The American Economy: Recovery When?

A distinguished panel answers burning questions on the economy at David Horowitz's Restoration Weekend.

[Editor’s note: below is the video and transcript of a panel discussion featuring Steve Moore of the Wall Street Journal, Rep. Ed Royce and author David Newton. The discussion was part of the David Horowitz Freedom Center’s annual Restoration Weekend, held Nov. 18-21, 2010 in Palm Beach, Florida.]

Part I

For Part II of the video, click here.

Introduction: There’s a pretty vigorous debate going on about not only stimulus and bailout and deficit spending, but about the Fed’s printing of money and quantitative easing.  We have a superb panel to offer some clear thinking about both fiscal and monetary policy, about spending, federal and state budget deficits, and hopefully a new policy path aimed at economic growth and recovery and job creation with a Republican House of Representatives.

The people in this room follow closely unemployment statistics, inflation data, interest rates, trade deficits, your tax rates, and especially housing figures, and equities and bonds, including municipal bonds potentially at risk; the price of gold.  Who knows what the price of gold is?  About half of you do, yeah.  And business and consumer confidence numbers are closely watched, too.

So whither Obamanomics, what can we expect from the Fed, and how will the GOP House impact the economy?  Let’s start with one of America’s leading economists – very popular, very articulate.  Steven Moore is a member of The Wall Street Journal editorial board.  He has a BA from the University of Illinois with a Master’s from George Mason University – our friend, Steven Moore.

Steven Moore: Morning, folks.  It is a pleasure to be here.  You know, I haven’t been able to stop smiling since Election Day.  I’ve just been in the best mood.  And I want to thank David Horowitz for bringing me to this conference.

Just one story about the election.  You know, I was over at Fox News that night, just having a lot of fun watching the returns coming, and about 10 o’clock – I’m from Chicago, and so I couldn’t resist – as the returns from the East Coast were coming in, I called my mom, who still lives in Chicago.  I said, “Mom!  It’s a great night here on the East Coast.  It looks like everything’s turning red and Republican.”  And my mom said, “Yeah, Steve, here in Chicago, it’s such a good night, even the dead people are voting Republican.”  That is a good election.

Let me just cut right to the chase here.  I think that everything that we have done in Washington over the last two years to deal with the economic crisis has been exactly the wrong thing to do.  In other words, they’re batting a thousand.  And we have made this recession much deeper and much longer than it would’ve been if we had done nothing, let alone done the right thing.

And that’s, I think, the real tragedy of the last two years is, you know, if you compare this business cycle with the Reagan business cycle, when we cut tax rates in 1981. At this stage of the economic cycle, we have this measly, pathetic 1.6 to two percent growth.  At this stage of the business cycle after the Reagan tax cuts – which, by the way, was a deeper recession than what we faced in 2008 – the economic growth rate was 8.2 percent.

So when you talk about reducing the debt – and reducing the debt requires a lot of economic growth– we’re just not getting that.  At 1.6 to two percent growth, you’re not even creating enough jobs to keep up with the pace of the labor force.  So we’re going to need about 250,000 to 300,000 jobs a month for just the next three years just to get the unemployment rate down to eight percent.  So we’ve got a huge rebuilding job to do.

And to put it in perspective about what’s happened – and by the way, I’m not making a partisan point here.  Because actually, some of the initial mistakes that were made in terms of dealing with the crisis were done in the last months of the Bush Administration. I have an editorial that’s coming out next week that I’ll give you a sneak preview of, where I just added up all the cost of all these programs that we’ve done – every dingbat program that we’ve seen in the last two years, starting with, you know, the $700 billion TARP program.  And then, of course, we had the $800 billion stimulus plan, and then we had the bailout of GM and Chrysler, and then we had the Cash for Clunkers program, and then we had the mortgage modification program.

We’ve paid people about $200 billion in terms of renegotiating their mortgages.  I have this wonderful bumper sticker on my car that says “Honk if I paid your mortgage,” and people are just honking at me everywhere I go.

If you add up all of the cost of these programs, it’s about $2 trillion.  $2 trillion.  Now, to put that number in perspective – with $2 trillion, George Bush, two years ago – because this is about the two-year anniversary of the economic crisis – could’ve suspended the personal income tax for two years.

Now, think about that.  Think about where the economy would be today if we had declared as a nation that no business and no worker has to pay income tax until we’re out of this economic crisis.  We wouldn’t be anywhere near a 10 percent unemployment rate if that had happened.  And that’s the real tragedy of this.  It’s not to me that we spent $2 trillion; it’s that we spent $2 trillion and we’ve got nothing in return for it, except, you know, windmills and solar paneling and, you know, high-speed rail systems that have almost zero long-term payoff.

