we ought to be developing a hybrid vehicle. >> when you are going to open up america, it is very expensive, and it requires an enormous investment. we should think about windfall profits. a lot of this windfall profits the to go into investment. secondly, someone was mentioned last night, 90% -- i think this is right -- 90% of the oil reserves are controlled by state-owned oil companies that are controlled wholly largely by countries. and those companies are not investing, which is why production is going down in so many places in the world. one of the challenges is we have got to invest, we have got to get those countries, those oil producers, to invest in more oil globally, not just out of the and i did state it is one of the azing facts in terms of opec production, since opec was created in the 1970's, if you look at their capacity, it has flatland at 30 million barrels a day, and that is when you see historically a tremendous loss of price stability in the price of oil. >> we rail about multinational oil companies. we need to encourage the saudis and other major or producers to open talks private multinational investment to help them. it is in their interest to do it, to bring in the new technologies, and to bring in the exxons and shells to help them increase their production. >> we are out otime. i want to thank stuart eizenstat, eric fleisher, stephen hadley, john hannah, john-master, john negroponte, susan schwab, and charles wal. continues. host: we're back with christian weller, senior fellow for the center for american progress and diana furchgott-roth, from the hudson institute. thk you for being with us. let's begin with the question that all lot of peoe are wondering. two economist help us with that. here is the "daily news." panic is there headline. are we headed for a double-dip recession? guest: i do not think so. there's enough good stuff on the investment and even in the housing market. but the bad news is that what we have in the economy is not enough momentum to carry us rward to lower unemployment. that means we need in order to get to lower employment and stronger growth we need policies of intervention. the president and congress to pay attention to jobs and growth. while we can avoid a double-dip recession, i think the biggest threat is that we will can lumbering along at low growth and high unemployment. host: how quickly do we need that policy intervention? in the coming days to have though markets react in a positive way, or is it something that can wait until congress gets back in town? guest: i do not think our policy should be driven by wall street thinks from one day to the next. but it needs to be sooner rather than later. much of the air has been sucked out because of the debt ceiling debate. that was never really kinetic -- connected back to economic growth and jobs. and that is what policy analysis are looking for. not simply about spending or taxes in the abstract form, but how relates to the real economy and to create jobs. that needs to happen sooner rather than later. but it is necessitated on the realities onhe grod, high unemployment, not what wall street thinks for one day to the next. host: let me turn to diana furchgott-roth. double-dip recession? guest: i can forecast the past but the future i have a problem with. it is not the debt downgrade but what is going on in the economy. a week ago friday, we had very slow gdp numberscompletely unexpected. that was a big downgrade from a growth of 1% in the first quarter to a growth rate of 0.4% in the second. that call a lot of people by surprise. second quarter growth was a lot lower. 1.8% and people thought would be higher. we have sious problems as christian said what the economy, with jobs, with gdp growth. the president is capable of doing a lot himself without waiting for congress to come back to town. host: what he'd do? guest: many regulations set by the cabinet agencies that he has control over. he could call epa administrator lee said jackson and teller to lay off of the ozone roles. that would have to cut back on emissions, cut back on factories, cut back on their industries. he called the secretary of interior and moved more drilling permits through in the gulf of mexico. he could go to the national labor relations board and sale lay off of boeing building that new factory. we need more plants in the indebted states instead of moving out to china. host: here is what the president said yesterday in his plan for recovery he put entitlement reform on the committee when the super committee starts doing its work under the recent debt deal. he is also calling for payroll x cut, tax reform is part of the joint committee, and unemployment insurance. let me take payroll tax cuts and unemployment insurance, what is the impact of that? how does it help or hurt? guest: people have to understand that we already have under the tax deal struck last year with the republican congress and president obama, we have an extension of unemplment insurance benefits in the payroll tax holiday. they are expiring at the end of the year. the fear is that if they expire and there is nothing to follow on, there will be a severe cut in come to lower income families who at this point, when they get the money, they spend it immediately and boost consumption. limited to onet year, they thought there would be a catch up to bed with a strong economy. at this point, we note that the economy is weaker tn expected. the labor market is weaker than expected, and that these additional measures are necessary, especially because long-term unemployment is at historic highs. they are on average out 40 weeks before they find another job. they really require some measure of support that they do not have. extending unemployment benefits is a way to boost income for lower-income families. guest: i would say it that unemployment benefits has been longer, 99 weeks, that is why we have such high unemployment rate. we need to move backo the traditional 26 weeks. many people sa the way into the last moment until their benefits are about to expire. that is not the right place to focus. we need to focus on getting employers to create more jobs we need more jobs for all of these people out of work. and their many things we could be doing about their right now. all thregulatory burden that we have preventing small businesses from creating jobs. the new $2,000 per worker penalty under the new health care law in 2014, if the firm does not have the right kind of health insurance, they have to pay $2,000 per worker per year. there's a lot of uncertainty about how the new regulations will affect jobs and we need to fix that. host: what about the payroll tax? is that a good idea to help employers? >> we've had to cut and the payroll tax and it has not been helping. it has not been giving an incentive to hire more workers. that should end. host: let me ask each of you before we get the phone calls, you sound like s&p made the right call. guest: i think the united states has very substantial fiscal problems. i would not say that they made the right call in that we're going to continue to pay the interest on our debt. no danger of us defaulting. moody's and fitch made it different call, but i do not think the current problem in the market aren't due to the s&p downgrade. it is due to the fundamental economic problems. if the s&p gave us back to triple or raid -- the aaa rating, i do not think the market will go up. it's more about the unemployment report a we had last friday. guest: i did not think the s and p did itself any favors with this decision. there is nothing new here. the economy is weak. we know we need to focus on jobs and growth. the policy makers need to put a plan motion to reduce the long- term structural deficit, the lack of revenue, the driving factors. those things need to be addressed. but there is nothing new in the s&p's decision. they have not open the vault and found new information that we did not know we had. the media announcement, they bundle the whole thing, and did not focus on the real problems of the economy. host: the senate banking committee is going to look into the decision, gathering affirmation about how they came to that decision. let's go to steve, a democrat in florida. caller: hello. host: we are listening. caller: i have two questions. you're referring to a lot of cutbacks on regulations for businesses. guest: yes. ho: what if we cut the corporate income tax rate down to 14%, because most do not pay more than 40% anywa -- 14% anyway. and as a counterbalance, repeal law that enables corporations to take their operations overseas? i heard the reason that they do this is to prevent double taxation. but if a corporation is not providing jobs for americans, why would that be our problem? the other thing i wanted ask, when the market was going down yesterday, i was listening to a show where they were saying that a lot of people were taking their money out of stocks and purchasing u.s. treasuries because that was a good thing. and i will go offline to listen to your comments. guest: that is an excellent question. the united states corporate tax rate is the highest in the world right now. it was second-highest to japan, but in japan lowered its tax rate. so we have the highest in the world. but top tax rate of 14% would be a substantial improvement. unfortunately it is not possible to repeal any laws that prevent u.s. corporations from going abroad. companies can locate wherever they live. as i just mentioned, a genera election just moved its x-ray headquarters to china. we have a big impediment with a high corporate tax rate, companies repatriating these funds and bringing them back. when they are coming back in, they are taxed at 35%. so corporationsose millions of dollars immediately. if we lowered the rates, that would give a stimulus fund right there. host: and the story about treasuries. investors are pouring money into treasury bonds. guest: people still look to the united states doar and treasuries as a safe haven. host: given that, the federal reserve meets today. there are a lot of headlines in here that the fed might have to dig deeper to do something. what can the fed do at this point? guest: the fed could institute a new buying program, buying up securities and providing more liquidity. would allay any fears that the turmoil in the markets would translate to the credit markets. the other part is the fed could nounce that it will do whatever is necessary if the economy weakens further to help the economy. that would be contrary to statements bernanke has made so far. i think to some degree that is what we are looking for from the administration and federal reserve, to have some reassurance that poles makers are -- policy makers are ready to step in if necessary. that is one thing i would look for. but let me address the corporate tax issue. statutory highest tax rate in the world but we have so many loopholes and exemptions and deductions that the effective rate is fairly low, in the middle of the industrialized countries. all tax professionals agree we need to streamline and simply fay the tax code -- simply if i the tax code. it is going to be easier if it would mean the layoff of tax accountants but it would make it easier for corporations to operate in the u.s. we know from all international tax studies tax system misty is something -- simplicity is something they value. so we can't look at e top tax rate but the effective rate. that is actually fairly low because of t gamut of tax loopholes. we started the conversation about closing loopholes and so far republicans have been reluctant to start the conversation. host: we are having an economic roundtable on the "washington journal" until about 9:15 a.m. we have two different perspectives about what we are seeing in the econo and how wall street is reacting, what the fed might do today at their meeting and what president obama had to say yesterday and republican leaders about had you to spur economic growth. he is president obama on the payroll tax cut and unemployment. >> specifically we should extend the payroll tax cut as soon as possible so workers have more money in their paychecks next year and businesses have more customers next year. we should continue to make sure if you are one of the millions of americans who is looking for a job that you can get the unemployment insurance that your tax dollars contributed to. that will put money in people's pockets and more customers in stores. st: let's hear from the republican in little rock, arkansas, bill. stkpwh i see obama time remember the peter principle he is over his head but i think this lady has something here. here is what i wonder. we have all of these minds in washington and you folks in these think tanks. what about some leader, the president won't, but some leade saying to the chamber of commerce i want you to come to the white house, labor unis i want you to come to the white house. we are going to have a conference, we are going to have it public and we are going to brainstorm every chance and find a way -- you talk about repatriation. forget the loopholes. if you needo tax rates. unions, you ha to give up something to get some of these jobs. business, you have got to want to take care of americans. want it in your heart. yes, it is a business and you have to earn money. but this is nothing we are playing with here. get to the white house, both sides give up. unions wit osha and the environmental regulations, it is no wonder the businesses had to go overseas. host: t me stay on the point of regulations because here is a tweet. look of regulation adds to the financial market cause a huge hit on the economy. that led to the taxpayer bailout. ugh. guest: i would beg to disagree and i