Transcripts For CSPAN2 Tonight From Washington 20130109

This discussion is an hour and a half. The Vice President for Economic Policy here, and thank you all for coming. Its an interesting time for the Housing Market. We could have said that anytime in the last five years but things are changing a bit, after more than five years of decline, markets around the country seem to be doing somewhat better. Home prices are going up. And foreclosures are at a fiveyear low. On the other hand, were still suffering from a serious overhang from the crisis. More than four million households have lost their homes through foreclosure. This is, of course, been very bat for families and communities and bad for state and local budgets. On top of that. Home price declines wiped out roughly 7 trillion in household wealth. And left more than 10 million families underwater on their mortgages. In particularly hearterrity communities lice leaves more than half the home owners are underwater and many by half of their homes value. This is creating significant problems. For one thing, underwater home owners are at a much greater rescue of foreclosure, in part because in case of a setback, the borrower has no cushion. And Equity Lending beyond the mark. College students and elderly rely on home equity for collateral, and impacts on aggregate demand and a negative wealth effect. So not much question that underwater mortgages are a serious problem and a drag on the economy. The mull try trillion dollar question is that would do about it . Which brings us to todays plan. The use of emanant domain to seize underwater mortgages owned by private investors, write down the principle, and then refinance the loan at its current market value. This has sparked a heat debate. Not favored by mortgage investors but local governments and consumer groups see it as a last resort for final he finely deleveraging debt. The question is, is this the right policy to fix the problem . I just want to say that cap housing team has frommed with the problem for several years. Last year we released a plan for reducing principle through shared appreciation, and we called on the federal Housing Financial Agency to reduce prims on loans owned by fannie mae and freddie mac. And in the back we have these proposals and other materials we produced on the subject, also you can find them on the c. A. P. Web site. Today, we have a terrific panel of experts, and im looking forward to hearing from them and let me introduce them. Steve gluckstern, the chairman of mortgage resolution partners, a firm that has developed proposals to reduce mortgage principle using emanant domain and is in discussions with me and municipal government across the country, prior to his work, he cofounded alternative asset manage. Firms as a Trust Company llc and capital v partners, as well as the specialty financial rear re insurance. Congressman brad miller is a recently retired representative from north carolinas 13th 13th district. During his five terms as the house five terms in the house congressman miller was a leading champion for consumers in the fight against predator mortgage lending and bad servicing practices. Tom deutsche is the executive director or the american securization forum. It is opposed the call for using Eminent Domain for mortgages. Previously tom was an associate at mckey nell son llp where re worked on structured financial offerings. Jim carr is a senior policy opportunity agent. He was previously the chief Business Owner the Reinvestment Coalition and before that, senior Vice President for financial innovation, planning, and research at the fannie mae foundation. Finally, moderating our panel, c. A. P. s director of finance and policy, julia gordon. Prior to joining c. A. P. She managed a policy team at the federal housing agency. She was previous Senior Council so take it away. Thank you, michael. Everybody ready . What were going to do is were going to start with questions of the panel, and have a conversation up here, and after a while we will open the floor to questions from the audience as well. So i hope youre thinking about what you would like to ask the folks up here, and with that, were just going to start with a dull question here. Im going to start with mr. Gluckstern, how big of a problem is negative equity and for him . That was the first part, where are we . A lot of people think its behind us and were driving forward. I would argue its in fact in front of us. Mike gave the number, four million plus or minus American Families have lost their homes already, but by almost any measurement, somewhere between three and eight million more will lose their homes if woe dont do something. So, id argue, its not in the rearview mirror. In fact its in front of us. Who bears the cost or whats the consequence . Theres lots of consequences, obviously. First and foremost, families who are disrupted and taken from their homes. And its worth thinking about the numbers. Were talking tree or four our five million more families. Thats as many as 20 million more americans. Why its a problem . Mike alluded to. When youre underwater, your behavior changes. You dont spend as much money oning in. The only thing you consume more of is healthcare because are in the stress, look at the numbers, that goes up. So the costs are significant, both the families, and id argue to society, and obviously the communities in which these people live. Foreclosures cost both hard dollars and soft dollars. There are property tax issues, and the consequences felt by all of us. Mr. Miller, do you have anything to add to that . In particular, road blocks to solutions. I dont know whether we have hit bottom or not. One of the rules of economic, if something cannot go on foreign, it will stop, and some of the force pushing down the Housing Market cant go on forever. We have had new households have not been forming, so people are continuing to live we three or four roommates or live in their parents basement or whatever. That cant go on forever or well have some very unhappy families. We already do. Were going to have to replace the Housing Stock at some point. There are some parts of this that cant go on forever. But there is still a lot of very a lot of family pressure, still ten million americans who owe more on their house than their house is worth. That means, as the introduction said, they cant just sell their house if they get into trouble. So we have a lot of foreclosures still in front of us, and the cycle of foreclosures causing equity loss, equity loss causing foreclosures, is something we havent broken yet. The impediments of remains the we have had this kind of problem before. The Great Depression did not begin with the Housing Market. The bubble was not housing but the stock market. But when times are that bad, times are that hard, youre going to have a foreclosure crisis, and they did in the Great Depression. But one of the new deal agencies, the home loan corporation, was remarkably success of the program, putting Arthur Schlessinger of that era. It saved the middle class, and they bought foreclosures, they bought mortgages at a deep discount from the portfolios of failed banks, and there were many of those. And those were in the days before safety and soundness regulation and accounting, and there were plenty of banks quite willing to sell mortgages for a bird in the hand. And so they bought mortgages at deep discounts, which gave. The room to negotiate and reduce a principle, and even though they really managed the agency more like social workers than lenders, when the agency finally closed down in the 50s, it finally turned a profit. So we know we can make this work. The mystery is why it hasnt happened now. The securitization of mortgages, the separation through who owns them and manages them, is probably part of it. The safety and soundness in Accounting Firms are about not willing to recognize losses, is probably part of it. The honest to god incompetence of servicers because of the way theyre paid. They simply dont have enough resources to do the job is part of it. But there has not the people who are affected, who are the investors in mortgages, have not been in a position to cut a deal to limit their losses. Thank you. Mr. Deutsche, where do you think we are as the Housing Market in the Real Recovery . Is neglect testify equity a problem for the market or will the problem take care of itself . A lot of questions. Might be the first negative. The only time steven and i will agree on the panel, is that i think i do agree with steve, negative equity has been a significant problem for everybody involved. The home owners have been certainly devastating to many home owners, so go from buying a house, putting a down payment down, to not owing any money on the house if they were to sell the house thereafter. Certainly for investors who put up money to lend to those individuals, whether securitization process, private label mortgages and a trillion dollars outstanding in private label, or the american taxpayer. Theres 51 2 trillion dollars of mortgage debt guaranteed by fannie, freddie, and ginniemae, and if the underlying loan is less then the value all in all theres been a tremendous loss to the American Economy and to the individuals that have borrowed the money, and certainly to the folkses who have lent that money, whether thats through the american taxpayers or the Pension Funds, mutual funds and the like, who bought and owned private label Mortgage Backed security. 0 to answer the first part of the question, where are we, thats where i disagree with steven. Were clearly not heading toward the maelstrom of the storm but coming out of the storm. As an example, at the opening remarks, San Bernardino county was mentioned as one of the areas you look at as being one of the ground zeros of negative home price appreciation, what we have seen in San Bernardino, just evaluating the number of loans in default in that county, is that in june 2009 it was 31,000. June 2010 it was 25,000. June 2011, 18,000. June, 2012, 12,000. Over the course of the last four years the percentage changed in the default mortgages, in that county, has gone down 61 . The mere fact of that signaled to me that were not in the middle and not going into he heat of the storm here. Were starting to come out. Doesnt mean thats going to be make things better for the person who is challenged to make a mortgage payment. Doesnt make life easier for somebody who has 150 ltv, but does install as an he could and nation were move away from the center part of and it moves towards areas where we have more home price stability. And in markets like phoenix, arizona, you have seen rapid home price appreciation. Its been 20, 25, 30 year after year now, through 2012, where you went from a market that was really going down precipitously, and is now shooting up with the same velocity. Can you talk about the issue from the neighborhood and the municipality point of view . Whats going on, on the ground. I actually would maybe i can be the Bridge Builder between steve and tom a little bit to say we are seeing improvements across all markets, and i think thats a very positive sign. I think the downside is that the damage has been so heavily concentrated in a handful of states and within those states, a handful of communities have been so disproportionately damaged, that even though the numbers are looking positive, in fact in those communities theyre still struggling, and the extensive amount of underwater debt are also contributing to low sales in stores to higher unemployment, unnecessarily so, and for those families getting into foreclosure because of a loss of income or because of a loss of a job of one of the owners. If they could in fact find relief through principle reduction in order to save their home, that would be from a Public Policy standpoint to be positive and would help prohot and stimulate the market faster than the slow recovery its experiencing, even in a market like San Bernardino county. So i would say that i dont see us getting into the abyss. Thats over. But i dont believe we have reached the point where we can say the marks are recovering so we can walk away and let the market do its own thing. The unfortunate part about the conversation is were looking at Eminent Domain, which is one of the most extreme things a Public Entity could do, which is the taking of private property when in fact theres so many things that could be done and could have been done that are not nearly as extreme to actually help mitigate the foreclosure crisis. So we look at things like principle reduction through the hamp program. Fannie mae and freddie mac are not pursuing principle reduction, yesterday the dollars are there. It would be a net positive to taxpayers and would help to recover in communities like San Bernardino. Its not happening. Services have a lot more flexibility than hey pursued in order to modify loans, including principle reduction. Financial has been a leader in principle Reduction Program, and others have not followed their lead, and i theres at a federal level. Would cost the american taxpayer nothing and would allow households to restructure the debt on their family home and keep it. I if you own a luxury yacht, you own Luxury Yachts or rental property, you can restructure that debt but you cant if youre a moderate or middle income household that has a simple home as your principle asset. So the fact we at thely in this kissing unfortunate because many things can happen before we have to good to an extreme measure of Eminent Domain. Let me suggest, does everyone agree that principle reduction is in fact what has to happen . Well keep Eminent Domain to later in the discussion, but we have to agree principle reduction well get to principle reduction, particularly for borrowers who have an able to meet mortgage payments, who have no sign of distress, havent had a divorce, havent had a loss of job, a loss of income. Those borrowers are demon straight an able to pay the mortgage, have done that through the crisis, and are current on their mortgages as your initial plan proposed, dont think those are appropriate borrows to go after principle reduction because they have not signaled an inability thats going to cause them to go into default. So we should punish them with the fact they have been honoring and paying appropriately so that when we go through and provide principle reduction, you say youve been a good guy so you dont get it, but that over there has been a bad guy, well do it for them, is that your proposal . Im not saying were going to put them in a stock okayed and punish them because theyre paying on a mortgage. Im saying they have an able. Show no sign of distress. They have an ability to pay that mortgage. If the borrower loses their job and have an inability to pay, every service should look to some kind of principle Reduction Program for them, and the hopes that get a job, and then resume paying on the mortgage. To say every borrower who is underwater, cut away the mortgage principle . Thats a massive disservice to the 5. 