<DOC>
[111th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:55097.wais]
TREASURY DEPARTMENT
FISCAL YEAR 2011 BUDGET
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 24, 2010
__________
Serial No. 111-22
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
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COMMITTEE ON THE BUDGET
JOHN M. SPRATT, Jr., South Carolina, Chairman
ALLYSON Y. SCHWARTZ, Pennsylvania PAUL RYAN, Wisconsin,
MARCY KAPTUR, Ohio Ranking Minority Member
XAVIER BECERRA, California JEB HENSARLING, Texas
LLOYD DOGGETT, Texas SCOTT GARRETT, New Jersey
EARL BLUMENAUER, Oregon MARIO DIAZ-BALART, Florida
MARION BERRY, Arkansas MICHAEL K. SIMPSON, Idaho
ALLEN BOYD, Florida PATRICK T. McHENRY, North Carolina
JAMES P. McGOVERN, Massachusetts CONNIE MACK, Florida
NIKI TSONGAS, Massachusetts JOHN CAMPBELL, California
BOB ETHERIDGE, North Carolina JIM JORDAN, Ohio
BETTY McCOLLUM, Minnesota CYNTHIA M. LUMMIS, Wyoming
CHARLIE MELANCON, Louisiana STEVE AUSTRIA, Ohio
JOHN A. YARMUTH, Kentucky ROBERT B. ADERHOLT, Alabama
ROBERT E. ANDREWS, New Jersey DEVIN NUNES, California
ROSA L. DeLAURO, Connecticut, GREGG HARPER, Mississippi
CHET EDWARDS, Texas ROBERT E. LATTA, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia
JAMES R. LANGEVIN, Rhode Island
RICK LARSEN, Washington
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
GERALD E. CONNOLLY, Virginia
KURT SCHRADER, Oregon
Professional Staff
Thomas S. Kahn, Staff Director and Chief Counsel
Austin Smythe, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, February 24, 2010................ 1
Statement of:
Hon. John M. Spratt, Jr., Chairman, Committee on the Budget.. 1
Hon. Jeb Hensarling, a Representative in Congress from the
State of Texas............................................. 2
Hon. Gerald E. Connolly, a Representative in Congress from
the State of Virginia, prepared statement of............... 4
Hon. Paul Ryan, Ranking Minority Member, Committee on the
Budget:
Prepared statement of.................................... 5
Question for the record.................................. 58
Hon. Timothy F. Geithner, Secretary, U.S. Department of the
Treasury................................................... 6
Prepared statement of.................................... 9
Responses to questions for the record.................... 52
Hon. Marcy Kaptur, a Representative in Congress from the
State of Ohio:
Questions for the record................................. 52
Article dated January 22, 2009, ``Want More Lending?
History Offers Lessons''............................... 61
Hon. Kurt Schrader, a Representative in Congress from the
State of Oregon, questions for the record.................. 55
Hon. Robert B. Aderholt, a Representative in Congress from
the State of Alabama, questions for the record............. 60
Hon. Betty McCollum, a Representative in Congress from the
State of Minnesota, submission for the record:
Letter dated February 19, 2010, from Sunrise Community
Banks.................................................. 63
TREASURY DEPARTMENT
FISCAL YEAR 2011 BUDGET
----------
WEDNESDAY, FEBRUARY 24, 2010
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m. in room
210, Cannon House Office Building, Hon. John Spratt [chairman
of the committee] presiding.
Present: Representatives Spratt, Kaptur, Becerra, Doggett,
Berry, Tsongas, Etheridge, McCollum, Langevin, Larsen, Bishop,
Moore, Connolly, Schrader, Hensarling, Garrett, Diaz-Balart,
McHenry, Mack, Jordan, Lummis, Austria, Nunes and Latta.
Chairman Spratt. We will call the committee to order. Today
we pick up our review of the President's budget for 2011. We
will hear from the Secretary of the Treasury, Tim Geithner,
about the administration's outlook on the economy, jobs, budget
deficits, and also about initiatives contained in the
President's budget for 2011.
As we began the calendar year 2009, the economy was not
growing; it was shrinking at rapid rates--a negative rate of
5.4 percent; shedding jobs at a rate of 779,000 jobs in January
alone. In the last quarter of 2009, the economy grew--positive
growth--by 5.7 percent. That is the highest growth rate in 6
years. Not bad. On January 20th of this year, job losses have
averaged 35,000 over the past 3 months. That, too, is
frightening. In the judgment of the Congressional Budget
Office, neutral and nonpartisan, the Recovery Act contributed
to this turnaround, raising real GDP by 1.5 to 3.5 percentage
points in the fourth quarter of 2009, and increasing employment
by between a million and 2 million jobs. Secretary Geithner,
Secretary Paulsen, and Chairman Bernanke used some
extraordinary measures, added billions to the debt and deficit
in the process, but they brought the economy back from the
brink.
Still, too many Americans are feeling more of the recession
and less of the recovery. One reason is unemployment, which is
persistent. And no one can be satisfied when unemployment
averages 10 percent, and underemployment is nearly twice that
size.
Secretary Geithner, we hope you will take the opportunity
today to tell us more about job creation, job generation, and
growth in the President's budget.
From my perusal of the budget, we find about $100 billion
for a job-creation package, and on the tax side the
administration is laying out proposals like a $5,000 job tax
credit for new hires. In addition, it appears that the
President's budget proposes significant tax relief for families
and small businesses, and this hearing gives us a chance to
examine those proposals more closely.
From the start, the Obama administration has realized that
it would be almost impossible in any circumstance, particularly
in this great recession, almost impossible for us to move the
deficit down without moving the economy forward. That is why
the President's budget for 2011 has dual objectives. In the
short run we want to restore the economy, for sure, and in the
long run we want to restore the budget. While we build up jobs,
we need to bear down on the deficit, doing both things at the
same time.
This year's deficit is projected to be $1 trillion, 556
billion. That is enormous by anyone's yardstick. But let us
remember that last January, CBO projected the deficit, before
President Obama took office, extrapolating the Bush
administration's budgets and fiscal policy, CBO projected
deficits of $1.3 trillion, which is $300 billion less than it
is today, but pretty close to the deficit we are working with
as we put forward a budget for the forthcoming fiscal year.
Let us also note that the President proposes to cut the
deficit by half, from $1 trillion, 556 billion in 2010, or 10.6
percent of GDP, to $727 billion, or 4.2 percent of GDP, in
2013. The President's budget keeps bringing the deficit down to
2014, when it reaches 3.9 percent of GDP.
Now, a $727 billion deficit is nothing to cheer. This
cannot last. It cannot be the final stop on the path to a
deficit reduction. Frankly, I would like to see more deficit
reduction in this budget for 2011. We are on an unsustainable
course, amassing a mountain of national debt. The longer we
dodge the hard choices, the harder they become. But halving the
deficit in 4 years is a worthy objective, and the budget
clearly does obtain some other welcome issues on the
President's part of bringing the deficit down.
We proved in the 1990s that it is possible, politically
possible and economically possible, to reduce deficits
responsibly, but it cannot happen without concerted effort. It
is not going to simply descend upon us. It is hard to do
without bipartisan cooperation and a growing economy. That is
why the President's appointment of a fiscal commission is a
welcome step, we think, in the right direction. Another step in
that direction is reinstatement of statutory pay-as-you-go,
modeled on rules adopted in the 1990s that helped us turn
record deficits into record surpluses.
On both the budget and the economy, stark choices confront
us, but the budget set out by the President marks a step
forward in the effort to pick up the economy by bringing down
the deficit.
Mr. Geithner, we look forward to your testimony today. But
before I turn to you, I am going to turn to the Ranking Member
designate today Mr. Hensarling and offer him the floor to make
any statement he wishes to make of his own.
Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
Welcome, Mr. Secretary. First, as a Texan, let me thank you
for your sensitivity and your leadership for visiting with the
folks at the IRS in Austin, Texas. I have no doubt, Mr.
Doggett--I believe the facility was in your district--will have
more to say. But certainly on behalf of the Texans of this
committee, we certainly admire and appreciate what you did.
Having said that, Mr. Secretary, since you and I are the
veterans of many of these hearings, you probably know, and
don't take it personally, I am going to be a little less
complimentary of your leadership on the economy.
It was a year ago that the stimulus bill was signed into
law by the President. We were told that unemployment would not
exceed 8 percent. We were told that the legislation would
create or save 3\1/2\ million jobs. A year later we know that
has not proven to be true. A recent quote from the Associated
Press: Ten months into President Barack Obama's first economic
stimulus plan, a surge in spending on roads and bridges has had
no effect on local unemployment and only barely helped the
beleaguered construction industry.
We know that money has gone into projects like $49,000 of
taxpayer money for rubber tennis courts in Bozeman, Montana;
roughly half a million dollars for a skateboard park in
Pawtucket, Rhode Island. And the list goes on. Unfortunately,
as we all know, unemployment continues to hover around 10
percent, a generational high. We know that since the bill has
been passed, that jobs have been lost every single month, with
the exception of one. We know that since the President was
sworn in, that 4 million of our fellow countrymen now find
themselves out of work. And human suffering continues from
coast to coast.
Last, but not least, if you add on the interest, we know
that the American people are now $1.2 trillion deeper in debt,
roughly $10,000 per household. And now we understand that the
President and Congress are talking about yet another stimulus
program. I understand that the vocabulary has changed; I am not
sure the policies have.
My guess is the American people believe enough is enough.
When they hear more stimulus, they think more debt. And
certainly all we can see is debt in the budget that the
President has presented to us. Already on top of signing into
law an increase of 84 percent in nondefense discretionary
spending, we are now presented with the largest budget in our
Nation's history; the largest budget deficit in our Nation's
history, $1.6 trillion; over 10 percent of our economy, the
largest as a percentage of our economy since World War II; the
largest debt in our Nation's history, $9.3 trillion, weighing
in at roughly 63 percent of our economy, once again, the
largest as a percentage of the economy since World War II.
Under the President's budget, interest on the debt alone will
quadruple by 2020, reaching $840 billion, roughly $6,000 to
$7,000 per household just to pay the interest cost on the debt
under the President's submitted budget.
It was a couple of weeks ago that OMB Director Dr. Orszag
was before us, and he admitted that deficits above 3 percent of
GDP are unsustainable. Yet as I look at the President's budget
each and every year, we have a budget deficit exceeding 3
percent, which, according to the administration, is
unsustainable.
This Nation was already on a precarious fiscal road prior
to this administration. Today it is unequivocal that the Nation
is on the road to bankruptcy if we do not change our ways. This
budget has us on the road from taking government to costing 20
percent of our economy, its average postwar era average, to 40
percent when children who are born today enter the workforce.
At that point millions will never have their opportunity to own
their own home. Millions will never have an opportunity to go
to college. Millions will never have an opportunity to start a
new business. Surely, surely we can do better.
I spent a lot of the break in February, particularly since
we were snowed in, speaking to small businessmen in my
district; a landscaper, a building materials small businessman.
I talked to community bankers, I talked to Fortune 500 CEOs, I
talked to investment managers who manage billions of dollars,
and I heard a similar message from each and every one of them:
great fear and uncertainty on how this Nation is going to deal
with this level of debt and deficit; a fear to start or expand
a new business, not knowing the outcome; fear of a potential
multi-trillion-dollar takeover of the national health care
system and what that could potentially do to labor costs; the
threat of a potential $800 billion energy tax on our economy;
continued bailouts, as we heard on Christmas Eve, that all of a
sudden we now have unlimited taxpayer exposure to the bailout
of Fannie and Freddie, a bailout Nation where the big get
bigger, the small get smaller, and the taxpayer gets poorer.
The new bank tax, I am not sure--even though it may feel
good to be punitive, I am not sure any American believes that
somehow, somehow their interest rate is going to go down or a
line of credit is going to be opened up if their banker gets a
new tax.
Now, I have no doubt eventually this economy will rebound.
By any historic standard we already ought to be out of this
recession. But when I talk to those who create jobs and invest
in jobs, growth, and opportunity in my section of Texas, the
policies of this administration are hampering job growth, and
they must change. And I hope in the future that the
administration will look upon jobs as job number one and put
forth a plan to deal with the debt and deficit that ultimately
will bankrupt our country.
I yield back, Mr. Chairman.
Chairman Spratt. Let me tend to one housekeeping detail. I
ask unanimous consent that any Member who wishes to submit an
opening statement may do so at this point in the record.
Without objection, so ordered.
[The prepared statement of Mr. Connolly follows:]
Prepared Statement of Hon. Gerald E. Connolly, a Representative in
Congress From the State of Virginia
Mr. Chairman, thank you for holding this hearing and asking
Secretary Geithner to appear before the House Budget Committee to
testify with respect to the Fiscal Year 2011 budget.
Last year, when Secretary Geithner testified before this committee,
I stated that the public must see the concrete benefit of TARP--the
Troubled Asset Relief Program--and our enormous investment in the
financial industry. I was worried that TARP focused too heavily on Wall
Street, while the concerns of homeowners and small businesses remained
largely unaddressed.
In fact, just yesterday, the FDIC released data showing that bank
lending declined 7.5 percent, or $585 billion in 2009. I'm sure my
colleagues have heard from their homeowners and small businesses that
they are having severe difficulties obtaining refinancing and small
business loans. We know why--the banks are not lending.
The President is proposing to use $30 billion of TARP authority for
a Small Business Lending Facility to continue to address the lack of
small business capital. While this is a positive step, I hope that we
use the majority of unspent and repaid TARP funds for significant
deficit reduction.
I appreciate the President's plan to reduce the deficit from the
inherited $1.3 trillion at the end of 2008 to $706 billion in Fiscal
Year 2014, and, like the President, I believe we must do more. The
improving financial sector returned almost $200 billion more of TARP
loans to the taxpayers than originally projected. These funds represent
the single largest deficit reduction in history, and I hope that the
Administration will be judicious in its continued use of TARP funds,
balancing the short-term need for assisting homeowners and small
businesses, with the long-term goal of deficit reduction. As John
Podesta testified before this Committee last month, long-term fiscal
responsibility will enable the ability to preserve social safety net
programs.
I remain cautiously optimistic about the President's proposal for a
bipartisan fiscal committee to address our long-term budget deficits.
It is clear that long-term deficits pose a significant threat to
America's long-term stability. Therefore, I hope that all members of
this proposed committee will bring a realistic focus on deficit
reduction, honestly exploring all options, free from demagoguery.
Returning to fiscal responsibility will take time and difficult
choices, and I hope that all those who claim to support it demonstrate
that supposed commitment in their actions, as well as their words.
I was pleased to see the President include pay parity for military
and civilian federal employees in the Fiscal Year 2011 proposal. Last
year we included language in the Budget Resolution to this end. All
federal employees dedicate themselves in the service of their country,
and pay parity recognizes their efforts. We must enshrine this
principle moving forward to ensure our ability to recruit and retain a
high quality workforce. I look forward to Secretary Geithner's
testimony and working with him as we fashion a budget resolution in the
weeks ahead.
[The prepared statement of Mr. Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Ranking Minority Member,
Committee on the Budget
Thank you, Chairman Spratt and Welcome, Secretary Geithner.
Mr. Secretary, it seems that ever since you've been sworn in, your
presence here on Capitol Hill has offered Democrats and Republicans a
rare opportunity to unanimously agree on at least one thing--
criticizing you.
I for one would like to strike a more constructive tone today. At
this point, it serves little purpose to endlessly bicker about the past
and how we got into our fiscal mess. No doubt, this Administration was
dealt a tough hand. But for the purposes of this Committee, and this
hearing in particular, I'd like to make today's discussion about the
future.
You are here, after all, to present the President's budget, which
should outline a viable way forward. Above all, it should make the
tough choices and do the heavy lifting to get our federal finances back
on a sustainable path. And yet, I'm just stunned that your budget fails
on this most basic level.
This isn't just subjective criticism. Your budget fails to meet the
test of sustainability as defined by your own Administration. Budget
Director Orszag, for instance, has said that we need to get our
deficits down to about 3 percent of the overall economy over the medium
term so that our debt levels are no longer rising.
But under your budget, deficits never fall below 3.6 percent of GDP
and debt as a share of the economy rises consistently throughout the
ten year window. These numbers aren't consistent with a so-called ``new
era of responsibility.'' They are more in line with a glide-path toward
bankruptcy.
Mr. Secretary, you know markets and you know the real economic
risks of not taking concrete action to reign in our debt. For perhaps
the first time in our nation's modern history, observers are beginning
to seriously worry about a debt-induced economic malaise in the U.S. or
even a full-blown crisis.
The world is looking for a signal that the country is actually
charting a course back to fiscal sustainability, but your budget
doesn't offer encouragement. Within days of the budget's release,
Moody's announced that, absent a plan to stabilize and bring down our
debt levels, the U.S. could eventually lose its triple-A credit rating.
We have seen over the past two years how quickly a plunging economy
could lead to a fiscal mess. But, going forward, the causation will
likely shift and we will find that an unsustainable fiscal path can
lead to an economic mess.
Neither party wants this to happen. That is why, as we work towards
getting our economy growing again and fostering sustainable job
creation, we must also chart a realistic course to get our fiscal
situation under control.
Chairman Spratt. Mr. Secretary, the floor is yours. You can
summarize your statement as you see fit. I think you know that
we have some absences today because we are in competition with
three or four other committees, but we regard your testimony as
extremely important to us, and you can take your time and
proceed as you desire.
Thank you, again, for coming here today. We look forward to
your testimony.
STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you, Mr. Chairman, Congressman
Hensarling, members of the Budget Committee. It is a pleasure
to be here today to talk about some of the major challenges we
face as a country and the challenges we have to face together.
I wanted to thank Congressman Hensarling for beginning
where he began by reminding us of the tragic attack that we saw
in Austin, Texas, last week. I was there with Commissioner
Shulman on Monday. It was just extraordinary to look in the
eyes of those people and hear them tell the story of what they
did working together to get out of that building as quickly as
possible. They saved many, many lives. It was extraordinary to
listen to them talk about the pride they have in serving their
country as public servants at a time when we are all facing
together a really difficult set of challenges. But thank you
for what you said. I have tremendous pride and respect for the
men and women of the IRS who are working hard every day to try
to make sure that this government can do what it needs to do to
protect our national security and make sure that we are
providing health care basic services to millions of Americans.
They do a necessary, important thing, and we all owe them our
honor and our respect.
A year ago, when the President took office, the essential
urgent task facing the country was to act forcefully to prevent
a second Great Depression. A year later, in large part due to
the actions we took under the Recovery Act and steps we took to
put out the financial fire, our economy is now growing again.
The economy is now healing. This process is going to take time,
but it is important to acknowledge the progress we have seen to
date in starting this process of healing and repair.
This is progress, but it is not enough. We need to do
everything possible to reinforce strong economic growth led by
the private sector that extends to communities across the
country. We need to make sure also that Americans and investors
around the world have confidence that once we have sustained
growth in place, that we are going to bring down these
unsustainable deficits.
Now, these are complementary; they are not competing
objectives. If you care about future deficits, and you have to
care about future deficits, you need to care about economic
growth today, because if not, if we don't have growth, our
future deficits will be higher. And if you care about economic
growth, you have to care about these deficits, because without
confidence that over time we are going to be able to work
together to bring these deficits down, then future growth will
be weaker.
Right now, Mr. Chairman, our top priority has to be to spur
job creation and private investment. Last week I was in North
Carolina, and I met with business owners in Durham, and I heard
how, because of a very careful, smart program to provide tax
incentives that incent private investment, we saw people take a
warehouse that had been vacant for a decade, in an area of
unemployment three times the national average, renovate it,
turn it into a business center that now employs hundreds of
people and a range of different businesses.
That is a good example of smart policy that has a good bang
for the buck, but we need to do a lot more. That is why we
proposed a series of measures to provide support to small
businesses to invest in infrastructure and clean energy to
assist State and local governments so they can prevent future
layoffs. These are immediate, important steps we can take
together, but in order to lay the foundation for longer-term
growth in the future, we have to invest in innovation and
reform.
We need financial reform because families and businesses
deserve a financial system that supports investment in future
innovations, not just future real estate booms. We need to
support innovation with incentives that encourage investment in
research and development. We need to increase exports, because
the more product our businesses make and sell to other
countries, the more jobs we are going to see in the United
States. We need to invest in education because businesses need
an education system that does a better job today of creating
the skilled workforce of tomorrow. And, of course, we need
health care reform so we can help provide greater economic
security for middle-class families and help businesses reduce
future growth in health care costs.
These proposals for innovation and reform are built on a
basic simple idea that the role of government is to create the
conditions for private-sector businesses large and small to
grow and to expand. And the President outlined today before the
Business Roundtable a series of reform proposals to support
that objective, and I think these are proposals that the
businesses of America have a large stake in supporting. They
all recognize the importance of better education outcomes,
stronger infrastructure, clear incentives for how we use
infrastructure, and they have a very substantial stake in
trying to bring a strong program of financial reforms into law.