would think the overregulation of sarbanes-oxley and dodd frank are making it more difficult for companies to upgrade in the united states. a lot of firms are not hiring here, they are hiring abroad. the dodd frank bill sets up an office of minority and women inclusion to make sure that banks and financial firm and subcontractors like the janitors and paper shredders have fair inclusion of women and minorities. that means that the presidents of our banks have to think do i have enough pacific islanders even though none might have applied. plus there are many other bureaus that make it tkeuf for our companies to -- make it diicult for our companies to operate hear and it is easier to operate overseas. so i would cesar baines oxley -- i would say that those have immeasurable obstacles to locating here that other countries do not have. host: now an independent caller from michigan. caller: the fundamental problem that our system has, i believe, the taxation act of 1920 was supposed to offer the public a n nonburdensome tax -- i thought those key words were voluntary and temporary. but the supreme court has never honored this attitude nor does the politician on top of that. the concept is we are authorized $40,000 of taxpayer money from the federal government to put in -- to build an alzheimer's building bond firm. they projected either a $3.5 million facility or $6.5 million facility. you really can't tell. the billionaires donated $3 million to the building bond fund, so it brought it down to $3.5 million. we voted for it. after two or three years they collect too much money, they claim they can't pay the bond off early without facing penalties. they are lying. they could pay it off but they don't have a process to. the concept is they collect too much money, they give money back to the rich businesses because they are supposed to help us prosper and from that standpoint it is going to be a taxpayer funded mandate and become unsustainable and they won't pay for the building. host: what are your thoughts, christian? guest: when we hear taxes and spending the important piece is sort of you need to look at what the role of the government, what do people want, and then the taxes come after that. you don't collect taxes just for the fun of it. the important piece is when you look at what the federal government -- and i can only spk to the federal government hear -- what it does is often very popular. it provides the largest program, social security, retirement benefits, disability benefits, medicare, medicaid and defense. that eats up the bulk of federal spending followed by benefits for veterans, education. then a whole host of smaller programs. most of the programs that we have and much of the federal government spending is very popular. it is sort of this amorphous notion of government spendin that is unpopular but each prram has enormous support and isery popular. once you go through that and say these are the programs we want to keep then you have to find a way to finance them. that requires additional revenue measures given where we e at this point. but it ultimatelmanassas more efficient spending. that is particularly relevant on a health care side. we have unsustainable healthcare inflation expected the next 10 to 20 years. we can handle it right now but it is something we need to address. healthcare costs are rising much fast than cost and incomes. healthcare law put in place in 2009 is a first step to increased competition and transparency in the health insurance market to reduce the cost, but that is one small step in the right direction. in the end we have to ask ourselves do we like what the government is spending its money on and once you move below the amorphous notion of government spending to individual programs you willind the vast majority of voters support those. then the taxes need to follow. and we have to have a conversation of how you raise the revenue. host: here is a tweet from house speaker john boehner about growth. it is time to scrap the failed stimulus policies. d.n.r.'s must come together to cut spending and save entitlements. now craig in manhattan. caller: i think the job creators and entrepreneurs are kind of cowardly -- they want the government cut them a path. business is always fraught with uncertainty. if you get into siness, you get the lion's share if you succeed. but imagine if the wright brothers said the laws of gravity are too oppressive i be able to fly. now we fly from continent to continent because they wouldn't take no for an answer. what is more oppressive than the laws of gravity? host: appear now from linco lincolntown, g. -- georgia. caller: good morning. good to be with you. there is a point that needs to be brought up and that is the finance, insurance and real estate grew to be 40% of profit and 20% of the economy and it was built on the back of theecuritization that has proven to be fraudulent. i would submit that that 40% profit and 20% of the economy needs to revert to manufacturing and go back to manufacturing which is 8%. short of that i don't think there is going to be a recovery. host: diana? guest: well, it used to be that many, many americans were employed in agriculture and that shrank. the me is going on about manufacturing as lower wages abroad take some jobs out of here and move them elsewhere to china and india. but our financial sector is making profits right now. we should be glad that we do have profitable sectors in the u.s. economy. to go back to the previous caller about entrepreneurs, john kerry and dick luger have the start-up act that would give visas to foreign entrepreneurs who could come here and create jobs. if they created jobs for native born americans for five years they would get a green card. this is the kind of policy,ery low cost, that we need to look at to increase innovation and entrepreneurship and growth here in the economy. host: a gentlemen in randolph, vermont responsibilities s responds to -- responds to the comments about repatriating says when you mention repatriating -- guest: i think it is unfortunate that most of the jobs american companies are creating now are offshore because of the lower tax rates. we need to do something to equill celebrate that and -- equill celebrate that. i say more and more of the funds continuously flow into the unitedtates. i'm not talking about a one-time tax holiday. perhaps that will make joan more annoyed but i was speaking about something permanent rather than tempory. host: here is another e-mail. if you want to send us an e-mail send it to journal at espn.org or twitter.com/cspanwj and you can have this conversation with each other on our facebook page. here is another e-mail, christian. guest: the rating agencies are private institutions funded under the new law. they will be supervised by the s.e.c. we go through this every crisis. the rating agencies, standard & poor's, et cetera, do not have the best possible track record. they mickelsssed a number of cr. there are a number of crises they missed or misinterpreted. let me get back to a bigger we have sort of circled around and that is what drives job creation. when you look rat employer surveys, what they are missing is customers. they think sales are low. they are worried that their consumers are maxed out on too much debt and consumers do not have enough income to spend. it is not a question of companies not having enough cash hand. they are very profitable. they have been building up cash sie the early 1980's. they are not spending, not hiring. it is not a matter of regulations. we know that job growth is stronger in countries that are more heavily regulated. germany is doing well and other european countries. so it is not a regulatory or tax issue. at this point companies are sitting on cash and holding on to their cash. there are a number of reasons why they are doing so. primarily they are not investing and hiring because they look at the consumer side and see consumers not getting jobs, consumers running essentially into a wall when it comes to income. the payroll tax holiday and unemployment insurance holidays ending but overburdened with debt. host: diane? guest: so what do you propose to do about it? how doou propose to get them out of debt? more stimulus? guest: at this point the first order is to extend t unemployment insurance extensions to at least do no harm. extend the payroll tax holiday. there are other things we can do. we need to continue the mortgage reworking, continue to deal through the banks, through the hud ent, through the programs to make sure -- guest: so, no mor spending cuts? guest: i think spending cuts in the short run will be harmful. but back to the debt ceiling deal, many of the spending cuts were back-loaded. much of what will happen in terms of long-term deficit reduction is unknown. we don't know what the super committee will do. and i think that is an opportunity to dohe right thing. bo on deficit reduction and job creation. that is at this point protect the weak economy, eure we have job creation. don't cut spending the short term but put the deficit reduction and spending cuts and revenue increases on the table. host: diane, before you weigh in let me show our viewers what the president had to say about no more spending cuts. >> our challenge is the need to tackle our deficits over the long term. last week we reached an agreement that will make historic cuts to defense and domest spending. but there is not much further we can cut in either of those categories. what we need to do now is combine those spending cuts with that additional steps. tax reform that will ask those who can afford it to pay their fair share and modest adjustments to healthcare programs like medicare. host: he said not much more we can cut. guest: when we've a problem he calls for tax increases. that will take away more funds from private individuals. it will adversely affect small businesses who have the individual tax rates. and it is interesting when the president calls for more taxes on millionaires and billionaires this refers to the bush tax cuts which set people earning $200,000 and more a year. so that is the wrong description. we need to look at entitlement cuts down the road, not necessarily now. we are now borrowing 40 cents out of every dlar we spend and it is an unsustainable situation. host: john boehner responded to what the president had to say in a statement saying republicans have demonstrated this problem can be involved whout tax hikes. difficult work remains and members of the joint selec committee will need to make tough decisions to rein in the spending that is driving our long-term debt. the debt is driven by two factors, low revenue and unsustainable healthcare inflation over the lg term. so, we need to have a conversation of how we spend healthcare dollars more efficiently but at the same time we have to have a conversation about the look of revenue. much of the debate over taxes centers around the extension of the bush tax cuts for the top 2% 3% of tax paeurpayertaxpayers. when the tax cuts were enacted in 2001 they were followed by the weakest employment creation on record and weakest investment record on record. so taking them back shouldn't do anything for economic growth. we're talng about a very small group who have done well the last few years despite the crisis. i think that taking it back is a sensible approach, a balanced approach because the alternative is to cut in the near term programs that benefit a broad swath of americans such the unemployment insurance and deep cuts into social security, medicare a medicaid. host: we have this tweet. isn't it fair to say s&p's overrating of the 2008 crisis is a factor in the current status of u.s. debt and deficit. next to marie in wisconsin. caller: good morning. first of all, i just want to say i do agree with mr. wells completely on many of these points. everyone seems to neglect to mention a couple of key things where a lot of money goes and that is into the billions spent on three wars that quite frankly have not proved to be nation building for the united states in any which. the second point is when you look at the overall economy of the united states the priorities of the majority of americans have nothing too with paying welfare to corporations some who are o international. perhaps we need to stop that and tax completely for social security all the way up the fee scale. if they don't want to pay extra taxes fine. start building the fund but collect everything that has been completely robbed from social security by the government for all kinds of nonsense. host: all right. guest: well, the attacks of 9/11 did mean that we went and defended our country and we could have just kept going like we did in the 1990's and not reacted at all. but getting rid of al qaeda, getting rid of osama bin laden, al qaeda and taliban unfortunately are still very much alive and we mourn the death of thoseervicemen who died over the weekend. we need to protect the united states from further attacks by attacking these people abroad. there is less chance we will have another 9/11 here in the united states. but we do need to make substantial cuts in entitlement, not just healthcare, social security, gradually raising the retirement age, perhaps increasing contributions also, to bring the fundsecome back i balance. we are fortunate that americans are living longer but it means cost of the programs continue to grow and we need to be restructuring those. we also need fundamental tax reform. i would agree with christian that we need to get rid of some of the lap holes, lower rates, make the system more efficient. host: go ahead. guest: i would add something to entitlements. entitlement is this catch-all and it doesn't helthe debate. we