Did you see that Joe Biden – I’m not making this up – about three or four weeks ago, said that the economic stimulus plan has worked “beyond his wildest dreams?”  I saw about three weeks ago this great cartoon where President Obama is carrying Joe Biden around like he’s a piece of lumber.  And he goes up to this window, and it says “Cash for Clunkers.”  That’s the way I feel about Joe Biden.

But in any case, if you look at all these programs – and then you have to ask yourself the question, why didn’t it work?  If we’ve learned anything in the last two years, right, it’s that Keynesian economics doesn’t work. We tried this in the 1930s; it didn’t work then either.  After 10 years of government spending, the unemployment rate was still at 12 percent in 1940.

And so then the question becomes – that I just want to spend a couple minutes with you on – is why doesn’t it work?  Why is it that all of these economists in Washington believe in this fairy tale that when government spends money it creates wealth?  And the answer is, to put it real simply – Milton Friedman taught us this—that all economics comes down to this one insight.  Remember, Milton Friedman taught us this – there’s no such thing as a free lunch.  Right?  There’s no such thing as a free lunch.

What does that mean?  What that means is – and I think there’s not any kids in this room, so I can say this to an adult audience – there’s no tooth fairy out there.  Right?  If the government spends a dollar, the dollar has to come from somewhere.

So let’s discuss how the government can get money to spend it.  There are three ways the government can get money to spend it.  What’s the first way it can get money to spend it?  It can tax us, right?  It can literally reach into my wallet.  It can take out this $20 bill, and it can give it to you.

So now you have the $20, right?  And the government says this is wonderful, because there’s going to be a multiplier effect.  You’ve heard this – you know, the term, there’s a multiplier effect.  You’ve got the $20.  You can go out and spend it.  And you can take it to McDonald’s, or you can go to Wal-mart, or get your nails done, or whatever it is you want to do with that $20.  And those McDonald’s workers have money.  And for every dollar that they take from me and give to you, there’s maybe $3 of economic activity.  That’s the idea here.

Now, where does it go wrong?  What are they leaving out of the equation?  Well, I’m $20 poorer, and he’s $20 richer.  Right?  So can you see, at best, this is a zero-sum game?  There’s no additive to the economy.  In fact, I would make the case that under this scenario, it’s a negative-sum game.  Because I worked to get the money, and he stole it from me.  Right?  And that’s not a way to create wealth.  I will take the $20 back now.  I need that to get home.

So what’s the second way they can get the money?  They can borrow it, right?  They can borrow it.  And in fact, the federal debt now is about $13 trillion.  In the last two years, we’ve added $3 trillion to the debt.  And now you have to ask the question, does that add to wealth?  And does that add to job creation when the government borrows?

Well, yes, we put money into the economy.  But guess what?  What are they leaving out of the equation?  Somebody has to buy the bonds.  Right?  There’s no additive to the economy.  If the federal government puts $3 trillion into the economy by borrowing, you’re taking $3 trillion out because people have to buy $3 trillion of bonds.  Does that make sense?

And so that – and by the way, do you know who owns the most bonds of any entity in the world?  China does.  And you know what China’s doing right now?  They’re selling bonds; they’re not buying them.  In fact, China has reduced its portfolio.  Then you have to ask the question, if China isn’t going to borrow them, who?  If China isn’t going to lend us $10 trillion over the next 10 years, which is the amount that we’re expected to borrow, where’s that money going to come from?

And I am a big believer – the one prediction I’ll make to you today, just as an economist – interest rates and inflation are going up.  There just almost no question about it because of this insane fiscal policy.

And then of course, the third way they can get the money is by printing it. And of course, that’s what’s happening in spades right now.  That’s what QE2 is all about.  QE2 is just a fancy word for saying that what we’re doing right now is we’re monetizing our debt.  Right?  We’re basically having – the Treasury Department is issuing debt, and the Federal Reserve Bank is now buying the debt.  And how does the Federal Reserve Bank get the money to buy the debt?  They print it.

And so this is, I think, one of the scariest things.  I call this, you know, the Argentina, Bolivia and Mexico model of economic development, right?  Because that’s what those countries do – they print money every time they get into this kind of crisis.

So I’m very nervous about this.  And I would say that the reason people aren’t even angrier than they are is because the numbers are so gigantic now we can’t even comprehend them.