Now, Mr. Chairman, as you know and your colleagues know on
this committee, as we try to lay a foundation for longer-term
growth, we have to return to living within our means as a
country. A year ago the Nation faced a deficit of $1.3 trillion
and projected deficits before we passed a single bill that,
according to CBO, would more than double the Nation's debt over
the next decade.
The deficits we face are the legacy of past policies and
the recession, but they are now our challenge to meet. In this
budget, Mr. Chairman, we have outlined a path to bring down our
future deficits by more than half, to below 4 percent of GDP.
First, we propose a freeze in nonsecurity discretionary
government funding. If this freeze is enacted--and I want to
make this very clear--if this freeze is enacted, by 2012
nonsecurity discretionary spending would equal, when adjusted
for inflation, about what we saw in 2008. By the middle of the
decade, as a share of the economy, it would fall to its lowest
level in more than 15 years.
Second, 2 weeks ago the President signed into law a law
that said any new initiative should be paid for without adding
to the deficit. In the 1990s, this discipline, ``pay as you
go'', helped move us from a deficit that was 4.5 percent of GDP
in 1991 to a significant surplus in 2000. In fact, in January
2001, the CBO projected 10-year surpluses of $5.6 trillion.
Over the ensuing 8 years, Washington did not pay for tax cuts
for the wealthy or a huge expansion of Medicare, and by January
2009, these choices, together with the great recession,
produced projected 10-year deficits of a staggering $8
trillion.
Third, Mr. Chairman, we need to make our tax system more
fair. To do that we propose to allow certain tax cuts to expire
as scheduled. These are tax cuts that affect only those
Americans, 2 percent, that are the most fortunate in our
country, and would only affect 2 to 3 percent of small
businesses. We want to close the so-called carried interest
loophole by taxing the income of hedge fund and private equity
managers in the same way we tax the income of teachers and
firefighters. At the same time we want to extend tax cuts for
working Americans. We cut taxes for working families and small
businesses in the Recovery Act. We cut taxes for first-time
homebuyers and for parents trying to care for their children.
We cut taxes for 8 million Americans paying for college. And in
this budget we want to extend those tax cuts, and we want to
enact new tax cuts for those who invest in small businesses,
tax credits for small businesses that increase their payrolls,
and tax breaks for Americans who retrofit their homes to save
energy.
Now, we recognize we need to go further over time, and this
is going to require some tough and at times politically
unpopular choices, and that is why the President last week
created a bipartisan deficit commission modeled on the
successful Reagan-Greenspan Commission on Social Security and
the Conrad-Gregg proposal. The Commission's job will be to step
back from politics and recommend policies that bring down our
future deficits.
Let me just close by underscoring something I think you all
know, which is we face enormous challenges as a country, and
what the government does today, over the next year, will impact
our country for decades to come. What we do today to invest in
lasting economic growth will impact the ability of a generation
of Americans to save for college, to open a small business, to
own a home, or plan for retirement. And right now, of course,
many Americans and many watching us around the world have lost
confidence in Washington's ability to come together and reach
agreement to solve problems facing the country.
We can't change the past, Mr. Chairman, but we share an
obligation to work together to shape our future. And if we
invest responsibly together in reform and innovation, if we act
on these fiscal imperatives we face over the longer term, then
we are going to emerge stronger from this crisis with growth
that will be more broadly shared across the country.
I want to just conclude, Mr. Chairman, by saying I think if
you listen careful today, you can see the early signs of a
broader consensus on how to deal with these fiscal challenges.
I want to echo part of what your colleague Mr. Hensarling said,
which is if you listen to people across the aisle today in this
country, people today say, Deficits matter. Tax cuts aren't
free. We have to pay for the commitments we make. But our first
priority now is to get this economy back on track and get
Americans back to work.
Thank you, Mr. Chairman.
Chairman Spratt. Thank you, Mr. Geithner.
[The prepared statement of Timothy F. Geithner follows:]
Prepared Statement of Hon. Timothy F. Geithner, Secretary,
U.S. Department of the Treasury
Chairman Spratt, Ranking Member Ryan and members of the Committee,
thank you for the opportunity to appear before you today to discuss the
President's Fiscal Year 2011 Budget.
The U.S. economy is still in the midst of one of the most
challenging periods in our nation's history. We have pulled back from
the brink of financial collapse and a historic recession. The overall
economy grew at an annual rate of 4 percent over the last six months of
2009, but millions of Americans remain out of work and the economic
pain of the recession can still be felt throughout our nation. This
crisis has caused enormous damage to the basic economic security of
tens of millions of Americans.
This is why we have a lot of work to do together to make sure that
as overall economic growth recovers, so does job growth. We must
restore confidence in the economy's fundamental resilience, and we are
taking the steps to ensure sustainable growth going forward that is
more widely shared among the American people.
Our immediate priority is to work together to encourage the
creation of more and, better-paying jobs. We can only achieve that
objective if we are committed to laying a foundation for job creation
in the private sector. In the short-term that means ensuring that the
true engines of job creation, America's businesses, have the right
incentives to expand and hire through new targeted measures in 2010
that will speed job creation.
But laying a new and stronger foundation for the private sector
requires more: it requires an equally strong public commitment to
invest in the innovation, modern infrastructure, and the education of
our future and present workers. These investments will enable our
businesses to compete, increase productivity, and most importantly,
will help create good, well-paying jobs. In the long-term, this new
foundation requires the creation of a strong investment climate by
showing our commitment to return the deficit to sustainable levels and
establishing the right rules to restore trust in the core functions of
our financial system. When recovery is firmly in place and the economy
is back on its feet, we need to begin the process of bringing down the
deficits that Washington has been accumulating for almost a decade.
These deficits are too high and left unchecked they will burden our
children and grandchildren, and could drain investment from the private
sector, drive up interest rates and threaten the very prosperity we are
seeking to produce.
The commitment in this Budget to job creation, innovation,
investment in the skills of our people and fiscal sustainability is
essential to setting the stage for the kind of broad-based economic
growth that will provide middle-class Americans with rising living
standards and financial security.
Pursuing these goals requires a careful balance. It means not
turning too quickly away from our immediate goals of jobs and recovery,
while also not ignoring the long-term health, education and energy
challenges that our nation cannot afford to further ignore. And it
means laying out a clear path to fiscal sustainability, and
demonstrating our commitment to walk that path by taking the first
critical steps along it.
recovery and job creation
As the President said last week, jobs must be our most immediate
focus. That means that even before we get to our FY 2011 Budget, we
will work with Congress to enact legislation to accelerate the pace of
job growth.
First and foremost, we will do this by providing businesses--
especially small businesses that have been major job creators in recent
years--with tax cuts and other incentives to put more Americans back to
work quickly.
The Administration proposes to extend Recovery Act business tax
relief, and to create a new, temporary tax credit for job creation. We
will extend Recovery Act measures that allow small businesses to deduct
the full cost of new investments in qualifying equipment. And we will
allow all businesses to take bonus depreciation deductions this year
for qualifying capital investments.
Under our new ``Small Business Jobs and Wages Tax Cut,'' all
businesses will be eligible for a $5,000 tax credit for every new
employee they hire in 2010. An additional bonus amount will be
available to firms that increase their payroll by adding hours or
raising wages, with the total credit amount capped at $500,000 per
firm. Because it will use a 2009 baseline, there are no games or
accounting tricks any business could perform to get the job or wage tax
cut without actually increasing jobs or wages.
In order to get money out to businesses quickly and thus provide a
fast-acting incentive to hire, firms will be able to claim the credit
on a quarterly, rather than annual, basis. We expect that over one
million small businesses that are growing jobs or wages will receive
the credit.
This combination of tax measures will boost the pace and quantity
of business investment and, with it the number of new jobs that
businesses create.
To cope with the difficulty that small businesses face in getting
bank credit, the Administration is proposing legislation that will
rescind $30 billion from TARP and create a new separate program
designed to provide capital to small and community banks. Our proposal
includes a carefully-designed incentive structure that improves the
terms of the capital the more a small bank expands lending to small
business. And we will explore additional ideas from Congress on other
ways this facility could work to expand lending to credit-worthy small
businesses.
We also call for extending through September of the effective
Recovery Act measures that supported up to $15.4 billion in Small
Business Administration loans through lower fees and higher guarantees
during this difficult time. And we will support legislation to increase
the loan size of the SBA's two most heavily-used guarantee programs.
Second, the President has proposed measures to spur immediate job
growth by creating incentives to invest in our environment and energy
security. In addition, the Budget includes an extra $5 billion to
expand the number of firms eligible to receive a tax credit for
investments in U.S. factories that produce clean energy products. This
will boost jobs by helping to build a strong U.S. clean energy
industry. And because it is an expansion of an existing program, there
are already worthy businesses ready to receive the benefit so that the
additional amount will go to work quickly creating new jobs.
The President is also proposing new incentives for consumers who
retrofit their homes to make them more energy-efficient, and we are
seeking to expand several Recovery Act initiatives that promote energy
efficiency and clean energy and that have been particularly popular and
effective at job creation.
Third, the President is proposing to boost infrastructure
investment beyond what was included in the Recovery Act so that we can
continue modernizing our transportation and communications networks.
This increase will support needed public works, provide private sector
companies with new work, and spur additional hiring.
As we take all of these steps to get Americans back to work, we
need to extend Recovery Act relief for those most hurt by the nation's
economic troubles. This will include emergency assistance to seniors,
unemployment compensation and COBRA assistance for the unemployed, and
relief to revenue-strapped states and localities to help prevent
layoffs.
building a new foundation
While our first aim must be to restore job growth, the FY 2011
Budget looks beyond the immediate recovery to build a new and stronger
foundation for growth in the years ahead. Our aim in doing so is to
produce growth that once again raises the living standards of all
Americans.
We cannot afford an economic expansion like that of the past decade
when, as the President said last week, jobs grew more slowly than
during any previous recovery; the incomes of average American
households declined while the costs of health care and college reached
new highs; and much of our growth was built on the sands of a real
estate and financial boom.
In order for Americans to thrive, this nation must rely, as it
always has, on a vibrant private sector. Our entrepreneurs, small and
large businesses, workers, and nonprofit organizations must be the
engines of productivity growth and the primary creators of new, high-
quality jobs. Washington's role must be to create optimal conditions
for small and large American businesses to grow, innovate and create
jobs.
Government can play this important role by helping to ensure that
families can save and that businesses have ready access to the credit
needed to grow; by helping to expand the body of technical knowledge
and the quality of public infrastructure to encourage new businesses
and greater productivity; by expanding the market for American goods
and services by increasing our exports to the rest of the world; and by
helping Americans to better educate themselves in order to best employ
the latest knowledge and compete in an increasingly globalized
marketplace.
The President's Budget outlines policies to make important progress
on all of these objectives.
A strong, healthy financial system is crucial for sustainable
growth, job creation, and broad-based prosperity. Such a system helps
families save for a house, a child's education and retirement. And it
channels those savings into investments that let businesses grow, hire,
and raise incomes.
Our financial system is far stronger today than it was a year ago.
But it is operating under the same rules that led to its near-collapse
and a dangerous recession. These rules must be changed to keep the
system from taking unjustifiable risks and so that it can fuel growth.
We need a financial system that is safer; in which financial firms,
especially large ones, have more capital to absorb their own losses and
cannot take risks that threaten the whole economy. Consumers need to be
given the information they require to make the decisions that are right
for them and they need to be protected from unfair and fraudulent
practices. The government needs to have the authority that it did not
have in the recent crisis to break apart and unwind failing firms in
ways that limit damage to the system as a whole.
The Administration has proposed reforms that would accomplish these
goals, and the House has already passed legislation. We must finish the
job of enacting comprehensive reform for the sake of people's financial
safety and to ensure growth.
At the very core of the Administration's efforts to build a new
foundation for growth are our efforts to encourage American innovation.
We already made the largest investment in basic research funding in
history last year, and we propose to build on that. Even with our tight
fiscal constraints for discretionary spending, our Budget for the next
fiscal year will increase civilian research and development (R&D) by
6.4 percent. Our aim is to help create the conditions for greater
economic productivity and the emergence of new growth- and job-creating
businesses. And with most of these new investments offset by reductions
in military R&D, we will pursue this aim without increasing the size of
government or government spending.
As the President has said, no area is riper for R&D-driven
innovation than energy. Whether you are a consumer watching the cost of
filling your gas tank go up or a scientist tracking how climate change
is affecting our planet, it is clear that we can no longer afford our
heavy reliance on fossil fuels to power our economy.
The transition from fossil fuels to clean energy will challenge
both America's technical ingenuity and our political will. But the
challenge holds out tremendous possibilities not just for improving our
health and the environment, but for creating new, high paying ``green''
jobs and driving the recovery of America's manufacturing economy.
This Administration is committed to creating clean energy and green
jobs. The Recovery Act is already investing $90 billion in clean energy
technologies. And our FY 2011 Budget extends that commitment. As I have
already mentioned, it expands by $5 billion our Advanced Energy
Manufacturing Tax Credit, a 30 percent credit for qualified investments
in new, expanded or re-equipped clean energy projects. It substantially
expands support for construction of new nuclear power plants by
increasing loan guarantee authority for such projects by $36 billion.
It funds a $500 million credit subsidy to support $3 billion to $5
billion of loan guarantees for energy efficiency and renewable energy
projects. It continues work begun under the Recovery Act to modernize
our electrical grid so that it is smarter, stronger, more efficient,
and helps foster the growth of wind and solar energy projects.
We will make parallel investments in infrastructure with the
intention of taking full advantage of the knowledge generated by the
new R&D we are funding. These investments are designed to be launched
as quickly as possible in order to create jobs. They will include
increasing a $7.2 billion program to expand access to broadband
computer networks, and following through on our five-year, $5 billion
commitment highlighted by the President last week in Florida to develop
high-speed rail.
We are also proposing to expand and make permanent the very
successful Build America Bond program, which was part of the Recovery
Act. Build America Bonds have expanded the investor base for municipal
bonds and lowered borrowing costs, helping to restore a badly damaged
municipal finance market and support job creation through new
infrastructure projects. States and localities have already issued over
$64 billion in such bonds through the end of December. The President's
Budget proposes making Build America Bonds permanent with a subsidy
rate that makes extension revenue-neutral. The Budget also proposes
expanding the eligible uses of these bonds, allowing them to support
financing for nonprofits and a wider range of municipal borrowing.
A critical component for building a new foundation for stable,
long-term growth, and a complement to our efforts to increase R&D and
innovation, is opening up foreign markets to American goods and
services. The President has set a goal of doubling our exports over the
next five years and thereby supporting two million American jobs.
Our Budget will substantially increase funding to expand exports,
especially those produced by U.S. small businesses. The Budget will
provide a 20-percent increase in Commerce Department funding that
promotes exports from small businesses, as well as funding for the
Import-Export Bank to expand U.S. small business use of the Bank's
financial export assistance.
History shows that, besides R&D, the investment that pays the
greatest returns in improved productivity and greater prosperity is
education. The Budget makes substantial new investments in this area,
as well.
The Budget will provide new incentives for the rising generation of
students to train as scientists and engineers. And because in order to
succeed in a global economy higher education is a necessity and not a
luxury, the Administration proposes to increase community college
graduation by 5 million students by 2020.
The Budget increases maximum Pell Grants awards to $5,710, and
further propose to make Pell Grants an entitlement program, to further
the President's commitment that coming from a lower-income family
should never be a barrier to any young person with high educational
aspirations. In addition, it will extend the American Opportunity Tax
Credit, which provides a tax incentive of up to $2,500-a-year toward
college costs--or up to a total of $10,000 for a young person getting a
four--year degree.
The Budget will support the Administration's efforts to make major
reforms and improvements in the nation's elementary and secondary
schools to help students graduate so that they are ready for
postsecondary education or a career. It will expand the Recovery Act's
successful Race to the Top competition for funds to include not only
states, but individual school districts, and by investing in a new
competitive fund to encourage states to develop innovative techniques
for recruiting, retaining and rewarding effective teachers.
Finally, this budget is designed to give middle--class Americans a
chance to get back on their feet and contribute to this economy. That
commitment has been central to the Administration's policies from the
outset. The middle class was the focus of the Recovery Act. And soon
after taking office, the President created a Middle Class Task Force,
led by Vice President Biden, aimed at raising the living standards of
working families.
In this budget, we build on that commitment. We are proposing to
extend the lower- and middle-class tax cuts that are scheduled to
expire at the end of 2010. Among its effects, this extension will
ensure that 97 percent of small businesses who file individual income
tax returns will be spared an increase in their tax rates. The Budget
will also extend the Recovery Act's Making Work pay tax credit. And
through the initiative of Vice President Biden, we will expand the
Child and Dependent Care Tax Credit to help those who are working or
going to school and are also responsible for caring for others.
We will further assist tens of millions of middle--class families
if we pass health care reform that protects every American from the
worst practices of the insurance industry, gives small businesses and
uninsured Americans a chance to choose an affordable health care plan
in a competitive market, and requires every insurance plan to cover
preventative care.
The Administration and Congress have worked hard over the past year
on health care and we have no intention of letting the chance for real
reform slip away. It is crucial to remember that beyond the difference
reform would make to the quality, cost and coverage for tens of
millions of Americans, reform would reduce the growth of health care
costs. This would be of immense importance to the efficiency of our
economy and to our ability to reduce deficits over the long-term.
the fiscal imperative
American families are making tough choices in difficult times;
Washington must do the same.
Every American knows that the path of our deficits is too high and
that if they persist long after this recession ends, they will pose a
corrosive threat to our economic future.
That is why we believe that even as we take emergency action to
spur demand and job growth, it is not too early to begin the process of
imposing policies that can start bringing the deficit down to
sustainable levels once recovery and job growth have a firm footing.
Failure to show our commitment to bring down medium-term and long-term
deficits can weaken a recovery. Failure will mean higher rates for
families that want to buy a home or businesses seeking to start or
expand. Failure will limit the government's ability to respond in
future crises.
Of course, in tackling this problem, we must strike precisely the
correct balance with the job- and growth-spurring measures required to
assure recovery, and the investment in innovation and education to lay
a new foundation for future growth. If we fail to do so, we risk
driving the economy back into recession, causing immense additional
harm to middle-class families and making it even harder to fix our
fiscal problems.
This last point bears repeating. Advocating deep and immediate cuts
would damage growth, exacerbating our fiscal challenges.
On the day that President Obama took office, the budget deficit for
2009 stood at $1.3 trillion--9.2 percent of GDP--and the projected 10-
year deficits for the following 10 years were $8 trillion.
These huge deficits are the result of the prior Administration's
decision to enact large tax cuts and a prescription drug bill without
paying for them. Over the next ten years, those measures alone are
projected to add $5.8 trillion to the deficit, including interest
expense on the additional associated debt.
The impact of the policies on our nation's debt burden was
magnified by the great recession the President inherited and its impact
on revenues and automatic increases in spending on safety net programs.
Together these automatic changes will increase deficits by about $2.4
trillion over the next ten years. Simply put, over $8 trillion of the
projected deficits we faced as we put together this budget were due to
the fiscal policies of the last eight years and the effects of the deep
recession this President inherited. A much smaller amount--less than
one tenth of the effect of the unpaid for policies and the recession--
is attributable to the cost of the means by which we supported and
pulled the economy out of crisis.
Deficit trends of this level are not sustainable. Beginning to
correct them will require cutting deficits enough to stabilize the
debt-to-GDP ratio at a manageable level so it is no longer rising. This
requires cutting the deficit to 3 percent of GDP. This Administration
is committed to achieving the goal of deficits that are roughly 3
percent of GDP by 2015. Doing so would mean that the on-going expenses
of government will be completely covered by incoming revenues; the only
thing adding to the deficit will be interest costs on the accumulated
past deficits.
This is an ambitious goal. The deficit in the current fiscal year
is expected to reach 10.6 percent of GDP. To reach our 3 percent fiscal
target between now and 2015, we must lower deficits as a share of GDP
by more than they have been reduced in any five-year period during the
past six decades.
The President's Budget proposes a series of actions that would
begin to put us back to a responsible, sustainable fiscal path. Let me
highlight those changes:
The Budget will freeze all non-security discretionary funding for
three years (2011-2013) at 2010 nominal levels, with funding after the
three years increasing only at about the rate of inflation. The freeze
will reduce deficits by $250 billion through the end of the decade.
Among other things, it will require us to eliminate or consolidate
funding for several education programs even as we make significant
targeted investments to improve education. It will mean reducing
spending on the National Park Service, terminating the Brownfield
Economic Development Initiative for poor areas that the President
advocated during the election campaign and still supports.
In addition, we need to restore the basic set of disciplines that
helped make sure that if Congress proposes new policies or tax cuts,
these are paid for with offsetting cuts or changes in policy. In the
1990s, Washington started to live by the budget rule and the basic
common sense principle that if the President and Congress wanted to
pass an expensive tax cut or entitlement increase--however worthy--they
had to find offsetting measure to ensure it did not increase the
deficit or debt. This common sense rule--called PAYGO--helped
Washington move from large deficits to surpluses. If Washington had
lived up to this principle during the last decade it would have served
as a bulwark against the unpaid for tax cuts and entitlement increases
that make up the heart of the current deficit and debt. Reinstating
PAYGO will help return the government to fiscal sustainability.