need to separate healthcare from social security. social security right now still has a surplus. it takes in more revenue than it spends. we need to have a conversation, a national conversation, about what we are going to do about social security in the next 75 years. but it can pay its full benefits to 2036. itas money in the trust funds. we need to have a comprehensive discussion on how to streamline benefits and improve them. there is bipartisan support to improving survivorship, divorce benefits, creating poverty benefits, someing both democrats and president bush put on the table. that is a separate discussion. security is not the driver of our long-term deficit. it is healthcare. that means we need to have a conversation on how we are going to reduce healthcare inflation on medicare and medicaid. the patient protection and american care act, healthcare reform bill of 2009, started this by inkraesing competition in -- increasing competition and increasing transparency, lowering costs but that is just one small step in the right direction. host: we will continue taking phone calls during the economic roundtable but joining the conversation is hrurpa senior vt the national so, of realtors to talk about the downgrid of fanny and freddie by s&p. what impact does this have on the housing industry? >> any time there is a downgrade of a company that is not good and the borrowing cost of that company would rise. but what has happened is right now the mortgage market is essentially nationalized. so the fanny and freddie are the children of the government. and given that the government is downgraded fanny and freddie will be downgraded. but given the uncertainty people are seeking safe havens so what we noticed yesterday is that the borrowing costs for the u.s. government as well as fanny and freddie dropped on the news of the downgrade. host: we saw that it was the lowest it has been in 2011 the interest rate. >> the interest rate, mortgage rate last week was 4.4% average on 30-year larate. that is a 50-year low but i wouldn't be surprised this week it would be lower given the situation and the chaotic market conditions and stock market where people a seeking safe instruments and turning toward u.s. government debt even with a downgrade. and i think another thing we keep in mind is sometimes the dog that did not bark and you have other rating agencies such as moody and fitch. host: is the time to buy now? >> certainly i think the overall macroeconomic pressure is for rising rates. we have high budget deficit and will continue. if there are signs of a respectabl economic recovery the rates will rise. so, certainly from a consumer, who are very comfortable in their finances, have secure jobs, it is a great time to lock in these low rates. host: we had a viewer earlier who said, you know, when you drive off the car you -- when you drive off the car lot a block away your car is worth 20% less. it naturally tkraoerbts. -- depreciates bute says hold on to the howls. but what security can you give to people that their house will continue to appreciate? >> i thinkn some markets -- you go back to the supply and demand situation. i think that during the bubble years clearly prices were way off the handle and you had to see them come down. now prices are now overcorrecting, slightly below the fundamently justifiable levels based on price to rent ratio or price to income ratio. also in the u.s. we have a growing population, that means there will be a steady demand for housing at some point. it is not occurring right now but at some point it will be growing demand for housing. so i would think from a national price point of view that the are right now bottoming long. we are not seeing any measurable declines. in fact some price measurement in the past few months have shown increases. so the declines are probably over. but the recovery may take some time to get back to normal. historically one would about four or fi five percent and we may be a couple ofears from reaching that steady 125eu9 state. host: the president said one way he would like to help is have fanny and freddie rent the homes that are now foreclosed upon. do you agree with that strategy? what would be the outcome? >> certainly less foreclosed property on the market will help stabilize the market but the key is whether it is better for private investors to purchase and they have -- they would have their own private incentive to rent or whether there should be more government intervention it delay some of the homeowners who are going through the painful process. it is a tricky call. but one thing we have noticed in the past 12 months is there are an active number of buyers who are willing to buy foreclosed properties provided the price is right. in places like las vegas, miami, we are seeing heavy cash transactions, meaning people are bypassing mortgages and going straight cash and cash makes up close to 70% of transactions in these depressed markets. nationwide one-third of transactions are cash. host: fear returns is the headline of the "wall street journal." what does that mean for bank of america and others that hold mortgages? >> the situation on the bank is that they have been making profits. the cash reserve had been rising. they have easily passed the stress test. and we have been hoping for the lending standards to return to normal given that they have plenty of cash reserves. now, the latest news where they are feeling additional financial pressure could mean that there is overly stringent underwriting standards that could be in place. because one thinghat needs to occur for theconomy is for the housing to recover and the housing to recover. for the housing to recover, we need the buyers to enter the market with the u.n. -- with the normal underwriting, but the stringent underwriting is keeping buyers from entering the market is not good news that the banks have to reexamine their overall balance sheets. host: before you go, the federal reserve meets today. what are you watching for? guest: i think they will try to say something about extended -- the quantitative easing, not a new one, but just to say that if there is no -- but just to say there is no immediate rise in interest rates anytime soon. i think the federal reserve needs to be very careful not to just come out and say they will print more money. that could be more psychologically damaging for the investor community. host: lawrence yun, thank you for your time. christian weller, what are you hearing? guest: i think mucof that is wishful thinking. when it comes to the housing market, what we have to news -- what we have to realize is that many homeowners are still underwater, about 23% of homeowners zero more on the homes than their homes are worth. 23% of homwners owe more on their homes than their homes are worth. what that means is that we are going to see years of high foreclosure rates. about 4% of mortgages are in foreclosure, about 8% or 9% of mortgages are delinquent. we have an oversupply to potentially enter the market, that are all on the market. there is not that much turnaround because people know they live in these neighborhoods. they know there are lots of homes for sale. they know that prices are not rising, possibly falling, especially in the weakening labor market. in that world, nobody really wants to invest. it is a symbol deflationary spiral. if you think the prices are -- is a simple deflationary spiral. if you think prices will be lower tomorrow, you will wait until tomorrow. the oversupply of existing home i do not think we'll see a quick turnaround in the housing market. host: diana, your take on the housing industry? guest: it is very regional, places where people have purchased a lot of second properties, they're doing a lot worse. we need to look on a regional basis, but the product -- but the prognosis overall is not good right now. host: we have retweet -- "he has called for tax increases, but we have not had any, is his point. and yet the unemployment is up, gdp down. why? guest: we have had $1 trillion in stimulus. we started off in january 20,009 2009 and we have been sucking money out of the private sector. the government has attempted to step in thinking it can spend money better than the private sector can. this just has not worked. that has seen a lot of uncertainty. taxes were about to go up last december. this is not a good envonment fo investing in creating jobs. the president went on national television yesterday, and frequently over the last couple of months, calling for tax increases. there is a lot of uncertainty as to regulations, taxes, and that is one reason why americans do not have more confidence. they are not going out and buying, and businesses are not treating jobs. host: on that point, if fox says, "the market was plunging while the president was speaking. how does that speak to the company's the market has in him? guest: the market is reacting to fundamental uncertainty of what exactly the downgrade for s&p ultimately will mean. it is a technical aspect, to someegree. the s&p downgraded the u.s. debt from aaa to aa-plus. depending on how regulations are written for by financial markets, banks, insurance companies -- some pension funds have to get rid of u.s. debt. u.s. regulators have said they cannot hold on to the u.s. debt, it is still as good as cash. others may not. the market is trying to figure out the technical consequences of this downgrade. we will wake up in a few days and realize th was all turmoil. that is one part of where the market went down. other point -- and that has hinted at this before -- we are at an inflection point at the economy. some economists say we will get faster growth in the next six months. some say we will get a double- dippers session. thmarket swings are rightly -- the market's swings vary widely as it always does during these times. to reaffirm the markets, to say that we are going to do whatever is necessary to avoid a -- dead recession. we are going to create the jobs recession.-dipp so that we have a track record of boosting confidence in the private sector, boosting job growth in the private sector. i think we need to continue those efforts by extending unemployment insurance, not enacting spending cuts in a rash fashion as the economy still weakens. host: ryan has been waiting patiently on the democratic line in arlington, virginia. caller: when the s&p downgraded, they were absolutely right. nobody wants to admit it, but they were absolutely right. and i would like to ask diana -- diana, you keep saying when are they going to lower tax rates for corporations? well, g.e. got a $14 billion tax break, $5 billion domestically, not abroad. tell me, how could we help a corporation any more? tell me what other loopholes we can close. >> well, as kristin mentioned earlier, there are many loopholes but they just a fact -- as christian mentioned earlier, there are many loopholes. lower tax rates in a revenue neutral manner so that we have a more efficient and fair tax system as to the point that we save jobs, maybe we did, but the unemplment rate is two percentage points higher than before we started this whole stimulus exercise. the s&p downgrade i think reflects the views of the economy as a whole. gdp is a lot lowethan we thought it was going to be. e employment news came out, only 117,000 jobs were created. the labor force participation rate, americans choosing to participate in the labor force, went from 64.1%, 63.9%, the same level as january, 1984. we have one of the smallest percentages of able-bodied americans working in the labor force in a very long time. so the economy is not doing well, and that is why the markets are going down. the s&p downgrading is perhaps tangential, but it reflects what is going on in the economy. that is what we need to fix. host: diana furchtgott-roth and christian weller, all this talk about economic news and indicators, what it means for you. tim, from michigan. caller: good morning, greta. i feel like i hit the lotto today, a kid. i actually got through while you are hosting. host: what is your question or comment? caller: my comment is about this class war that the republican party has been waging, especially since -- that president agan started but especially under president george w. bush. it was said that when social security, when it first started -- you can tell me what the ratio was to people contributing to the people collecting. i think he said it was like 30 to one. when you tie it to the advantages where they are eliminating jobs, corporations should still be responsible for a portion of the gross domestic product. even though there are not workers, that it will be taken out of, they will not be paying someone a salary, but they should still be responsible to contribute to social security. one other thing -- the way they have taken over the lexicon job creators, it is more like job porters. as far as entitlemes go -- when mitch mcconnell and john boehner and that ilk refer to medicare, social security as entitlements, that is ridiculous. what really scared me is when mitch mcconnell, about three weeks ago, they were talking on the news about trying suspected terrorists in american courts, and mitch mcconnell said, "i'm sorry, terrorists are not entitled to american justice." how dare he used the entitlement word when referring to terrorists, and referring to entitlements when it comes to senior citizens in this country. i don't see how u can refer to terrorists and americans. >> we did not need a rating agency to tell us that the gridlock in washington over the past several months has not been constructive, to say the least. we knew from the outset a pronged debate over the debt ceiling, a debate where the threat of default