You know, when I was at one of the Tea Party rallies this year, somebody made the case – somebody had this bumper sticker on their car.  And it said, “Thank God Barack Obama doesn’t know what comes after a trillion.”  And I thought, you know, whew! Thank God he doesn’t know what comes after.  What is it, a gazillion? I don’t know.  He’ll probably be using these numbers in the budget soon.  And so these are really frightening numbers.

Another bumper sticker – another guy who was at one of these Tea Party movements, the Glenn Beck rally – he had a baby stroller with a little three-year-old girl in the stroller.  And she had a little sign around her neck, and it said, “Do I look like I have $4 trillion?”  I don’t think she does.

And so, the point is, these numbers are just absolutely gigantic.  By the way, a trillion dollars – anybody know how many zeros there are in a trillion?

Unidentified Speaker: Twelve.

Steven Moore: Right. Twelve zeros.  $1 trillion is a million million dollars.  We will borrow more money in the next 10 years – you heard Sen. Jeff Sessions talk about this last night – that $10 trillion we’re expected to borrow under the Pelosi budget – that’s more money than the United States government borrowed from 1776 through 2005.  That’s pretty frightening, isn’t it?

So these are gigantic problems.  But the solution to this is very clear.  We have to grow the economy much more rapidly, and we have to cut the spending.  And of course, it goes without saying, we have got the three most important words in Washington – repeal Obama Care.  Right?  Repeal Obamacare.  We can’t make any headway on this without that.

A word on the tax bill – I think right now we’re in a kind of fragile economic recovery.  You know, two percent is pretty measly; it beats, you know, not growing at all.  But I will say this – first of all, what Nancy Pelosi did when she left to campaign without telling any American worker, any American ambassador or any American business what the tax rates are going to be starting on January 1st, that was – I’ve been in Washington for 28 years – I think that’s maybe the most irresponsible thing I’ve ever seen.  Would you agree with that?  I mean, it’s unbelievable.

And we’re talking about not just individual income tax rates going up.  We’re not talking about, you know, the personal rates which would go up from 35 to 41 percent.  By the way, we shouldn’t even call them personal income tax rates.  What these are really are small business profit taxes.  And so we’re going to take a lot of money out of the backs of the small businesses.

But then capital gains goes up from 15 to 20 percent.  And by the way, it’s not just 15 to 20.  I don’t know how many of you followed this, but in the God-awful healthcare bill that we passed nine months ago – one of the ways we paid for that was a 3.8 percent investment tax surcharge.  How many of you are aware that that’s in the bill?  I didn’t even realize it was in the bill until after it passed.  That means capital gains don’t go,  from 15 to 20; they go 15, 20, 23.8 percent.  That’s a 60 percent increase in the capital gains tax.

Now, you don’t have to be an economic genius to know that when you raise the capital gains tax, what does that do to the value of assets?  They fall.  Right?  I mean, think about if these guys talked about putting 100 percent capital gains tax, what would happen to the value of stocks.  You know, they’d fall to zero.  So this will definitely depress the stock market.

And then, of course, you see the same thing with dividends.  Dividends are going to go from 15 to 41, plus the 3.8 percent – so 15 to 41 to 45 percent.  Can you think of anything dumber to do right now than that?

And then, of course, the other big one – are any of you following what’s happening with the death tax on January 1st?  I mean, this is a big one.  I mean, right now, we are – we just celebrated the 320th day of zero death tax in America.  Right?  You know what happens on January 1?  All the way from zero to 55 percent, with only a $1 million exemption.  Can you – first of all, can you imagine what nursing homes are going to be like for the next month?  People literally are going to be throwing grandma out the window.

So you know, this is a kind of scary situation.  We on the East Coast always say that George Steinbrenner picked a good year to die.  But that’s a really serious one, too.  Because the estate tax falls most heavily on small and family-owned businesses.  So we’ve got to do something about that.  I would favor – if I could wave a wand and just be the economic czar, what I would do is put in place the Steve Forbes flat tax.  You want to see America get competitive?  Do that.

Two other quick things, and then I’ll turn it over to the next panelist.  One of the things we haven’t talked a lot about – because it seems like a problem that’s passed us by, but it hasn’t – is this Cap and Trade bill.  And I’m very worried about what might happen in two weeks on Cap and Trade.  It’s already passed the House.  I could see them sneaking that through the Senate.

And by the way, I don’t want to be quoted on this publicly, but I’ll just say this, for this audience – I think that global warming is the greatest hoax of the last 100 years.  And so, this is something that – they know [this].  This is not about reducing – but look, some of my best friends, some of the smartest people I know, do believe in global warming.  So even if you’re one of those people, you know, who does think that this is a crisis, it doesn’t matter.  Because Cap and Trade will do absolutely zero to reduce global temperatures.