5 trillion the american taxpayers have paid out through fannie and freddie, and the trillion dollars of outstanding mortgage debts that mutual funds and pension founds belong to you cant say we should just give away money these bor bosh bw ers because theyre underwater. It would be useful for folk watching the debate to hear about the proposal and the issues and then we can continue this line of discussion. The first thing, its important for people who understand that tom made a good point, which is americas mortgages are not owned by banks, which is what everyone in the world assumes. Banks own less than 20 of americas mortgages. The bulk of the balance are actually insured by freddie and fannie. Thats only cost the taxpayers a few hundred billion dollars, but theres a segment, 4. 7 million loans owned by what are called private label securitizations. About 4s 7 million borrowers, a trillion dollars as tom indicated, and we focus primarily on that segment, the pls segment, because those bond holders and investors in those securities do not have the best interest of the United States government guarantee on their performance. They live or die by the fact whether you pay your mortgage or you dont. Because of that those securities trade at market. They do not trait at par. Trade at par. They reflect they fact there are huge problems in that community. Right now is the perfect time to put a slide up to frame this. This is one one page in fannie maes Third Quarter 10q. The United States governments view of the pls sector. This is with respect to that portion of the bonds they own. The discussion of why fannie mae owns these bond at all, but they do and under the Disclosure Rules they now tell us what they think about the underlying mortgages, and these are the numbers you want to look at. Fannie mae says theres 28 billion on their balance exposure to mortgages in this sector. They expect a 50 default rate. This is Going Forward under existing conditions. And when it defaults and goes to foreclosure, they expect 66 loss under that mortgage. Half the mortgages, twothirds of the principle written down. So it tells you fannie mae believes there are roughly two and a quarter million more foreclosures coming in just in the pls sector. So in the frame, are we focused on these mortgages . By the way you think that fannie and freddie and the banks have other avenues . All the programs you talked about for reform and for helping home owners, most of those programs are not eligible to be used in this sector. Pls, home owner has very few options. Our thesis is, by allowing these home owners to write down the mortgages, the principle reduction, we dramatically reduce the number of foreclosures and allow that home owner to stay in their home. You have a program that is allowing home owner to stay in their home. How do you do that, write down the principle . Because theyre owned by trusts. We looked around and said, okay, it would be great if we could go to the trustee, or the servicer, who runs the trust, and say, you know, youre going to have 50 of your people defaulting and youre going to lose twothirds of your money, and, by the way, your bonds already trade reflecting that. Youve taken that loss already. Why dont we allow the home owner to stay in the house and you simply write down their mortgage . A lot of structural reasons that tom knows better than me, the trustee or servicer cant write those down. Cant sell them. Theres whole bunch of things they cant do theyre stuck in that trust. And looked around for whats the way to get that Home Mortgaged . Taken out of that trust and put in the hands of someone who really has an invested reason to want to keep the home owner, the local community. And we looked around and decided the only way you could get that loan out of that trust was using a powers that community has, given to it in the constitution of the United States and handed down, and that this power of condemnation. I said this a couple of times in jest. Im not as dumb as i look. If we could have found any other way than using Eminent Domain, we would have come up with that idea. We understand the controversy but let me tell you, theres no other way. And the local community can condemn the mortgage, take it out of the trust by the way, pay the trust fair value. Fannie mae will tell you the fair value. Theyve already done it. The owner of that mortgage gets exactly the fair value in todays market and then reunderwright to a new standard. Thats a program we have put forthand were discussing with some several dozen community in the United States. Is there really no other way . [inaudible] theres an inability for servicers to write down principle on privatize loans. Absolutely falls. In fact writing down a principle has been increasing over time on private label securitized loans. You may be confusing that with tse. Theres no ability for the servicer of a fannie or freddie loan to actually write down. So there is a very big distinction there. Second, he says that we, mrp, cant figure out a way to get these loans out. Well, its because mrp doesnt actually own the loans. What theyre proposing at the core of this proposal is mrp wants to take loans from somebody else. That in essence is what Eminent Domain is all about. The person doesnt want to sell you those loans so you go and take then, grab them without that persons consent. Well come back to the legal issues involved with that throughout the discussion here. But sticking to the policy side of it, there is a reason why you cant get out of the trust, and the reason is the United States government, the u. S. Department of treasury, tax law does not allow those ones to be sold out. So when you come back to the legal analysis and figuring out whether mrps proposal would violate interstate commerce, the very clear answer is, because the loans are already regulated in these trusts, law does not allow them to be sold out. Instead, it does allow them, tow, to be written down within the trust as long as the servicer believes thats in the best interests of the investor. So, what they would have you believe is that the servicers in fact are not operating on the behalf and the best interests of the investors, and the investors, very sophisticated institutional invest yos, are being duped by their servicer to not do the right thing on the loan. Have a hard time going back to Institutional Investors who national trillions of dollars of pensions, and going back and saying, youre irrational, you dont know what youre doing, go tell the servicer to write down massive amounts of principle, thats in your best interests. If they thought that was in their best interests, they would be doing that. But instead theyre telling them, use it where appropriate. If someone loses their job and have negative equity, undertake a program that jim indicated that often is proposed to put out there and put into effect, is actually write down some ridges give them some shared appreciation in those circumstances. In someone took out a loan, has not had any distress since then and is still able to pay their mortgage, what is the sense in saying, lets wipe away all that underwater debt because that is better for those individuals. Certainly would be better for those individuals, but all the pension money and all the institutional money funds that has been put it to, that would be wiped away, and in fact, moodies did a great study on this and said if you would to take mrps proposal, implement it nationwide, 30 of the value of outstanding private label Mortgage Backed securities would disappear overnight, since theres one trillion dollars of outstanding Mortgage Backed securities, that means 300 billion will be lost by Pension Funds, mutual fundses and other funds in the universe. That, combined, is much more than fannie and freddie have lost for the american taxpayer. You have stud yesterday the Eminent Domain it is absolutely the case that servicers dont act in the best interests of the investors, and i think the lack of unity of interest between investors and servicers and trustees is one of the reasons that so many Institutional Investors have resign from the membership in the organization because they think that trustees are not acting in their interests and theyre interests would be best served if there were reasonable negotiations. There are certainly concerned about this proposal. I dont think the trustees can be counted upon to act in their interests in a condemnation proceeding. They wont fight for fair market value. Theyll throw in the towel because they have nothing to lose. This is a screwed up system. Technical term there . Yes, actually is. Im not sure if thats a legal or economic term. But if its true that the constitution is now a suicide pact, mortgage and Servicing Agreements are pretty much suicide pacts. They do separate out from the investors, the management, and the management has a lot of incentives not to modify mortgages, which would be in the best interests of the investors. You know, when a mortgage is foreclosed upon, the losses are 50 from the value of the mortgage . More . Its obvious that investors would love to see logical reductions of principle so that home owners who can pay the mortgage on the house will be in a sustainable exploring they dont have to foreclose, and its not happening. We, argue why its not happening, but clearly it is not happening. That would be the advantage of bankruptcy, which you were for, i was for, i introduced the bill in the house. That got beaten back in the senate. Defeated by the banking interests. And that is the advantage of Eminent Domain. It is a government power that doesnt worry about who has what interest and who has what power. Its the power to take something for public purpose, property for a public purpose, at fair market value, which is a lot less than what is being carried on what is being shown as see the value in the books, and then modify it and you probably make money. Thats why this Business Model actually works. I understand the concerns of investors, that their interests will not be represented, but something has really got to give. One of the questions thats come up about this proposal is that, at least in the primary thrust of it, its hard to home owners who are paying their mortgage currently. Does that concern you at all . Do you think that Eminent Domain should be used for home owners who are in default or just to cut through for anybody . I think the phrase that both lawyers and economists like, its depends. I think where we dont want to be, which tom described earlier and i perceive as well in a position of not modifying the mortgages of people who are performing because they havent shown theyre going to default, and then not modifying the mortgages of people who are not performing because you dont want to reward them for their nonperformance so you dont have much left. I think it probably does need to be tailored to the circumstances. Probably specifically whether a home owner is unable to pay this mortgage and likely to default and lose the home to foreclosure, and would they be able to perform on a mortgage for a lesser amount that would be a better deal for the investor than would foreclosure. Put a different wrinkle on the table and ask you in the past Eminent Domain is a power that has often been used in ways that disadvantage communities of color. There is any concern about whether this is an expansion of the powers of condemnation and are there any concerns about that. I want to get to that because i believe there are real concerns about the use of Eminent Domain, but i just want to say first of all, the idea that the servicers have been acting rationally with respect to loan modification really i want to just come back to that. We wouldnt have the 49 state attorneys general settlement, we wouldnt have occ just concluding yesterday another multibillion Dollar Settlement enough fact the services were acting in a rational manner. It would be good if they were because we would have ended this foreclosure crisis two or three years ago. Having said that i do believe there are concerns with respect to how Eminent Domain could be used in this circumstance, depending on how the loans are selected, how the program is designed. It could be that individuals who actually need the assistance the least, which i think toms concern, actually get the benefit, and chose to who are really struggling dont. So i think at a minimum a program would need to be designed so the highest priority are people who have experienced financial distress, but the principle reduction actually allows them to remain home owners. The second thing is depending on how the loans are selected, they could have an adverse consequence at a neighborhood level. That is to say loans would be selected in Nonhispanic White communities but not necessarily in latino and africanamerican communities. It depend 0s on the type of loan product, the criteria of the borrowers sayings, housing prices, et cetera. The real concern how it would be used. And i would say not necessarily from a Race Ethnicity perspective but from a Housing Market perspective, the title, clear title, could be clouded pressie significantly as soon as investors start to sue, because my guess is tom is noddingey there would be a lot of lawsuits initially with the first taking of a distressed loan, and if that occurs, its questionable whether the loan can actually that house could be sold back to the original owner or whether the person who the entity who buys it has to hold it until the legal issues are worked through. So theres a lot of concerns about this issue. Eminent domain is one of the most commonly used government powers. Theres nothing extreme or unuabout it. We would never build a straight road if we did not have Eminent