was used as a bargaining chip, could do it burke enormous damage to our economy and the world prosper that threat, coming after a spring of economic disruptions in europe, japan, and the middle east, has now dampened consumer confidence and slowed the pace of recovery. host: here is "usa today" with the headline, reaction from republicans after he gave his address yesterday. the gop rebuffed tax push. and the "financial times" has its headline, "obama seems to have the upper hand in the deficit debt talks." inside the store, it says, "some analysts see the trigger as a democrats' best option. if they cannot come together, automatic spending cuts, half to domestic, half to defense, has go into place. from being -- that is because the domestic cuts set out by the trigger largely exempt the programs that are important to democratare being slashed. without revenue increase, there is no reason for democra to compromise. there are the best cuts they're going to see, says tom davis, a former repubcan congressman from virginia. at the same time, shifting party dynamics from rank-and- file republicans and isolationist views from the tea party mean there will be internal divisions of bond many about how far the pty should go to protect the defense budget. eric cantor said there will be renewed pressure on republicans to give in to tax increases. but remember to resist that pressure." christian weller, the you think democrats have the upper hand? is there no reasono compromise? guest: it is very difficult to y who has the upper hand. i think the politics on the debt ceiling debate are shifting all the time. we should not make a pronouncement at this point on how the super committee will react. therare priorities a needs to be addressed. the first one is to strengthen economic growth, strengthen job creation. and the supercommittee will discuss that the president is pushing in that direction, some members of congresand voters want to see action on jobs, on growth. we will have the conversation about what should happen on the spending side and tax side to help growt to help jobs. that will dominate increasingly the debate over deficit reduction. th needs to be traded off, the short-term emphasis on job growth needs to be traded off against the long-term challenges of massive deficits, especially the lack of revenue and the health care inflation problem we face over the next t 10 to 20 years. but we should not assume anything about the supercommittee at this point. it has enormous power and opportunity here to do the right thing for the economy in the short run, for the deficit and economic stability in the long run. host: here is the latest week from republican tom price. "house report and put it before back in april that outlined how we can get this nation back on sound fiscal footing." what about the differing factions within their own party? guest: we really need to get a handle on spending. later this month, we are going to get the mid-session review, the new numbers put out by the office of management and budget and the congressional budget office. it will downgrade u.s. growth from the projections they put out in january, and they may wait -- they may well wipe out all the deficit is by increasing the deficit through lower growth. the growth the projected for this year was 3.1%, and it will probably go down to about 1.5%, 4.2% next year, and we will not get that next year. taking three or four percentage points off gdp growth increases the deficit. it will basically wipe out all these savings they're having so much trouble over $1 trillion with the special committee in savings over the next 10 years. we will have to come up with a lot more jt to keep en. host: let's go to rob, republican, from rochester, new york. caller: for mr. welr, he keeps referring to revenue, an increase in taxes. i'm a real estate broker in rochester, and the market shot. i sold one house here. they're hiding all these houses in foreclosure already. there are hundreds of houses in foreclosure that day are not telling anybody about. if you go to hothomes.com, if you live in rochester, there are four houses. that is a bunch of hooey. there are hundreds of homes in foreclosure. you keep referring to it as increase in revenue, you mean increasing taxes. maybe last year we made $60,000. u cannot increase my revenue anymor it is like taking bloodut of a stone. host: we will get a response from the christian weller. guest: throwing around these buzzwords, if they mean it -- they do not mean anything to real people. important point here is that there are ways to generate more revenue without taxing somebody who makes $60,000. that is clear. when you look at what is on the table, you need to close loopholes for corporations, taking back some tax credits that simply do not do anything for economic growth, treing income of hedge fund managers and private equity managers the same as my income and your income. those kinds of measures would not hurt you, they would not hurt 99% of america. they would not hurt economic growth, but they will ultimately allow the government to maintain the programs that people value. they will maintain social security, veterans benefits, mecare, medicaid, education, and so forth. we need to be very mindful out when we talk about spending and tax increases, we're talking about real people. there are ways to be smarter about spending and there are ways about being smart about the tax side that do not hurt the economy and most people. that ultimately is the conversation we want to have, because we need stronger economic growth, we need more jobs, and we need ultimately to have the budget that protect the recovery right now but reduc the deficit for the long term. host: "companies are -- diana, companies are themselves sitting on record amounts of cash. i wish to misspending keeping them from that cash? guest: a smaller percentage of it gets taken out, and we need to be encouraging them to bring it back here to the united states. guest: i would like to jump in on the cash issue because we have talked a number about it. the companies have been building up cash since the early 1980's. when you look through the data, they are largely using it for things other than productive investment of hiring. they are using it for mergers and acquisitions to y other companies. they are using it toefend themselves against takeovers. they are using it to defer buying back of their own shares and to pay dividends. there are a number of things companies are doing with the cast that does not necessarily translate into more investment and hiring. at this point companies do not need more cash to do things that are not productive. at this point -- and they say so. they need customers. we need to boost jobs, incomes, and those things are what companies need. they need customers. host: diana wants to jump in here. "u.s. workers were less productive in the spring and that does not bode well for future hiring." guest: the short-term numbers are fluctuating widely, and they go along with -- they are often subject to revisions, but there is a lot of noise and that data. long-term, if you look at the last three years, productivity has gone up at a reasonable rate. guest: it is difficult to say that we think emersion acquisition deal or dividends is a productive use of company kaspar they're trying to do the best they can -- of company cash. they're trying to do the best they can, and they think it is a good use othe funds. how can we say that it is not? guest: it is not a productive use. they're not investing in productive capacity. terms of net investment beyond depreciation of the lowest levels. you ultimately see that translates into productivity over the long term. will we are not investing today it will ultimately come into -- from a policy perspective, that does not mean we should encourage those activities. the dividend tax cut that we enacted in 2003, it led to more dividend payout, b it did not lead to more it best man, growth, and hiring. -- into more investment, growth, and hiring. guest: the dividends were double taxed to begin with, so the change was getting rid of a double taxation. the whole problem in washington, we think we can tell companies what the most productive way is to organize their assets and the finances. it is possible that new companies emerging into more companies separately? i do not know, i should not say. these are decisions that maybe we should have low corporate tax rates come and take away some of the decisions rather than trying to second- guess. >> we know from the literature that is not boosting innovation and economic growt there is a vast literature that shows that. we also have to be mindful that we have spending programs in place that people want, that the country wants, that needs to be financed. we cannot simply lower taxes on corporations and let them get away with keeping a few people their shoulders happy to dividend payouts, and at the same time burdening the american middle-class morand more with higher taxes. host: we will have to leave it there and get back to our viewers. go ahead. caller: i do believe that there is an inability to realize that we have been had. we have been fleeced by our political classes, the elitists in our country. george bush, when he left office in 2008, pardoned one of the biggest housing scammers. the guy ole $30 million from h.u.d. and other programs. they used strong buyers, and it seems to me the political classes in this country produced nothing. it it was not for equity in t housing market, they would have had no money for their campaigns, and so on. it was silverado savings and loan with the bush brothers, ne bush. it was real estate scamming. onong island, there was a man named john mcnamara who stole half a billion dollars from general motors acceptance corp. in mortgage fraudsand he got away with it. he never did a day in jail. even this other gentleman, he stole $30 million from h.u.d. in one year alone, did not pay any taxes. you can follow the trail and see he paid every executive in my government -- and even my current government, steve levy, my county executive, he has had to relinquish millions of dollars of campaign cash. he cannot run for election because of some federal probe. host: got your point, anthony. we go to nebraska. caller: i'm curious why we do not go back in history on the trade problem. back in 1860 week passed a tariff to fight cheap imports om britain. why don't we do the same thing? even mckinley did that, and it increased employment and decrease the cost of labor. guest:t would cause a trade war, and other countries would -- what we really need, saking of trade, is the free trade agreements to be ratified by congress. we have outstanding free trade agreements pending, but not ratified, with colombia, panama, south korea. this would give more market to our export, and a substantial numberf americans work for companies that export. it would be against world trade ganization regulations. guest: i agree with diana to some degree that we do need to focus when it comes to trade on exports. we have been doing fairly well on exports since 2004. even last quarter, export growth was much stronger than our imports. clearly, we're doing right on exports and trade. we do need to keep imports coming because what happens is we are importing intermediate goods, we add value, we put them into cars, machines, airplanes. then we export them at our high prof for u.s. manufacturers had not think the solution is passing more trade agreemes. what we do need is to help smaller companies, small manufacturing companies to really gain access to the market. jeff insel, who heads the president's competitive this -- jeff immelt, who has the president's competitiveness -- we need to build on that momentum that we already have on the manufacturing side, by bringing in small manufacturing companies into the game. host: diana, there is the situation in europe as well that is playing into what we're seeing in our economy. explain your take on that. guest: we think we have problems here, but it is nothing compared to what your past. the eu has bailed out ireland, greece. now they are needing to bailout italy and spain, and this is taking a tremendous amount of resources. the bank's there have real solvency problems -- the banks there have resulted probls, and they will be able to buy fewer of our exports. some of our banks are also invested in europe. guest: to some degree that is right. i do not think we will necessarily talk about bailing out italy. guest: d e u. guest: i agree that there is this worrying about could this spillover into the banking systems. you saw negotiations early into summer whererance and germany were pushing the private banks to participate more in bailing out greece, and the banks, especially finland and oers, said, no, if we do this, our banks will gondar that raises redlags for me and for a lot of -- will go under. that raises flags from me and for a lot of other observers with the bigger countries like germany and france, and how could this ripple effect free more uncertainty in world financial and the world market. host: should there be a coordinated global response? guest: no, i think the you should be dealing with this on its own. french and germataxpayers will get tired of bailing out greece, ireland, and these other countries if the you decide to do it with their european stability mechanism. host: here is another tweak from our viewer who wants you to debate the infrastructure bank proposal. kristin, let me begin with you. ,e heard that -- chris cti let me be with you. why wld it work? gas co we're talking about a national infrastructure bank. it would be a loan guarantee program, possibly through the department of