And the reason it won’t is because – you know what I call Cap and Trade?  The India and China Full Employment Act.  Right?  Because all that will happen is jobs will leave the United States, and they’ll go to these other countries, which is why – how many of you are from California in this room?  What in the world were you people thinking?  I mean, California actually passed its own Cap and Trade bill, so that they’re going to put a major energy tax on everything that’s produced in California?  All that’s going to do is lead to jobs, you know, even leaving faster to places like Nevada and Tennessee and Washington State.  So that’s a really bad one.

The last thing I’m going to say – because I think I’ve used up all my time – and this is the most important thing, that  I do believe that the number-one issue for our country long term – what we have to be focusing on as a nation is this issue about what country is going to be the global economic superpower, you know, over the next 10 and 20 and 50 years.

For everyone in this room’s lifetime, there’s no question that the global economic superpower has been the United States.  And we have been a force for good in this world.  We’ve led in technology, we’ve led in, you know, job creation and innovation, but now we have for the first time in our lifetimes, an honest-to-goodness rival in China.

And some of you have heard me tell this story, but I want to tell it again.  Because it’s an important one – it tells a lot about where we’re headed. It was about meeting with the Economic Minister of China.  And this guy’s a big muckety-muck.  He’s like the number four in the chain of command in Beijing.  And one of the fun things about working at the Wall Street Journal is we have these interviews, these editorial board interviews, with these muckety-mucks from all these countries.

And so he came in, and he’s talking about, you know, all the incredible things that are happening in China.  And by the way, what’s happened in China in the last 25 years is one of the great miracles of human history.  I mean, this is a country that for thousands of years couldn’t even feed itself – starved to death 200 million people.  Now, you know, they’re growing at 12 percent, they’re doubling their standard of living every 15 years.  It’s just an amazing success story.  And they’re not a completely capitalist country, as you just heard.  But they are moving in a capitalist direction and a free market direction.

So anyway, the Chinese Minister said to us – he said that by the end of this year, 2010 – he said, We are going to surpass Japan.  And we’re going to be the second-largest economy in the world.

By the way, did you all see that happen a few weeks ago, that China is now officially the second-largest economy in the world?  To me, that’s the biggest economic story of the last five years.  We better start paying attention to these people, right?

And so then he said something that really stuck in my craw.  He said, basically – by our economic models – he said within 18 years, China is going to surpass the United States.  He said, We’re going to catch you.  And then he said, in a kind of haughty way – he said, Once we catch you people, we’re just going to speed by you and leave you in a cloud of dust.  We’re just going to look at you through the rearview mirror as we speed right by you.

And you all don’t know me very well.  But if you cut me, I bleed red, white and blue.  So I couldn’t take this much longer.  So I finally said, Sir, you know, what you’ve accomplished in China is a great miracle, and I really want to salute this.  But not in my lifetime is China going to surpass the United States.  And sir, the reason that’s not going to happen is because our Chinese are so much smarter than your Chinese.  He didn’t like that very much.

One of the reasons we will remain number one is we are a much more innovative country than they are.

And so – but the reason I mention that story – and this is the last thing I’m going to say – the reason I mention I mention that story is, I actually left that room very frightened.  Because China is focused like a laser beam on competitiveness.  That’s all they think about.  They are  hyper-obsessed with how can they be number one in every single industry, whether it’s manufacturing, or aeronautics, or defense industries, or – you know, you just go on down the line – the information age – all of these things – they are strategically thinking about how they can be number one.

And the fault that I have with our political class in Washington – and, I’m sorry to say, this goes for both parties – is nobody is thinking strategically about what we have to do to fix the things that are broken to make sure that we’re number one.  Yes, we have to fix our taxes, and we can’t go on with the highest corporate tax rate in the world.  Yes, we have to fix our liabilities.  Yes, we have to have an education system that’s world-class, where we’re graduating people with world-class educations, which we’re not doing.  We have to fix all of these things, and do it soon.

And on an optimistic note, I will say this – we are going to fix these problems.  Because what the American people said in this election is it ain’t working.  Right?  I mean, people didn’t – the American voters – didn’t fall in love with Republicans.  Right?  They just basically said, Whatever you guys are doing in Washington, it’s not working.

And I think we’re going to see – over the next five years, we’re going to see reforms in all of these institutions.  And when we do we’re going to see the biggest economic boom you ever saw.

Thank you.