The Budget will include proposals to close the ``tax gap'' by
collecting more of the taxes that are owed, but are not paid. This is
critically important. Tax evasion not only reduces tax revenue, thereby
resulting in an implicit tax increase on those Americans who pay their
taxes, it also reduces the faith Americans have in the tax system,
starting a vicious cycle that can result in even more evasion. I
appreciate this Committee's longstanding interest in, and leadership
on, efforts to reduce the tax gap. I look forward to working with the
Committee to address this important issue.
The Budget will provide nearly $250 million in new enforcement
initiatives to improve compliance, which will build on the foundation
established in the FY 2010 budget to hire nearly 2,000 new employees
dedicated to addressing international tax evasion by businesses and
affluent individuals, improving information reporting, and broadening
collection activities.
Since President Obama took office, the United States has
aggressively pursued international tax agreements to further cross-
border tax information exchange. In the past year alone, the United
States has signed agreements improving tax information exchange with
Switzerland, Luxembourg, Liechtenstein, Gibraltar, Monaco, and Chile.
The United States also is working multilaterally to make sure that
countries meet international standards on tax transparency and
information exchange. The Administration is committed to preventing the
facilitation of offshore tax evasion. Finally, the Internal Revenue
Service has vigorously pursued enforcement actions against those hiding
money offshore. All these efforts are being undertaken to address a
fundamental concern: Again, tax evasion, especially through the use of
offshore entities and accounts, undermines confidence in our tax system
and results in an implicit tax increase on those who pay the taxes they
owe.
Our Budget will include a number of proposals to increase
information reporting and withholding. The most significant proposal
involves addressing the use of offshore entities and accounts to evade
U.S. taxes. This initiative will result in billions more in revenue
over the budget window and just as importantly send the message that if
you hide income and assets offshore to evade tax, we will find you and
you will pay. I applaud the leadership this Committee has shown on the
issue.
We are also proposing substantive changes to our tax laws to
address rules that yield unfair and economically inefficient results.
For example, our proposals to reform our international tax rules, to
address those aspects that disadvantage investment in the United States
and encourage companies to ship jobs overseas. Of course, we recognize
that this is an area where our tax law must strike a balance. We are
concerned about the competitiveness of U.S. companies abroad and
recognize that the growth of U.S. companies globally can benefit the
United States. But we recognize that allowing a company that moves jobs
or investments overseas to gain a competitive advantage through our tax
code against a competitor that chooses to expand investment and job
growth in the United States is unfair and is bad policy. This Budget
seeks to strike that balance by limiting our proposal regarding the
deferral of expenses only to interest. In addition, we drop a previous
proposal to limit the ability of taxpayers to elect the tax status of
business entities under the so-called ``check-the-box'' rules. We
remain concerned about the misuse of those rules to inappropriately
avoid U.S. taxes, and thus are proposing tighter rules regarding the
use of foreign tax credits, as well as a new provision to backstop our
transfer pricing rules that will subject to immediate U.S. tax
excessive returns on intangibles transferred to low-tax foreign
affiliates. Our goal in these proposals is to limit the role taxes play
in business investment decisions by reducing implicit tax incentives to
move investment and jobs overseas. We are, of course, open to
discussing how best to achieve that goal.
Our proposals to allow some of the Bush Administration's individual
tax cuts to expire as scheduled and to limit the value of certain tax
benefits are restricted to those with the highest incomes. Moreover, we
again propose that the income earned on a so-called ``carried
interest'' be taxed as ordinary income and not at preferential capital
gains rates, so that private equity and hedge fund managers pay tax on
their compensation under the same rate structure as average Americans.
The new Budget will include the President's Financial Crisis
Responsibility fee to be imposed on our largest financial firms. The
fee will raise $90 billion over 10 years. And it will be extended
beyond that period in the event that the cost to the taxpayers of
saving the financial system turns out to be greater than that. This
last point is another one that bears repeating; the fee can and will be
extended until every penny of taxpayer assistance from TARP has been
repaid and the cost of the rescue to taxpayers is zero.
The Administration's Budget will cut the deficit as a share of GDP
by half as a share of the economy, from the 9.2 percent of GDP the
President inherited in 2009 to 4.2 percent of GDP in 2013. The deficit
will fall further in 2014, to 3.9 percent.
But this is not enough.
That is why the Administration supports the creation of a
bipartisan Fiscal Commission. The Commission will be charged with
identifying policies that could win the necessary political support to
complete the job of achieving fiscal sustainability. Specifically, it
would be asked to propose how to balance the budget exclusive of
interest payments on the debt by 2015.
Both Democratic and Republican administrations have turned to
similar bodies when the nation faced complex and contentious fiscal
decisions. For example, in 1981, President Reagan established by
Executive Order the so-called Greenspan Commission to cope with
financing problems of Social Security. We could make progress tackling
today's fiscal problems with similar bipartisan action.
While the new Fiscal Commission's first job will be to balance the
operating budget of the government--the budget absent interest payments
on the debt--by 2015, the panel also would be charged with proposing
changes to address the unsustainable rate of growth in entitlement
spending and the long-run gap between government revenues and
expenditures. The nation will be challenged anew to maintain fiscal
balance as the Baby Boom generation retires, especially if we fail to
reform health care. This will make the Commission's latter charge as
difficult, and important, to meet as its immediate one.
Finally, I want to highlight progress we achieved over the past
year in rescuing our financial system and our economy at a lower cost
to taxpayers than many anticipated.
Treasury has taken steps to dramatically bring down the cost of the
Troubled Asset Relief Program (TARP), which helped stabilize the
financial system, and to shift the focus of the program to small
business and housing. As a result of careful stewardship and improved
financial conditions, the projected cost of TARP has fallen from $341
billion last August to $117 billion in this Budget, and we have removed
an additional $250 billion reserve in place in the event that
additional financial stabilization efforts were necessary. If Congress
joins with the President in enacting the financial fee, American
taxpayers will not have to pay one cent for the financial rescue.
conclusion
While our country is in a stronger position today than it was one
year ago, we still face tremendous challenges. In meeting those
challenges, the true engine of job growth and prosperity, the private
sector, must lead the way. But the government must help create
conditions that allow businesses to thrive.
We must work together to spur job growth, to invest in ways that
make our economy stronger in the future, and to lay the foundation for
long-term growth. And we must work together to ensure that our
government goes back to living within its means.
These goals reinforce each other; they are not in conflict. Without
growth, we cannot begin the process of restoring fiscal responsibility.
Without confidence that we can bring down our long-term deficits, it
will be harder to make sure we are getting Americans back to work and
improving economic security.
We are a strong and resilient country. We have successfully
confronted great economic challenges in the past, and we will do so
again. This is a question of will, not ability. The American people
want to see us do this together--to work to solve the problems that we
all face and to get the economy back on track.
I look forward to working with you in a bipartisan manner on this
endeavor.
Thank you.
Chairman Spratt. Let me ask you a couple of rather
technical questions about the budget for clarification. Freddie
Mac, Fannie Mae are not consolidated with the rest of the
Federal budget, so that your accounting difference, to some
extent, to that extent at least, from the Congressional Budget
Office, which fields the given investment we have made, the
cash infusions we have committed ourselves to, stock we hold,
the two should be consolidated. Would you like to explain
Treasury's position against consolidation at this point in
time?
Secretary Geithner. Thank you. This is really a question
for accountants. Like on many issues, accountants will disagree
on what the appropriate treatment is. We do not think it is
necessary to consolidate the full obligations of Fannie and
Freddie onto the Nation's budget, but we do think it is very
important that we make it clear to investors around the world
that we will make sure we will take the actions necessary to
make sure that those two important government-sponsored
enterprises can continue to play the role they need to play as
we repair the damage caused to this housing market. That is
going to take some time.
We are going to propose reforms to the Congress next year
to try to make sure we bring about fundamental change in the
housing market and get ourselves in a position where the
government is playing a less risky, but more constructive role
in supporting the housing market in the future. That is going
to be a difficult set of reforms, but we do not believe it is
necessary to consolidate the full obligations of those entities
onto the balance sheet of the Federal Government at this stage.
Chairman Spratt. What would be the impact on the deficit if
you did consolidate the two?
Secretary Geithner. I think the CBO answer would be--again,
this is a matter for accountants--is they would have no impact
on the deficit to do it.
Chairman Spratt. You have set a short-term goal of having a
balanced operating budget by 2015, exclusive of net interest on
the national debt. Now, obviously, net interest on the national
debt is an extremely important, extremely important obligation
under our budget. Indeed, it is the true entitlement in the
sense that it is totally obligatory. It can't be changed or
disavowed by law. Why have you chosen that target, and is this
a target for the next 10 years or just a target for the next 5
years?
Secretary Geithner. It is a target that we have to achieve
in 5 years and hold to. But you should view it as necessary,
but not sufficient. For an economy like the United States, we
need to make sure--and this should be the basic objective that
guides our fiscal policy choices--we need to make sure we bring
the deficits down to a level over the medium term that
stabilizes our overall debt burden at a level that is
acceptable. And for an economy structured like ours, that turns
out to be roughly 3 percent, which is roughly the primary
balance, meaning it means the economy would balance if you
exclude interest costs. The budget would balance. If you
achieve that target, then you achieve the necessary essential
thing, which is the debt burden as a share of the economy is no
longer growing, and it stabilizes at a level that we can live
with. But you should view this as a necessary, but not
sufficient objective. Obviously, we want to go beyond that over
time.
What the President's budget does is propose a series of
detailed policies that bring our deficits down to below 4
percent. They don't take us all the way there. We are very
direct and very explicit about that. One of the tasks we are
going to give the Commission is to recommend additional
proposals that will take us from just below 4 to under 3 over
the medium term.
Chairman Spratt. Looking back a year, what we have
accomplished is pretty significant, phenomenal some would say,
from negative growth of minus 5.4 percent to positive growth of
5.7 percent; from losing 797,000 jobs to losing an average of
25,000 to 35,000 jobs. Very impressive. Not so significant we
can say the game is over, by any means. But people aren't
feeling it. The large reason for that is that unemployment is
still lagging well behind and will lag significantly behind.
Would you tell us the major initiatives for job generation
in the President's budget for next year?
Secretary Geithner. Mr. Chairman, I think you are right to
highlight the fact that in a relatively quick period of time,
we have gone from an economy shrinking at an annual rate of 6
percent a year to an economy that is growing at roughly that
same rate. That came more quickly, with more strength, more
broad-based recovery and basic growth than many people
expected, and that is a necessary essential achievement.
Nothing would be possible without that essential achievement.
But this crisis caused incredible damage to basic
confidence of Americans' businesses and families in the economy
as a whole, and we are still living with the scars of that
damage to confidence. And what you see today, even as the
economy heals, and the caution you see in terms of how families
spend and how businesses invest and hire is a reflection of
that damage to confidence.
The most important thing we can do, whether you care about
long-term deficits or the immediate challenges facing the
country, are to make sure we are working together to put in
place some additional targeted measures of support that will
strengthen growth and increase job creation in the near term.
As I said in my opening remarks and you saw in the
President's State of the Union Address, we think the most
effective things we can do are some targeted tax incentives for
small businesses; things to improve access to credit for small
businesses; carefully designed tax credits to encourage new
hiring; zero capital gains rate on investment in small
businesses; targeted investments in infrastructure; continued
help for State and local governments; and some carefully
designed tax incentives to encourage families to put in place
energy efficiency-improving changes in their homes. That
package of measures are not expensive, but we think they can be
very powerful in providing more spark to business investment
and in providing stronger growth and job creation in the near
term.
Chairman Spratt. Looking back over the last year, what you
had to do, often with great rapidity, to save the economy from
entering some steep downward spiral, do you think that the
actions taken by the Treasury and the Fed have had a palpable
significant effect on the economy? And to what extent have they
contributed to GDP growth?
Secretary Geithner. Mr. Chairman, the actions we took to
stabilize the financial system were an essential part of what
has brought the economy back from near depression to very
substantial positive growth. The Recovery Act would not have
been as effective as it was without those measures to stabilize
the financial system, and they have been remarkably effective
in bringing stability and confidence to the system, bringing
down the cost of borrowing to municipal governments across the
country, to homeowners, to small businesses, and large
businesses. But as you emphasized, we have a lot of challenges
ahead of us still. I think it is very important that people
recognize that even though we are growing again as a country,
this crisis is not over for most Americans, and we have to work
very hard still to make sure we are reinforcing this process of
healing and we are trying to restore and improve confidence in
businesses and Americans that we are going to stick with this
until we make it better.
Chairman Spratt. One final question. You are proposing a
bank tax, a tax on banks that have participated in the TARP
program and others who might have participated, on the grounds
that the availabilities benefited everybody. As we look at
regulatory reform, it strikes me as an old country banker that
the single best means of safety and soundness is capital. What
we are seeing is a situation where the regulators, the
auditors, the examiners have been outpaced by the
sophistication and cleverness of financial instruments. I think
that phenomenon is going to continue as we go into this further
and further in this world where money moves at the speed of
light.
Why not take that $90 billion that we are taxing and
require the banks instead to add it to their capital structure
so that we can have better capital-based institutions as one
step towards better safety and soundness?
Secretary Geithner. Mr. Chairman, you are absolutely right
that the most important thing you can do to make sure that this
financial system can support recovery in the future and that we
reduce the risk of future crises is to make sure we have enough
capital in this financial system. We did not have enough
capital. There is substantially more capital today in the
financial system than there was a year ago, 2 years ago, and
this puts the system today in a much stronger position to make
sure it can work to support this building recovery.
This bank fee, though, is a very important act. In the
legislation to authorize the emergency measures to stabilize
the financial system, Congress required the Secretary of the
Treasury to propose ways to recoup any losses that the American
taxpayer would have faced from the actions we took to put out
the financial fire. Although we have reduced those expected
losses by more than $400 billion, we still face some risk of
loss from the actions we had to take to stabilize the financial
system. And so what we did is propose--and I think this is a
very simple, fair thing--what we proposed is to put a modest
fee spread out over 10 years on the Nation's largest banks that
benefited most from the actions we took to make sure that we
can look the American people in the eye and say, You as
American taxpayers will not have to bear a penny of costs for
the actions we took to put out this financial mess. That is a
simple, fair thing.
We are obligated to propose a way to do that in the law
that authorized the TARP. We met that obligation by proposing a
fee that would provide--not just meet this fiscal obligation,
but provide a modest disincentive to future risk-taking and
leverage. We think the way we designed it will have no risk of
negatively impacting lending and will not materially erode or
challenge the capital position of these firms.
These firms are in much stronger position today because of
the actions we took. There is much more capital in the banking
system today than there was a year ago. And as part of
financial reform, we want to make sure that we are building a
more stable system in the future. But it is a reasonable thing
to ask that the institutions that benefited the most from this
crisis protect the taxpayer from having to bear any losses from
the actions we took.
Chairman Spratt. Thank you, Mr. Secretary.
Mr. Hensarling.
Mr. Hensarling. Mr. Secretary, in June, the administration
released its white paper on your capital market reform
legislation. In that, I thought I read where in the fiscal year
2011 budget that you would explore options in dealing with the
GSEs. And what I think I just heard in your testimony--well,
let me back up. As I read your budget, I think I only found one
sentence devoted to the GSEs that certainly was not any type of
reform plan.
My question is: I think I just heard you say in your
testimony that you will now be submitting a plan next year as
opposed to this year. Did I understand you correctly?
Secretary Geithner. Let me explain. We are going to lay out
a set of broad objectives and principles to guide reform.
Mr. Hensarling. Is that this year or next year?
Secretary Geithner. We are going to put out principles and
broad questions this year. We are going to put out some broad
questions and invite public comment on those questions. And
then we are going to use that process of outreach, and I am
sure there will be extensive congressional testimony, to try to
shape a set of legislative proposals we can present to the
Congress next year.
Congressman, let me say there is nobody who is going to
care more about making sure we fix what was broken, not just in
Fannie and Freddie, but the broad government's role in the
housing market, than me. And we want to make sure that we get
it right, That we do it carefully. We can't do everything right
away. The judgment we made, and I think this is the right
judgment, that if we are going to get this right, we want to
make sure that we are proposing these changes at a time when we
have a little bit more distance from the worst housing crisis
in generations.
Mr. Hensarling. Mr. Secretary, I understand that. Nobody
doubts your sincerity. But, clearly, there was a time that the
administration anticipated presenting reform plans in their
budget. That is not going to happen today. And I am curious
about putting it in the context of what happened on Christmas
Eve when Treasury announced that all of a sudden we were going
from a potential limit of $400 billion of exposure to the GSEs
to unlimited. It appears that clearly you have a larger problem
than you anticipated.
And so the question is, I suppose, do you see any limit to
the taxpayer exposure to GSEs? It is very disheartening for
many to have the administration lift the taxpayer exposure and
present absolutely no plan to prevent the future hemorrhage as
we are drowning in debt.
Secretary Geithner. Congressman, thank you for raising
this. I am sorry I didn't respond to this initially, because
you said this in your opening statements. The law that
authorized the executive branch to go in and stabilize Fannie
and Freddie gave the Secretary the ability to provide whatever
support was necessary to achieve that objective. We have
actually not seen any material change in our estimates of
potential losses for Fannie and Freddie.
What we did at the end of the year in sort of an abundance
of caution is to try to make sure that the world as a whole,
Americans and foreigners around the world, understand----
Mr. Hensarling. The assessment is not different, Mr.
Secretary. You are not anticipating spending more than $400
billion.
Secretary Geithner. We have seen no change. We use a
variety of independent assessments of potential losses, and we
see no change in those estimates of potential losses over the
last several months. Some may look a little better on margin.
But what we want to make sure----
Mr. Hensarling. I am sorry, Mr. Secretary; what is the
extent of the loss that you are anticipating?
Secretary Geithner. We laid this out in the budget in
details, but I want to just clarify what we actually did. What
we did is use the authority Congress gave my predecessor, the
previous administration, the Bush administration, to make sure
we could take whatever actions were necessary to make sure that
investors were confident holding the debt and buying the
securities guaranteed by that company. That was a very
important thing to do. That was the intent of the law, and we
acted consistent with that not because we are concerned about
any changes in expectations, but we had to do it in that time
frame.
Mr. Hensarling. I understand you are acting consistent with
the law, but I didn't hear the size of the magnitude of the
loss that Treasury is anticipating.
Secretary Geithner. In the budget, and CBO has this, too,
there are a variety of new estimates of potential exposure. But
I would be happy to go through those into more detail.
Mr. Hensarling. Go ahead and move on. If we could pull up
the chart on the debt. I know that the President, when he
submitted his budget statement--I believe I have the quote
right--said, ``We cannot continue to borrow against our
children's future.'' You said something similar.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
I have no doubt that you are very sincere. I have no doubt
that the President is very sincere. Yet I look up here, and,
again, all I see is a sea of red ink taking us to levels of
debt that America has never seen. And so, again, I find myself
agreeing with roughly 80 percent of what the President says; I
just disagree with 80 percent of what he does.
And so my first question is: Do you agree with Dr. Orszag
that having deficits exceeding 3 percent of GDP are
unsustainable in the long term?
Secretary Geithner. Of course I do. I said that in the
response. I explain why. But I think that is a very misleading
chart. We need to look at what happened to the fiscal position
of the United States, actual and projected, from 2001 to 2008.
You need to show what projected deficits and debt was going to
be when we stepped into office.
Mr. Hensarling. I believe these numbers come from both OMB
and CBO of what current policy is, Mr. Secretary.
Secretary Geithner. What is essentially misleading about
this is, again, in 2001, we had projected surpluses by CBO of
$5.5 trillion. And in 2009, when the President took office,
before we did one act, those projected deficits----
Mr. Hensarling. You are not denying the numbers, you are
just trying to put them in context to say you are performing
better than the worst-case scenario. Maybe it is the next-
worst-case scenario.
Secretary Geithner. No, no, that is not what I am saying.
What I am saying is the debt that you lament, that we are all
going to share the responsibility of dealing with, is the
legacy of a set of policies put in place before we took office.
Now, I welcome----
Mr. Hensarling. Fine, we can talk about the mess you
inherited. But you are in charge now. And I think you said
something along that in your testimony, and nowhere in your
budget do I see that you change this current policy.
Secretary Geithner. No. No.
Mr. Hensarling. If I could, let me finish this one point. I
believe both the debt and the deficit go right back up after
2020. Never reaches 3 percent. In 2020, it starts to go back up
to 4 and beyond.