ccommerce. there are infrastructure banks that are alternative models that exist in other countries, typically economic development banks, that you have to get some government subsidy and backup guarantees. but they would be largely self refinancing through the investments they make. we know we have massive infrastructure needs when it comes to growth, bridges, school construction, greening of office buildings, so on and so forth. it would work because the way these banks loan guarantees would be structured is they would have to look for a positive rate of return. in some cases, the government would add a little extra, would subsidize the rate of return to bring in investment response. by and large, there would only be profitable investments that the private sector is not undertaken in because the payoff would be over such a long. of time -- over such a long put to of time, and they often did not want to go there. the idea is not to take something over that the private sector is already doing, but fillg in the gap for the private sector is not yet going and wi never go. host: why wl it work, diana? guest: just for the reason he said, that is because that is where the private sector will not go. it will be a question of the infrastructure bank playing political favorites. you can see that there might be a lot of money going to illinois are california, but here we're talking about cutting spending. we do not need an infrastructure bank when we have the private sector. that can finance many infrastructure projects. also our technological capabilities have increased to the extent where now we can toll roads. tolling means that private companies would be interested in building a road, and then there can be told to get back revenues. there is one close to prince george's county, one close to dulles airport. there preventing the pvate sector from investing in infrastructure, such as not allowing private sector investment on federally funded projects and roads. we need to look at the regulations and see if we can roll those back. guest: it has always been sort of -- its surprising to hear diana speak like this because there has always been an agreement between conservatives and progressive economists -- even milton friedman argued that the government has a role in infrastructure investment. banks will levere public dollars to bring in private vectorinvestors' dollars. the reason private invtors are not going there is they have a short rate of return in terms of recovery could bring their money. the infrastructure bank is meant to deal with that problem. into projects that private investors themselves will not -- guest: 1 infrastructure product is high-speed rail. the government wants to spend $53 billion on high-speed rail, and fewer than 2% or 3% of americans use rail, so it would get funneled into projects such as that like mass transit that are politically correct. thiss not something the private sector wants to invest in and our tax dollars should not go into it either. guest: private companies would like to run rail, they just do not want to invest in the infrastructure on the actual rail along the corridor, which costs $20 billion. guest: because they think it will not pay off. guest: know, when you lk at other countries like germany and britain, the privatization of the rail, increasing -- private companies said they would like to run the trains. they do not necessarily want to invest in the real capacity. neither do they in other countries. guest: $53 billion in president obama's high-sed rail project? guest: in the northeast corridor there is the demand for high- speed rail. host: we have less than 15 minutes to continue this debate. i want to show you what the president said yesterday about this supercommittee and what he will do to put pressure on them to come to some sort of agreement. >> i realize after what we just went through, there is some skepticism that republicans and democrats on the so-called supercommittee, the joint committee that has been set up, will be able to reach a compromise. my hope that -- my hope is that from a's news will give us a renewed sense of urgency. i intend to -- my hope is that from yesterday's news we will give us a renewed sense of urgency. the committee will have this administration possible cooperation. host: "the washington post" editorial echoes what the president said, the call for mpromise between two sides . it will be worth only of the country's leaders come up with full-fledged solutions. "the wall street journal" says this. "a downgrade awakening. they argue that we are taking a step back to the daily turmoil look at the larger picture. terming u.s.ebt debate is not a sign of political dysfunction, despite what the s&p and the chinese say. it is a sign we're finally beginning to comprehend and correct the problem. the process will be messy, as democracy always is. it is a sign of progress. guest: i think they got it right. the as and he got it wrong saying that we have a dysfunctional system, ignoring the fact that we got a budget deal, a debt deal. the important point is, yes, it is messy, but in the end, we have a deal. there is a national conversation over the right party. how do we get growth? how do we strengthen growth, create jobs, and how do we ultimately address the challenges of the structural deficit? despite incredible divisions on partisan ideology, it can come together to fix the problem. the hope is that the supercommittee will do exactly that, that it will come together and address the nation's priorities, create jobs, broke job creation, promote growth, and address the long-term structural deficits in the long run. host: diana, your thoughts. guest: the fact that we went through this battle and all we got was $2 trillion in cuts the white house office of management and budget midsession revie will come out later this month, and ey will add right back at $2 trillion by reducing gdp growth. we need to look at what is being done in the house of representatives, where the house passed a budget resolution that would c $6 trillion over the next 10 years. house republicans also psed cap and balance that would cut spending and cap future spending and pass a balanced budget amendment. these are the long-term solutions we need to be looking at. we cannot just cut $2 trillion over 10 years. guest: we also have to understand the cap, cut, and balance approach, the house paed it knowing full well the senate would not pass it. on the other hand, the democracy and budgeting process is a step- by-step issue. it is not that one day congress will fix all problems and we will go home and not meet for 30 years. every congress will face these challenges, especially in an economy that is not as turbulent as ours. at this point we need to figure out how we're going to start making downpayments and creating growth. at the same time, start thinking about how we're going to reduce the structural deficit. host: cnn is reporting this morning that pressure is on the white house. here is a tweet from congressman connie mack saying that "mac again calls for geithner to resign in the wake of market fears and permanent unemployment of 9%." about: i'm wondering more campaign reform. host: what about it, dennis? caller: is c-span taxpayers? host: no, it is part of your cable bill every month, brought to you by your cable service. caller: get the presidential campaigns to use that. host: we're getting way off topic here. go ahead, john. caller: i have been working since 1976. since the epa came in to the government our government has shut down a bunch of different companies due to the epa regulations. is there any way to get epao relax on businesses and do a corporate tax on companies that are moving to different countries? guest: diane not addressed that. i want christian to address that. why do you think the epa should not relax the regulations? guest: well, it is not just simply giving polluters what they want. it is protecting natural resources while also protecting the health of people. en you look at countries like germany or spain, and armenta releases are a double-edged sword. they rearrange costs in the short run, but often these regulations are phased in over long enough periods of time, giving companies exemptions, to prepare for the new regulations. they have made the company's much more fuel-efficient, less polluting. en you look at countries like germany and others, they have used this to really build marine industries, to be very well -- to be world leaders when it comes to win craft and solar power, and so forth. that is where we are behind. we could use regulations, voluntary agreements, and others, as we have done with other fuel efficiency standards to prod companies to become more efficient and to go were clearly markets are. guest: so why don't we just announced that in 20 years everything will be wind and solar? the companies will have the time to invest in those jobs. we now have natural gas, coal, and oil, and these are the more efficient forms of fuel. america is getting cleaner every year as we've been in new plants, buy new vehicles. it would be relatively simple for the president to call lisa jackson and say let's hold off on the car and regulations, let's hold off on the clean air transport regulations. until unemployment goes down to 7%. host: is't it that they want certainty that this will go away? guest: even better. these are optional. the epa is not required to put forward any of these rules right now, and what they're doing is making energy production, making any kind of factory usage more expensive here, which is why so many plants are going overseas to china and india. host: 1 more phone call, richard, a democrat from massachusetts. caller: thank you. the thinking from conservative think tanks -- where was your voice during the bush administration? it had two tax cuts. that prescription drugs and of $800 million that -- $800 billion that wasn't paid for. also, diana, when the private sector is not hiring, it is the duty and responsibility of the government to create jobs. president eisenhower did it with the international highway system that created many jobs. host: diana, what is your response? guest: between003 and 2007 when the bush tax cuts were fully in effect, we created hundreds of thousands of jobs every month. i would say is not the government possible to create jobs, rather it is the government's role to invest in the private sector to create jobs. the government could hire one group of people and ve one group dig ditches and another fill them in. we have seen that in the past couple of years with the shovel- ready projects and the $1 trillion stimulus package, and we're left with unemployment that is two percentage points higher than when we started in january 2009. we have seen it does not work and we need to take a different track. yes, president bush did spend too much when he was in office. many people said at the time -- i was working at the department did labor and the council of economic advisers. part of it was congress. my boss, of the labor department, went in every year to congress lower budgets and she was called uncompassionate by congress. they put the money right back in. so this was not just president bush's problem. guest: the tax cuts of 2001 and 2003 were a lesson on how to squander money. the important piece is going back -- and i agree with diana -- that we should be creating a situation where the private sector is adding jobs. wh you look at the past couple of years, that is exactly what we have. the private-sector is creating jobs. the private sector added 154,000 jobs. that is not enough to reduce the unemployment rate, but part of the problem is that the government, especially states and local governments, are cutting jobs -- laying off teachers and public workers. on all categories at that level. at the state and local government. education is the largest category, public safety is the second, transportation is thi. we're seeing private sector momentum going forrd because the stimulus and other measures have created an environment where the private sectors are comfortable hiring. what is putting a drag on it is that the government is cutting back on jobs, and individuals do not have enough income to drive more momentum forward. for the near future, we need to continue the extensions of the unemploymentnsurance benefits and the payroll tax dollars. host: we have run out of time. real quick, diana, 20 seconds. guest: how many people would not like to have that back right now? guest: unemployment is the wrong measure. we're talking but job creation. the job creation measure for the bush and administration, whether after 2001, 2003, it was an abysmal. it was the lowest since the great depression. host: many people would want a 4.8% unemployment rate right now. guest: the job creation track record for the bush administration was the lowest since -- host: we've got to leave it there. christian weller is a senior fellow for the center for american progress. and diana furchtgott-roth is the director of the john pistol is that the newseum to talk about transportation security. >> this weekend on book tv, frederick olmstead is remembered for designing washington. also from washington, book tv stopped by a launch party for juan williams. the skull and crossbones are long gone, pirating in the 21st century his night vision goggles. inside the world of the pirates of somalia. sign up for book tv alerts. >> next, a look at what can be learned of our debt reduction from the french and american revolutions. this 45-minute discussion is hosted by that freedomfest 2011. analyst includes steve forbes and john mackey, the ceo of whole foods. we are delighted to have you here, and we're on to talk