Domain powers. No way a city could take ten feet of everybodys yard to have sidewalks in the neighborhood. Its one over the most commonly used powers everywhere in america right now. Some municipality is exercising Eminent Domain to take something for some public purpose at fair market value and probably in every state in america right now, theres probably a jury del breath on what fair market value is. This is not this has been around for a long time. The reason that Eminent Domain or taking, is mentioned in the fifth amendment, was not to give the power to government but to refrain the power to make sure when government took property, that government take it for public purpose and for just compensation. There are procedures worked out. We do this all the time, really. This is not unusual. If you went to municipalities lawyer, town attorney, and said we want to do a condemnation, he wouldnt scratch his head and say, condemnation . Never heard of that. Let me look at the law books. They do it all the time and there are procedures to take it, to start to use it, and to put to the side to be determined later in litigation the value. Its called a quicktake proceeding, the term lawyers use. We worked this stuff out. We havent done it specifically with respect to mortgages but didnt with all other kinds of property. We havent had a foreclosure crisis like this before that has tempted us to use it for mortgages. I want to comment on that. I totally agree taking ten feet of property in order to widen a highway. Thats very different from taking whole areas. The history of Eminent Domain is one of the most distressing uses of public power in history as it respects communities of color. The entire infrastructure of urban renewal was biased on Eminent Domain. The naacp testified two years ago about their identification of inappropriate uses of eminept domain from california toroids, to rhode island. It is a problem in the past and remains a problem today. Just depends how its used. So, yes, communitiesite all the time, quite appropriately. Many communities use it inappropriately as well. Let me just say, any government power that hat not been used unjustly when it comes to race. The home openers loan corporation, which i celebrated earlier, one of the great of the new deal was very inequitable in helping white families, helping white home owners and not helping africanamericans. In fact some say the practice of redlining began with the home loan corporation. Theyre the first ones ones whoy we will not modify mortgages in these neighborhoods. So, we will not be able to take a step further as a nation if we only exercise government power that have over the course of our history been used justly, as between africanamericans and latinos and whites, because none have been. We are not talking about taking property here. Were not talking about taking houses to put in an elevated train. Or some of the things robert moses did in new york and long island. Were talking about trying to preserve neighborhoods, trying to take mortgages so they can be reduced so the burn who actually lived in that home can continue to live in that home, and that the home is not going to sit vacant, boarded up, with weeds knee high. Let me tell you where the debate really. It its the assumption the home is going to be lost to foreclosure. So for the last five years, a borrower has paid their mortgage, theyve been underwatery, wait San Bernardino or phoenix and start with the assumption that foreclosure will happen on that home, that starts a debate that just cant be won by the other side because youre assuming what doesnt actually occur. If the borrower has the ability to pay you agree that somebody who is in a negative equity position is at far higher risk of foreclosure than someone who has equity in their home. Far higher risk of walking away from their commitment. No question about that and thats certainly a risk factor associated with a negative equity home. But doesnt signal in any way, shape or form, that borrower has lost the ability to pay the mortgage. Doesnt show they have lost their job, doesnt show theyve lost a spouse, theyve reduced their hours. All it shows is that the are simply a negative equity, and that may be 10 or 50 . If that borrower has some kind of negative income event in their life, they lose their job, have a health crisis, theres a death, divorce, disability happens, they have nothing to fall back on. They cannot sell that home. They cannot borrow against that home. I think thats precisely when the servicer has to step in and engage in appropriate loan modification but if a borrower loses the their job and the best opportunity to get a job is 50,000, likely to be a situation where home retention may not be an option for the borrower. Is this working . I know we have 100 things to comment on. Im going to pick three. Pick the premise, which is mrps program is not mrps program. These are programs developed by cities to protect their community for which we, as an advisor, worked with them. So its great convenient for tom to call the first question is communities of color. Anyone who thinks that this is not disproportionately affecting community of color is kidding themselves. We have managed to more or less wipe out all latino wealth in this country through this crisis. So, the assumption about concern about Eminent Domain, and for sure it has been used historically. In this case the housing crisis has leveraged against our i have a lot to say about toms analysis which i flawed in many, many ways. But the one exam, he called moodies, that very Reputable Organization that rated all bonds aaa, through the cycle, including when the cycle was crashing, with a statement that, if you accommodated a program that mrp recommended, we would see our three probably 300 million there. Just use logic for a second. Our program calls on communities to pay the value of an underlying mortgage at fair value. Does it pay fair value for something, have to be the notion a 300 million loss is absurd. Very convenient, headline benefits but just flat out loan and modes has been flat wrong many, many times. Last thing, its very i dont want to pick a side particular live but maybe i do. Go right ahead. This crisis was more or less brought on by tom and his colleagues. That is really what happened. Not tom personally, and not him individually, but that securitization, and by the way, i just want to make a comment now. They benefit by in the continuing upset payments by home owners who are underwater who continue to make payments on mortgages, because whether they morally think they should do it or whatever the reason. Thats a transfer of wealth from individuals who are under pressure and underwater, to these investment communities. Inappropriate. But people want to look at what happens to foreclosed home and look who the largest buyer only foreclosed homes is becoming . Its not that firsttime home buyer. Its in fact wall street. Tom and toms colleagues, going out and buying maybe youre buying them. I dont know buying these homes, so exactly two things happen. One is, returning ownership communities into tenancy communities, and we know what happens with transient communities, Property Values go down, and win and then the benefit will not rise to the existing home owner who has been thrown out but to wall street. Lets give tom chance. Well, now that the curtain has been drawn back and youre all going to see im truly the wizard behind the curtain manipulating a 12 trim outstanding mortgage market, im a little abashed to say, yeah, it is me. Couple things. First, fair market value. Key question the locality of Eminent Domain bat and mrp is proposing. Steven says its developed by the cities. Not a single city has developed Eminent Domain program. Whether youre all hear from you hear from San Bernardino proposing a program. Entirely devised by mrp and they helped construct a joint Powers Authority in San Bernardino county. Why do you have a joint Powers Authority . Whoa why does the county create legal construction . And a simple answer is because they need to create a special purpose vehicle. Follow with me here in my world of securitization. The county of San Bernardino, start seizing mortgages through this quoteunquote quick pick, they take the mortgage, and they decide how much to pay later. That seems very convenient if you go with mrps analysis that when you take it, youre only paying 70 to 80 of the appraised value of the home. Mrp builds in a foreclosure discount for borrowers who are still current on their mortgage. So follow with me a little longer here. So the joint Powers Authority is separately going to is taking these mortgages at 70 to 80 of their val other but not putting up the money. Theyre taking the mortgages and saying well pay you later, and then mrp, through their program, private investment fund, will then refinance those mortgages to fha. Okay. Well, we have i just need to finish im getting to. Through that quick take program, if it is determined later that it wasnt fair market value, the joint Powers Authority can be bankrupted and no one wins in that situation, but Institutional Investors, the Pension Funds and mutual funds who didnt get marry market value, now have their mortgages ripped off. I didnt practice im a small town mother and ive actually tried a quick take progressed, and a quick take condemnation, and in fact the condemning authority deposits with the court, usually after they tried to negotiate with the Property Owner unsuccessfully, they deposit what they think the values were and then they take it, and then the Property Owner can take that money and can still contest the valuation and get paid more. Now, if they lose the valuation, they might have to pay something back, but they the condemning authority does have to pay something into the court to the Property Owner, to take the property. A few things. First, at the risk of giving tom a heart attack im going to agree with several of the things he said. May not be able to go back to his office once i get through. But i do want to start with going to the point that steven is making. I do believe theres real potential in this proposal of Eminent Domain. Im going to come back to the part where agree with tom but i thing theres real potential and it goes beyond the individual loans. It goes into the servicer, the investor is recognizing if they dont make decisions to better modify loans, someone may take the decision from them, and that can be much more powerful than the numbers of loans purchased. Just the fact a community has stepped up to the played up to the plate to do that. I have to say a little pushback to steven and where i agree with tom, if we assume that there cant be negative implications across Race Ethnicity simply because a program is in place and a particular set of households are in more distress, theyre going to get more help, i think that thats not a reasonable assumption. The fact that africanamericans and latinos need something more does not mean that when the program is designed it will benefit them more. The example of this program is what ive seen so far, the borrowers have to be current in their mortgages. Well, one might expect it would then africanamerican and latino communities in fact were a disproportionate share of households may be behind in their mortgages because their mortgage is affected by unemployment or loss of income. So theyre on the surface we would potentially be given the real individuals who need it from a Public Policy standpoint but who are not immediately in distress and not giving support the households who actually need it because theyre in financial distress. So that alone to me says the program deserves a second look. My point is i agree, and i think theres real potential in the imEminent Domain purpose in this case, but if we walk into it assuming the households that need it most are going to ben flint the most, then we could have every sort and manner of unfair and unequal outcome. And the final thing, what i agree with tom with as well like i said, tom you wont be able to go back to your office you could have whole neighborhoods target yesterday the house prices are substantially underside down. Theres two steps to the process. The first step is the loan is purchased. The second step, its sold back to the original owner. What guarantee that loan will actually be sold back to the original own center another way of say the underwright criteria for that person to buy their home back . If for somesome reason people of color do you want to clarify . No home is bought, no loan is one of the problems we have is everyone assumes they know everything about what the program is. I dont know because ill say this again. We work with communities to design programs that fit their needs, that address the issues of, is this current home owner or delinquent home owners, all home owners . In . You want people to prequalify . A hundred aspects. We believe were saying well lay out to you all the actions you have and you as a community can make sure these very issues get dealt with, figure out, how do you bring this out to the community and address those issues to eliminate the pitfalls. This is not a one size fits all. This is in fact individually designed by those communities. By the way, the communities we are most heard this on in these conversations are the most heavily minority communities in this country. That is the logic of the conversation. A quick comment about how bad foreclosure crisis and collapse of home values have been for communities of color. Theres been lots of studies now on the fact of loss of net without, household net worth, and irresponsible lending, theyve done publications in the last couple of weeks. Nyu economic study in the last couple weeks, a lot of the loss of value is actually in the neighborhood where there are foreclosures. Its having a home on your block or the next block that is vacant and boarded up and weeds are growing. And that is theres also all the foreclosures that are flooding homes Housing Markets generally, but specifically, a great deal of that, of those loss of values, have been because of foreclosures in neighborhoods. That has affected africanamericans and latino neighborhoods disproportionalitily by an enormous margin. The nyu study found that 46 the median household had lost 46 of their net worth, their life savings next house crisis, in the last five