Moderator: Just on the California point, for one second – the reason some of us have longer faces than usual –the nation’s biggest and best state, the eighth-largest economy in the world, did choose the opposite tack.  There were candidates talking about tax rates and job growth, and they got wiped out.

So there’s a movie being made in Los Angeles called “Battle LA.”  And it is being made in not Los Angeles –but  Shreveport, Louisiana.  So Southern California’s in trouble.

From Southern California, our next speaker is Congressman Ed Royce, who’s a longtime principled conservative, representing the 40th District base in Orange County.  He and his lovely wife, Marie, are longtime residents of Fullerton.

Royce’s priorities in Congress are protecting our homeland, supporting our troops and veterans, providing meaningful tax relief for workers, protecting the budget, and cutting excessive government spending.  You’re ready?

Let me say one more thing about him.  The Wall Street Journal editorialized this week as follows about Congressman Ed Royce – “We think the best choice to run Financial Service is California Republican Ed Royce, who was right all along about Fannie and Freddie.”

Congressman Ed Royce: Thank you.

I recently had the opportunity to co-chair our effort in the House with Battleground to fire Nancy Pelosi.  And we criss-crossed the country, me and two others.  We recruited candidates, and we raised money for this effort, trying to replace Nancy Pelosi’s votes with a new generation of Republicans who would be principled and would help us turn this country around.

And I wanted to share with you – we had a large sign that I would take with me that said, “Fire Pelosi now.”  But Marie said she was conflicted.  During the Democratic decision to pick their new leader, she had changed, I noticed, that sign to “Hire Pelosi now.”  And we are not disappointed with the decision made by the Democratic – our Democratic colleagues.  We’re not disappointed.

Because I think this is a time for us to philosophically lay out how we got here, and how we’re going to get out of this.  And I think the clear ideological differences between people like Nancy Pelosi and Barney Frank – we now have the opportunity, with oversight, to look into the issues of how we got to where we are.

And I want to start just by observing that all spending bills originate in the House.  I remember four years ago, when Pelosi became Speaker of the House.  I thought we had a problem then, as a deficit hawk.  We had a $162 billion deficit that year.  Four years later, four years later, under her leadership, every spending bill originating in the House, we’re at roughly 10 times that level for the budget deficits.

And those deficits going forward are unsustainable.  And part of this, of course, is the result not just of additional discretionary spending, which has been wildly enthusiastic – eight and a half percent increases a year on the Democrat side – but the stimulus bill, the new healthcare bill, will add $1 trillion going forward.

And the question, I think for us – and this is the question that our former Fed chairman, Alan Greenspan, asks – we are either going to get some control over this spending and bring it down, and show a glide path towards a balanced budget – we’re either going to do that now, or we’re going to face that bond crisis.  And it is going to be very, very difficult, once we get into the crisis – as you can see in Greece or Ireland – to pull back out again.

And so, this is why we do need the leadership right now in the House to drive solutions.  And this is why a lot of this has to be messaging.  We must get out and explain to the American public how we got to where we are, and how we’re going to get out of it.

You’ve heard me, in the past, rail a lot against Fannie and Freddie in terms of the policies that were enacted in Washington.  But I think one of the real questions is, how did those policies originally get put into place?  And in that, I think we’re indebted to National Review and to the employees over at Fannie Mae, who are now telling us how ACORN helped change the underwriting standards in the United States.

National Review had a good piece going back to 1995, to Chicago, Illinois, when the individual in charge of training and in charge of the Annenberg Challenge, the Chicago Annenberg Challenge, was Barack Obama.  And he was in charge of funding an effort at that time.  In ’95, there was an article in the paper – Are you making dog food wages?  Have you gone through bankruptcy?  Don’t despair.  There’s a way for you to own a house.  And that way was to approach ACORN.  And ACORN would get you into housing.

And at that time, in ’95, Barack Obama was heading up an effort – and I wanted to share with you the tactics used by ACORN at this time.  They would flood bank lobbies with ACORN activists in order to get the point across to banks that they should lower their lending standards.  They would show up at a banker’s home, on the front yard, to intimidate his family.

But banks were routinely explaining to them, We can only do so much.  Because the secondary market is controlled by Fannie and Freddie.  And they have this requirement of 20 percent down.  So you want us to do zero-down payment loans, five percent-down payment loans?  We just can’t do that.

By the way, the reaction of the Democrats was different to this than the reaction of the Republicans.  Milt Martinez had 10 of these ACORN people show up on his front yard.  And he said, Well, Monday, why don’t you come down to my office?  Give me your information, give me your name.  Course, he ran that by security.  And Monday, when the 10 of them showed up, four of them he had arrested for the outstanding warrants.