today about the american versus the french revolution. to get this discussion started we will talk to tom palmer, who was with atlas international, and he has been reading numerous books, and coming up to speed on the french revolution. he is well versed in the american revolution. tom, what have you learned that you can share with our audience regarding your views of the american versus french revolution? >> before we get started, this guy has an eye that, a computer, and he is better prepared than anybody else. >> life is unfair. i would like to start by taking issue with a remark that was made by john adams on stage here, and it is common among anglo saxon speakers. it is mistaken that somehow bastille day, today, is a bad day to celebrate. i think it is a great day to celebrate, the tearing down of the best deal, and the liberation of the small number of prisoners who were held there. seven people at the time. what happened later, which recall the french revolution, was a disaster, and it was a disaster because of economic policies that could have been avoided, and our good friends who were friends of thomas jefferson, they moved to america, and their son set up the dupont company. he said to not do this. it had to do with monetary policy, which matters a great deal. a little bit of background. the dominant interpretation of the french revolution is either a marxist, a clash of protective forces, the feudal system versus the rising capitalist course policy. this is rubbish. it has been established this is false on every count. there is nothing to be said for that interpretation. no good historian today -- and it persists. we still hear this language read the other is the conservative interpretation. it is also mistaken, the one with an associate with john adams, that somehow it was a mistake talking about the rights of man. in fact, most americans were enthusiastic about the origin. it started in a fiscal crisis, as did the american revolution, a lot of debts and a call for new taxes to pay them off. the french king them had bankrupted itself in 1786. it was declared to be insolvent. they had already paid out to tax revenues. they said, where is the money going to come from? they found they could not get anything done. finally, in 1788, the call for the meeting of the state's general for the next year, the first time in 175 years that the body was to be convened. when they met, they made some decisions that were quite right. the third estate among the three said we are the assembly of the nation. we do not want to be covered in this medieval fashion anymore. the fundamental crucial mistake was not repudiating the debt, and it is what we're on to face, coming up right now, with the debt ceiling, a similar question. i think they should have said this is not our debt. we're not responsible for this. the consequence was that they could not find a way to raise taxes and they could not repeat that, partly because it was a widely held, so be quite so many people were owners of government that, and did not want to lose the rents that would accrue. they've made a catastrophic decision. the nationalized the lands of the church, which is not exactly what we think about churches today. these were state-favored institutions, and said they would seize these lands and auction them to pay off the debt. they issued the interest-bearing loan that they replaced the old debt with this new loan that would be used to buy the church lands picnic the scheme -- church lands. the scheme was a big mistake. here is what edmund burke had to say and i have never found a conservative who will cite for a criticism of the revolution who understood burke. he said, and read it carefully, this audience will understand what he is saying. most readers cannot comprehend lives. "industry without vigor, congress expiring, revenue unpaid, people impoverished, a church pillaged, a state not relieved, anarchy made the constitution of making them, and everything human and divine sacrificed to the idol of public credit." people read this today and have no idea what they're talking about. he means the national debt. national bankruptcy is a consequence, and the crown all, the paper securities of new top during power, the discredited paper security of impostures -- impoverished supporters held at as the support of an empire. in lieu of the two great recognized -- today people think he is talking about birds or lizards -- species -- gold and silver. the lasting conventional credit of mankind, which disappeared and hid themselves in the earth from whence they came. when the principle of property was systematically subverted. he understood the economic foundation of what was the turn out to be a disaster. it was not that they started with bad principles, as many conservatives misunderstand. it was a big mistake to challenge the market, to establish representative government, but rather, they started out very early on by is destroying their own monetary system. this was a catastrophe. bad money drives out good, because they traded at a fixed ratio, in order to pay a debt in either gold or paper, as paper was the proceeding because they were putting more of it, i paid in paper, not in a bowl. gold was court said. -- gold was hoarded. there was a currency shortage because the notes were only issued in large nets. they had to issue small notes. this may sound familiar to some of you, and i would like to read one of the arguments, a poor, 1791, another issue of the paper currency. they should make up for the scarcity of cash, and revive trade and manufacturing, by reviving circulation, which has languished because of the means to sustain it. can you say stimulus, quantitative easing? this is the essentially the same thing. the economy is languishing because there is not enough money in circulation, and samuel dupont said money is the medium of exchange. what you need is production of wealth. money is not wealth. it is a medium of exchange. wealth is good and services, which ultimately exchanged against each other. the consequence of this was accelerating inflation, more inflation, the collapse of the monetary system, skyrocketing prices, and price controls. that is of course the solution, price controls. people clamored for controlling prices. you'd see the consequence of these disasters policies. 1793, the law the maximum is installed, and in all the histories of the french revolution i've read, most of them mentioned this on one page, as a passing sort of thing. when are the guillotine's established in leon? for the purpose of be heading speculators. people who are not bringing brad to the market. they have the bread. they know what. if we chop off the heads of more bakers, there will be more red. unassailable logic. this accelerates the total social economic collapse. the root of this was bad economic policy. it was largely an economic terror, and it was not inevitable that they do this. they should have gone their house in order early and said we are going to cut spending, which is what we should ask our congress to do, because we are not at -- not that far off from the same fiscal problem. it is a very hard thing to do, and i think holding out the possibility of repudiating the debt or restructuring it has the colleted it restructuring its day, is much better. i will mention parallels that she's given us pause for concern. first is the immediacy of many of our economic leaders. timothy geithner, who is a smart guy, i saw him on television saying, if we do not raise the debt ceiling and allow more borrowing, the credit markets will downgrade our bonds. they will find out we are spending more money than the treasury is getting in. they do not know that? i think they know that already. i do not think that is thought to have big impact on the willingness of people to lend money to our government. the second thing is we have institutional rigidities. everyone gets a subsidy, no one wants to lose it. on the tax side we have another problem. two major features the remind me of the pre-revolutionary situation in france, homeowner'' mortgage interest deduction. this is one cause that contributed to the fiscal crisis. everybody got to get a bigger more and more money going out. this is a big problem. and that particular tax privilege or tax preference has pushed us in the wrong direction. the second one that is pushing us toward socialized medicine is in on taxability of your insurance, so that everybody gets it from their employer. this is not the case before. this goes back to world war ii, insurance is not a taxable benefit. you do not shop around, and the consequence is it has put in a set of things that is moving us to a single-payer system, which means the state, rationing, favored people get treatment, on favored people did not. we need to address those on the tax side to avoid these incentives that are pushing us more and more towards the control of financial markets and health care. long and short-term i'm a big fan of the principle of the french revolution, but the economic policy was a catastrophe, and this is the primary reason why it went wrong, and there are important lessons there for the and i did states today. thank you. -- for the united states today. thank you. >> thank you. it would be a good thing that the u.s. repeated that because it bring fiscal sanity back into government, and it would demonstrate once and for all that treasury securities are not the safest investment. they are the true job bonds of our market. it is a tragedy that joe bonds refer to private corporations who are trying to hire workers and trying to create a profitable business and they get the shaft compared to the treasuries. there's a lesson here, and i would like to get a comment on someone on the panel who would like to comment, and that is the u.s. also heavily into debt, both the state and the federal government, they also inflated their continental dollar, not on the same level as france, but they still went in that direction. however, the hamilton plan, which is often criticized, turned out to be very successful. it was oversubscribed, and basically, a hamilton plan was to take all the state debt from the states so they did not have to repay that and added it to the federal debt that they owed to france and other foreign countries, and get it was oversubscribed. why was it oversubscribed by investors? because in the hamilton plan, they had a tax system, mainly to tariffs and to excise taxes, and what is known as a sinking fund, to deliberately paid off the national debt by i believe 1812 or around that time, and that is when they did in fact pay off the debt. my question to you is, do we really need to go toward repudiation or could we adopt a hamilton type of plan? some of you are having a sinking feeling hearing about the scori, frank, what would you think about a plant like that to solve our problems? >> i have been trying to put out your dollar out here, and i am not sure that the treasury will be able to do that. a sinking fund is one way to repudiate -- to bring that under control it assumes at some point that you actually have the revenue to do so. at this point, unfortunately, the numbers i've seen, i add up the numbers, does not give me that in a warm feeling that is an easy or something that does not produce revolutions in the street along the way. that is one of the issues with all the spending cuts and we all saw at the madison courthouse on a pretty minor issue, and you take good additional revenue, and good tax revenue, to establish a fund, it makes it difficult to do. >> your bank came through the tarp crisis quite nicely. you're not forced to take part money and you were financially sound throughout that time period. why was that? why were you not attempted to engage an easy loans? how did you escape from that question are >> if it was tempting and we joke about it today. you're just trying to get this into the subprime loans. but they took a look at the market. several things that people talk about, all the liquidity in the market, with the foreign governments buying debt, pushing down the real interest rates out there, people who felt forced to buy these mortgages and establish them, you can imagine the committees sitting around, why we cannot get enough deal here, put the money into these. they will pay off. we cannot take the opportunity to do that. we are a private company and did not have to worry about the quarterly earnings. i like to see our government but the brakes on and stop doing that as well. >> doug casey is here with casey research. we're delighted to have him. what you think the government should do to solve its debt problem and now, a $14 trillion deficit that seems to be growing higher, higher taxes, cutting government spending, off what combination would you like to see? >> i want to complement,. that was a fantastic, accurate, sound presentation. >> let me get to the microphone. >> i hate these damn microphones. they sound like you're speaking into a 55-gallon barrel. but i want to complement tom on the presentation. i do not have anything to do with anything that tom sadr frank said. but what do we do about this debt? it is going to result in the overthrow of the current civilization here in america. such as it is. my recommendation that we be defaulted on. i would recommend many years ago, when it was a much more manageable problem that it is now. i will give you three reasons why the u.s. government, which i do not think should exist -- [laughter] but nonetheless it should default on the dead. number one, it would punish the people that were stupid enough to lend it money and make it possible for them to do all of the destructive things that have done. [applause] and i'm very sorry for the people that have pension funds and people that their banks would not be able to pay them back or anything like that. that is just tough lot. i would say, actions have consequences, number one. i like to punish the people that have lent money to the government. i cannot think that anything is owed to them because they were lending to the wrong kind of borrower. number two, if you have to default on the debt for moral reasons. otherwise, it is an albatross around necks of the next generation and generations after that. it is turning them into service. you cannot do that to people that are yet unborn. people that are alive today, who lived above their means because of that debt and other debts, let them pay the piper. not the people in the future. that is the sec reason. moral reasons. the next generation. and that third reason is that the u.s. government defaulting on its debt might make it impossible for the u.s. government, if it is going to exist, which is no guarantee it will, certainly not in its present form, to borrow again. that is the third huge benefits. i see these three big benefits. [laughter] some will say, we do not want to overturn the basis of society. maybe we should pay it off. well, i understand. it may be possible. look at china. 