years. Thats a stunning number. It takes us down to the lowest number that its been since 1969. We are really a different nation now than we were five years ago, because of the loss of theres been a lot of discussion about income inequality, inequality in wealth is worse than income inequality, and in its disproportional losses are greater in africanamerican communities and latino communities and in low Income Neighborhood where people did own their homes, but there have been many foreclosures, the average net loss loss of net household worth has been 91 . I agree with both jim and congressman miller that we do need to target the borrowers needs. Thats the key point of the debate. Find the borrowers who are challenged paying mortgages and address that. Dont come up with a program that instead addresses the folks who are not having difficulty paying their mortgage. If the curtain has been drawn back on me as the grand maestro of the mortgage market, let me pull the curtain back a little bit on what steve is saying about the mrp Program Designed to meet the needs of the community. If that is true, mrp in my opinion, should be registered as a not for profit institution. But instead they arent. Theyre registered with the security and Exchange Commission as a private pool investment fund. Their incentive and profit motive is to make money. That is not necessarily congruent with designing a program to meet the needs of the community, which is why the program has been designed to actually take borrowers who are current in their loans thors the most valuable loans. Cherry picking of the loans of borrowers who can pay their mortgage. But because theyre underwater, well use the government power to take those mortgages away from investors who valued them appropriately, refinanced them, redo them, and then all of a sudden now you have a very profitable loan, mrp, in their own program document, proposed to sell back to fha, to make a significant profit. What they promise their investors is 20 to 30 return. If their Program Works and theyre paying fair market value, how do they pay their investors to to 30 . To circle back, whether mrp makes money or is a nonprofit, there are 30 in municipalities looking at doing some version of this right now. This is a these municipalities are hurting and they havent been getting help. What how would you help them . Im just curious because ive wanted to ask this publicly. What would would you support changing the Bankruptcy Code to permit because if you say no to everything, then i propose doing this in there are actually a lot of proposals to do this. A law review articles which nobody read. Howell jackson, who is a law professor at hard sadr, wrote an oped, and Christian Science monitor in 2008, proposed doing this with federal funds, federal agency, there is an article in new republic in march of 2010 suggesting that treasury could use t. A. R. P. Funds and act exactly as the Home Owners Loan Corporation has done, as not do this not for a profit but specifically to help home owners. American securitization forum wasnt for that, either. Real quick point. Just to clarify my position. Im not opposed to the in concept the use of Eminent Domain for borrow are who are upsidedown who are current. Im simply saying that the priority would be in my view, for those who are already experiencing financial distress. When you get to the point of the current, i think there are other tests that could be put in place and thats why i think the bill needs to be more detail on the table before theres a vote of yes or. No for example, if youre paying 70 of your income, do you want to force that home owner to actually go into default before they actually get help and wreck their credit score and in the process of doing that, cant buy clothescant buy food, cant buy. 4500 if we successfully help them keep their homeowner and their home. We above our cost associated. 4500 is a funny number. Where did we get that from . We looked around at trendsetter federal government will pay that to the service or to pay that to the log, who is no risk at all. We chose that number because the federal government is already. And the deal. Well charge to successfully resolve homeowner and a home. Thats who we are. Investors cheered as a refinancing activity that has changed a because of a community is going to condemn a love, pay for the loan. Unlike you get it for nothing else which is not exactly true. You put the money in advance of the trends that we have to be some money. Either way, boros would you get that on a . The people who are there. They need to be given a return on that, which they basically judged by the risk. We dont promise them anything. We need to have capital to the exercises. Were required to get you to invest the money. So the fact of what happens here. I dont mind it being accused of being a capitalist. I cant believe we are going to start and end this agreed with each other. Im going to give myself a heart attack here. For people to put up capital, they have to feel like theyre going to get an appropriate return. If you start changing the rules, go after they put the capital and say weve decided even that was never in the history of this country conjuring a program to take individual marketers, will take with the court tanks is fair market value, every investor will disagree. We will decide where we think and what should happen with those mortgages. In the process, well get a debate about what to do is fannie and freddie were getting 90 plus of every mortgage in america. The market for taxpayer off the hook of mortgages. The government came and took mortgages we dont think a fair market value. But now youre asking for more capital from Pension Funds. It seems illogical that will find a way to get out of the housing crisis to create online needs for firsttime home buyers only do the exact wrong things to scare investors away. I want to make this pricing argument. Or some mixture between what mortgages would meet to be and if we agree on what fair market diaries. I use the governments numbers of the value of mortgages. Its not some magic. Its the exact numbers that feeding itself, tells you these mortgages are worse. Well get there. The course got to go through that, but thats the proposal up on the screen. I do want to go to the audience and saw these folks have come here on out to give folks a chance to ask questions. Will try to take churns here. And please identify yourself. An organizer with the Service Employees union and responsibly cant change the rules, you will change the rules come up to the economy. He came to value out. You just cant go in on always. I now keep in a pure part. We bailed you out, not to bill you out, they save lots of homeowners. Its hard to believe we cant change the rules. You already agree about the playbook completely. Now we take to change and thats problematic. We need to start initiatives in a lot of places unless we do that nothing will happen for that. Thank you. Questions . Question for tom and others on the panel. The impact on a fate shared to expand a little bit about that, but also the longterm consequences on the Security Market to discuss forward. Maybe two issues his first what i think what steve and the crew has focused on is going after private labels mortgagebacked securities. The scariest is what would happen if they go after fha loans. Remember, most are originated around down payment more or less come you can get an fha loan at 2 to 3 down payment. The number of person who should be focused on this is recently confirmed caro ponte who is a pilot underwater mortgages. If you seem to use Eminent Domain, should we also use this to go after fannie and freddie allowed and thats what they have to focus on. Your second question here is what would be the longterm implications to Securities Market . Try telling a Chinese Investor Pacific Capital work in the United States right now, the u. S. Residential real estate. Pylon out lots of new skirt or ossetians coming in and taking property and 69 city mrp folks can design to their needs rather than the person. Had we fixed it and freddie in the gac problem in the United States quakes simply makes that much more impossible that rdas. The argument at some point in the future we may do this again when never done this in the past and now it makes no sense at all to me. The reason theyve never done this in the past is never had a foreclosure crisis like this. I dont think theres a lot of temptation for municipalities to do this after the foreclosure crisis. I mean, why would she do this unless you had a problem at the crane home values and foreclosures in negative equity to foreclosures and on and on. Thats like someone in Emergency Rooms saying he was in cardiac risk and i did defibrillator because i thought if you few months and come back and say can you shuck my chest again . Theres really not an incentive to do that unless it that circumstances the one with god. You made a couple comments i was going to make, but just one last thing. Dont worry about pls. We should look elsewhere. Its not even clear he could use those to loans that an fha guarantee because those might be deemed separate property. This sort of threat, that if a Community Even chose to do so, which im not sure if they wouldnt even be legal. That is what i describe as a scare tactic. What about everybody else . To respect you for a local community to take federal property, youre indicating its potentially illegal. I 100 agree with you. Privatelabel security, 10 owned by cne and freddie, which the fha faith is a conservator. If you start taking loans, are seeking federal government property, which the fhs they had publicly indicated. Were concerned about this and potentially may step in legally if you start taking federal property and interference conservatorship hours. I dont think it is all or nothing. The fact of the matter is the president has been around with the foreclosure crisis. Once identified under the Program Ideas to show a a net present value is beneficial to the ambassador and homeowner and those were the only those selected for the program, that could be explained to many investors which are not losing money, youre gaining money and once again go back to lawsuits if they this is what happens when you really know i dont do which are supposed to be doing. I believe there are ways in which the Securities Market would not be impacted at all and investors here or around the world with a net present value makes sense. The challenge goes into the details of how the program is structured. Weve got some more questions here. Yes. [inaudible] complements for putting together this panel. Just one statement harassment question. Theres many investors, including ami members that acknowledge the problem support down shared appreciation, other solutions for better or worse. I want to direct my question to some panelists and i was surprised by some of the comments. Can you reiterate how Something Like this proposal impacts the unions, seniors and what are some of the unforeseen consequences, of what sounds like a tempting program, but may need to be better understood by communities before they perceive because while we hope a few may have impact on many americans. Yeah, i think i was nuts in a question because you put your finger on the issue of seniors. Seniors to me represents a population that could potentially benefit in the courage of their markets, but current mortgage makes sense of 37 years old and have the possibility of never paying off that loan. But just in the principle might be a reasonable thing to do. The details are to me with this Eminent Domain conversation should be. Gracious question about seniors and unions is because they have an interest as homeowners, but also tension holders or Pension Funds. Says steven and thomas, do you want to stephen took a shot at the process that fundamentally describes securitization at the simplest point is older americans, retiring Police Officers have pension money. Through their 401 k s, pension money. Usually through mortgagebacked security when you buy a mortgagebacked security from you all a lender to take the money and lend it to someone else. A firsttime home buyer who is a fireman. Effectively you take money from other communities have people with saving someone that ultimately to people who want to buy a house. The problem with the Eminent Domain proposal list are effectively saying for those who put me out there, who want this money to their 401 k s, mutual funds, you say what you hope that homeowner and ill do it at the expense of these Pension Funds and that is fundamentally wrong, particularly when you seem the power of the government. If i might, slightly different interpretation. First of all, many are the very people who find themselves underwater. Thats who it really is in many cases. So we used the example that the pension fund by the way, if you talk to the trustees of pension fund, they have to maximize the value, but also think about constituents. You do have a situation where we have a devastating problem, holding back construction jobs with that particular union. Niu is a community that says were willing to pay fair value for these mortgages. By the way, you own a bob fisk a part of a trust with 100 mortgages and maybe theres one or two. It will pay fair value so that can turn that marketing to cash. That allows us to keep that union member in their home to renegotiate with. That is why the pension fund, in my opinion should be enthusiastic and should tell their bond managers, this is good. Its good for america, good for constituents and even good for my return. Is going to say quickly from the investor side, if youre using net present value, its a net positive for Pension Funds. It is true mortgage investors have been outlays on a lot of issues, which is why youve got this one wrong. But i think working families benefit any couple ways in that they are homeowners and their effective are not worth, their life savings in nature mattock way as we discussed earlier. Second, they care about jobs. They are affected by the jobs crisis and a big heart of the jobs crisis has been the effects on consumer demand from the loss of net worth. And finally, as unions hold Pension Funds, if their pay fair market values, it is not hurting them. That is what fair market value means. It means they are selling something or having a sale, they get paid what its worth. They