But here’s what the Democrats did in Illinois.  They went to Senator Dixon of Illinois.  They said, We need to change the underwriting standards in the US, and Fannie and Freddie are standing in the way.

And as a consequence of those hearings, and as a consequence of actions by the Clinton Administration, they were able, over time, to get what they desired – zero-down payment loans here in the United States.  And at the same time, of course, the Democrats, working with senior management or executives at Fannie Mae and Freddie Mac, were able to change a system so that they could be involved in arbitrage, overleveraging 100 to one here in the United States.

Now, there were a number of mistakes that the regulators made.  And some of them you know – setting the interest rates too low in ’03, ’04, ’05.  By the way, Ben Bernanke advanced that argument within the Fed that they should be lower.  Because he was worried about deflation, which is the same argument he’s making now about QE2.  Turns out he was wrong, and it caused an asset bubble in housing, as many economists had predicted, just as now we’re worried about that asset bubble in commodities and the stocks, right?

But the reality is this – one thing that the Fed did see coming was the systemic risk that had been created.  One thing they did forecast was the collapse of the housing market.  And they said it’s not just a collapse of the housing market we’re worried about.  We’re concerned about the systemic risk to the wider financial system around the world.  Because if housing goes down in the United States, with the way in which these portfolios are over-leveraged, with the fact that – well, it was groups like ACORN that went to the Clinton Administration and said, We want 30 percent of the portfolio to be in things like subprime.  Well, what they wanted, actually, was low-income loans to people who couldn’t, you know, come up with a down payment.

But the reality was, what the administration came up with as an alternative to that was a system in which 50 percent of the portfolio basically was subprime and Alt A loans.  $1.7 trillion, eventually, was guaranteed by Fannie and Freddie.  And here was the worry of the Federal Reserve chairman – that that would all become worthless, that the investments that people had in Fannie and Freddie, including the banks’ investments, including the insurance – AIG had the insurance on these mortgage-backed securities – that all that would collapse.  So it would be far more than just the collapse of the housing market in the United States and the collapse of Fannie and Freddie.  It would be, in addition to that, the wider collapse in the financial system.

So you had the bubble.  But on top of it, you had removed all market discipline.  Going forward, we have to change this system from one of private profit – because it was very much in the interest of the executives – of people like Raines over at Fannie Mae and Freddie Mac – to take these risks.  Because it was private profits and public losses.

The other issue that we have to confront going forward is the fact, as I say – the spending is unsustainable.  And the beneficiary of the spending, for those of you who presume that it might be infrastructure – less than five percent of the stimulus bill went into infrastructure spending.  The Greens were able to block that in the Congress.  That is why you had so many moderate Democrats on transportation that refused to vote for the stimulus bill.  Because that stimulus bill did one thing – it grew government.  Just about every government agency, every government department – salaries and benefits went up as a consequence of that legislation.

So going forward, we’ve got a challenge.  And what we have to begin with is repealing and replacing that healthcare bill.  What we have to begin with is reversing course in terms of the budgets and take us back to where we were in ’08.  And then we have to pass a long-term plan that puts us back to a glide path towards a balanced budget.

And I will add this – when Peter Orzog, Director of Office of Management and Budget in  the Obama Administration, says after resigning from his position, do not raise taxes in a recession, it is time to listen to one of Obama’s former advisors.  I concur.  You cannot right now raise taxes on capital and investment in the United States and not expect it to have a very adverse effect.  So that’s another action we have to take, and quickly, in order to make certain that those tax rates do not go up in January.

These are some of the issues that we’re going to have to face, and face them soon.  But we need to move along with our panel.  So thank you, again, very much for this conference.

Moderator: David Newton has written 160 articles.  His seventh book, co-authored, is “Job Creation – How it Really Works and Why Government Doesn’t Understand It.”  Please welcome Dr. David Newton.

David Newton: Thank you, Larry.

This is our website.  If you want to take a look at the book, you can preview it before making your purchase.  But it’s pretty self-explanatory – go to  And it’ll give you some insights into what’s going on.  That’s the money spent since 2008 trying to create jobs.  And down below that is the national debt.  That’s how fast it’s moving as we speak.  So, to my presentation.