30 years ago, it was nothing but poor, ignorant, starving peasants. there was nothing in china. and now the place is blossoming. just as many countries around world, not just china. but i do not think that as possible for it to be turned around here in the united states. it is not possible to do in the next 30 years what china did in the last 30. why do i say that? you would have to overturn the whole government in this country anyway. all the regulations in this country make it so hard to produce, only an idiot, i would think, would set up a business in this country without looking at another country where it is much easier, ok? regulations are choking this country and their cars are getting worse, not better. that is not going to work. the taxes in this country are brutally high. only an idiot would set up a business in this country without investigating what they could do in another country. and the taxes are going higher in this budget. and there is no saving, no building of capital in this country. why? because of inflation and the artificially depressed interest rates. there is no capital to do anything. let's just borrow it from the chinese. so you cannot pay off the debt. it is not going to happen. i'm very gloomy about the political future of this country. [laughter] i think we will not have a second american revolution but something that resembles the french revolution. and i am not looking forward to the revolution. every revolution, at least for a generation after word, it is worse than what they overthrew. i am so glad for the french. it was wonderful that they read the age of regime. except it was worse for the next 20 years, robespierre and then the poll in. and the same thing with the american spirit there was no reason to kick the british out. 3 percent taxes, that is what they were extracting. but this country would have been much better for having the gigantic, prosperous version then turning into the behemoths that it has today. i do not even approve of the american revolution. [laughter] look at what happened is with idiots. right after the american revolution, this of the alien and sedition acts and so forth. i do not approve of revolution, contrary to what chips said, but we are going have one. and financially, they are primarily economically based. americans are so drugged up on prozac and watching the whatever that show is where somebody sayings. what the was that called? [unintelligible] of course company when they cannot buy things a walmart anymore because it is too expensive and the chinese will not lend us money anymore, this place, it is going to be a disaster in this country. do i care? well -- i will be watching this on my widescreen from some place that is comfortable. and you can people can watch it out your front windows. [laughter] [applause] >> there is an old saying on wall street, no one is so bearish as a sold-out world. -- bull. i would like to return to a little more sanity with hearing john mackey, who happens to be one of those idiots to does run a major corporation in the united states. [laughter] and very successfully, not because of, but despite government regulation. john, give us your perspective -- obviously a default on debt could have major repercussions for the u.s. economy and your business. is there in your view a way out of the government to maintain some kind of stability and get back to fiscal sanity? or does it matter to you? >> one thing i love about freedomfest is that when i come there, everywhere else, i am like this radical guide. [laughter] and i am like the one same person here. -- sane person at the show. [laughter] i wish you could see all the cool stuff tom has got here. he is showing the deficit over the next 70 years. i love dogs. he is such a funny guy. i always love listening to him because he is just got such a great sense of humor. but it is not too late now. cannot cross the point of no return yet. but the problem is we are approaching a period we can handle the deficit that we have right now but can we handle the deficit that we will see in the next 30 or 40 years? not unless there are fundamental changes that occur. today, it is a spending problem. the government is out of control. makes promises it cannot possibly keep. there is just no way debt -- we're not going to pay all the entitlements that -- we are not going to do it. there is no way. there are not enough revenues. you can demagogue about taxing the rich, but if you just look at the statistics, there is not enough money there. they are going to cut spending. somehow or another. we have not yet passed the point of no return. if we do have -- as a business person, a ceo, i tend to be more optimistic. america has a great value tradition that in some sense has been awakened. i think that we are struggling to come take back our nation. i always said that the 2012 elections of the most important lessons of our lifetime because we are either -- [applause] we are either going to be -- we will see whether it is powerful enough to trot off -- for a lot the parasites that are infecting us. and we just might. i am keeping our fingers crossed and doing what i can. i have not given up hope. but talk to me in another year- and-a-half, and we might know more. i think we have to deal with the entitlement issues. that is the problem for that is what is by broken the spirit we cannot afford these decisions that have been made toward they're going to have to be dealt with. there are not enough revenues. what they really want to do is get a value-added tax and more taxes in there. they really want to spend money. that is what they do. that is what we have to try to avoid. america does not have a revenue problem. it has a spending problem. i think we can correct that. hey, to know, if we do not, i am going to go to doug's island someplace and i have enough money where i can watch the tv with doug. [laughter] i think the american revolution is still very possible. i think that is what we should be working for and i think we are working for it. i am somewhat hopeful. >> i take it that you have not been called by president obama -- if you're the ceo of a major corporation, he did invite a number of business leaders to get their opinion of how to deal with the crisis. were you called to come to the white house? i >> i am not on the tape. there has been no reason to call me. [laughter] [applause] >> thank you, john. one reason the french revolution ended so badly and their debt was so excessive was because they based on ending wars that constantly off against the english, against russia, against italy, the list went on and on and it was never-ending. is there a lesson here for the united states of america which seems to be fight acne -- fighting and ending wars? >> let's stop doing that. [laughter] [applause] >> that is the obvious point. we are hemorrhaging a check and the amount of blood and treasure all over the planet. -- a gigantic amount of blood and treasure all over the planets. the size of our military commitments, the number a trip wires we've set up around the world, if this happens, we go to war. korea is a well-known example but there are others as well. a police decision to blunder into iraq. the possibility of conflict with iran, absolutely needless. the ongoing afghanistan adventure which started out with getting the guy who did this and then mission creep started very quickly thereafter and now it is nation-building. and the yes, we can administration will do something never done in the history of the world, establish and the sovereign power of the afghan state from one recognized border to another. that is our current criteria of that success. i can tell you that this is never going to happen. it will never happen. but that is the standard of our foreign policy geniuses. that is what we're going to do it. and it is not going to happen. we will be defeated in afghanistan. it is an idiotic gold. but so long as there is more money and more quantitative easing, they will continue to pump our treasure out all over the planet. this is a contributor to our current bankruptcy. i would say that a bigger contributor is the unfunded liabilities in the entitlements. these are staggering. and they do not show up in the debt. they make a promise to pay, they obligate themselves in a statutory matter to pages. it does not show up in the national accounting because we have $70 trillion just for medicare. the bush administration thought that they could buy the votes of seniors in peoria with the unlimited by at or benefit in the form of the prescription drug benefit. it is uncap, it is unbelievable, i do not think they got a single vote of a single senior. talk about dumb policy, a bankrupt the country for nothing. that is what is being piled on top of more debt and more dead, these obligation simply cannot be met. it is not feasible. something has to be addressed and has to be done to address these problems. because of we do not, we did this scary nightmare scenario of a real collapse. >> people like scary movies. give the people what they want. >> you are quite correct but you do not go far enough. let me take this to its logical conclusion, in my opinion. first of all, that ridiculous that venture in afghanistan, which has helped bankrupt -- it's a delay, i look forward to the bankruptcy of the u.s. government because that they are bankrupt, they cannot do this stuff anymore. they just will not be able to do it. some say we have to keep our government from bankruptcy. no, no. that is wonderful that they are bankrupt. just like the french revolution, that is the good news that they are bankrupt. the bad news is that something will come after them and be even worse. as far as afghanistan, i have to say one thing about that. y n hell today invade afghanistan when it was 15 saudis that apparently drove those planes into those towers? i gave a speech today on terrorism, which was basically, learned to make terror your friend. it was a tactically stupid thing on the part of them to have done that. but this is a major crime that was committed for the way to of salt that crime was not by launching -- and the way to solve that crime, if the japanese attacked pearl harbor, we attack beijing and the chinese. it is roughly equivalent to that. in the constitution, which is dead letter and not preserved whatsoever, there is a section where the congress can authorize letters of marque and reprieve. it was a dead cat to criminal events -- a gigantic criminal event. you have a bounty to round of the people that did it. and we should not even have a u.s. military. crazy the way people deified the u.s. military, our best and brightest. no, they are not. they are average guys that needed job. you have three types of military. if you ever thought about it. it gets late armies, which are drafty armories. you get mercenary armies, which are better in many ways. and that is what we have today. and you have militias. i am all for militias because they are not well organized and they cannot be used for operations abroad. [applause] that is all that this country needs is a militia. anyway, this is all turning into a war against islam, which the islamists started in the 600 and that has been going back and forth now for 1400 years. and now with u.s. government bombing six separate islamic countries, that they do not like these new crusaders bombing their countries. they do not like it. this is going to get out of control. it is a very serious thing, very bad. >> you made some good points about war and i'm not sure that there is a solution about their as there is in the case of the unfunded liabilities. that problem has been sought by corporations, major corporations, they used to have a defined benefit plans. they were all a serious problem of unfunded liabilities because people live longer and the investments were not doing as well and so forth. can the excessive generous health-care programs, too. now they have a fine contributions instead of the fine benefits, and also by having health savings accounts which whole foods has adopted. there are solutions to the unfunded liability problem. we just lacked leadership on the top down to say, look, we have to bite the bullet and move in this direction. i like to ask one other question for our distinguished panel, and then we will adjourn. one of the reasons the french hyperinflated and had the huge debt problem was because they lack a solid tax base. they exempted -- a catholic church was exempt from