should not her Pension Funds. I understand the concern that investors dont think they can count on with some justification , dont think they can count on trustees and servicers to protect their interests and advocate for fair market value with enthusiasm at the local level when it is challenged and is coming out of their portfolio anyway. They dont care. The money goes straight to the investors. They dont care and they throw in the towel quickly. Im not exactly sure how to fix it, but i would encourage steve and the other groups considering this and some of them pretty far along. His is not the only proposal like this that they work with you to try to make sure that there is some way to reassure you that you are getting paid fair market values for mortgages taken from the securitization across the pool. Let me see if i can get an ally on the panel, try to anyway or at least have a heart attack. Jim, do think its appropriate for investors to believe the government, given the history of imminent domain in america, that investors should just trust the government and courts will actually get fair market value rate for hundreds of billions of dollars invested in security . Thats an easy one. The reality goes into detail of how the program is designed. My concern, and stephen has alluded to this in applications come you dont only understand how the program is designed. But to me, thats not my problem. Thats the problem. The Program Design is where the rubber meets the road and if its done in a way in which it can be demonstrated. The only ones eligible for purchase by a municipality or those that show a net present value to investors and homeowners. To me thats a very different conversation than one of the marxist line of gloves for an individual is upside down and theres no other parameter except their underwater. A couple other questions. Fair market value is such a common legal concept in every corner of america right now. There are pattern jury instructions. There are ways to prove it. There are comparable sales. Various valuation based upon income that it produces. I mean, this is not some strange calm that. If you take the numbers that stephen put up here. If you have an economist to say this is a calculation, the other side could crossexamine or call their own economists can produce evidence of sales and income and Everything Else that goes into proving value. What stephen has done is they take these numbers. This is what the government tells you is the real value. The third order from 2012 if you look at the price of outstanding securities, theyve appreciated approximately to pay this summer, yet theyve appreciated 20 since then. We are going to move on. [inaudible] thank you. Im going to take this from a different perspective because they think you are overlooking a major group of folks. I dont have a pension. I think as you look at major cities where i live, theres more to alexandria to old town. The housing crisis which developed because mortgages are given to people who could not afford to buy homes or keep their mortgage has erupted now. Affordable housing is an issue for cities and towns that want to redevelop. A minute domain is scary. So my first question is freddie and fannie need to go away. Two, if you have to change the guidelines for Eminent Domain from taking, like a case of rhode island, the developments, we change the guidelines that say, will take your homes because you cant afford the mortgage to redevelop another community for Eminent Domain, for traffic and roads and like that. So youre going to change the love number one because they do try and alexandria to stop from having an alley taken away so they can put their tables outside. Into, how are you addressing the loss or are we now saying everybody has to be a homeowner . Or a government and people saying its okay to be a renter because renting is then and were not talking about that at all. Thank you. If no one else wants to respond, let me just say there was a piece of that that i wanted to speak to because you got is something i was earlier to allow me to come back and that is if in fact the program doesnt require that the previous owner has agreed to buy buy that home back, those properties, those phones can be purchased in this homeowners out of their home. That was the concern that its raising. I thought that cut to your point about what if the government used its authority to buy those phones if they by of this program, your upside down by x , and therefore you cant afford the loan, so we purchased it in no were going to sue property for the purposes. To save save the trouble, for the most part committees proposals as far as i know them are taking them home. Theyre taking the mortgage. So the person who is a homeowner still others are mortgage, just a different person. Is that accurate . All of the proposals have been to condemn, to take the Eminent Domain mortgages on Owner Occupied homes and target it with the owner really want someone to buy the mortgage and negotiate with them. So like the case you refer to is actually connecticut face. I dont think that has a lot to do with the circumstances. [inaudible] know, the lot is established in place in every state. Their condemnations are taking place in all manners of property interests, including missile adventures. What is fair market value is in the constitution, in the fifth amendment. Just compensation, public purpose. Im going to try and get in one more audience question before time runs out in the back. And greg squires from George Washington university. The panel began vague knowledge in the mark h. Was coming back across the country. I wonder if anyone has a sense as to what extend does this come back gentrification is simply displaced people perhaps that has nothing to do with foreclosure crisis or job loss, but simply appreciating Property Values in your neighborhood. I think from their question, you and i have sympathetic poetical views, but im not sure thats whats happening right now. Im not entirely convinced we have further to fall, but to the extent that its slowing, it is as i said earlier ironclad rule of economics that something cant go on forever full text. Home buyers have been falling for so long that at some point its going to sound. Theres been an enormous amount of damage. Theres still a lot of downward pressures in front of us, a lot of the Housing Market is the new upmarket. Can they use the equity. They dont have any down payment for a bigger house. Its not going to come roaring back. Weve had five years now of Housing Starts being a third of the natural demand weve seen for 15 years before the bubble. Theres some access we had to burn off. Were way past past that now. It comes from new household formation. It comes from second hole to some extent replacing dilapidated housing. Thats the reason it slowed down more than anything else. I hope we can take another question. Thanks. John the hospice, one of stephens partners. Congressman miller, the challenges for mrp to sit down with your organization and top race. So tom, my question for you is when should we come to debit your organization Organization Top price . Weve had a few sit downs. We can probably sell tickets to those sit downs. I think chris would like to be in the room, too. I want to take one more actual audience question. This person in the fourth row we cant see. Thank you committee and a fierce. This question is to mr. Gottstein. You mention youre intimately with communities to develop a solution that makes the most honest than for these communities him a question to you is do plan to extend that to the level of work political leaders and evaluation methodologies them make the most amount of sense individually. Knows the answer. I referred to at the congressman said. You basically use either comparables or other kinds of recognized systems. I never spent a lot of time on that today is not that big of an issue. John wasnt being facetious when they said to tom, when is the time to sit down . Because if we agreed on price, all of a sudden investors that they really were being fairly treated, which is what we contend. This can make an enormous difference. So well go through their community to look at their houses to get fair market value, but they are not customized solutions. I wasnt kidding about selling the tickets prior. Theres a profit opportunity there. The key question in the key differential in terms of the green for the price is what Eminent Domain brings to the debate involuntarily. Its police power to take Institutional Investors to still the mortgages had a belowmarket by price. One last word. This is not i said this before, this is not an unusual government power. Its probably the most commonly used government power. Lots of procedures developed over centuries. Jury trials in every corner of america right now determining fair market value, condemnation proceeding, Property Damage cases. This is not all that unusual. The reason for so much consternation that mortgage investors is that securitization , choose a technical term i used before, screwed up, that they cant trust anyone to protect their interests. If they are getting paid for market values, what a willing seller would agree to sell to willing buyer, thats the legal standard. I dont think thered be much of a problem. Theyre concerned is the servicers, trustees will not protect their interests and will throw in a towel. If we can get past that, that will have some justice behind it. This will be a way to get control of the cycle of School Closures and declining home values that we still have not broken. Averages a desperate times demand desperate responses in the reality is even know many communities across the country are really hamstrung and harmed by extraordinary amounts of upside down data. I think this Eminent Domain proposal is a viable one that should be considered, discussed and i think if appropriately designed could have a huge impact on the market. But i would caution that while it is used in communities across the country on everyday basis, their excuse is that Eminent Domain right across the country in communities across the country on an ongoing a daily basis. Its useless to be clearly defined and well monitored. But if done properly could be an extraordinary opportunity for the Housing Market, particularly communities most distressed. Thank you. I want to remind everybody there are materials in the back. I think therell be folks from mrp and that was with various investor groups in the mba as well. So choosy want to talk to. On february 1st, well be having our next Housing Panel on the question of down payment. So well start looking at the firsttime homebuyers and whats really going on out there. I want to thank the panelists were fantastic. This is really fun. We hope to have you back here soon. Thank you all for coming. [applause] [inaudible conversations] i think that collect divinization of the minds of americas Founding Fathers is particularly dangerous because as they say so the book, they were not a collective unit and presenting msi which tends to dramatically oversimplify politics of the founding generation comes to be used as a big battery ran to beat people over the head with it in ways both historic late in coherent and unsound. Today, a panel of the urban Institute Review the fiscal cliff steele last week. Former Congressional Budget Office official come along with white house Economic Advisor donald merry and discuss the deal in the senate for negotiations over the federal budget and debt ceiling. This is an hour and a half. Welcome to the urbana citys first tuesday. Our topic today is the fiscal cliff. Id like to welcome everybody in the room. Those of us on cspan and those on the web. My name is howard deutsch, editor of the urban workings blog tax box. The fiscal cliff this what i hoped we would never hear again. One of the great helmet value of 2011 was intended to be fiscal wounds so severe it would drive congress and the president to grant a longterm thing to reduce the deficit. The idea was democrats would agree to cut spending republicans consent to raise taxes, all necessary compromises to avoid the spending cuts and massive tax increases that would occur if government toppled over the cliff. At the time, skeptic predicted a different outcome. The figure congress and the white house would agree only one thing and that was to find a way to tap the consequences through delay and obfuscation. Kessler said the congress did on new years, but it did do other things as well. So over the next two months or face of ferryboat grand canyon for fiscal cliff. When budget crisis between now and march. To explain what happened a week ago but is likely to have been of the next few months, we have the most respect to budget experts feared to my left is Donald Marron, a former member of bushs economic bases and director the tax policy center. Rudy sabonis former assistant director to Office Management budget and institute at the urban institute. Between them is bob reischauer, former director of Congressional Budget Office and president emeritus of the institute. Before you start a come a few housekeeping issues. Each of our speakers will talk for five or six minutes. Ill ask questions. Well talk among ourselves and opened up to questions from all of you. For those of you watching on cspan on the web, you may send us questions by emailing public affairs, all one word at at urban. Org. I ask you to keep your questions brief and send us your name and affiliation. Our first speaker will be Donald Marron talking to us about the tax consequences of the cliff. Things, howard. Hi, everybody. We sit here on january 8 asserted that an incredibly busy year for tax policy. A day to talk about the tax consequences of the clifton deal struck to avert it. Back in october, my colleagues and i issued a report that looked at tax things bundled in the fiscal cliff. You had in your seat eight result of what was living in what was possible in the fiscal cliff. I want to quickly remind those what this chart shows and then compare it to what actually happened. Some of the chart here shows us how much people as tax rates would not if we fell entirely off the fiscal cliff. So the vertical percentage point if you look at the column to the far right could maybe see on average across all taxpayers at the end of last year, tax rate schedule to go up by five Percentage Points. Theres a reason people in