Well, here’s where we are.  Unemployment’s around 10 percent.  In California, we’re excited because it’s come down from 12.6 to 12.4 percent.  GDP pace, as we’ve heard, is anemic.  We’ve lost 11.5 million jobs in the last two years.  And as Steven said, we need 300,000 per month for a little over three years just to barely get us back to the same employment levels that we were at at the beginning of the recession.  We spent $800 billion of the stimulus.  We’ve been running $1.3 trillion deficits, we have almost $14 trillion in debt.  It’s now approaching about 88 percent of our total GDP, which is around $14.6 trillion.  And we have $1.1 trillion coming next spring for Obamacare.  And so there we have it.

Now, here’s a great quote – “The role of government is to get out of the way quickly.  Ultimately, the recovery will be led not by the government but by industry, business, and the creativity, ingenuity and enterprise of individuals.  If the measures you take in responding to the crisis diminish their incentives, curb their entrepreneurship and make them feel unsure about the climate in which they’re working, recovery becomes uncertain.”  So, who do you think said that?  Tony Blair, the former head of the Labor government in the UK, in his new book.  So think about that.  There’s a man who’s been converted to what really works.

Now, this is my two diametrically opposed philosophies going on every day in front of me in California.  [A power point presentation now commences.] I’m tired of looking at the ubiquitous orange signs for the ARRA, with the little stickman with his shovel in the dirt – “Putting America to Work.”  I’m so tired of seeing those things.  What exactly does that mean?

And then there’s my friend, Tom Marcus, on the right-hand side, who’s down in the Conejo Valley, looking out over his manufacturing facility, where real people are working on real machinery, producing products, and marking those up with a gross profit margin, selling them to people.  These are the, diametrically, two ends that are opposed with regard to job creation.

Now, on the one hand, this is how the government defines it.  They’re tax-consuming jobs, temporary projects.  They redistribute wealth.  The private sector is greedy, profits are irresponsible, capitalism is flawed, entrepreneurs exploit people.  Capital must be rationed, income should be egalitarian, and government, of course – just like Robert Young – knows best.

Now, on the other side, this is how we see it.  We want jobs that are tax-producing jobs – sustainable work, things that create wealth, create private sector competition.  Profits create an incentive.  Capitalism actually works.  Did you know that entrepreneurs innovate?  Capital is really price based on supply and demand.  Ultimately, income should be tied to performance.  Well, that’ll go over well in Washington.  And ultimately, government should get out of the way.  And this is the diametrically opposed philosophies that are going on right now that we cover in the book.

The government’s view of the economy can be summed up as – if it moves, you should tax it.  If it keeps moving, regulate it.  And of course, if it stops moving, it’s time to subsidize it.  So that is the mentality we’re up against, though.

So, I’m going to give you 10 quick takeaways, and then we’ll get the panel going.  First, the US private sector should be focused on entrepreneurs, innovation, creativity.  The invisible hand, as we know from economics, is that market gaps get filled by people who take a risk.  They get in there, and they have an incentive to try something new and innovate.  You then build profits, you build wealth over time.

And so, our first takeaway is that ideas create the companies and the industries that create jobs.  It’s not government.

Take a look at our last 100 years.  This is our second chapter in the book – 100 years of what’s going on in the US with regard to GDP, our employment rate, federal spending; and how big is that as a percentage of GDP.

You can see that during the war, of course, in World War II, we had a blip in there.  But notice how right after the war, we got it back down to something manageable again.  But then, as you get through the ‘50s, the ‘60s, ‘70s, you watch the budgetary creep just begin.  And when you get to 2010 – this is where we’re actually at – our GDP, our government spending, is about 25 percent of our GDP.  And it’s projected in 2012, it’ll be approaching 30 percent.  We’ll have government budgets larger than our GDP was just 23 years ago.  Think about that.  And the problem is the economy’s been growing, but the federal spending has been growing at a much faster rate.

So second takeaway – US employment for the last hundred years has been about resiliency.  It’s been about the private sector.  But what we have is we have a clash of the private sector versus government.

And our book is based on a concept called the certainty factor.  When you create certainty in the near term and intermediate term for businesses – with regard to low taxes, great opportunities for profit, lower regulations, less legislation to deal with and so forth – what do businesses do?  What do the entrepreneurs in this room do?  Well, you invest.  You modernize your plant, you open up new facilities, you upgrade your facilities, you buy new equipment.  And in all that, you need people to do all that work.  So you hire people.

So the second takeaway is that strong certainty is positive.  And when you create uncertainty, you have negative.  That’s why right now, in September, was reported that there’s $2.3 trillion of private sector business cash sitting on the sidelines un-invested in the economy.  And Washington and Obama are standing there looking at the private sector saying, What are you sitting on your cash for?  And the reality is, why would you invest it now?  It’s too uncertain.  Obamacare’s coming, et cetera.