I will end here, Mr. Chairman. I guess the question I would
ask is: Where is the leadership? If you agree, the President
agrees, we are drowning in a sea of red ink. I understand your
economic theory that we have to have these short-term deficits,
but, Mr. Secretary, those are long-term deficits that I think
you would agree as a professional economist will absolutely
wreck our economy in the future. And what I see is an
administration proposing more spending, more entitlement
spending. And what we are offered is, number one, a commission
that Congress didn't have to vote on, where some mandatory
spending is taken off the table, number one.
Number two, you spoke of the freeze, which, as I understand
it, you essentially exempt 83 percent of the budget. You wait a
year to turn on the freeze, or you turn it off after 3 years.
According to your own numbers, that is a difference of growing
the budget 49.01 percent versus 49.27. The numbers are just put
into a Microsoft Excel spreadsheet. Those lines aren't
manipulated in any way, unless Mr. Gates of Microsoft did it.
And so the question is: If you know you are on the road to
bankruptcy, you know the numbers, and all we get is, Well, we
are doing better than somebody else predicted, with all due
respect, Mr. Secretary, it is just not enough.
Secretary Geithner. Congressman, I welcome your concern
about our long-term fiscal position. You state eloquently why
it is important that we work together to bring these things
down. We face two different horizons for deficits. We have a
real problem over the next 5 to 10 years, and we have to act to
bring those deficits down. But that is, in a sense, digging out
of the mess we inherited because of the policies of the
previous 8 years and because of the recession.
But that is not enough, because as your previous chart
shows, we face dramatic escalation in the size of our deficits
over the longer term and, as I think you know well, are driven
by--overwhelmingly driven by what is happening to health care
costs. The only way to deal with that daunting trajectory of
future debt burden is to make sure we are bringing down the
rate of growth in health care costs.
Now, though I know many people on your side disagree with
how we are proposing to reform the health care system, the
central rationale underpinning those reforms is to make sure we
begin the process now of putting in place policies that will
bring down the rate of growth in that part of entitlements.
Now, those get worse because we are going to age as a Nation,
but those long-term deficits are overwhelmingly driven by the
basic costs embedded in our health care system today. If we
don't act on that front, then we have no way to return to the
point where as a country we are living within our means.
Chairman Spratt. Ms. Kaptur.
Ms. Kaptur. Thank you, Mr. Chairman, very much.
Welcome, Mr. Secretary. I agree with you; turning the
economy around and creating jobs and growth through private
investment should be our priority, including to reduce both
private and public debt. And I hope we can engage here in two
areas. This requires that we heal the housing and commercial
real estate markets to lead our economy to recovery. Currently
those markets are a true drag on that.
Secondly, we need to restore confidence of the normal
lending and credit markets. Not Treasury picking favorites.
What is happening now is, as the Wall Street Journal adequately
documents this morning, lending has been falling at an epic
pace, with the largest decline since 1942 through fiscal year
2009.
Now, I have had serious disagreements with the last
administration in the manner they proceeded on the housing
front and on the normal credit market front, and I am having
concerns. Though I disagree with you on a lot of things, I feel
sorry for you because I don't think Treasury is the place to
heal what I am talking about, and that is what I want to engage
with you on these challenges.
First, let us talk about the housing programs. Your
administration, compared to the last one, is trying, but you
are not hitting the mark because you are not on the bull's-eye;
you are on the edges. On housing foreclosures your programs are
not working. HAMP is not working. You have recommended cuts in
programs that go to the States to help to do workouts. If I
could encourage you and Secretary Donovan, make certain Federal
benefits to these institutions, the servicers and the banks,
dependent on their ability to qualify, let's say, for FHA or to
get into one of our secondary markets, because they are not
coming to the table.
What was done over the weekend--you are trying to do good.
You said, now $1.5 billion we are going to put through TARP,
and we are going to do mortgage workouts, but we are only going
to do it in five States, and these are the States. Ohio wasn't
one of the five. I say, Oh, California. Why California? Oh,
Nevada. Arizona? Florida? Michigan, our neighbor.
Let me give you some numbers. Those States rank in
unemployment--Arizona has got a 9.1 unemployment rate; Nevada,
13 percent. The district that I represent, Ottawa County, just
one county in my district, has 17.3 percent unemployment. Lucas
County, 12.3 percent. Erie County, 12.5 percent. The counties I
represent have more unemployment than those States and more
mortgage foreclosures county by county. I am saying, Why did
Treasury do that?
So I believe that the program that was just announced fails
to provide sufficient and proportional assistance to hard-hit
areas and other regions that were left out for no explicable
reason. So you make political choices at Treasury, just like
you picked Merrill Lynch--they got merged. But you dumped
Lehman Brothers. At least the last administration did. That
doesn't give confidence to the housing market.
So I am going to ask you, would you be willing to meet
with--and you don't have to answer this on the record--areas
where we have these huge housing foreclosure issues, and we
don't see that what the administration is doing in the housing
markets is actually leading to robust recovery in those
markets.
The second point I wanted to get to is the normal lending
process, that is not happening. You are picking favorites over
at Treasury. SBA, you know, do TARP loans to these small
businesses, whereas our community banks back home can't lend
for a whole variety of reasons. You are looking at the wrong
end of the telescope. The goal should be to get robust activity
in the normal banking sector.
Let me read you from an article written by former FDIC
Chairman William Isaac, who actually resolved thousands of
troubled institutions. He says, The banking system shrank 5.3
percent in 2009, according to the FDIC. The problem remains an
approach that is highly pro-cyclical toward regulation, coupled
with highly pro-cyclical mark-to-market accounting. The
administration is increasing bank capital requirements
immediately, making the banks bring securitizations back onto
their balance sheets immediately instead of phasing in the
change and hitting them with greatly FDIC-increased premiums on
top of mark-to-market accounting having destroyed some $600
billion of bank capital. We should increase bank capital, bring
securitizations back onto bank balance sheets, and increase the
FDIC fund. But they must be phased in.
I know my time has expired, Mr. Chairman, but let me just
say, meanwhile the administration is doing nothing effective to
help smaller banks survive. They need a net worth certificate
program or some type of other capital program to help community
banks. That would almost cost nothing and would help the normal
system to function.
Could you please address the housing approach of the
administration and what you are doing to get the normal banking
system to operate rather than Treasury trying to substitute for
the lack thereof in the normal credit markets?
Secretary Geithner. Congresswoman, those are excellent. Let
me start where you ended, and I will come back to housing.
You are absolutely right that one of the most important
things for us to do is try to make sure that small community
banks across the country have access to capital. Because of
what has happened to our financial system, it is hard for even
strong, viable community banks to go raise capital now. So what
we have proposed, the President proposed, is that we design a
$30 billion small business lending facility that will provide
capital to small community banks that use that capital to
increase lending to small businesses.
As you said, this is a very cheap program. It does not cost
a lot of money and is a very important, necessary thing to do.
I would be happy to talk to you in more detail. It requires
legislation, but it is not difficult to do and not expensive.
One of the most important things we could do is support capital
for small community banks.
Second, we are----
Ms. Kaptur. I have had two businesses come up to me this
weekend and say, Can I get one of those TARP loans? That is the
wrong question.
Secretary Geithner. We are not proposing a TARP program.
TARP has outlived its basic usefulness because banks are
worried about the stigma of coming to TARP, and they are,
frankly, worried about the conditions. We had 600 small banks
withdraw their applications because they were scared about the
stigma and the conditions that would come.
So what we are proposing to do is to design a new program
outside that context that would be targeted just to small
community banks; give them capital so they can increase lending
to small business customers is a simple, pragmatic, sensible
thing to do and does not cost a lot of money. One of the
highest return things we can do as a government today is to
give a dollar of capital to a small community bank that meets a
simple test for viability. I completely agree with that.
One quick thing on capital. You are absolutely right. If
you listen to community banks across the country right now,
they are worried about three things. They are worried about
uncertainty caused by financial reform, what it is going to
mean for the rules of the game going forward, and that is one
good reason to try to bring financial reform down to Earth to
rest as quickly as we can. That will be helpful for confidence
and for clarity.
They are very concerned about pressure they perceive from
their examiners and their supervisors to raise capital, tighten
lending standards--in effect, amplifying the contraction in
credit you see produced by the crisis--and they need capital.
But we need to respond on all three fronts. But when we
reform capital standards, which we are going to have to do
because they were too low, but when we reform them, we are
going to make sure they are phased in over time with a decent
transition period so we avoid just the risk you appropriately
pointed out.
We will be very, very careful about that, and I care very
deeply about that.
Now let me say two things on housing. The actions that we
took together with the Fed have brought a measure of stability
to housing markets. As you saw yesterday, the seventh month of
increased prices in the housing market as a whole, that is
enormously important to the basic economic security of tens of
millions of Americans.
Now the program we designed to help make sure that people
who can afford to stay in their homes actually stay in their
homes is now reaching 1 million Americans with very substantial
reductions in their monthly payments, which on average saves
about $600 a month for these families. This is very powerful,
very effective, very direct relief to people who deserve to
have the chance to stay in their homes, and it has
substantially reduced the pace of increasing foreclosures.
But we are looking all the time at ways to increase the
reach and effectiveness of that program. We would be happy to
listen to any ideas you have, and the program that we announced
over the weekend or last Friday, which is designed to pilot
some additional reforms that might improve the reach of these
programs for the unemployed and for people facing negative
equity, are things that we hope to build on in the future. But
we would be open to any suggestions. Any ideas you have we
would be happy to talk with you about them.
Ms. Kaptur. Mr. Secretary, who do we contact on that
housing issue?
Secretary Geithner. My colleague, Assistant Secretary
Michael Barr, is responsible for policy; this is the Treasury.
Herb Allison is his colleague. Both of them are in charge, but
you can come to me directly if you want to.
Ms. Kaptur. Thank you.
Chairman Spratt. Mr. Nunes.
Mr. Nunes. Thank you, Mr. Chairman.
Mr. Secretary, welcome back to the committee.
Mr. Secretary, as you know Mr. Ryan, the ranking Republican
member, has introduced his ``Road Map'' reform. This is the
second time that he has introduced it. It is much improved over
the first version from 2008.
I would just be interested to know what you like about the
plan, what you dislike in the plan, what you suggest that we
change in the plan as we move forward, as we look for a
credible solution to our Nation's growing fiscal problems.
Secretary Geithner. What I like about it is it's a plan. It
doesn't ignore the problems. It is straightforward about them,
and it meets a basic test of government, which is it proposes
specific ways of bringing our fiscal house in order.
I do not agree with much of the specific proposals he made,
but I give him a lot of credit for having the courage to put
out a lot of stuff that is going to be very controversial, not
just among Democrats but within his own party.
We are going to have a difficult debate on these kinds of
things, but one of the virtues of this commission that the
President has established is that it brings Democrats and
Republicans together, asks them to step back from politics, no
preconditions, and to figure out where we can build consensus
on ways to bring our resources and commitments more into
balance.
Mr. Nunes. So I assume you do not like, if I am hearing you
correctly, you don't like the aspects of the changes that we
make to Social Security?
Secretary Geithner. Well, I personally would not propose
introducing private accounts. I would not propose privatizing
Social Security. I don't think that is necessary to restore
solvency to Social Security.
He has got a lot of ideas about what to do on Medicare and
Medicaid which I think would leave millions of Americans with
inadequate coverage.
But, again, a lot of credit to him for having a plan and
proposing specific changes. And I think again, he has met the
basic test, which is to say, people who share in responsibility
for creating this mess--and that responsibility is shared by
many people--are going to be able to share in the privilege of
proposing ways to dig our way out of that mess.
Mr. Nunes. You know, if we continue, first of all, I want
to make sure for the record that no one is discussing
privatizing Social Security, and in fact, we are just trying to
offer similar health care proposals or health care plans and
Social Security plans and the retirement security plans that
Members of Congress have and other Federal employees have,
which tend to work pretty well for Federal employees, and I
think it would be appropriate to expand those to all Americans.
That is really at the basis of what Mr. Ryan's proposal does.
And I would argue that, you know, one of the problems we
have with Medicaid and Medicare, despite--I mean, we can argue
over the numbers, but they are tens of trillions of dollars in
the hole. So they are essentially bankrupt themselves. And I
would argue that by doing nothing for these programs means that
they will not exist.
Secretary Geithner. I completely agree with that. We do not
have the luxury of deciding that because it is politically
difficult to figure out how to confront these things, we are
not going to do anything about it. We don't have the luxury.
And the world is not going to wait for us.
Again, a lot of credit to him for having a plan and
proposing things that help restore gravity to our fiscal
position. I disagree with a lot of the suggestions he made, but
I give him a lot of credit for having ideas.
Mr. Nunes. Thank you.
Do I have 2 more minutes here?
Chairman Spratt. You do.
Mr. Nunes. Thank you.
Just quickly, I think you have read that a lot of people
are suggesting that the short-term interest rates need to rise.
And some argue they should. Some argue they shouldn't. Some say
that because of these low interest rates, it is what has caused
this financial crisis to happen. Do you have any comments on
that? Do you agree, disagree? What are your thoughts?
Secretary Geithner. Congressman, I will never comment on
the monetary policy decisions of the Federal Reserve, just as a
matter of basic principle, which is they are established as an
independent authority with a difficult job of trying to make
sure that we achieve sustainable growth with price
sustainability in the future, and I am very careful never to
comment on the merits of those choices. The Chairman of the
Federal Reserve is now testifying, though in another building,
today in the Congress right now, and I know that your
colleagues are having a chance to talk to him about that. But I
leave those questions to him.
Mr. Nunes. Okay. Fair enough.
Thank you very much, Mr. Chairman.
Mr. McHenry. Will the gentleman yield 30 seconds?
Mr. Nunes. Sure.
Mr. McHenry. Secretary Geithner, in terms of the
commission, you discussed the commission. Everything is on the
table. No preconditions. If we unwind and raise taxes to the
pre-2001 and 2003 levels, undo all those tax cuts and have
massive tax increases, the budget still isn't sustainable, is
that correct?
Secretary Geithner. We are not proposing to do that. I just
want to make sure that you understand. What we are proposing to
do is a much more narrow, targeted change which we think is
fair and necessary which is to allow the tax cuts that
benefited 2 percent of the most affluent Americans in the
country to expire as scheduled. But we are proposing to make
permanent and extend the rest of the tax cuts that would go to
95 percent of Americans.
Mr. McHenry. As a matter of this commission, why not say
that we have to deal with the spending side and not the tax
increase side?
Secretary Geithner. Well, I know you know the answer to
that question, but let me just say the basic principle.
Mr. McHenry. Well, I would like to hear your answer, not my
answer. My answer would be not to raise taxes.
Secretary Geithner. People are going to disagree on how we
solve this mess. And they are going to have different views as
to what the right mix will be. But again, we think it is
important, based on the model of really the only successful
commission we have had on economic policy in a long time, which
is the Reagan-Greenspan Commission on Social Security. We want
people to come, step back from politics, no preconditions, take
a fresh look at it, and they will make recommendations, we
hope, about what the right mix is going to be. And the way this
is designed is, it requires a vote of 14 of the 18 members to
make a recommendation, and that means that your side would have
to be a part of any decision to make a recommendation for
changes. So your appointees are going to have the opportunity
to fully shape whatever recommendations made, and I am sure
they will come with views on, again, what the right mix is of
things on the resource side and equipment side.
Chairman Spratt. Mr. Becerra.
Mr. Becerra. Thank you, Mr. Chairman.
Mr. Secretary, welcome. Thanks for being with us. I have
many questions that I would like to ask, but I find myself
constantly having to make sure we clear the record on where
things stand. And perhaps the best way is to use pictures. This
chart that I have up is very similar to the chart that my
colleague previously had up with regard to--Mr. Hensarling had
up with regard to the national debt. This flips it though. It
shows it as I think it should be, as red ink below the line.
And the point I would like to make here is that what we find is
that all that red ink added up. So at the point, the very tip
of that massive amount of red ink, that is when President
Barack Obama had a chance to come into office, right around
where the lowest point of that red ink is. And all of that red
ink put together is what President Obama inherited. In fact,
you can see the trajectory of where we were going, and if you
extend it out, that is why the chart that Mr. Hensarling used
showed that we were expecting to see a pretty bad fiscal
situation into the future.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
By the way, I want to make sure that we point out, all
those years that we had all this red ink, those were years
where we had the Bush tax cuts in place, these Bush tax cuts
that were supposed to get us back into surplus. All those Bush
tax cuts did nothing but add to the red ink.
We go to the next chart, as we hear colleagues talk about,
why is it that the President can't resolve this mess? It is as
if, all of a sudden, he started at the starting point with a
fresh hand when in fact--I don't care which analogy you wish to
use, whether he was burdened by tons of weights or whether he
was pushed back from the starting line on the 100-yard dash
another 100 yards, but it was not at the starting line. If that
horizontal line that you see is on the second chart is the
starting line, you can see where President Obama got to start
the race to try to bring the economy back and get Americans
working again. In fact, you don't even see where the President
picks up the keys in the White House from the previous
administration because the line falls off of the chart. That is
how bad these things were with these deficits that we were
running.
And by the way, the last time we saw any fiscal
responsibility happened to be when you see that blue line under
President Clinton. But all along the path of President Bush's
term, we can all see what is going on. So that is what makes it
very difficult. That is why that previous chart by Mr.
Hensarling showed so much red ink, because when you don't take
care of things at the beginning, it gets even worse. It is like
jumping out of the plane and not knowing how to pull open the
parachute. That is what happened. We had reckless fiscal
policy. The guy didn't know how to pull the cord to open up the
chute.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
If I can go to the next chart, to the left you see what
happens when you don't know how to pull the line on the chute.
You continue to see drops in economic growth, and it wasn't
until 2009 that you got to see some economic growth begin
solidly, and now the projections are for solid growth.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
If we go to the next chart, there are consequences to not
knowing how to pull the chute by passing massive tax cuts for
the wealthy and not paying for them, by starting two wars and
not paying for them. And guess what? Everything to the left in
the red was the previous administration.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
Where you see 741,000 jobs lost that first month of
January, that was actually the month that President Obama got
the keys, towards the end of January. And that 741,000 is
actually 779,000; 779,000 Americans lost their jobs the month
that President Bush handed the keys over to President Obama.
But since then, President Obama did pull the cord on the chute.
We are trying to bring to a soft landing this great recession.
And now, for the first time, we are beginning to see some
opportunities.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
And if we could go to the final chart that I have, what are
the consequences for Americans as we talk about all these
things without giving people a clear picture? Well, if you take
a look at the left side of the chart in red, you see what
happens to people's savings accounts when you have reckless
fiscal policy and you have got a guy and a party that doesn't
know how to pull the cord on the parachute and takes the
American public on a really fast descent. So beginning in 2009,
we have seen some change.
Mr. Secretary, I wish I could ask you a whole lot of
questions. All I will say is, do you believe that we have now
begun to see the end of this great recession that began at the
beginning of 2001?
Secretary Geithner. Absolutely. You just have to point out
the numbers you pointed out. The economy is now growing, and
things are healing, and that growth came more quickly and it is
stronger, and it is more broad-based than most of us
anticipated. And nothing is possible without that. You need
growth for jobs to come back.
Again, our obligation right now is to make sure we are
doing carefully-designed targeted things to reinforce this
process and repair. Because even though we have growth now, the
recession caused just a huge amount of damage to the basic
fabric of confidence of Americans. But your numbers are good,
and it is an important story to tell.
Can I just go back to your first chart? I just want to say
one thing about your first chart and your second chart. It is
much worse than that. It is not just what happened over that
period of time but what projected future deficits were when we
took office. And as I said, the beginning, before we came in,
before this Congress came into office, the projected increase
in the future debt burden facing Americans was going to be $8
trillion over the next 10 years. So it is not just that period.
It is what the future looked like over that period of time.
And if you look at your second chart, I just want to point
out that I had the privilege of serving the Treasury Department
as a career civil servant for much of that period of time, and
you saw in that period of time----
Mr. Becerra. During the Clinton years you mean?
Secretary Geithner. During the Clinton era, as a career
civil servant, though. It is important to point out that,
during that period where you saw fiscally responsible policies
put in place, you had very strong private investment, very
strong growth, very strong employment growth. You saw the
average incomes of Americans rising over time. Growth was much
more broad-based. You saw enormous improvements in
productivity. So it just shows what you can do if you do what
all families do, which is to make hard choices and make sure
that you are being responsible.
And I think it is very important to take some encouragement
from what you are hearing on both sides of the aisle now
because you had a long time when people said that deficits
don't matter. People are not saying that anymore. People now
say, deficits matter, and I said, at the end, tax cuts aren't
free. We have got to pay for the stuff that we commit to do,
and we are doing that. But as the chairman said at the
beginning, the thing we have to do now, because of how damaging
the recession was, to make sure we are reinforcing growth and
that we give people some confidence that we are going to be
able to work together to bring down those long-term deficits.
Mr. Becerra. Thank you, Mr. Secretary.
Thank you, Mr. Chairman.
Chairman Spratt. Mr. Latta.
Mr. Latta. Thank you, Mr. Chairman.
Mr. Secretary, thank you very much for being with us today.