washington bruce out about that. It would be a chicken to take tax increase. What we have on the left of the chart is lining up households by how much income to see what the effect would be a determined income levels. The we divide them into six turnovers to see the middle income folks in our nation are scheduled to have a tax increase of just short of four Percentage Points that would increase tax from 14 on average at the federal level to 18 and that wouldve been the equivalent of 2000. The other group is the top 1 , since they were focus of the debate. You can see they rescheduled a few we win off the cliff to have a bigger tax and kris. In Percentage Points wouldve been seven Percentage Points would increase the tax rate from 31 to 38 . So first conclusion was theres a big pending tax cut. Basically for all americans. From lowest to highest, all americans have a tax increase if we went off the cliff. Vary somewhat by income level. The other result was a lot of the focus was about the tax cuts originally enacted under president bush in 2001 and 2003. The reality is theres actually many, many other tax provisions conspiring word that it is important to distinguish categories of tax cuts among us originally did in 2001 and 2003. But my colleagues and i did decide to tax provisions in the nine different bands, which i realize is the law, but they were important and distinctive if that is useful to track them. You can see on a sheet of paper on the screen here they included such things as the alternative minimum tax. We just lived through but went through about a decade in which the alternative minimum tax was scheduled to expand to households from her for a million households should roughly 25 or 30 million households, the congress would step in to one of the questions was whether they would do that. Tax cuts enacted under president bush originally are primarily affected low and moderate income households. They were then of course the ones that primarily affected high income households both on ordinary income and capital income Capital Gains and dividends. You can see there is the estate tax scheduled to go up at the beginning of the year. You can see things called the extenders. This is several dozen provisions that have been renewed sometimes two years, but are scheduled to expire in virtually all scheduled to expire at the end of flashier. Some of the beginning of the year. You see here that president obama enacted in 2009 tax credits focus on lower income and moderate and moderate income folks. Those are scheduled at the beginning of the year. Blue at the bottom payroll tax cuts. The temporary payroll tax cut you can see all income levels in the scheduled to expire at the end of the year. End of last year. So this is what was tito. Also in the purple color for the taxes originally enacted in the Health Reforms scheduled to begin at the beginning of this year. See how different tax provisions scheduled to strike at the start of the year, take them all together they add up to a pretty big hit. This is what actually happened. Same scale, same structure under the taxpayer relief act. When they came to visualize with going on in your mind. A couple things to leave out. The bars on what actually happened are by and large much lower than what were scheduled to happen. Enough orders of magnitude, signed into law last week avoided less than two thirds of the scheduled fiscal cliff. More than a third of the class was avoided. The part that happened, as you can see here, for most americans was the exploration of the payroll tax cut. Theres something intended as a tax cut for the stimulus and we knew one day of his go away. Political debate in the congress and president decided now is the time after two years of a lot to expire. Essentially a working American Families see their taxes go up this year relative to what they were last year. By around one percentage point its actually two percentage point for this working across all households. Thats the biggest part of what was actually like to have been in the cliff. If you look at the top 1 , you can see essentially three other things happened. In the purplish color coming you can see tax increases in 2010 went into effect. Almost overwhelmingly focused on folks earning 200,000 or 250,000 or more. And the grayish color, you could see tax cuts enacted in 2001 at 2003 were not allowed to entirely continue and most of the expired. The gray bars on the original chart are larger than the ones that go in to a fact. For example, dividend tax is scheduled to rise to ordinary tax rates at the end of the year. The new ones rises to 20 plus the Health Reform taxes. Where is the fiscal cliff wouldve had the old 39. 6 tax bracket kick in at a lower rate. Low income level under the deal struck for those of a taxable income of 400,000 or 450,000 or higher. So most of the cliff was avoided. The amt patch was solid and dispatched permanently. So from a budget and keep point of view, i find that base in terms of communications that we will no longer be having discussions that is attached are not patched. The majority of the low and middle income tax cuts and enact good or fully extended. President obamas credits in 2000 were not personal extended, but were extended for five years. Most extenders for continued a little sliver of orange and yellow here. The estate tax veto enacted didnt avoid the entire cliff, which is quickly the other quick take away from this chart is obviously what the pattern is. Most american is an increase of three or four Percentage Points at the highend seven Percentage Points. What happened is low in under income levels already two thirds if not or tax increases, the folks in the top 1 didnt get the taxi of by five percentage, 4. 5 Percentage Points. Theres wondered if the cliff face in a he bore the brunt and president obama has been successful in its goal of having more tax burden shifted to highincome folks. Thank you. Bob . Okay, pleasure to be here but you. We just had a gathering on saturday night and i was asked how im a one to 10 scale when i scored the outcome of the fiscal cliff negotiation and without a whole of thought i confess. I say i give it a two to enough might be generous. The people who i was with were a little taken aback by the negative appraisal because they like most americans were received at this episode of fiscal perils of pauline was over, at least for a few weeks and it wasnt the collapse of financial markets, was a huge tax increases on all of us and all the other dire ramifications of failure that the media and pundits have been hyperventilating for two months. Didnt come to pass. Quite naturally we had two glasses of wine and i was told i had to defend my score. And why it was so pessimistic, which i did by explaining what i thought would be needed and then comparing to what i got up beyond. I want to know after 42 years in washington, im not so naive as to believe that we ever couldve done anything close to a time, but given the domestic political environment, International Situation that we are in, the weakness of our economy, you know, probably nothing about the seven or eight was in the cards, but its worth looking at a 10 comparing what we have to realize why we are not in the best of all possible worlds at this point. Issue one is really the big enchilada, which is doing the one turn fiscal balance that we face in an accessible way and that would have given a 10 to what folks were talking about, but was unachievable, which was the grand bargain between the president and the congressional leaders on a package of tax and spending policies that over the next 10, 12 years would destabilize the debt to gdp ratio and that would send the package somewhere in the two to 3 trillion range. Of course there wasnt time. The time between the election in january 1st 2 workup of his details, give up the fact we have to Political Parties snarling at each other and not a whole lot of the way of negotiations. That really wasnt in the cards, but a nine, which would have come from enacting some big pieces, quote, down payments, accompanied by a framework and specify how the rest of the puzzle would be put together over the next six months is some credible enforcement wickedness and who would ensure the balance of the undone task would be accomplished. Such a framework might have included an agreement to increase revenue from tax reform, reduce entitlement spending or similar reforms of somewhere around 1. 2 trillion on each side minus whatever was part of the down payment agreement. Of course became a keep it short of this. So to is a charitable grade. A second bit concerned about the fiscal cliff issue was that it had dire consequences for our fragile economy we might have pushed the economy back into recession as cbo and others had warned if the fiscal cliff cerda was prolonged and went through a whole calendar fiscal year. None of that was really in the cards if we were over for two weeks, two months, whatever. A score of 10 on this dimension would have included, in my view, some shortterm measures to stimulate the economy, combined with the two to 3 trillion reduction in deficits over a 10 year period, but given the political make up, that was never in the cards. But what about a nine . And nine would adhere to the fiscal hippocratic oath, do no harm. On balance, weve got a bit blind great on this. Extended Unemployment Benefits continued for another year with the recession has hit most severely. The majority of taxpayers, thats what we refer to 99. 3 of the population was spared and had tax in trees and reenacted a permanent patch to the alternative minimum tax thereby protect dean 35 million households from something they were totally unaware they were about to get hit with, which was a considerable increase in their liabilities for calendar year 2012. But on the other side, and why this is and seven on this dimension or even in eight, the payroll tax holiday from which all working americans have benefited over the last two years was not continued and that will decrease takehome pay over the course of the next year for the average American Family by something over 1000 bucks and this is money that is going to reduce consumption. You know, i think a more sensible approach would have been to say were going to face this out and ive been an advocate of phasing it out for over a year and extend one percentage point reduction in the payroll tax for 23rd team and then have it disappear in 2014. Overall im taxes, i would give the deal a very, very low score. The amount of revenue generated was farther and president had hoped for an even lower than the amount the republicans seemed willing at various times to put on the table. The tax code is tremendously complicated component of American Life and defended a, its more complicated today than it was a few weeks ago. Notwithstanding the reference is to the top 2 been affected by type rates, something under 1 or around the. So this was a sacrifice visited upon a very, very tiny fraction of the population and just to make sure that, you know, that group didnt leave the table hungry, we make modifications in the estate tax of 10 million in the future. So we made that part of their lives a good deal happier. Probably worse than the failure to adhere to the initial 200,000, 250,000 threshold to or higher tax, income tax burdens start. The fact that members of both parties quite vocally and quite prominently are saying that these rates that weve adopted our permanent. We are permanently extending the bush tax credit. This will impression eight among many that tax rates are at the table the future, when in fact when we should do what we do. That is very damaging. Anyone who looks subject to the budget challenges that lay ahead would have to conclude that if we are going to reduce deficit to accessible and sustainable levels and were going to continue to provide the majority of americans with the services that they want and expect on the services needed to make our economy competitive or continue to be competitive, either through higher rates are more likely through a combination of the two, were going to have to visit increased taxes im not the 1 , not the 2 , president of the 20 that the 30 or 40 of americans. The sooner we face up to that, the sooner we can get onto with important issues that the government should be addressing. The fourth goal was to reread or the research and tea for those running businesses, for those responsible for administering federal, state, vocal programs and for citizens are dependent on government services. On this dimension any progress was made at all. Sequester solems comment that feeling hasnt been increased. What this government is running a great know still runs on march march 27 to talk to a 27. 