taxation, all aristocrats for example, many of the landowners did not have to pay taxes at all. without that lack of the tax base, what you have in the united states, you had a problem. my question to you, do we have a fair tax system right now, and are there groups that are being exempt that should not be exempt? president obama says the rich need to pay more. is there any validity to this argument? it might be worth doing by show of hands from our audience, how many of you in the last year paid income taxes, federal income taxes? ok, keep those hands up. i want the cameras to see this. this is a successful group. you know they -- if you pay taxes, you made enough money to pay that tax beyond the exemptions. as you know, poor people and many middle-class people now pay no income tax. only the wealthy pay income taxes any more. clearly this situation is very different from the french situation. a body want to comment on the tax aspect of our countries doing business? >> i will be controversial and wait for doug to wait and point out why i am a sellout. i do not like paying taxes. i find taxes owed is. i do not consider them a privilege. they are a form of robbery in my opinion. is not as the same as buying something that all food. i walked in, i'd pick up the thing i want, i say i am willing to pay this money for. i do not get that kind of choice. when i was younger and ghoulisher, i thought would it not be great if the state did not pay any taxes. you could get the things without paying the taxes at all. we have run that experiment. we of oil-based states like saudi arabia and it is not a happy outcome. it is terrible when the state does not depend on the goodwill or the willingness of the population. a broad tax base generates a better, more stable situation for liberty in a situation in which the state kids as well as from some other source. we call a resourced curse and it destroys liberty every place that they suffer from it. i think that our current system of a staggeringly complex inventions in getting more complex as we go on, it is a big mistake and leases in the wrong direction. however much rather have a situation where everyone is paying some tax. and i mean everyone. you might have a very small exemption for people such as the tax is putting them into a condition of non-sustainablilit. but everyone should pay some taxes. get rid of the privilege status of your health care, non-taxable benefits, which create -- creates perverse incentives leading us toward socialism, and the home mortgage interest deduction and so on. the people that mark mentioned that do not pay federal income taxes, they do pay payroll taxes. takes quite a bite out of your income. i think most americans have a sense that they are taxpayers even though they may not be paying federal income tax. but overall, the tax reform that would substitute lower, plat flatter income tax with far fewer trade of deductions, it would be a better system. it would not be ideal, it does not tackle by libertarian bone as much as i would like. i like to bring them down lower, lower, lower, as much as we can come and get things off of being subsidized by the state and onto a market-based fee and pavement based structure for them. but we need to begin looking at what the status called tax expenditures. all the money they do not get is a state expenditure, that is what they mean. but there is one element where they have a point. when certain things are exempted from taxation, it generates a lot of bizarre, perverse incentives in the economy and in the social system. i think we should be willing to make a grand bargain in say, we will remove the exemption from mortgage interest, remove the exemption from health insurance, make that actual taxable -- taxable income in exchange for bringing those rates down very ronald reagan did accomplish that at one point made. it was a huge move forward. they wiped out 3000 pages of the federal tax code. but the bidding starts tomorrow. all the lobbyists are going to come out to get little loopholes for them and their friend. at the very least, moving back to that situation would be a big improvement and i think would eliminate the dangers of a horrifying scenario that some people present. i am in this for the long haul. i am a fighter. i have not earned enough money to buy an island. i am just not going to give up on this country. [applause] >> one more comment and then we will close. >> i am puzzled when someone uses the word affair with taxes. there -- they're not supposed to be fair. they are supposed to take the most amount of money from the least amount of people that are likely to take over the government. what the rob banks? that is where the money is. that is how you do taxes as well. when charles i could not convene parliament for 12 years, they did not raise taxes. he did not fight any foreign wars are started spending programs. it was frustrating for him. he ended up 5 inches shorter perio. whole thing start with a great idea. we're going to help the homeowner or do this and that. but there are unintended consequences. how we're going to find a way around it. flat, low, little, cut spending. parade. take our panel. potter, john mackey, doug casey. we will see you tomorrow morning. merci. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011] >> in a few moments, freddie mac chairman john koskinen on the standard and poured down grade of the u.s. credit rating. "washington journal" is live at 7:00 a.m. eastern. a couple of live events to tell you about today. the commander of u.s. forces in afghanistan, general john allen, briefed reporters on c-span2. he assumed command of the international security force from david petreaus last month. here on c-span at 2:30 p.m. eastern, john pistole is that the newseum to talk about security. >> freddie mac chairman john koskinen so that standard and poor's made a sound decision to downgrade. he was informed of the downgrade shortly before speaking at this institution. he also talked about the overall economy and the housing market. it is a little more than an hour. >> thank you very much. i've often thought with that checkered employment career that i thought she was going to introduce me as a guy that has a lot of different jobs, but somehow manages to always get another one. [laughter] >> when i was asked to come and speak at chautauqau, i decided you are my kind of people. you started at 10:35 in the morning. i always thought the early bird gets the worm is told from the bird's perspective, not from the worm. on behalf of those who like to start later, i'm delighted to be here. things sure have gotten more interesting in the economy the last few days. i must admit part of this maybe is my fault. if you hang around washington long enough and in the private sector, you get to know people. i thought it might generate interest if a few friends of mine could shake things up. i think they got carried away thursday and friday. before thursday, the deficit debate was obviously not democracy's finest hour as the old churchill saying goes, americans make the right choice after they've tried everything else. [laughter] >> now that the stock market has unsettled everybody's nerves, i know there are some here this morning who can't keep away from your blackberries or ipads. to help all of us keep us to date and keep down on the background noises of brokens and cheers. every time the market goes up by 100 points or more, it's thumbs up. when it goes down by 100 points or more, smack your head. all right. let's practice. people on this side of the audience are the happy people. they are going to be responding when the market goes up. people on this side are the unfortunately. okay, the market is up by 100 points. very nice. very nice. a lot of blackberry owners over here. on this side, unfortunately, the market just went down by 100 points. very good. very good. okay. for those who don't use blackberries or ipads, there will be salesman available afterwards to help you out. we also have made available teenagers who will help show you how to turn them into game boys. [laughter] [laughter] [applause] >> everyone knows we're in the middle of the worst economic downturn in 80 years. what surprised us is how long it's taken to recover. a combination of a slow recovery, and a deficit growing to unmanageable levels, coupled with an apparent inability or unwillingness to solve either problem has caused many american to worry about our future. after a career in the private and public sectors as a turn around manager, i'm optimistic we will make it. but in the interest of full disclosure, you should know that every crisis manager is optimistic. it's the only way to get through the sometimes seemingly unsurmountable obstacles. to understand, we'll start with a discussion about housing, it's historic role in the economy, the role it played in getting us into the problems that we face today, and the policy choices we have to make about the future role of housing in the economy. we'll explore the obstacle to economic recovery, presented by the deficit, and then talk about one the most significant factors that will not only positively effect housing in the future, and also the economy generally, population youth. the most stunning number i've discovered in preparing for this discussion involves population growth. so stay tuned. you'll know more later. a significant part of that population growth is derived from illegal immigration. while it's clear that educating immigrates and all of our children is increasingly important, a critical factor in our past economic success is a role that immigrants have played in the capital in this country. the question is whether we are taking it for difficult for this to continue in the future. let's start with the role of housing and the economy. the numbers tell it all. if you go back as far as 1959, you find that housing is typically accounted for about 15% of the gross domestic product. peeking at 19% in 2006, and falling in the first quarter of 2011. housing led the financial crisis and is following the recovery, not leading. it to understand the policy questions that we face about what support we want or need to provide to housing going forward, it's helpful to understand how it's financed in this country. years ago, you got a mortgage from the friendly local banker, savings and loan and they kept it as an asset, collected your monthly payments, returned your notes, and canceled your mortgage when you paid it off. the problem with this system is that it limits the amount of capital available to housing to the amount of capital banks and s&l available. to deal with the problem in the depression, fanny mae was formed, and then they turn around and raze cash by selling securities, secured by fools of the mortgages to general investors. they might not want your individual mortgage, but they saw a pool of mortgages as an attractive investment, because the risk was pooled together and diffused. it also helped they agreed to buy back any mortgage that was defaulted. the government stood behind because fannie was a government corporation. it was privatized in an attempt to cut the government deficit. to show how quaint they were, it was about $160 million. that's not the deaf set, it was the entire budget. freddie mac was formed in 1970 to provide competition. the two have competed for the last 20 years. now private, investors assume should either run out of capital, the federal government would support them. while the official washington position was oh no, not so, the assumption turned out to be correction. they still kept a large amount of mortgages on the book. by 1990, residential mortgage debt exceeded all of the banks deposits. at same time as the dot-com double was forming and bursting, the investors were looking for something else to invest in. housing prices began to expand faster than incomes. this is my favorite slide. if you ever wanted to be a bubble bursting, here it is. that's the problem with bubbles. they are always obvious after the fact. when you are in the middle, it's never clear if you are dealing with a bubble or economic progress. >> somehow people that looked at this graph every year as it unfolded thought it was possible for house prices to rise in total disregard to the income of the population. there were a few people that bet against the conventional wisdom. they made a lot of money. they are not giving it back. we're going to go on with the story. the apparent level increasing made mortgage securities look attractive. banks and wall street competed to establish them from the securitied provided by freddie mac and fannie mae for sale across the world. it will would in little or no loss since the house could always be sold for more than the mortgage. with prices escalating, houses had become a high return investment for many owners, rather than a vehicle for savings. when i was young, just a few years ago, if you lived in a house for ten years and sold it for what you paid for it, you felt like a champion, you got settler for ten years and forced savings to boot for paying down the principal on your mortgage. now with housing prices taking off, everybody wanted in the game. the increasing demand for housing was exceeded by the increasingly demand for mortgage securities. if follow the red line, you'll see the private label security market more than doubled in one year that 22 in 2003 to 46 in 2004 and peeked at 26% in 2006. it then declined close to zero and how has come up to 6%. to meet the demand from all street, for more product, you needed more people to buy houses to generate the marges. to = those people who otherwise had earlier, the standards to

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