I appreciate it.
I know the members of this committee have heard me say this
before. I represent the largest manufacturing district in the
State of Ohio and also the largest agricultural district, so
the two go hand in hand. One of the things I try to do when I
am home, I go through as many factories as I can possibly get
through.
So the number one issue in my district is jobs. And I know
that the chairman had asked a little bit on the stimulus, and
you had made some comments earlier. But maybe you can make a
comment on this from a statement Mr. Bayh made over the past
week on the CBS Early Show. He said, If I could create one job
in the private sector by helping to grow a business, that would
be more than Congress has created in the last 6 months.
Secretary Geithner. Could I not comment on what he said but
comment on the broader problem that we face together?
Mr. Latta. Well, but this is from a perspective of another
individual that represents a Midwestern State that has a lot of
manufacturing. And you know what the businesses in my district
have really said to me, they have cut to the bone. They have
laid people off. They are down to what really--to the point in
a lot of cases, they are working 32-hour weeks. And I think
what the Senator said really reflects what is going on in the
Midwest with the people in my area because, you know, they
said, you know, we have cut, we have cut, we have cut, but what
has the Federal Government done?
They asked me this question: How many Federal employees has
the Federal Government laid off?
Secretary Geithner. Congressman, I think if you look back
at the record of actions that the Congress authorized at the
beginning of the year, you saw very substantial tax cuts that
went to 95 percent of working Americans, to small businesses,
businesses across the country. You saw very substantial
assistance provided to States so they could extend unemployment
benefits, COBRA, make sure they are not firing teachers,
cutting critical services, and you saw some very sensible
targeted investments in infrastructure spending. And those
actions, combined with what we did to put out the financial
fire, have brought growth back to this economy.
Mr. Latta. Let me, if I could, go with--when CBO was here
with the director a couple of weeks ago or several weeks ago,
and again we have all talked about the word unsustainable, what
is happening here, but in his testimony, he made this comment.
Again, this is just commenting on the interest on the debt. But
you know, between 2010 and 2020, in nominal terms, from $207
billion to $723 billion, we will more than double as the share
of the GDP from 1.4 percent to 3.2. But that interest, then, we
are going to be spending--we are looking at $2 billion a day in
interest payments.
But again you have to read on, what he says, that that is
the CBO's baseline projections if all these things happen. The
projections see the major provisions of the tax cuts enacted in
2001, 2003, and 2009 expire as scheduled; that the temporary
changes in the alternative minimum tax from affecting more
taxpayers will not be extended; and that the baseline
projections also see that the annual appropriations rise only
with inflation, which would leave discretionary spending very
low to GDP by historical standards.
What the folks back home understand is that we are in a
situation that, you know, we are at critical mass right now.
But again, how do we go back and explain to the businesses?
Because, again, you know, when they look at all these things,
from cap-and-tax, you can go down the entire line, that nobody
is going to make any moves right now if they want to expand
because they are not really sure what we are doing down here.
Secretary Geithner. Well, you are exactly right that our
deficits are too high. They are unsustainably high, and we have
to work together to bring them down over time. But the
President did in his budget propose specific ways to constrain
spending growth and to make our tax system more fair, and those
measures together bring our deficits down by more than half as
a share of the economy over this 4-year period of time. So
those are very substantial, very sharp cuts in policy.
Now people are going to disagree with them. But I think
what we ask is, is that if you don't like that mix of policies,
then propose some alternatives. But I think we met the test of
proposing some things that are going to be very unpopular
because the government has to demonstrate to the American
people that we are prepared to go back to living within our
means as well, just as we asked them to do.
Mr. Latta. Let me ask just this one last quick question,
because looking at the unemployment rate chart that they had
given out that day, we are looking at getting into 2014 to 2015
before we get to quote-unquote normal employment in this
country. Again, this is with all of these cuts, everything
expiring, according to what CBO says. But are we looking at,
through the President's budget, trying to get to that 2014,
2015 period by that time frame?
Secretary Geithner. We are going to do everything we can,
but it will require the Congress, too. We can't do it on our
own, to try to make sure that we are creating strong growth
that is broadly shared and that we have as many jobs created as
possible with the growth that is going to come. But, again,
what you are seeing is just a measure of the damage caused by
this recession. It just caused a huge amount of damage to the
basic confidence of businesses across the country.
It is starting to heal. It is getting better. But I think
we have a lot more work to do. But, again, it requires the
Congress, too--we can't do it on our own--to try to make sure
that we are reinforcing the healing process, that we make it
possible for investors, for businesses to invest again and that
they start to add back hours and employees that they cut so
deeply in the face of the panic.
Mr. Latta. Thank you, Mr. Secretary.
I yield back, Mr. Chairman.
Chairman Spratt. Ms. Tsongas.
Ms. Tsongas. Thank you, Mr. Secretary, for your testimony.
I would like to ask you a question addressed to housing.
And to begin with, I would like to read an e-mail that I have
received from one of my constituents in Methuen, Massachusetts:
``I am contacting you as a last resort to what has been a
never-ending battle with our mortgage lender who we feel has
tried to get as much money as possible from us before
foreclosing on our property. We were offered a mortgage
modification if we made a good faith payment of $7,700, which
we did. We were approved, but we were told we had to reapply
because of missing paperwork. To make a long story short, we
reapplied, and after losing our documentation seven times, they
then put us in a trial payment that was $1,200 more than we had
been approved for. More recently, we were told that they were
sending out a package immediately, and I would have it in a
couple of days. It has now been weeks with no package and no
contact.''
This is not, as I am sure you know, an unusual story. I
have heard from constituents around my district who were given
a trial modification through the Home Affordable Modification
Program, HAMP, seemed to have been strung along during the
trial period, have been told multiple times that their
documents were lost, have learned that the foreclosure process
was never suspended during the trial period, are being denied
permanent modifications, and now can't make contact with their
servicer.
Furthermore, many of my constituents are finding that
servicers are reporting them as delinquent to the credit
bureaus, even as they are making their trial payments in full
and on time.
Well, I applaud you for recently announcing proposals to
address some of these issues. For instance, requiring
documentation before trials are made so that borrowers who
could never have qualified for a permanent modification are not
given false hope or drained of even more money.
I am concerned that there is still plenty of ways for
lenders to exploit borrowers. For instance, there is still no
recourse for borrowers when servicers claim to have not
received their documentation and no independent appeals
process. My constituents repeatedly tell me that they get no
response from their servicers, and when they do make contact,
are passed from person to person and division to division
within the company, hearing contradictory information at each
stage and simple promises such as, we will send you the
paperwork today, that are never kept.
So as you are addressing this great challenge, I am just
asking, are you taking any steps beyond the new guidelines to
ensure compliance by the servicers? And what would you need to
know that you needed to have additional interventions to make
what you are trying to do work?
Secretary Geithner. Congresswoman, we hear those stories
across the country. It is not unique, as you said. And it is
just unacceptable that a crisis caused in part by the fact that
we allowed, as a country, a huge amount of basic fraud to
happen across the mortgage market has just caused a huge amount
of damage, not just to the people who borrowed too much but a
bunch of people that were completely responsible in their
borrowing habits and are suffering through no fault of their
own as they see the value of their house decline, their
neighbors' homes foreclosed on. And you are exactly right that
servicers are not doing enough now to try to make sure that
they are getting relief to people who need it fairly and
quickly and sensibly. And we are going to continue to put
enormous pressure on them to do that.
Now you can see today, it is very helpful to see, you can
see every month now what is happening to servicer performance
along their metrics so that the American people can see which
servicers are doing better, which servicers are not doing that
well. But absolutely, there has not been enough progress on
this stuff, and we are going to continue to make sure that we
are putting enormous pressure on them to get better at meeting
the basic needs of their customers. And we are open to any
suggestion for how we can do that, and we would be happy to
talk to you in more detail about things that we think will be
helpful in that process.
I just want to underscore, though, still that a million
Americans today are seeing very substantial reductions in their
monthly payments, and we are seeing very substantial conversion
of those temporary modifications into permanent modifications.
Now it is not going to reach everyone who may feel they may
deserve some help on this front, but it is a very substantial
benefit, reaching more and more Americans every week. And we
are going to continue to work as hard as we can to make sure
these servicers are doing the simple fair thing of treating
their customers better, making sure they get the relief they
deserve.
Ms. Tsongas. Well, we, Members of Congress, are really the
first--we are the people who hear first and foremost. I know we
have several people in my office dedicated to helping people
who are facing foreclosure, and I would say, to reach out to
all of us to hear, are we hearing more success stories rather
than many, many of this kind of e-mail of absolute frustration?
And I know my staff has found that to be the same.
Secretary Geithner. I agree with you.
Ms. Tsongas. So I suggest you reach out to all of us to
hear if what you are doing is working. Thank you very much.
Secretary Geithner. Well, it is working, but it is not
doing enough yet. And that is why I said--and we are completely
committed to make sure that we are doing as much as we can to
reach as many people as we can and these servicers are doing a
better job of meeting a simple, basic obligation.
Chairman Spratt. Connie Mack.
Mr. Mack. Thank you, Mr. Chairman. And I thank you for
holding this hearing today.
Secretary Geithner, I appreciate you joining us today and
giving members a chance to talk to you about some of the issues
facing the economy and the Nation as a whole.
It is no secret that our country suffered an extreme
economic crisis a year and a half ago. As legislators, we found
ourselves in unchartered water, facing not only a financial and
housing crisis but also increased unemployment levels and an
unprecedented level of government spending. I believe both the
Congress and the administration took hasty and unwise actions,
and unfortunately, the American taxpayers were left footing the
bill.
We passed bills that forced the government to prop up the
auto and banking industries, while at the same time spending
$700 billion in TARP payments; $800 billion in so-called
stimulus projects; and all on top of a 12 percent increase in
nondefense discretionary spending over last year. I am afraid
that the increased government involvement in the past year and
a half has caused a false sense of security and could lead to a
second crash if we are not careful.
Secretary Geithner, as you know, I am one of your harshest
critics. I have also been one of the harshest critics of every
bailout enacted over the last 2 years. You were in charge of
leading these irresponsible policies, and ultimately it was you
who decided which corporations would receive government funding
and which companies would fail. Instead of allowing
dysfunctional corporations to fail, declare bankruptcy or
restructure, you protected those failed corporations and funded
them with hundreds of billions of taxpayer dollars. These
irresponsible actions led to the Federal Government's
unprecedented and harmful ownership of private business.
New information continues to come to light about how AIG
funneled tens of billions of taxpayer dollars last year to
other financial institutions.
It was your role, Mr. Secretary, in crafting these policies
that made that possible.
How are the American people supposed to have confidence in
this administration when the same person who was supposed to be
regulating these financial institutions is now the one choosing
which companies to bail out? As a Member of Congress, I am held
accountable to my constituents, but who does the taxpayer hold
accountable for these out-of-control bailouts?
As a Nation, we cannot continue these reckless policies and
unprecedented levels of irresponsible spending. Unfortunately,
the President's 2011 budget is no exception. The reckless
deficits, runaway debt and unprecedented growth of government;
instead of reining in spending like many of my constituents and
all of our constituents are forced to do, the administration
proposes a budget with a $1.7 trillion deficit.
Secretary Geithner, you agreed, on February 2nd, when
testifying before the Senate Committee on Financial Services,
deficits matter, and you said that here again today. And stated
then, part of laying a foundation for future economic growth
and prosperity is returning to living within our means.
But actions speak louder than words. How can you continue
to ask the American taxpayer to keep paying for increased
government spending when you yourself admit we need to live
within our means?
You have also previously discussed the impact of our
deficits on international investors and their confidence in
investing in America. How do you think this reckless budget
will impact our Nation's investment strategies with other
nations' investment strategies with the United States?
And Mr. Chairman and Secretary Geithner, I would also like
to add, you keep saying that tax cuts aren't free. And you
might think that is cute, but it is important to remember that
it is not the government's money. It is the people's money who
have earned it. So if you take the perspective of it is not
free to government; that is not what the American people are
interested in.
Secretary Geithner. I think I agree with that but----
Mr. Mack. You keep talking about it is not free. We are
taking--the government is taking money from the people who
earned it, and I think it is important to recognize that
difference in perspective.
Again, thank you for the time and coming before us today. I
look forward to hearing your response.
Secretary Geithner. Okay. There was a lot in that
Congressman, so let me try to respond.
Let me just start where you ended again and say that what I
think is not responsible as a government is to promise to
reduce future taxes on a permanent basis and borrow to cover
the losses in that case. That is not responsible. No family
could do that, and I don't think that is fair or responsible to
ask them to do.
Mr. Mack. Secretary Geithner, that is why we need a budget
that cuts spending.
Secretary Geithner. I agree with you. Well, no. I would say
that you are right to say that if you are going to do--tax cuts
are a good policy. There is a very good case for trying to make
sure that you are providing incentives for business; you are
doing it in a sort of fair way. But I think the obligation we
have is to make sure that we are doing that in a way that is
fiscally responsible.
Now people are going to disagree with the mix that we have
proposed in our budget. But we do propose measures that will
bring those deficits down by more than half of a share of the
economy in a 4-year period of time. That is a very sharp, steep
trajectory, given where we started. And you know, I understand
people are going to disagree with what the mix is. But we have
proposed specific things that will do that in a way that is
fiscally responsible, and we are proposing to extend and expand
a range of targeted tax cuts that go to a lot of businesses and
working families across the country. But I want to come back
to----
Mr. Mack. Secretary Geithner, you did say and the
administration has said that you want to eliminate capital
gains on small business.
Secretary Geithner. Yes. Zero capital gains.
Mr. Mack. Which I believe is important and is a good thing
to do. But Mr. Secretary, at the same time, this budget raises
taxes on capital investment on investment, which--you can't
have it both ways.
Chairman Spratt. Mr. Secretary, let's move on if you will.
Secretary Geithner. You want me to move on? I would say
with reluctance----
Chairman Spratt. We have further questions to ask, and we
have a vote coming up on the floor. So there are more members
who are here.
Mr. Etheridge comes next. If you want to squeeze some time
out of Mr. Etheridge, you can continue, and I am sure he will
accommodate you.
Secretary Geithner. Well, I don't want to take his time.
Mr. Etheridge. Thank you, Mr. Chairman.
I will try to give him some time at the end. But I hope we
will remember that there were those who argued about whether we
should pass the TARP when we did it a little over a year ago,
and some who voted for it. They tend to forget the day that the
House voted it down, with a majority of the other side doing
it. I voted for it, didn't like it, didn't want to do it, and
didn't ask for it. The stock market fell 500 points. But over
the weekend, they went to the kneeling bench and came back and
decided the world markets were recognizing what we were doing,
and we had to pay our bills. So we shouldn't forget that.
As a result of that, from June of 2007 through March of
this year, household wealth was insured for $17.5 trillion.
These aren't my numbers. These are Federal Reserve Flow of
Funds numbers. So we need to remember, we are trying to repair
a problem that needs to be fixed.
With that, thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here. And thank you for
your testimony.
I am going to try to give you a number of questions and
give you time to cover it. The economic indicators indicate our
economy is starting to recover. I am thankful for that. I think
about 5.7 percent last quarter.
We are still hurting in North Carolina; in December, 11.2
percent, higher than the national average. I introduced H.R.
4437 back at the beginning of this year, the HIRING Act;
stalked two Chambers on it within a few days. In Erwin and
Benson, they are tickled to death. They didn't really know what
it meant, but they knew it meant it was going to help small
businesses put people to work.
The President has included some portion of that in his
budget, for which I am thankful. It looks like the Senate may
pick it up. Let me ask some questions on that and a couple
others and then let you respond and pick it up.
Is the President's proposal designed to spur job hiring? I
hope you will talk about how that does. And how many jobs does
the administration estimate that will come out of the $33
billion in that? And also, mine was a little bit bigger, be
that as it may. And how efficient would that be in getting
people back to work? And how does creating jobs have a positive
or negative impact on the deficit?
The second point has been covered generally, but I want it
covered again. I had written you a letter in early February.
You have since responded, as it relates to this whole issue of
small business people and capital for them. Because as you
know, one of our greatest challenges right now and one of the
big obstacles to getting this economy up and, I think, moving
is the availability of access to credit for expansion and
growth for businesses who have paid their bills, who have met
their obligations, and yet because of a number of reasons, not
necessarily Treasury but it may be on the other side of the
regulatory scheme, we have talked about this, of not being able
for these small banks to have credit to move. And I know there
has been a proposal of roughly $33 billion to help leverage
that. I want to hear that again.
And is there anything in the President's proposed budget
that is going to help on this front? Because I think this is
the one piece left in that pie that is going to get this
economy going.
And finally, if you will touch on just briefly, I know you
are working on this whole issue as it relates to American
Opportunity bonds. We passed the school construction last year,
roughly $20-some billion. That is still hanging. We are trying
to get that moving. A lot of shovel-ready projects that will
create almost 10,000 jobs in my State and across the country,
need for children.
With that, I will leave the rest of the time for you. I
have other questions, but I will submit them, Mr. Chairman, for
the record.
Thank you, Mr. Secretary.
Secretary Geithner. Let me quickly go through these. What
we propose is we give a tax credit to small businesses that
hire additional workers, a substantial tax credit for each
worker they hire above a certain baseline as well as a
reduction in----
Mr. Etheridge. Limited to roughly 50,000, similar to what
we have got in our bill.
Secretary Geithner. Now we have not put an estimate about
how many jobs that will create because that is sort of
uncertain, but we have said that it would reach hundreds and
hundreds of thousands of small business companies. And the
independent CBO says that this proposal has the highest bang
for the buck in helping job creation in any of the competing
tax proposals out there that are designed like this.
Second, on the credit side, you are absolutely right that
small businesses need access to credit if they are going to
expand. We proposed two things. One is to expand what the SBA
can do in terms of guarantees at lower costs to small
businesses. We think that can be very powerful but also a
program, as I said to your colleague, that would give capital
available to small community banks across the country for those
that increased lending to small businesses. And under this
proposal, we said, is a very simple proposition, which is, the
more you lend, the more we will reduce the dividend you have to
pay the taxpayer and the government. We think that is sensible
policy, good high return.
The school construction bond program, we are looking at
ways to make those programs more effective. The Build America
program model looks to have been a much more effective way of
trying to make sure that local governments, State governments
can borrow at affordable rates to fund construction projects,
and we are looking at a variety of ways to take what works in
that program to reform these other programs to be as powerful
as those.
Mr. Etheridge. Thank you, Mr. Chairman.
I yield back.
Chairman Spratt. Mr. Jordan.
Mr. Jordan. Thank you, Mr. Chairman.
Thank you, Secretary, for being with us.
You have, in times past, as well as Director Orszag a
couple of weeks ago when he testified, talked about the deficit
and the debt situation we are in. We are in that situation
largely because of four things: The new entitlements that were
put in place during the Bush administration; the war efforts
that we obviously had to do; the economic downturn; and then
the tax cuts. Every time the question, those are the four
things, and Director Orszag did it several times in our last--
--
Secretary Geithner. And the recession.
Mr. Jordan. Yeah, economic downturn, recession, whatever
you want to call it. Those are the four things that were
pointed to. I want to focus on the last, and obviously some of
those things, I agree, led to the tough situation we are in.
But I want to go to the tax cut issue.
Do you think that our economic situation would have been
better had not the tax cuts--tax cuts in the last decade, 2001,
2003 tax cuts for families, small business owners, personal
income rates that went down, capital gains--do you think our
economic situation would have been better had those tax cuts
not been put in place? Yes or no.
Secretary Geithner. Congressman, I will put it this way: In
recessions like the one we were in and we are still facing,
there is a very good economic case to have temporary targeted
tax cuts that go to businesses and working families. That is
what we proposed. Congress enacted that. We think that is very
good policy in recessions.
Mr. Jordan. I am talking about the tax cuts that were put
in place because what you point to, every time we talk about
the big debt numbers that we see that we all know we can't
have, you point to these four things, and there seems to be
many times an emphasis placed on the tax cuts that were put in
place in 2001 and 2003. I want to know, yes or no, would our
economic situation have been worse in your professional opinion
had not those tax cuts been put--I mean, good or bad, what were
they?
Secretary Geithner. In my own view, looking back, but it is
hard to know this with confidence, is that if they had been
designed differently to be more temporary and more targeted, we
would have seen a better record of economic growth and a better
record of fiscal responsibility. That is why I said, in
recessions, there is a very good case for temporary targeted
tax measures to spur demands for private investment, but you
have to do that in a way that is responsible, that we can
afford. Otherwise, you are just going to add to long-term debt
and leave people with a cloud over the future that is going to
make them less confident to invest in----
Mr. Jordan. Well, let me ask you this, then, because I
spoke last week in Mansfield, Ohio, a town in my district that
has been hit very hard. The Auto Task Force shut down the GM
facility in that district. There were 1,400 jobs lost when that
took place. I was speaking to a group of NFIB, 40 small
business owners in the room, and I brought up what is being
talked about right now, something your administration is for,
something that just passed the Senate, this jobs package,
specifically, the tax credit for hiring someone who has been
unemployed.