4 was pushed off for another year. In other words, everything we have before in the way of uncertainty. But the path forward is if anything murkier than it was on december 31st and in many ways the consequences of failure to resolve any of these issues is probably greater now than they were even of 2012. Finally, there was the hope that a successful resolution of the fiscal cliff debate lucrative for import slated priorities, immigration just to name one in creating more constructive, less partisan, less toxic environment in which the congress should choose to be more productive and that the executive branch relationships to be improved. On this dimension, i fear that if they changed at all, did deteriorated in that minimum the First Six Months of this calendar year are going to be absorbed to do with all these issues that were resolved at the end of 2012 it were just going to be consumed by sons of fiscal cliff. You know, they come in packaged together or maybe an individual components. The expectations of the two parties for the next round are wiped out wider than they were several men to go and both parties have been have been drawing and redrawing of the same please the line in the sand and those fines are as unsustainable places. The sites have greater . Bob, thank you for that optimistic analysis. Rudy, can you give us any more of a sense of optimism . This has led them to advocate that they should try to resolve it. Using what they call regular order. I think that is what they mean by that. But the congress should go ahead and pass the budget resolution. Have that resolution contained reconciliation instruction, which is a fancy phrase, how much to slow down the growth of spending. And maybe to find something horrible if they dont file through. We saw that was with the super committee. I think there are two basic problems with this approach. One is there is not enough time as opposed to giving themselves more time by temporarily raising the debt limit per sequester again and spending the cr. But even if they give themselves more time, they cant pass a budget resolution in the house and Senate Passed their own and they havent done that for a number of years, and i think it would be even harder for them now. The one thing that the deal did was detect the low hanging fruit by increasing taxes on the hyper rich by a significant amount. Well, even if i am wrong and i find it hard to believe that conference led by paul ryan and patty murray is going to come up with anything very useful. [laughter] semi short run production is that we will rely on senator Mitch Mcconnell and the Vice President. And i think that double witness the argument over how far to kick the can down the road next time. Before the fiscal cliff deal, even worried that we might possibly fall off the cliff by accident, which look we didnt happen, i think it even less likely that we would default on the National Debt by accident we used to say during the cold war and the use of Nuclear Weapons is deterred by the mad doctor in. If we did default, even for a short periods of time, that would really be bad and we would suffer the consequences. So in the longer run, have become more depressed that this is possible. [laughter] during the campaign, the president promised that he would spare the middle class from any pain on the tax increases by having to give up things that they think that they had been promised. Certainly the republicans are not going to lead a crusade for middleclass taxes. Since the campaign, it seems to me that the president on that promise by mentioning how much he will protect the middle class and certainly the middleclass has a style as well. As bob also implied earlier, it clearly shows that you cannot solve the budget problem without the middleclass making a contribution. The problem with rich people is there just arent enough of them. [laughter] even if you have simpsonbowles type reform, it is bound to to raise the tax burdens mythically. Especially on those who rely on production. On the other side, the president must know that this must not be a very happy second term unless the budget problem is solved. Otherwise hes going to face a series of fiscal cliffs end the restriction of his ability to make progress on immigration and infrastructure and etc. So i think he would be keen to cut a deal and bend over backwards to do so. But he certainly has not decided to take that layout. Consequently, i feel no reason to abandon the forecast that i have been making for a long time. That is that its going to take the debt crisis to get our leaders to act. If that does happen, i think groups like the aarp who have even the tiniest of reforms will see that they have been very shortsighted. They will be hurt mightily by Retirement Savings in a market crash. It is what we have seen that is very dramatic. Changes without much notice of tensions. We hope that that will happen, but i guess im not willing to change my forecast as of yet. So bob and rudy gave us less than optimistic prognostications some of you are pretty optimistic when it comes to this. Is there anything that came out of this that leads you to believe that things may turn out better . I was joking with a colleague earlier. I thought a good outcome would come through. Its not a bad outcome. One thing stands out to me. Forgive me because this is a process oriented thing. One nice thing about this video is that it resolves issues that people have been fighting about the entire 10 years. So it has been hanging out ever since the tax cuts were active in 2010. Having eliminated that, it has freed up mental bandwidth not worry about what were going to do this year and next year. And i mean this all in a personal sense. But it is also true that policymakers have limited bandwidth. If you say to them every year you have to do this, that means a very bright and talented and industrious people have to figure how to do that. We are now free from that. The same thing is true for the tax cuts in 2001 and 2002. You probably dont like out was resolved, but whatever was done is now permanent. It requires new congressional efforts and that frees up the kinds of issues that were raised about what we want our tax system to apply. It is not a bad way. But its now in the rearview mirror. I think there is an opportunity for folks to be more forward looking to spend time thinking about deductions and exclusions and how you make it simple and im not so enough to think that that will be easy. I must admit that ive i have become cynical at the ability of these things enforcement actions. I would like to think that we have freed up some bigger issues. Let me ask you about the permanence of the tax code. Don just talked about how might be a useful thing. And also why it may not be. What is your sense . Is it a good thing or a bad thing . Well, the first good thing is that we did avoid the humongous tax increase that wouldve caused a recession. It wouldve been less that way. I guess i dont make as much out of the extensions on a permanent basis. I think we will be talking a great deal about tax reform over the next year. And we wont be restrained by the notion that we should keep these things steady for a good long time. We had tax reform and it turned out well but we will have is a tax code with lower rates. And i dont underestimate the difficulty of achieving that. Its going to be very hard. Especially if we try to raise revenue. I do not think we will be restrained. I would like to say why i dont agree with you. Which is when you make something permanent, then there is no requirement for the congress to deal with an issue. You wait around, you twiddle your thumbs, you wait for something to be done. If you extend the tax cuts, you know that there has to be an ability to talk about the one we had. And again, it forces congress to enact it and thats not hard. The forcing them to act in the action on playas and tries the t constituents possible to take action. You know, if we had of done this same tax cut for Something Like that. We would be back in the fray again to to comment on your expectations. Teachers at georgetown i want to be one of those students. You know . [laughter] i was just going to say in the good days we tried to make changes that were permanent. In the good old days if you have to admit the system was not as good as it is today. I am at a loss for what kind of things that we can act upon in a sensible way. Can talk about Something Like this sequester, something that is hard to deal with in a sensible way. But it would be nice if we had more things that were expiring, but that is not always feasible. It is good to get that off the table. Its good not to have long debates every year about such things and extending the rates. So i am not as worried as others are whether we call these things permanent or temporary. Its not hard for the congress to pass this or extend the tax rates at the lower levels. With the struggle is do we have to pay for it, and if we do not pay for it, how are we going to deal with other things . There are not well, maybe there are. Theres not a lot of time to sit around and worry about we have the alternative minimum tax and if we do so, how we construct the patch is the same way we have done for the last nine years. It is just this coming up with the money for the rationalization to allow yourself to do this. We talked a little bit about process. From my own perspective, we tried all of these budgets and nothing seems to work. But it does leave another Pressure Point and given the fact that Interest Rates are negative at the moment, do any of you think that we have been absent and that we will ever get action in washington . Would get congress and the president willing to do what they need to do . I was surprised during the debate. I expected a lot more volatility. It kind of goes back to why every little discussion seems to cause the market to go up or down. And it seems this much more pressing about what we do with the fiscal cliff. I suspect that what the markets learned from the 2011 prices is that congress will act prevent harm from being being done at the very last minute. What that means is it is less probable as we approach the debt limit in the other fiscal cliff the market will pressure into action. But the interesting thing to me about sovereign debt crises if you look at the history of those things. The markets tend to remain very calm as the budget situation deteriorates, until one day they do not. It is not a gradual process. Neil ferguson has pointed out these things are essentially impossible. But they can be set off by an otherwise lovely and stay. Unlike greece and other countries that have been in sovereign debt crisis is, it isnt that we dont have the ability to solve the problem. They do not. We do. We lack the political way. So the very kind of different situation the other thing that we must keep in mind is we have not got the usual signal from the markets were Interest Rates and living beyond their means were Interest Rates will go up because we have a weak economy. Instead we have policies where we are going to keep Interest Rates and an unusual type of thing. It eliminates the signals to the public looks to for action. What do you think . Well, they are telling us that the market rates should be incredibly low end we still have a tepid u. S. Recovery. You know, i can talk about u. S. Financial fiscal crisis and i dont really feel in my heart you know, it is still many years in the future. [laughter] you know, the world is tired of sending us a signal. And its easily process it in different ways. We have the power to get back on a system that works. And its the usual thing. If youve ever read any selfhelp books at all, you know about the urgency and importance. The same thing happens at the federal level. The crises are what gets attention. And we do have moments when something important get address addressed and how you do that is to leadership. So we look forward to doing something large. And this gives us the political constellation that we have, which is not an easy thing to do. But it is something we should encourage for our leaders to deal. For them to say that there are more crises wynette. Once those are in the rearview mirror, we should get together and attempt to do some great things like tax reform. I think low Interest Rates are very important in getting the budget under control. I have always been fascinated by the canadians were able to turn the public around to really opposing any deficit efforts at all. If you talk to canadian politicians, they say that their most effective argument was that interest was taking 40 of their revenue. They could convince the public that that is whats bad, and we can have that argument right now James Carville said in the Clinton Administration that he wanted to come back reincarnated as the bull market because that was limited what they felt they could do with the agenda at the time. As far as i know, there is no one in humanity who currently like that. [laughter] let me ask you a little bit about patrick moore. When you think that we can conceivably do tax reform without an agreement this tax code needs to raise . Without an agreement, would it even make sense to try to do tax reform . By and large, no. There is a question about being revenue neutral and what neutrality would be and whether you could move around at things in that context. That is much harder to do. And once you start doing fundamental tax reform, what do you think . I think that sounds pretty good. So we can talk about this Going Forward. Certainly okay, thank you. Okay, let me try to be optimistic here. Its interesting that during the debate, and for a wild during the fiscal cliff debate, there was a discussion about support from across the aisle. Bob, you think that is there anything that will be sparked from that discussion . My answer is no. The deductions are solutions that affect the middle class. They tend to be very popular. You know, everyones for it in the abstract. The people want to bail out. You know, they are so far where they were before, they have allusive recovery, they have all the complexities and donald has argued quite persuasively about it being a good thing to do and i draw a parallel to 1983 in Social Security when we were in a crisis and we had to do something. One of the most important things we did was raise the age of a normal retirement where you have old benefits from 65 to seven. The first person accepted was not accepted for 17 years. You know, i am all for that. But we dont have 17 years, i do not think. Is there a way to build on this . Well, if there were in agreement that we need to raise this amount of revenue or that we are going to cut it by this point, going after the exclusions and deductions that is in principle the best way to go about it. It sounds good in the abstract. But as bob says, its hard as people become aware of what it means. It has to do with health, mortgages, charity, taxes, nonetheless, there has been interest on both sides of the aisle as well. There is a longstanding proposal to reduce the value of deductions and inclusions for high income folks. Governor romney and others have put forward deductions and proposals for them. Again, it is unclear. I have been a bit concerned about where this discussion is going. We are talking about a 50,000 cap on discussions, lowering the value to 128 or whatever. That leaves the tax cut even messier than what it is today. So i really believed that true tax reform is getting red as many of the deductions as he you said. I am not naive enough to believe that you could get rid of them all. I consider the most reasonable proposal limits things like the Home Mortgage and etc. To the 28 credit. But it did advocate getting rid of the rest of the underbrush. And i think that is the minimal amount in which we are trying to achieve. We talked about spending a little bit. It appeared that the administration briefly supported this idea. What is your opinion . Well, you can look at this from a couple different perspectives. It is a more accurate reflection