And I will be honest, when I brought up to the members in
that room that small business owners make our economy go, they
laughed at the proposal. They said, that is not what we need.
We are not going to hire someone unless we see economic growth
taking place, unless we can increase sales, and we see good
things happen in our economy.
And frankly, they liked--now this is not Jim Jordan,
conservative guy from Ohio talking--this is small business
owners. They liked the tax cuts you said weren't that good.
They liked those tax cuts that were put in place, the across-
the-board tax reduction, making it less costly to do business.
They liked those, and they did not like this proposal, this
idea that somehow if they hire someone, they are going to get a
tax credit, because they aren't going to hire anyone until the
economy starts to pick up.
Secretary Geithner. We agree on more than you would expect.
We are proposing to extend those tax cuts that go to 97 percent
of small businesses across the country. So we think that is
reasonable policy. We think we can afford to do that. It is not
going to be easy. We think we can do that. I also agree with
you that the most important thing for small businesses now is
to see demand for the products they produce grow over time.
Mr. Jordan. Certainly.
Secretary Geithner. That is the most important thing. But
what this tax cut can do--and I believe it is going to have
broad Republican support, too--is to try to make sure that as
this economy starts to recover--and there are parts of the
economy now that are really starting to grow again, orders are
picking up significantly--we want to make sure that as that
happens, firms have a little bit greater incentive to hire to
meet that demand for greater employment. So we think it will
have some spark value in increasing the odds that, as the
economy starts to grow again, you see more jobs created. That
is its basic rationale. But again, you could just look at the
CBO. What CBO said is, the most powerful way, biggest bang for
the buck is to increase hiring.
Mr. Jordan. Thank you.
I have 15 seconds. I want to go back to that first
question. I want, if you will, you to say yes or no. The tax
cuts that went into place, had not those tax cuts happened, do
you think our economic situation would have been better or
worse?
Secretary Geithner. I think that if we had designed them
differently----
Mr. Jordan. I know you said that last time.
Secretary Geithner [continuing]. They would have been
better.
Mr. Jordan. But I am saying, no tax cuts or the tax cuts
went in place. Which was better?
Secretary Geithner. Look, you know, again, there is a very
good economic case in recessions for cutting taxes. But you
need to do it in a way that is temporary, targeted and is
designed to over time----
Mr. Jordan. It sounds like you are saying that those tax
cuts were a positive for our economy.
Secretary Geithner. No. What I am saying is, I think they
could have been designed in a way that would have been better
for the economy and better for our fiscal position.
Mr. Jordan. Were they negative for the economy?
Secretary Geithner. I am not going to say that.
Mr. Jordan. That is what I figured. Thanks.
Chairman Spratt. Ms. McCollum.
Ms. McCollum. Thank you, Mr. Chairman.
The tax cuts that were passed by reconciliation in the
early 2000s under the Bush administration. They were done at a
time that our country was facing war. Has our country ever in
its history passed tax cuts at a time that it was borrowing to
go to war?
Secretary Geithner. I don't know for certain. But I think
it was rare, if not fully without precedent.
Ms. McCollum. So, in most cases, most of our Presidents and
Congresses, at a time when our Nation was facing a national
security challenge, didn't cut taxes.
I would also just like to talk about this $5,000 hiring
credit that I have heard many people say is not good. I will
just say, from a point, if an employer is looking at hiring
someone, and they are right on that cusp, it costs a lot of
money to bring an employee on for the first couple of years. I
worked in major retail sectors for 27 years. And it can cost
anywhere from $2,000 to $3,000 to even bring on a part-time
employee, more dollars just to bring on a full-time employee.
And part of what you are doing when I first saw that was giving
an opportunity for employers who are right on that cusp,
whether or not to hire somebody else, to help offset those
first-year costs that you have when you bring on an employee.
If you could answer that quickly, and then I would like to get
to----
Secretary Geithner. You are exactly right. I think what you
do is provide an additional incentive, as companies start to
see increased demand for their products, to bring on more
workers more quickly than they otherwise would. And that is why
the CBO in their analysis said this had a very high return for
every dollar of resources we are asking the taxpayer to
provide.
Ms. McCollum. Because I know a lot of my colleagues who
haven't worked in the private sector with hiring employees and
doing training for employees don't know about that cost that
you have the first year when you bring an employee on.
I would like to talk for a second with you about TARP. One
of the things that you have talked about is how you brought
down the cost of the Troubled Relief Asset Program, TARP, which
has helped stabilize the financial system. And because of that,
you are looking at doing some more stabilization in place. One
of those areas is with working with community banks, and I want
to commend you for the work that you have done. I have a
community bank, Sunrise Community Bank, right on University
Avenue by our State capital, and it says in the letter, which I
will submit for the record, ``I commend the Treasury Department
for their responsiveness to community development banks' needs
for their rechanneling TARP funds to Main Street.'' He goes on
to say, ``Sunrise Community Bank plans to submit an application
to participate in the CDFI, capital investment initiative,
because it will provide patent and affordable capital and
enable us to expand lending and promote economic recovery in
our local community.''
Could you talk a little bit more about how you are taking
this to Main Street?
Secretary Geithner. The program you have is just a good
example of what you can do with this kind of program. What that
program would do, again, is to give capital to community
development financial institutions that serve some of the
hardest-hit areas across the country that they can then use to
expand lending in those communities. It has got a very high
return. It is very powerful and effective. We expect that they
will make very good use of this program, this money, and we
want to take that basic model and extend that to community
banks, small community banks across the country, not just those
that are community development financial institutions.
The CFI program has a long history, and it has got a great
record of returns for the taxpayer, and we think it is one of
the most effective ways, again, to help get credit opening up
again in parts of the country where it has been most adversely
affected. Because what you are seeing now is that the overall
system is stable. The system is much stronger today. There is
much more capital in the financial system. But for small banks
across the country, many of them face a lot of challenges in
commercial real estate because of a bunch of decisions they
made, and they are going to have to cut back lending further,
unless we can find a way for them to be able to get additional
capital. That is the basic premise.
And if you talk to community bankers, they are very, very
supportive of this program because, again, for those that would
normally be able to go out and raise capital but can't do that
now, this allows them having to avoid having to cut credit
lines further to their customers and expand credit lines to
their viable customers.
Ms. McCollum. So as in the TARP repayment that taxpayers
have seen on the rescue to keep our country from sliding into
depression, we have seen that payback. We are also going to see
a payback on this round to the taxpayers as well as we
stabilize our financial institutions in our communities.
Secretary Geithner. Exactly. The independent analysts of
the costs of this program have concluded that it is like the
expected costs are now $400 billion lower than what people
estimated a year ago. That is real resources we can help use to
meet the long-term fiscal challenges of this country. We have
worked very quickly to replace the investments the government
had to make in the depth of the crisis with private capital. So
$170 billion have already come back into the Treasury with a
positive return for the American taxpayer.
We moved very aggressively to make sure that we were
reducing the government's involvement in the financial system
as quickly as we could, and that has given us more resources
today, not just to reduce our future debt burdens but to meet
the longer-term challenges we face. So if you are on the
conservative side of the aisle, you can look at what we have
done and say that, relative to when I came into office, the
Treasury has a dramatically smaller stake in the financial
system. We have pulled back from the vast bulk of investments
we were forced to make--my President was forced to make in the
financial system. We have done so at much lower cost than
anybody anticipated. We have proposed a sensible fee to make
sure the taxpayers don't bear a penny of loss for all the
judgments we had to make--my predecessor largely had to make.
And we have some work to do, though, to make sure that
small banks can get access to credit, and we are helping
reinforce this gradual process of healing in the housing
market. So we haven't healed everything that was broken. There
is a lot of work we have to do, but we are in a much, much
stronger position to do that today because of the actions that
we took.
Chairman Spratt. Mrs. Lummis.
Mrs. Lummis. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here. Along the same
lines, I want to talk about TARP as well and the flip side of
the coin that you have been visiting with, with Representative
McCollum.
The administration did propose a tax on banks that either
did not receive assistance or paid it back to pay for the TARP
moneys that will likely be lost through nonbanking-related TARP
initiatives. And then the President also proposed using the $30
billion in TARP money for this new program to subsidize small
business loans through community banks, the CDFI program. I am
assuming, based on what you have said, that you think that is
great, that using TARP money for new spending initiatives when
TARP itself required that you recoup losses, it is okay. But
how do you justify that? What I see happening is picking
winners and losers, government playing a shell game with money
that we are borrowing.
Secretary Geithner. Let me say this in the starkest terms
because I think it is very important to make it clear in this
case. We have spent a fraction of the resources Congress
authorized us to spend to put out this financial fire because
we were successful in adopting a strategy that largely relied
on private capital coming in to allow us to get that money back
for the American taxpayer. And those resources--and it is
hundreds of billions of dollars--go to reduce the debt of the
country.
Now Congress gave us authority to continue to try to act to
repair what was broken in this financial system, and there is a
very good economic case for trying to make sure that we are
finding ways to get capital to small banks, helping fix what is
still broken in our housing markets. This fee was built--the
proposal that we leave the taxpayers harmless for the cost of
this crisis was put into law as an obligation on me to propose
ways to make sure that we were recouping any losses. So what we
did is--I think it is a very fair thing--which is the largest
banks in the country that benefited from the most of what we
did pay, over a 10-year period of time, a modest fee to make
sure that the taxpayers don't bear a penny of losses for the
actions we had to take. I think that is a simple, fair thing.
It is a fiscally responsible thing to do. There are different
ways to do it, but we proposed a sensible way to do it. And
again, I think it is important for people to understand that we
spent a fraction of the resources Congress authorized.
Mrs. Lummis. Mr. Secretary, excuse me. I have some other
questions for you.
Secretary Geithner. Okay.
Mrs. Lummis. If the additional spending comes at a cost to
TARP's lifetime cost, will additional taxes or measures be
placed on banks to recoup losses----
Secretary Geithner. No.
Mrs. Lummis [continuing]. That are not theirs?
Secretary Geithner. No. I think, again--I think those
losses----
Mrs. Lummis. And let me tell you, I appreciate your being
here today. I am still hearing from banks in my State that
because of the increased capital requirements that they have,
that they are not lending to borrowers that had very strong
balance sheets and that have already paid back all of their
previous loans, and they can't borrow money.
What I am hearing from people who want to borrow money from
banks to get our economy going and hire people is, they can't
borrow money because the banks won't lend it to them--not
because the banks don't have access to the capital and not
because the balance sheet of the borrower is bad. So I see it
as a regulatory problem. They see it as a regulatory problem,
whereas I think you are seeing it as an access to capital
problem.
Secretary Geithner. As I said earlier, I think there are
two related problems in this case. Like in any recession, what
happens afterwards is, you know, credit was too easy, and then
it gets too tight. People overcorrect. And banks overcorrect,
and examiners overcorrect. That is one reason why the
recessions can last longer, be more deeper, cause more damage.
And it is very important that we work against that basic
natural inclination.
And you are right that part of this is concern that
examiners across the country are becoming too conservative too
late. It is very important that supervisors try to make sure
they are bringing more balance to those judgments, and the
Chairman of the Federal Reserve and his colleagues are trying
to do that. They have issued a series of guidance to try to
bring more balance to that but----
Mrs. Lummis. And on your side of the equation, there are
some regulators, too, on your side, on Treasury's side, right?
The Comptroller of the Currency?
Secretary Geithner. Those are independent regulators also,
and we do not have the ability to--well, those are their
judgments to make. But your point is absolutely right.
Mrs. Lummis. I want to switch this.
Secretary Geithner. But one more thing. The capital thing
is relevant to this. They are not separable. If you can make it
possible for viable community banks to get capital temporarily
from the government, then you will reduce the risk that the
regulatory overcorrection causes damage to lending. Doing both
things is important, but you are right to emphasize both those
things.
Mrs. Lummis. Thanks, Mr. Secretary.
Thanks Mr. Chairman.
Mr. Doggett. Mr. Secretary, thank you for your comments
earlier and your trip to Austin. Certainly the professionalism
of the IRS employees there, the help of a good Samaritan, and
our first responders were vital in minimizing the loss of life.
Some of the response to that attack has been nothing short
of appalling. The terror caused by a suicide attack on this
public building certainly didn't involve any heroism by the
attacker because terror knows no discrimination. It is, as you
know from meeting with his widow, particularly tragic that Vern
Hunter, who provided 48 years of public service, almost 30 at
the Internal Revenue Service and two tours of service with the
Army in Vietnam, was the person who was killed. But thank you.
I wanted to turn to some of the same issues I raised with
you at the Ways and Means Committee. You have included in this
budget that you are presenting today $122 billion in
multinational corporate tax loophole closers. Why is it vital
that we enact those?
Secretary Geithner. I want to just say one more thing about
Austin, and I said this to employees there. How could it be
that a man who has served his country in Vietnam and safely
served two tours in Vietnam would die at his desk in Austin,
Texas, because he was helping make sure that Americans were
bearing their fair share of the burden of the privilege of
being Americans? It is a tragic, terrible thing. But as I said,
I think we owe those men and women of the IRS our respect and
our honor and our support for doing a very difficult, but very
important job for the country. But thank you for what you said
on this.
We have in our tax system today a basic unfairness. You
could have two companies in your State face very different tax
burdens. You could have a company that invests more overseas
paying less taxes than its competitor pays who is investing in
Texas. And the most simple way to say what we are proposing is
a way to change that basic balance. So we want to make sure
that we are taking out of the Tax Code incentives that have the
effect of encouraging companies to shift more investment and
more jobs overseas. That is the basic rationale.
Mr. Doggett. As you know from my prior questioning, I have
some concern that so little effort, other than the President
saying, Let's stop exporting jobs overseas, and the reports in
The Wall Street Journal that you and former Secretary Summers
sought to calm concern about this as to how much commitment
there is in the administration, and as a member of this
committee wondering if we need to find some other way to bring
balance as to whether you will really have a commitment to
getting this $122 billion in loophole closers adopted. What
specific steps are you taking as Secretary of the Treasury to
make this a reality?
Secretary Geithner. The President supports this. I support
this. We think it is good policy. As a measure of our
commitment to it, I draw your attention to the fact that we did
take a careful look at it, and we did modify some of those
proposals. So the proposals in the budget today build on things
you have supported in the past, Chairman Rangel has supported
in the past, but we have changed them in ways that we think
will improve the odds that they could become law. But we will
be as persuasive as we can----
Mr. Doggett. This year.
Secretary Geithner [continuing]. This year with your
colleagues. But as you know, this is something Congress has to
enact.
Mr. Doggett. I would just like to see the same level of
commitment that the President has had to taxing employer health
plans devoted to this.
Let me touch on one other area. When you opened your
testimony in Ways and Means earlier in the month, you commented
on compensation practices that defy gravity, that were deeply
irresponsible, in referring to AIG. Since that time, we have
had $16 billion in compensation bonuses from Goldman Sachs,
substantial amounts from Morgan Stanley and JPMorgan Chase. Why
shouldn't we follow the direction that our trading partners,
the United Kingdom, France, other countries, have in putting a
surtax on those excessive bonuses? It is deeply troubling, as
you have noted. The American people----
Secretary Geithner. Congressman, I completely agree and
share your concern about not just what happened in the past,
but what we are still seeing. Again, we think the most
effective way to bring some basic judgment or reality to those
compensation practices is to make sure that shareholders have
the opportunity to vote and approve to see them in the cold
light of day what these firms are proposing to pay their senior
people, and we want to make sure that their supervisors are
enforcing clear standards that will make those compensation
practices less risky in the future. We think those are the most
effective ways to do this, but of course, we are open to
suggestions.
I do not believe that if you look at what other countries
have tried in those areas--you just mentioned some of those
things--have been effective, frankly, in bringing those
reforms. We have seen substantial reforms already in the
structure of compensation, but we think we can do better than
that.
Mr. Doggett. Thank you.
Chairman Spratt. Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you, Mr. Chairman.
Mr. Secretary, we have votes, as you well know, so I am
going to try to be as quick as I can. So I am going to have to
throw you a softball, frankly. Look, there have been a lot of
reports of fraud and waste in the stimulus. That shouldn't
surprise us. It is a Federal program.
Secretary Geithner. Remarkably few I think, actually.
Mr. Diaz-Balart. I would beg to disagree with you, but that
is an issue I guess of what one is willing to accept as far as
waste and abuse.
Secretary Geithner. No, it is not acceptable.
Mr. Diaz-Balart. Right. I think it is way excessive. That
is just my opinion. And we could talk about those instances of
waste, fraud and abuse, and I would say such cases as campaign
consultants receiving stimulus money to help with the digital
conversion, even though the Federal Government has spent
hundreds of millions of dollars already doing that.
But here is my softball question. Specifically, what is
this administration doing, if anything, to actually recover
those funds? I mentioned one of the cases, but there are
obviously thousands upon thousands. What specifically are you
doing to recover the funds?
Number two is, how much do you think people can expect to
recover from those funds? And by when?
Secretary Geithner. Well, I don't think I can speak to that
specific case, but I can state that----
Mr. Diaz-Balart. No, I am not asking about that specific
case.
Secretary Geithner. Look, the Vice President of the United
States runs a very intensive, very tough process of review to
make sure that we are doing everything possible to limit
opportunities for fraud, to make sure that those tax dollars
are going to serve the purposes they were designed to serve.
And I believe the record shows remarkable care and discipline
to date on that process, something we can all be proud of. But
of course, I know he believes that we can do better. We are
going to keep doing better because we all share an obligation
to make sure that those resources are going to where they are
supposed to go.
Mr. Diaz-Balart. What are you doing to get the money back?
Secretary Geithner. Again, I would be happy to respond to
you in writing to that specific case, but I know he is running
a very tough, very exacting process, and he will do everything
possible to make sure that we are protecting the American
taxpayer from risk of fraud.
Mr. Diaz-Balart. Mr. Secretary, again--and it is not your
fault that we are running out of time here, but I would like
some specifics in all these cases of what you are doing
specifically to try to get actual recovery.
Secretary Geithner. I would be happy to do that.
Mr. Diaz-Balart. I am going to yield now to my colleague,
Mr. Austria.
But before I do that, I know that the administration is
working really hard and with unprecedented fervor to try to
track down the money.
But with all due respect, sir, when money goes to
congressional districts that don't exist, when $18 million is
spent on one Web page, I hate to tell you, if that is the
best--and I am not placing fingers--but if that is the best
that the Federal Government can do, it tells you why the
American people are skeptical.
Secretary Geithner. I agree. We are going to do as good of
a job as we can. I would be happy to provide details to you and
what all the things the administration----
Mr. Diaz-Balart. Thank you for allowing me to do it
quickly.
And I would like to yield to my colleague, Mr. Austria, if
that is all right with you, Mr. Chairman.
Mr. Austria. I thank the gentleman for yielding. I know we
have votes.
Mr. Secretary, thank you for being here. I want to go back
to TARP because I opposed the bailouts for multiple reasons as
far as picking and choosing winners in the private sector. I
didn't believe at the time we really had a plan in place--or at
least it wasn't transparent--as to how those dollars were going
to get into the private sector to help families who were
struggling from paycheck to paycheck, to help businesses that
are struggling from payroll to payroll. And I really--you know,
as Members of Congress, we are faced with our constituents when
we walk down Main Street, whether it be Main Street, USA, or in
my district, Main Street, Ohio. And when we are talking to
businesses--and I would love to take you down to my district
and talk to some of these small businesses.
We are getting more and more calls in our district office
about how they are having a difficult time getting financing,
getting credit, how they are having a difficult time with their
line of credit being reduced on them, or more restrictions
being put on them in order to maintain those lines of credit.
Let me ask you, I mean, this is the reality of what we are
facing right now. What would you say to these small business
owners? If you walk down, you know, Main Street, Ohio, or USA
with me, how would you explain to them that what we have done
with TARP is working and, you know, it has been helping them?
Because we are not seeing it. We are not seeing----
Secretary Geithner. I think you are exactly right, that if
you are looking at what has happened across the country today,
many small businesses in many States and communities across the
country are finding it very difficult to get access to credit.
And it is not just the companies that are in industries
suffering the most from the recession. It is companies with
pretty strong businesses, pretty strong growth prospects, too.
It is a real problem still. What I would say to them is, call
your Congressman----
Mr. Austria. They are, I will tell you that.
Secretary Geithner [continuing]. And ask them to support
some additional measures to try to make sure we are getting
access to capital at those small banks that they depend on and
that the SBA can do the things it needs to do and that we are
supporting sensibly-designed targeted tax measures to make sure
that we are reducing the costs on those businesses. That is
what I would say.
Mr. Austria. I know we have to vote. I see the time has
expired.
Mr. Secretary, that is not what we are hearing from our
small businesses. They are not able to get the financing, the
credit, that should be out there for them to help them, you
know, keep their doors open, to help them from having to lay
off people and make it from payroll to payroll.
Secretary Geithner. Congressman, I agree with you.
I think you are right to describe; that is true for many
small businesses. But it just underscores the importance of
trying to make sure that we are working together to try to make
sure that the banks they depend on can have access to the
capital they need to meet the needs of those customers.
Chairman Spratt. Mr. Larsen.
Mr. Larsen. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here.
There may be fraud and abuse in the Recovery Act, and I am
sure there is, but I know that the Recovery Act didn't pay to
stick accelerators or cause steering wheel problems either. So
this problem is not limited to government. So as long as we are
clear on that issue. Because I am still working on the thank-
you letters from the kids. And my hometown of Arlington will
get to walk on the Gifford Avenue sidewalks and have a safe
place to walk to Presidents Elementary the first time ever, and
that is from the Recovery Act. The same place in the Cedarhome
neighborhood in Stanwood, Washington. Eighty-four men and women
working on construction on 2nd Street in Ferndale to help with
economic development in Ferndale, Washington, about as far
north and west as you can in the lower 48 from Washington, D.C.
I don't expect them to write thank-you letters. But Members
should go visit these Recovery Act projects because they are
all over the place, all over the districts, and they are really
working.
I really have one question, and it has to do with access to
capital. In speaking with the smaller banks, the community
banks, and the big concern is if you follow through on this $30
billion small business lending fund, what is to stop the
regulating community from going to that community bank and
saying, Hey, we just saw you got $25 million from this lending
fund; keep it in the door. No amount of incentive decreasing
the interest rate, payback rate, is going to stop that. So what
are you doing to regulators on this message that this is money
for lending, not money for them to count against capital
ratios?
Secretary Geithner. I think you are right. It is a very
important concern. And these are independent supervisors, under
the laws of the land. But we are working very closely with them
to encourage them to make sure their examiners are not
overdoing it. The four Federal bank supervisors have put out
two important public guidance to examiners that everybody can
see in the public domain, trying to make sure that examiners
are not doing it. These directly address concerns about how
they are treating loans backed by commercial real estate as
well as loans to small businesses. We think that is important
to do.
But I want to just underscore one thing. If you don't have
enough capital today, and you get a dollar of capital from the
government, from the private markets, then you will not have to
reduce lending by another $8 to $12. So that act in itself will
help reduce the risk that you see strong businesses starved of
the credit they need to grow. But we want to make sure this is
targeted to those banks that are likely to expand lending. Use
the capital to do that. You can't force it, you can't compel
it, but we think we designed it in a way that will
substantially increase the odds of that happening.
Mr. Larsen. To clarify, as you are walking through this and
developing it for our consideration, you are speaking with the
regulating community.
Secretary Geithner. They are very supportive. Again, if you
can help a small community bank get access to capital, then it
is much less likely that they are going to face a lot of
pressure from their supervisors to force them to reduce lending
or to husband those resources. That is the basic balance we are
trying to strike.
Mr. Larsen. Thank you.
I will yield Ms. Moore from Wisconsin the remainder of the
time.
Chairman Spratt. Ms. Moore.
Ms. Moore. Well, thank you so much, Secretary Geithner. I
just want to start by saying that I have met with some of the
community banks in my area, and they feel that you have been
very responsive to sitting down with community bankers and
really identifying their needs and letting them help shape the
process for going forward. I thought you may have needed that.
I know you have been beaten up quite a bit lately. They wanted
to make sure I conveyed that message to you.
Everything has been said, but everybody hasn't said it, so
that is why I am here. I am going to ask you some questions
with regard to that first chart that Mr. Hensarling put up
there regarding debt. He says that that chart reflected current
law. Does that chart that he put up assume the tax cuts don't
expire and also that Medicare Part D and health care is not
fixed?
Secretary Geithner. I am not actually sure. I don't know
what those charts came from, so I can't be sure.
Ms. Moore. All right. The $30 billion TARP program provides
capital to small and community banks. Would you object to our
looking at that for credit unions as well?
Secretary Geithner. We are taking a look at that. In fact,
I think I am going to be spending a little time with them
directly talking to them about that. So we are taking a look at
that. I am not sure what we are likely to recommend. But
ultimately this requires Congress enacting legislation, so you
will have a chance to reflect on that, too.
Ms. Moore. The $5,000 tax cut to create new businesses or
to increase hours or increase wages, you said that the CRS
says----
Secretary Geithner. CBO.
Ms. Moore [continuing]. Is the best bang for the buck. As
compared to what? As compared to actually, say, for example,
creating some WPA kind of jobs? As compared to what?
Secretary Geithner. I need to go back and look at their
study carefully, but I think relative to almost any alternative
use of a dollar of taxpayers' money, it has a very high bang
for the buck. But I want to underscore the following: What we
are suggesting is that we also provide support for
infrastructure projects; that we also provide support for State
and local governments so they can provide critical services;
that we also support other tax incentives that can go directly
to businesses, small businesses in particular. So it is the
package of measures that we think together provide a pretty
good mix of support.
Ms. Moore. Thank you. Because I think as Democrats we are
constantly pummeled with this notion that trickle down works. I
think what small businesses need--I agree with the
Republicans--they need customers. Actually, they need people
who have money to spend, and they will increase their payrolls
based on that.
I do question that particular tax cut, particularly since
we don't know--you indicated that you didn't really know how
many jobs it would create versus other sort of targeted things.
Speaking of targeting, as a member of the Congressional
Black Caucus, we have been very, very concerned about the three
indices that we learned from Larry Summers: targeted, timely,
and temporary. We really bought into that and felt that that
was important. So we see a lot of incentives not really getting
down to the PUMA level, the Public Urban Micro Areas, and
moneys given through these broad screens of States and so
forth, and it doesn't really help the lowest-income and the
poorest people.
So we are really hoping that through the budget process
that you will agree with us that targeting--that you will stick
with that analysis where you get the most bang for the buck.
Secretary Geithner. Yes. I just want to say, again, one of
the most effective things we can do is to try to make sure that
we are providing resources to not just State governments, but
local governments, to make sure they can maintain the critical
services. We think those have a very high return. But we are
also being very supportive of a set of very effective targeted
programs that go directly to some of the hardest-hit
communities in the country, like the New Market Tax program,
like the CDFI program. But there are a range of other things we
are looking at in this area that we hope we can work with the
Congress to support as we move a series of jobs measures over
the next few weeks and months.
Ms. Moore. Last, I would like to agree with Mrs. Lummis
that I think that the regulatory agencies are overcorrecting.
And I don't agree, I think, that you just have a total hands-
off approach. I think that we have had other conversations
where I think that the banking community feels that they are
being somewhat arbitrary. It is not clear to them what the new
capitalization requirements are. And there are very many
creditworthy people who will not--thank you. I yield back.
Chairman Spratt. Mr. Secretary, thank you for coming, thank
you for testifying and for your forthright answers. We look
forward to working with you in this budget season to put
together a good budget for the United States. Thank you again
for your participation.
Secretary Geithner. Thank you, Mr. Chairman.
Chairman Spratt. The committee is now adjourned.
[Questions for the record and their responses follow:]
Questions From Representative Marcy Kaptur (D-OH)
1. Mr. Secretary, as I think regardless of party affiliation, every
Member here has heard from her or his constituents that the Making
Homes Affordable Program is not working--my constituents are struggling
with the servicers, applying many times over, being told one thing one
day to have the opposite told to them the next day. Servicers seem to
be obstructing the process. This program, being under the TARP, is
under your watch and your jurisdiction.
We agree that challenges exists, but the program has made
considerable progress: nearly 1.2 million borrowers have started trial
modifications, 1.4 million borrowers have received modification offers,
more than 230,000 permanent modifications have been granted to
homeowners and an additional 108,000 permanent modifications have been
approved by servicers and are pending borrower acceptance. Borrowers
are saving a median of 36%--more than $500 each month. Still, we
recognize that a number of challenges remain and we have been working
to improve the borrower experience during the Home Affordable
Modification Program (HAMP) process.
We recently revised program rules to provide borrowers with a
number of new protections in the HAMP evaluation process to help
address some of the confusion and anxiety that some borrowers reported
surrounding their rights during the evaluation process. These new rules
address borrower solicitation, borrower response timelines, the
foreclosure process, and borrowers in bankruptcy. They also require and
define reasonable outreach efforts to homeowners by servicers and
establish a timeframe for servicers and borrowers to respond. This
guidance also clarifies that servicers must consider borrowers in
bankruptcy for HAMP if a request for modification is received.
Revisions also address the HAMP evaluation process with respect to
foreclosure. Currently, servicers may not refer a mortgage to
foreclosure if the borrower is in a trial modification. The guidance
prohibits foreclosure referral for all potentially eligible loans
unless the borrower does not respond to solicitation, was not approved
for HAMP, or failed to make their trial modification payments.
Servicers will be required to provide borrowers with clear written
communications explaining the foreclosure process and stating that a
foreclosure sale will not take place during the trial period. If a
borrower is found ineligible for HAMP, a foreclosure sale cannot be
scheduled sooner than 30 days after the date of a Non-Approval Notice
so that the borrower has a chance to respond. Servicers must also
certify to their foreclosure attorneys that a borrower is not eligible
for HAMP before a sale may be conducted.
Additionally, Treasury shares your concerns about delays in the
HAMP process and we have taken a number of steps to remedy these delays
and hold servicers accountable for their performance. First, we
released updated guidance at the end of January that defines specific
timelines servicers must follow to respond to borrowers.
Within 10 business days following receipt of an Initial Package,
the servicer must acknowledge in writing the borrower's request for
HAMP participation by sending the borrower confirmation that the
Initial Package was received, and a description of the servicer's
evaluation process and timeline. Servicers may respond by e-mail if the
Initial Package was transmitted in that form.
Within 30 calendar days from the date an Initial Package is
received, the servicer must review the documentation provided by the
borrower for completeness and send the borrower a Trial Period Plan
Notice in the event of approval, a Borrower Notice in the event of non-
approval, or an Incomplete Information Notice if documentation is
incomplete.
All Borrower Notices must be mailed no later than 10 business days
following the date of the servicer's determination that a Trial Period
Plan or official HAMP modification will not be offered. Program
guidance defines specific timeframes and circumstances under which
borrowers can appeal the results of a negative net present value (NPV)
test and receive an answer from their servicer.
The Incomplete Information Notice must include a specific date by
which the documentation must be received, which must be no less than 30
calendar days from the date of the notice. If the documents are not
received by the date specified in the notice, the servicer must make
one additional attempt to contact the borrower in writing regarding the
incomplete documents. This additional notice must include the specific
date by which the documentation must be received, which must be no less
than 15 calendar days from the date of the second notice. If a borrower
is unresponsive to these requests for documentation the servicer may
then discontinue document collection efforts and determine the borrower
to be ineligible for HAMP.
Lastly, we have developed operational metrics to measure the
performance of servicers in responding to borrowers in a timely manner.
These metrics include such measures as the average time to pick up
incoming borrower calls and the percent of borrowers personally
contacted with responses. If a servicer's performance under any of
these operational metrics is determined to be materially insufficient
by Freddie Mac, which serves as Treasury's compliance agent for HAMP,
Fannie Mae, which serves as Treasury's financial agent for HAMP, can
undertake remedial actions that may include clawbacks--withholding or
reducing incentive payments to servicers, or requiring repayments of
prior payments made to servicers with respect to affected loans.
2. What do you intend to do to improve the program and help more
homeowners stay in their homes with workable mortgages? What can you do
to get the servicers in line, if anything?
On March 26, 2010, Treasury announced a number of enhancements to
HAMP, which reflect the Administration's commitment to broaden the
program's reach and impact, to strengthen the program's implementation,
and to continue to provide relief to American homeowners and the
mortgage industry as a whole.
These changes will provide temporary mortgage assistance to some
unemployed homeowners; encourage servicers to write-down mortgage debt
as part of a HAMP modification, allow more borrowers to qualify for
modification through HAMP, and help borrowers move to more affordable
housing when modification is not possible. The changes will be
implemented over the coming months.
The Administration has taken additional steps to provide assistance
to underwater borrowers. We have made adjustments to the Federal
Housing Administration (FHA) programs that will provide additional
refinancing options to homeowners who owe more than their home is worth
because of large falls in home prices in their local markets. These
adjustments will provide more opportunities for qualifying mortgage
loans to be responsibly restructured and refinanced into FHA loans
provided that the borrower is current on the mortgage and the lender
reduces the amount owed on the original loan by at least 10 percent.
Lastly, on March 29, 2010, the Administration announced that it
would expand the Housing Finance Agency Innovation Fund for the
Hardest-Hit Housing Markets (the ``HFA Hardest-Hit Fund'') for state
HFAs to design innovative, locally targeted foreclosure prevention
programs. The expansion allocates $600 million to states with high
concentrations of people living in economically distressed areas,
defined as counties in which the unemployment rate exceeded 12 percent,
on average, over the months of 2009. Combined with the first amount of
funding, made available from the HFA Hardest-Hit Fund, which provides
limited additional resources to states that experienced home price
declines of 20 percent or more, this program will draw on $2.1 billion
from TARP.
3. On Friday, February 19, the Obama Administration announced that
just 5 states would receive $1.5 billion in special mortgage assistance
through TARP for home mortgage modifications.
These states are: California, Nevada, Florida, and Arizona, and
Michigan. I am stunned that Ohio was omitted.
Last year was the fourteenth year of record foreclosures in Ohio;
that is, each year for the last 14 years we have set a record for the
number of foreclosures.
A Ohio housing organization looked at the HAMP Program and Ohio
ranked 48th in terms of the number of modifications vs. the number of
homes in serious delinquency.
Yet, Ohio did not receive help from this ``special assistance''.
This is in many ways an outrage--Ohio has been ravaged economically,
with foreclosures on the rise for each year for 14 years! How can you
overlook states like Ohio where the Making Homes Affordable Program,
touted and sold to us to help millions of Americans, has helped 2,529
Ohio homes move into a permanent modification since last year?
What is your plan to help states like Ohio?
Is this announced assistance to 5 states the first of several
announcements of assistance to states in need or is it the only move of
the Administration to extend assistance to states suffering from high
percentages of foreclosures?
I would like to ask that you submit for the record the requirements
and the related valuation estimates or formulae used to determine which
5 states were most in need and thus set to receive this special
assistance.
We urge you to identify other immediate means to assist hard hit
states addressing escalating foreclosures, like Ohio, that were so
sadly omitted from the TARP decision.
The first Housing Finance Agency Innovation Fund for the Hardest
Hit Housing Markets (``HFA Hardest Hit Fund''), announced on February
19, 2010, was designed to provide additional resources to states that
experienced home price declines of 20 percent or more, using the
Federal Housing Finance Agency (FHFA) Purchase Only Seasonally Adjusted
Index. Such large declines in home prices are enough to erode the
equity of responsible borrowers, many of whom made large down payments
on their homes.
Treasury recently announced an expansion of the HFA Hardest Hit
Fund. This expansion will provide $600 million to states that meet a
set of criteria different from the first round of funding. In light of
the populations of the areas covered, this is equivalent on a per
person basis to the $1.5 billion awarded in the first HFA Hardest Hit
Fund. The second HFA Hardest Hit Fund, announced on March 29, 2010,
targets five states with high concentrations of people living in
economically distressed areas. Specifically, states were ranked by the
share of their state population living in counties in which the
unemployment rate exceeded 12 percent, on average, over the months of
2009. The five states that have been selected are at the top of this
ranking, after excluding states that have already been selected for the
first HFA Hardest Hit Fund. The five states that will receive
allocations based on this criterion are: North Carolina, Ohio, Oregon,
Rhode Island, and South Carolina.
The objective of the HFA Hardest Hit Fund is to allow HFAs to
develop creative, effective approaches that consider local conditions.
Focusing on these areas will allow limited funding to be deployed with
enough scale to have a more significant impact. Further, lessons
learned through these programs will help other HFAs better serve their
communities.
Additionally, Ohio has received a significant portion of federal
funds dedicated to helping communities cope with foreclosures and
neglect. In October of 2009, the Administration announced a nationwide
HFA Initiative to support the important work of state and local HFAs in
providing affordable and sustainable housing resources to working
families. A total of $527 million was allocated to the Ohio Housing
Finance Agency (OHFA) as part of that program. In the second round of
the Department of Housing and Urban Development's (HUD) Neighborhood
Stabilization Program funding, Ohio received over $175 million--the 4th
highest funded state in that round. These funds support eight different
programs statewide and are critical to addressing issues of blight. HUD
awarded $83.4 million in Tax Credit Assistance Program (TCAP) funds to
the OHFA to restart stalled affordable housing projects. Through the
Homelessness Prevention and Rapid Re-Housing Program, Ohio received
$65.6 million for financial assistance and supportive services for the
homeless and those at risk of becoming homeless. In total, Ohio has
received more than $1 billion in funding to help prevent avoidable
foreclosures and stabilize local communities.
4. Secretary Geithner, at times I think that the only person
watching out for the taxpayer when it comes to the TARP is the Special
Inspector General for the TARP and his staff. Can you please explain
why your budget request includes such a drastic drop? Although some
TARP programs will be phased out by the end of the year, is it clear
that the investigations and oversight of the SIGTARP will not be
complete nor should they be.
While some programs under TARP are being phased out, the Special
Inspector General for TARP (SIGTARP) will continue in fiscal years 2010
and 2011 to conduct audits of TARP and enforce investigations to
prevent, detect, and refer for prosecution cases of fraud, waste and
abuse of TARP funds. In order for SIGTARP to continue to fulfill its
mission of overseeing TARP, the President's Budget provides the full
amount requested by SIGTARP for FY 2011 which is a 13 percent increase
over FY 2010 budgetary resources.
5. On Christmas Eve, the Treasury essentially agreed to fill
whatever hole of debt both Fannie Mae and Freddie Mac dug--regardless
of the amount of taxpayer dollars that it would take to fill both of
the holes. How is this commitment included in the Treasury's budget?
Since both institutions are in conservatorship under the Federal
Housing Finance Agency, should we be looking to see this bookkeeping at
HUD? In addition, I'd like you to explain the reasoning behind this
decision to hand Fannie and Freddie a blank check, when it is clear
that neither institution was functioning properly nor we would not have
had to place them in conservatorship.
The FY2011 Budget captures the full estimated cost of the
Government's expected loss exposure through the Preferred Stock
Purchase Agreements (PSPAs). The expected outlays for these payments as
well as the expected dividends paid to us by the Government-Sponsored
Enterprises (GSEs) as budgetary and reflected in the deficit. This
captures the nature of any contingent liability and the information has
been fully disclosed as part of the budget.
FHFA placed the GSEs Fannie Mae and Freddie Mac into
conservatorship nearly 19 months ago (September 2008) in response to
their declining capital adequacy and to support the safety and
soundness of the GSEs and their role in the secondary mortgage market.
In February 2009 we announced a comprehensive set of actions to support
housing market stability and provide assistance to responsible American
homeowners--and we have seen substantial impact from these programs.
A part of that announcement was continued capital support for
Fannie Mae and Freddie Mac through the PSPAs to strengthen our housing
and mortgage finance markets, and we reaffirmed that commitment through
our actions taken in December.
Certainty regarding the government's support for the GSEs is
crucial to stabilizing the housing market. At the height of the housing
crisis, private participants abandoned the housing finance market,
causing interest rates to rise and making it more difficult for
Americans to obtain a mortgage to buy a new home or refinance the
mortgage on their current home. In direct response to these problems,
the Congress included in the Housing and Economic Recovery Act (HERA)
specific authority for Treasury to provide all necessary financial
support to the GSEs.
Today, as the housing market has stabilized considerably, we do not
believe that the GSEs will need more funding than the amounts we
previously committed. Out of an abundance of caution, however, we
decided to provide additional flexibility to exceed the earlier funding
levels in order to maintain confidence in the initial commitments to
stand behind the GSEs. The changes we announced were designed to make
those continued commitments clear.
Questions From Representative Kurt Schrader (D-OR)
1. I have been a strong supporter of the Administration's efforts
to help troubled borrowers and homeowners. However, I am concerned by
the lack of bank participation in these efforts and the negative
affects this inaction is having on many of my constituents. Other than
publishing a list of banks who are lending and a list of those who are
not, what is the Treasury doing to compel banks to participate in the
Administration's mortgage modification programs?
HAMP is a voluntary program. We cannot compel banks to participate,
although the Obama Administration did require banks that received new
TARP funds under new TARP programs that were announced after HAMP was
announced to agree to participate in HAMP. Though we recognize that
some servicers have yet to sign up for the program, we are encouraged
that nearly 90% of the outstanding mortgage debt in the country is now
covered by servicers participating in HAMP. In the last quarter of
2009, the number of participating servicers increased from 63 to 102,
and the current number is 113. In addition, about 2,300 lenders
servicing loans owned or guaranteed by Fannie Mae or Freddie Mac are
required to consider those loans for HAMP. Expanding the universe of
participating servicers continues to be a key to maximizing program
impact and Fannie Mae, in its role as Treasury's financial agent for
the program, will continue to actively solicit additional servicers for
participation.