of overall inflation then is measured to adjust the benefit programs. That being said, we suggest that for the elderly, its not very good. That the index of inflation is slightly higher than the one we use now. So even if you live in a policy debate in a university and you ask about what is the right thing to use, in order to adjust benefits for the elderly, you probably wouldnt go to that especially if there is some other aspect of americas fiscal policy. It would be a more active thing. Standing back and looking at this a different way, if we impose the changed cpi, benefits for the elderly over time will be slightly lower. And who will be most affected by this . What about these adjustments that are made to peoples benefits once they begin receiving benefits. Your first year on Social Security, your benefit could be 10 Percentage Points less than it could be. Otherwise it could be 3 less. So if you are saying that you want to take money out of benefits, would you say that you want to effect those individuals who are not dependent or as dependent on their Social Security benefits . They could be working parttime. They could have pensions from iras and other retirement incomes. And then you look at the person who is 85 or 86 years old and their spouse has passed away and they are in a big financial circumstance. So its not that i wouldnt have some sympathy for them, for changing benefits, but it could be those who withstand the deduction. What do you think . I think the most important point to make is that saves you very little in the long run. It raises you very little on the tax side. That is the only thing we are contemplating and talking about, we are not talking about sufficient reforms to fix the problems that we face. One thing is historically it may have gone up by two or 310 of a percent of what we use. That is just a forecast. Its not a promise. We could say much more or say a lot less depending on how things work out. But in terms of real reform, again, i would much rather look at something of the sort that bob discussed is progress indexing and an approach to the problem that could lower the rate at the top more than at the bottom. And i emphasize the rate of growth because of the bowlessimpson proposal. So we dont have to impose a huge amount of pain to resolve the Social Security problem. I have to say that this is remarkable to me that during the entire fiscal cliff debate, we can always talk about the House Republicans who voted for dramatic change and during the fiscal cliff debate over the last month or so, there has been almost no word about even talking about it. What is going on in either way . What about sufficient money from medicare without reforming the system . I think it is evident what is going on. Social security and medicare are the two most popular programs invented. Thats a huge number of people that are affected. It really is hard for politicians to understand those programs. I dont know what to do to make reform unacceptable. That is why i am so pessimistic in the long run. I think it would take some sort of great things he did perform going in a good way. What do you think . You think it would commit political suicide . The president has proposed 34 billion of additional adjustments to expand on some of the ideas of the Affordable Care act. The capandtrade, the liberal organization, a plan that we feel is important. There are a lot of ways to do this, but many constitute what is written at large. The fact is when we look at medicare, the growth of spending on a beneficiary basis is very low over the next 10 years because of changes that were made in the Affordable Care act. We are talking about growth rates for beneficiaries. So it has to do with squeezing a lot more out of that in the short run. In the longer run, i think there are some fundamental reforms that could take place that are possible. The president made this a defining issue in the election. And he is going to preserve medicare and we must expect that this will be front and center in the fiscal cliff negotiations. The president says that he does not favor support. On the other hand he says he does favor it. The use of managed care. Is that something that comes from the same place, but a different name . As you know, i have a certain track record with support, which is actually something that came out of an article that was written in 1995. It was not a moderately different approach, but it has to do with what congressman ryan said. I have a lot of sympathy for moving in that direction in a sensible kind of way. We already had the Medicare Advantage component where many choose to get their benefits through a plan that is offered by some private entity. Whether that is covering medicare benefits to enroll in it or not. Those who will gradually get there themselves, it will move you very close to something that congressman ryan would view as premium support. But you are not going to get jobs and money out of that. The real issue is not medicare or medicaid. It is the underlying growth in Health Expenditures for beneficiaries. Those get benefits from the same providers and include the same mechanisms. And you have to institute reforms and changes in incentives that will lower the growth rate for all americans. That is the only way to be successful unless you think you are going to shift the costs onto beneficiaries, and that has huge limitations because the average Single Person over the age of 65 as a medium income of about 18,000. So you cant expect to get huge amounts of money like that. I am going to give the audience a chance to ask some questions. Please introduce yourself. Yes, sir . Hello, i am a fiscal economist. What does anybody out there think about the costeffectiveness and the expectations of having both people of both sides of the aisle in congress . There are many bipartisan groups that have participated. Do you see any opportunities that all . Ultimately it is the only way out. The congress has continued polarization. We see more polarization on the part of the voters as well, which is exaggerated from the point of view of the house. We are so clever and drawing these lines. It seems that a congressperson is taking it on as a whole. But it turns out many times they are going along with public opinion. It is very difficult to break through that. Yes, sir, but im in the back in reading about 2013, you have to understand whats going on with you. Because you have Campaign Contributions and lobbyists. Why are there separate tax rates that are not on the table for discussion. Many of us have social programs. But there is no focus or evaluation of Corporate Tax rates. Thank you. Okay, so lets talk about the state taxpayers be mackovic, will focus on the corporate park. Lets go back to the president ial campaign. You have one candidate propose lowering the Corporate Tax rates down to 25. You had the other candidate who is now reelected who chose the tax rates down to 28 . There is actually a very strong rate primarily because the reasons of international competitiveness. United states is out of line about what our taxes are. On the other hand, United States has high tax rates. What president obama has talked about is lowering the tax rate. It is something that others have embraced. Companies and businesses know what youre trying to do and the political discussion has been around business or tax reform and would be very interesting to try to cooperate with them. Okay, so dealing with some of these, it is extremely difficult, right . But i think a positive thing that came out of this fiscal debate is that for the first time in a long time, the Business Community is unified in the sense of getting the deficit under control. And they werent as worried about the individual tax rates that my growth as a result of having some kind of reform slaveholder that continues. So people dont argue about depreciation and so forth. I am more hopeful than a more unified view from the Business Community is possible and has been for a very long time. I just want to say one thing. But i am not fully knowledgeable of that meeting earlier today were a tax experts said you cant do individual reform and not corporate reform. When you change the parameters, a lot of entities shift to other forms that were tapped on the individual side. So if you lower rates in the Corporate Tax system and get away with some of the preferences, you will have this huge shift of people out of the individual and then to lower rates and into the corporate world. When they use the word corporate, watch. But there are a lot of businesses that are structured as partnerships and the taxation of their income happens to be individual tax returns and some have a choice and they base that on tax and considerations with taxes and others. And there are also other tax breaks that applied. The Search Engine listings, if you make them less favorable, you may have the effect of raising taxes on businesses and tax on the individual side. There are also fundamental business sides and he began to run in the political channels that to pay for it to tax breaks, the Bumper Sticker of what you have just done is cut taxes on corporations and small businesses. Now, there are a bunch of things that may not be true in what i said, thats the Bumper Sticker that youre walking into. And that starts to bring the pressure to fundamental wholesale reform. Okay. So we have questions from our remote viewers just trying to get to the bottom line of taxes. How much is part of a grand bargain for deficit reduction . Lets talk about revenues and shared gdp. How much is reasonable in such a tax code . Oh, dear. First of all, i think you have to separate the revenue target. It would not be inefficient. And i guess i feel pretty good about the kind of thing regarding the system. I think it was about 80 billion a year or Something Like that. I think its very obvious that as we look forward, we will need more revenue than we have been historically as a percentage of gdp. Due to what the demographics are doing to a large percentage of this. So its somewhere around 22 or Something Like that, its a reasonable goal to me. If i were looking out, i think that makes sense he might tell me what the spending is for gdp. And i will tell you two Percentage Points less, maybe a little bit closer. People talk about balanced budgets, Something Like two Percentage Points of gdp. It would be a tremendous accomplishment thats where we stand today. Together, i think its important to think about tax reform quite probably. But its not just a matter of adjusting the known pieces of the code. Thinking about things like being essential in raising that kind of revenue. So you are talking about spending and a 24 25 of gdp range . Well, credible in the sense that we can design a tax system to support that. Okay. It is hard to scale what we have to accomplish that if you look internationally, there are a bunch of companies that have larger government than the United States does. If you compare those tax codes, by and large they choose tax consumption more heavily than we do. This is not an either or thing. But it seems like Political Economic pressure. So you have to have a more efficient tax system. It means taxing and relevant terms in the u. S. Has to find a way to get there. Some people could talk about value added taxes, i firmly believe this, but that is my political difference. Do you think we are reaching the limits of the income tax . Well, i used to think that the politics will push us in that direction. But frankly i think it is coming up with a new tax and something that is totally unthinkable from a Republican Point of view and i cant imagine doing that in the next 10 years or so. To my observation about this would be not to ask the question what percent of gdp is total spending going to be. What is going to happen to Health Health care cost growth over the next decade. If we get it under control, i think that our numbers can be significantly lower. Sort of what we have seen over the last three or four years is very optimistic in a sense that Health Care Costs slowed down quite a bit. But we have been there once before and it did not pan out. Im sure there are some that should make us more optimistic compared to what time its happened. Are there any questions from the audience . The whole point of fiscal cliff the fiscal cliff was to try to get the deficit down. Its a four letter word and its called jobs. You know, the people were, thats a great thing. If we talk about why we havent had this, it makes a lot of sense in a everything that is said is true. The growth is beneficial, but the net benefits are different than a lot of people realize. The problem is we have designed a system where we have initial Social Security benefits and what that means is that the economy grows, withheld it is a little bit more obscure, but the evidence is fairly clear that when people have more income, they demand more health care. As a result, there will probably be more pressure on Health Care Costs. So while growth has a net benefit. You cannot solve this with realistic rates and growth. We have to be able to do that with what is possible in the United States. I dont want to deny that, but we cannot grow our way out of this problem. Are there any questions from the audience . Yes, sir. Yes, my question has to do with the congress and the white house. What implications we have for the Economic Future . Well, i think me put it this way. I cant believe that the quantitative easing the weve had has done all that much good. I think the effects must be trivial. I dont think it was worth the risk, personally. Or else worlds we do create the risk of more inflation. So i wish the fed hadnt done all of that. I guess im not as concerned as many people are. Its hard to believe that people can do it with precision. They are to make a mistake one way or the other. Making a mistake is just as powerful. So i dont think the risks are high, but i dont think it is worth doing what they have been doing. She i guess i am a little bit more charitable on the doing it. I dont think the impact has been huge. And i dont think that i want to be ben bernanke successor. [laughter] i will be the most positive. The risk profile is too little and too much and there are quite idiosyncratic reasons. We need to combat inflationary pressures. While it is built up in armtwisting levels, i think that the reality is that ben bern o