2. I support many of the Administration's efforts to support small
business growth and job creation. However, lower SBA fees and increased
SBA loan guarantees only go so far. Banks must lend for small and large
businesses to grow. What are you doing to encourage banks to reengage
the private commercial lending market and restore private investment?
Improving small business access to credit is an element of the
Administration's efforts to spur job creation and ensure a robust
recovery. In addition to extending the lower fees and higher guarantee
levels enacted under the Recovery Act, the Administration has developed
and pursued a broad small business agenda.
First, Treasury has put forward a proposal to create, through
legislation, a new $30 billion Small Business Lending Fund (SBLF).
Under the fund, the Administration proposes providing capital to
community and smaller banks to support additional small business
lending. Banks would receive a reduction in the dividends they pay on
this capital based on additional lending over a baseline set using 2009
data--providing a strong incentive for banks to increase their lending.
By providing capital to banks, this program could potentially leverage
multiples of the amounts of Federal dollars invested in new lending.
Moreover, by creating a new program outside of TARP, this effort
responds to input from community banks as to how to maximize
participation and its impact on credit availability.
In addition to the SBLF and Recovery Act-related SBA proposals,
Treasury has worked closely with the SBA on other efforts to expand the
tools banks can use to support lending to small businesses. We have
taken steps to unfreeze the secondary markets on which SBA loans are
bought and sold, helping to return activity and pricing on these
markets to pre-crisis levels. We are also working with Congress for a
temporary increase in loan limits on SBA Express working capital loans
and allowance for certain commercial real estate refinancing under the
504 program, as well as a permanent increase in the maximum loan sizes
for its largest guarantee programs--expanding the SBA's reach so that
additional small businesses can receive the credit they need to grow
and create new jobs.
Finally, Treasury continues to encourage banking regulators to take
a balanced approach--protecting the safety and soundness of banks,
while discouraging overly cautious practices that could discourage
appropriate lending. In February, with Treasury's encouragement, the
banking regulators released guidance--consistent with previous guidance
related to commercial real estate lending--instructing examiners to
avoid classifying loans to sound borrowers based solely on a decline in
the value of underlying collateral. Encouraging the implementation of
such policies will continue to be a high priority for both Treasury and
the Administration.
3. The ARC Loan Program established under the American Recovery and
Reinvestment Act is supposed to serve as a temporary zero-interest
immediate flow of capital for small businesses. While I support the
program, it is expensive to administer and difficult to manage. What
steps is the administration taking to reduce their personal budget
while making this loan more profitable and more accessible to banks and
small businesses?
This program does not fall under Treasury's jurisdiction. Questions
regarding its effectiveness are best answered by the Small Business
Administration (SBA).
4. What specific precautions have you taken to make sure the
proposed infusion of $30 billion in TARP funding to the SBA for small
businesses will be used to grow small businesses? Specifically, how
will you ensure this capital infusion is not used to simply shore up
balance sheets without onerous bureaucratic red tape?
The Administration is proposing the $30 billion SBLF that will
support small business lending at community and smaller banks. This
facility would be in addition to initiatives undertaken by the Small
Business Administration to expand its credit programs.
Treasury has significant experience with bank capital programs and
could implement this initiative quickly and efficiently. Our core
proposal for the SBLF would be to provide smaller banks capital with
incentives to increase small business lending by reducing the dividend
that banks must pay as they increase their lending relative to a
baseline set in 2009. This structure would provide a powerful
motivation for banks to increase their lending. Furthermore, by
providing this capital, our investment could be leveraged several times
over to increase lending by far more than the $30 billion we dedicate
to the facility.
Those banks that did not increase their lending would continue to
pay the higher initial rate--which is set at a level where the
government would anticipate earning a profit. Consequently, any budget
subsidy provided by the program would be received by those banks that
had increased their lending.
While the Administration has presented this option for using the
SBLF to make credit more available to small businesses, we look forward
to discussing with Congress other ways that--in addition to what is
described above--the fund could be fully deployed. Additionally, we
continue to discuss with federal banking regulators ways to spur
lending while enabling banks to remain well-capitalized.
5. What are the specific measures you have taken to reduce the red
tape and duplicative paper work already hampering SBA lending?
Treasury does not directly administer SBA loans, but we are working
with SBA to make sure that as many small businesses as possible have
access to the capital they need to support economic growth and job
creation.
6. What are you doing to rein in overzealous and reactionary
regulators who set artificially restrictive quotas and prevent time
honored good business practices that get in the way of good loan
officers trying to get qualified but struggling businesses the credit
they need?
While we support the independence of the banking regulators,
Treasury has encouraged the agencies to take a balanced approach that
supports safety and soundness but does not exacerbate economic
difficulties. Last October the agencies issued a ``policy statement''
on workouts of Commercial Real Estate loans with the intent to promote
consistency among examiners and agencies, increase transparency for
workouts, and ensure that examiners do not inadvertently curtail credit
to sound borrowers based solely on a perceived decline in the value of
underlying collateral. In February, with Treasury's encouragement the
agencies released similar guidance on small business lending. It urges
banks not to be overly cautious in making loans and instructs examiners
to exercise reasonable restraint.
7. How will you be carefully withdrawing the government capital
supporting the economy and allowing the private sector to take back
over as the recession gives way to economic growth?
Our progress to date in stabilizing the financial system, bringing
down the cost of credit, and opening up capital markets has enabled us
to begin terminating and winding down many of the programs put in place
to address the crisis. Many of those programs were designed to have
costs to the recipients of federal assistance. Fees and other pricing
aspects have made them increasingly unattractive as financial
conditions have stabilized. Participation in these programs has fallen
over the past year, and most are now closed. Some programs were
designed to mobilize private capital and replace public investments.
These programs are succeeding on both fronts. Other programs were
designed to terminate according to an announced schedule and are doing
so--generating returns to taxpayers reducing the total costs of
stabilization efforts.
<bullet> Credit extended through extraordinary Federal Reserve
liquidity programs has declined substantially as market conditions have
improved, and the majority of those programs terminated in February of
this year.
<bullet> The ``stress test'' of our largest financial institutions
provided the transparency and confidence necessary for them to raise
over $150 billion in capital from private sources. In turn, banks have
repaid 70 percent of TARP funds they received, and the Capital Purchase
Program, under which the bulk of support to banks has been provided, is
closed. We currently expect that TARP investments in banks will result
in positive returns for taxpayers. They have already generated $20
billion from dividends and warrant sales.
<bullet> In September, Treasury ended its Money Market Fund
Guarantee Program, which guaranteed, at its peak, over $3 trillion of
assets. The program incurred no losses, and generated $1.2 billion in
fees.
<bullet> New issuance under the FDIC's Temporary Liquidity
Guarantee Program (TLGP) Debt Guarantee Program ended in October, and
the TLGP Transaction Account Guarantee Program will likely terminate in
December of this year. Fees from participants in those programs are
expected to cover any losses from FDIC guarantees.
<bullet> Treasury ended its GSE MBS purchase program in December
2009 and the Federal Reserve completed its announced purchases of GSE
and Ginnie Mae MBS and GSE debt in March, 2010.
However, the financial recovery is incomplete. Persistent high
unemployment and high loan-to-value ratios weigh on the finances of
many Americans and will lead to additional foreclosures, which could
slow the recovery in housing markets. Credit remains tight for small
businesses. Some U.S. institutions and markets remain heavily dependent
on public support, with housing as the clearest example. Further, as we
wind down many of the programs put in place to address the crisis, new
shocks could have an outsized effect. We will continue to repair the
damage from the financial crisis through targeted programs, guard
against potential shocks, and pursue reforms to ensure that our
financial system contributes to our economy without putting it at risk
of collapse.
In the meantime, the government will continue to manage outstanding
commitments in financial institutions and markets to maximize taxpayer
return while preserving financial stability. The Federal Reserve
announced that in the near term it will allow its holdings of Agency
debt and MBS to run off as they mature or are prepaid. The Federal
Reserve also announced that it may sell those securities in the future
if it determines that the economic recovery is sufficiently advanced
and financial tightening is warranted.
Some remaining commitments have a fixed duration. The guarantees
provided through the FDIC's TLGP Debt Guarantee Program will expire by
the end of 2012 with fees expected to cover losses associated with the
program. The increase in deposit insurance from $100,000 to $250,000
per account is scheduled to expire at the end of 2013, and industry
assessments are expected to cover FDIC losses from its guarantee on
deposits. Similarly, most loans through TALF have a three-year maturity
and will roll off by 2013. The vast majority of those loans are
current. The Federal Reserve's senior loans to Maiden Lane II LLC and
Maiden Lane III LLC are scheduled to be repaid by the end of 2014. Both
loans have already been paid down significantly. The Federal Reserve's
senior loan to Maiden Lane LLC is scheduled to be repaid by 2018.
AIG is making progress in restructuring its operations to reduce
its risk to our economy and to repay taxpayers. The company is winding
down its Financial Products subsidiary, where AIG's risks were
concentrated. Its insurance subsidiaries are generating positive
returns and attracting attention from private investors. AIG recently
announced that it reached agreements to sell two large insurance
subsidiaries for a total of more than $50 billion, which will be used
to pay down the Federal Reserve's loan. We expect that AIG will
complete additional asset sales and continue to enhance revenues,
consistent with its strategy to repay taxpayers. However, TARP
investments in AIG will likely still result in some loss. The FY2011
Budget reflected estimated losses of nearly $50 billion. Today, on the
basis of a range of measures, Treasury believes that losses on its
investments in AIG are likely to be lower. In March 2010, the
Congressional Budget Office estimated that losses on all Treasury
investments in AIG would be about $36 billion.
The auto industry has also undergone significant restructuring, and
prospects for repayment of government investments in the industry have
improved. GM and Chrysler increased sales and revenues. GM repaid its
$6.7 billion TARP loan ahead of schedule. The $1.5 billion loan to a
Chrysler Financial special purpose vehicle has also been repaid. Last
year Treasury terminated the Warranty Commitment Program, and the
Supplier Support Program will wind down by April. Treasury plans to
recover additional TARP investments in GM once the company launches an
initial public offering. Treasury will also likely exit its investment
in GMAC through a gradual sale of shares following a public offering.
However, as with commitments in AIG, it is possible under certain
scenarios that the government investments in GM, Chrysler, and GMAC
will result in a less than full recovery.
With respect to other outstanding TARP commitments, Treasury
intends to liquidate its holdings of Citigroup common stock by year-end
in an orderly manner. We will work with other TARP recipients and their
supervisors to accelerate repayment where appropriate. In addition, we
will conduct additional warrant auctions throughout 2010, which will
generate additional returns for taxpayers.
Finally, Treasury will follow the principle that we intend to
exercise our voting rights in outstanding common stock investments only
on core issues such as election of directors, and not interfere in the
day-to-day management of companies. We will also continue to manage
investments in a manner that ensures accountability, transparency and
oversight.
In sum, we are working to return the capital base of our financial
system to private hands as quickly as possible, while preserving
financial stability and promoting economic recovery.
8. Please elaborate on Treasury's plans to increase tax enforcement
activities as described in the President's FY2011 Budget Proposal.
The Budget Request includes additional resources for the Internal
Revenue Service (IRS). With these resources, IRS will continue
initiatives implemented with the funding from FY2010 appropriations and
establish new initiatives that will bring in nearly an estimated $2
billion per year in additional receipts once the new hires reach full
productivity in 2013. The budget supports IRS taxpayer services, which
are critical to voluntary compliance; IRS runs a variety of programs to
assist taxpayers who are trying to meet their obligations under the
law. The budget also funds IRS enforcement priorities, including
international tax compliance of high-net worth individuals and
corporations. This has been a strategic priority for the
Administration. The additional resources will also focus on
implementation of new information reporting authorities, including
merchant payment card and securities cost basis reporting, which will
improve compliance and provide taxpayers with a more straightforward
interaction with the IRS. The Budget Request will also allow the IRS to
broaden its collection coverage and address noncompliance more
effectively.
Question From Representative Paul Ryan (R-WI)
1. Mr. Secretary, on 5 June 2009, Budget Committee Ranking Member
Paul Ryan and Vice Ranking Member Jeb Hensarling submitted a letter to
you regarding the budgetary treatment of the Federal National Mortgage
Association [Fannie Mae] and the Federal Home Loan Mortgage Corporation
[Freddie Mac], and other issues. The Committee would appreciate a
response to the letter at your earliest convenience.
Treasury responded in writing to the June 5, 2009, letter on
September 30, 2009. For your reference, we have enclosed the response
letter as an attachment.
[The letter referred to follows:]
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Questions From Representative Robert B. Aderholt (R-AL)
1. In the Administration's ten year budget outlook, its best
prediction for the deficit as a percentage of GDP is 3.6 percent. OMB
Director Peter Orszag has stated that the deficit needs to be at least
3 percent of GDP to be manageable. Why does the President not submit a
budget which meets this standard as a starting point for discussions
within Congress?
The Administration's Budget goes a long way to closing the fiscal
gap in the near term, although we know that there is more work to do to
bring the deficit onto a sustainable path in the longer term. The
policies we have proposed demonstrate our commitment to bringing down
the deficit and putting our country on a sustainable fiscal path.
First, there are tough decisions that had to be made this year--
about spending, in particular. We are continuing to go line by line
through the budget looking for programs--large and small--that work and
those that do not. The Budget identifies more than $20 billion in
savings. We are putting in place a three-year freeze on non-security
discretionary spending. This is not a blunt cut, but targeted so that
we are investing in our priorities--what will spur job creation and
economic growth.
Second, we also will be restoring some balance to the tax code:
ending the Bush tax cuts for those making over $250,000; making sure
wealthy investment managers pay the same income tax rates as middle-
class tax payers; and closing other loopholes.
Third, we are working with the Congress to pass legislation that
would put in place a fee on the biggest financial institutions so that
American taxpayers are paid back for the extraordinary help they
provided under Emergency Economic Stabilization Act of 2008 (EESA).
We recognize, however, that we need to go beyond the proposals in
the Budget if we are to bring the deficit down to a sustainable level
over the intermediate and longer term. This will be a difficult task,
one that will require tough and--at times--politically unpopular
choices. The President has created a bipartisan National Commission on
Fiscal Responsibility that is charged with suggesting ways to put the
government's finances on a sustainable path in the medium term and
beyond.
While the Commission's first job will be to balance the operating
budget of the government by 2015, it will also be responsible for
finding long-term solutions to our fiscal situation. The Commission
will have 18 members--10 Democrats and 8 Republicans. And to guarantee
bipartisan support, at least half the members of both parties must vote
for a recommendation before it is passed along to the President. This
ensures that the proposals the Commission makes will represent workable
solutions that have a good chance of actually being adopted.
2. The nation's debt and deficit is increasing to levels not seen
since World War II, possibly threatening our nation's credit rating and
increasing the burden for younger generations. Does the administration
plan to apply unused TARP funds to lower the nation's debt, as was
originally intended?
As a result of careful stewardship and improved financial
conditions, the projected cost of the Troubled Asset Relief Program
(TARP) has fallen from $341 billion last August to $117 billion--
reflecting a $224 billion reduction in the expected cost to the
deficit.
The Administration plans to apply repaid TARP funds to lower the
nation's debt, as required by Section 106(d) of the Emergency Economic
Stabilization Act of 2008. Treasury continues to follow the
requirements under EESA to deposit those returns to the general fund to
reduce the debt.
The combination of the reduced scale of TARP commitments and
substantial repayments should allow us to commit significant resources
to pay down the federal debt over time and slow its growth rate.
3. When deciding to cancel NASA's Constellation Program, did you
consider the billions of dollars spent thus far in the sense that it
represents a lot of progress which now will have to be repeated by
companies far less experienced than the current Constellation
contractors?
This program does not fall under Treasury's jurisdiction and is
best addressed by NASA.
4. Since its inception, the Constellation Program has performed
several successful tests and the Ares I-X text went very well in the
fall of 2009, despite having less funding than it was promised in
multi-year budgets. The new Ares rockets will be 10 times safer than
the shuttle. Should the so-called commercial companies follow the same
safety criteria as the current Constellation contractors? If not, why?
This program does not fall under Treasury's jurisdiction and is
best addressed by NASA.
[An article submitted by Ms. Kaptur follows:]
[January 22, 2009]
Want More Lending?
History Offers Lessons
By William M. Isaac*
The failure to learn the lessons of financial history led to the
financial crisis of 2008 and that same failure is hampering efforts to
find a way out of it. In 1938 President Roosevelt and his Secretary of
the Treasury Henry Morgenthau ordered bank regulators to abandon mark
to market accounting (MTM) in favor of historical cost accounting
because MTM was inhibiting lending and prolonging the Depression.
---------------------------------------------------------------------------
*Mr. Isaac, former Chairman of the Federal Deposit Insurance
Corporation, is Chairman of LECG Global Financial Services, based in
Washington, D.C.
---------------------------------------------------------------------------
In his quest to increase bank lending, President Obama should take
a page from President Roosevelt's book and demand that the Financial
Accounting Standards Board immediately reverse the MTM rules it imposed
beginning in the early 1990s.
The FASB re-instituted MTM despite strong objections from the
Chairmen of the Federal Reserve and Federal Deposit Insurance
Corporation and then Secretary of the Treasury Nicholas Brady. Brady's
March 24, 1992 letter was prescient:
[MTM] could result in extremely volatile earnings and capital. This
volatility would not be indicative of a bank's operating results and
would therefore be misleading to * * * users of financial statements *
* *. Moreover, [MTM] could even result in more intense and frequent
credit crunches, since a temporary dip in asset prices would result in
immediate reductions in bank capital and an inevitable retrenchment in
bank lending capacity.
This is precisely what happened in 2008. MTM forced banks to write
down assets when the market collapsed even for performing assets and
destroyed $600 billion of capital. If the FASB would reverse its
insidious MTM rules, bank lending capacity would jump by nearly $5
trillion!
Stated simply, MTM requires that loans and other financial
instruments held by banks be continuously marked to market prices.
Historical cost accounting records assets at their original cost
(adjusted for depreciation and amortization) and leaves them at that
price unless the bank (or its accountant or regulator) decides the
value of the asset is permanently impaired.
Robert Herz, FASB's Chairman, has been a staunch defender of MTM
and FASB's right to promulgate accounting rules without government
oversight. In a recent speech before the AICPA National SEC Conference,
Herz justifies MTM's blind reliance on markets and models as somehow
more ``transparent'' than historical cost accounting, which relies on
the time-honored practice of valuing assets based on projected cash
flows.
Herz cites, approvingly, a Government Accountability Office 1991
report that concluded historical cost accounting masked the S&L
problems in the 1980s and urged implementation of MTM so that ``banks'
true financial condition could be reported promptly * * *.''
Herz admits that the FASB implemented MTM to prevent a future S&L
crisis. If this isn't within the purview of a systemic risk regulator I
don't know what is.
The GAO report and the FASB's reaction to it were simply wrong. As
Chairman of the FDIC during the S&L debacle, I know that historical
cost accounting did not mask or prolong the S&L problems. Resolution of
the S&L problems was delayed by the substitution of ``regulatory
accounting principles (RAP)'' for ``generally accepted accounting
principles (GAAP).''
The former Federal Home Loan Bank Board's official policy,
supported by the Reagan Administration and Congress, was to allow the
S&L industry time to grow out of its problems by adding new higher
yielding assets. This policy required overriding GAAP accounting.
The FDIC coped with problems of the same type and magnitude in the
FDIC-insured savings bank industry. The FDIC rejected calls to
implement RAP and allow savings banks to pursue rapid growth. This is a
major reason why the savings bank problems cost the FDIC only $2
billion vs. nearly $150 billion of taxpayer losses in the S&Ls.
Overriding GAAP accounting, sanctioning rapid growth by poorly
capitalized and managed S&Ls, and failing to properly supervise S&Ls
were villains in the S&L crisis, not historical cost accounting.
The FASB's ignorance of this simple truth is evidenced by the major
recommendation in Herz' speech in which he urges that bank regulation
be ``decoupled from U.S. GAAP reporting requirements.'' Herz would have
us return to the separation between RAP and GAAP that cost taxpayers
$150 billion in the S&L debacle!
It is highly inappropriate for the FASB--five anonymous accountants
selected by trade groups--to take it upon itself to determine what
caused the S&L crisis and endeavor to correct it through accounting
policy. In its effort to ``fix'' an accounting system that was not
broken, the FASB wreaked havoc on the banking industry and the economy,
costing millions of people their jobs, homes and life savings and
costing taxpayers hundreds of billions of dollars to help repair the
devastation.
The FASB's blunders cry out for establishing formal government
review of the potential systemic effects of accounting policies.
Financial reform legislation that fails to address this critical issue
invites the next crisis.
[A letter submitted by Ms. McCollum follows:]
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[Whereupon, at 12:14 p.m., the committee was adjourned.]
<all>