Third takeaway – private sector’s view.  Well, when you’re a business owner – my co-author is Andy Puzder.  He’s the President and CEO of Carl Karcher Enterprises, which is the parent company for Carl’s Jr. and for Hardee’s – 72,000 employees, 3,100 locations.  We’re a great team, I think, because he’s the billion-dollar CEO, and I’ve been 26 years working with early-stage startups, venture capital and angel investors.

And the irony is, it’s exactly the same on both ends of the size of your company.  The reason you hire people is because of economies of scale, marginal productivity, a return on investment.  Imagine those kinds of concepts.

We should get a little booklet together called “What is a Business?” – three pages, maybe two – and just print them and give them to everybody in Washington.  Maybe they could read it.  Maybe we could actually walk them through how it works.

You hire based on the certainty factor.  You hire based on opportunities for growth.  And when you take that away, you don’t hire.  So hiring actually helps lower costs, it improves profits, it builds wealth.  You can actually create more tax revenue by lowering taxes and creating a more robust economy.

Fourth takeaway – government’s view.  I know this is hard to do.  I’m going to try to get through it.  It’s centrally planned.  You don’t really create anything; you just move money around.  And what it does is it disregards the certainty factor.  It literally just disregards it.  And it says that we will create more uncertainty and then wonder why you aren’t hiring.  And you just, again, can’t even comprehend their logic, which is illogical.

Barack and his team cannot sit in D.C. at the master control panel, moving levers, deciding that this industry should have jobs, this one shouldn’t, this one – you know, that’s not how it works.  It works because of the private sector.

So, wealth creation versus wealth redistribution.  Frank Knight, the noted University of Chicago professor, said it best in his 1921 book, _Risk, Uncertainty and Profi_” – “ The confident and venturesome assume the risk or ensure the doubtful and timid by guaranteeing to the latter a fixed income in exchange for an assignment of the actual results.”  That’s the heart and soul of entrepreneurship.  Somebody takes the risk and pays others to work.  And the person who takes the risk gets assigned the actual results, which could be profit, could be breakeven, could be a loss.  But that’s the risk you take in American entrepreneurship.  That’s what private enterprise is all about.

And wealth redistribution goes one step further than disregarding the certainty factor; it cripples the certainty factor.  And so our fifth takeaway is government cannot insert arbitrary philosophical decisions about how to do things – how much is too much money, how is a business supposed to work, which industry is supposed to happen.

Sixth takeaway – primary job creation.  When you hire somebody, that’s primary job creation.  You put them to work based on economies of scale, return on investment and opportunity for some kind of marginal productivity – I hired you, I’m expecting to see some kind of output gains in my firm.  And it’s value added to the firm, it’s value added to the employees.  And the benefits and the income that they earn, and so forth.  And so that’s the certainty factor in action.

And as a sixth takeaway, then, creating jobs ultimately remains a business decision.  You hire based on a business decision.

Now, secondary job creation are those concentric circles around that primary hire.  We have what’s called the employment multiplier.  And there are all kinds of jobs that come up.  Andy has a section in the Carl’s Jr. perspective where when one new restaurant opens about 30 jobs are created at that new restaurant.  But it’s about a 2.25 multiplier, because there’s about another 64 jobs or so that are created tangent to that particular business.  And those are the folks who deliver the food, and those are the folks who do the construction and the upgrade, and things related to the business being launched.  And what we see is geometric job creation over time.

And so our seventh takeaway is that a primary new hire actually creates additional secondary hires that are tangent to that initial position that’s created.

Now, some great examples of business models – I’ll just give you one.  Here’s an iPod up here.  Did you know that Apple actually makes the iPod for less than they sell it at?  Yeah.  It’s interesting.  And the company that makes this little clicker – they sell these for more than it costs them to make them.  And that’s an interesting concept in American private enterprise.  Because if you create a product or a service that people want at a price relative to the benefits that creates a good value-added proposition, people will buy it.  But they’re not going to sit there and say, Gosh, I wonder what this really costs?  And why are they selling it at that price?

But the Obama Administration treats it as if iPod should sell for $39.87, so they can cover the cost of the iPod.  But again, it doesn’t provide for the reality of American private enterprise, which is based on the profit incentive.  And so the business model, whether you’re in a billion-dollar company or an entrepreneurial startup, you have to have a gross profit margin.  And a gross profit margin is what drives you incentive to go ahead and sell units of whatever it is you do.

So the eighth takeaway is that job creation is all about fitting business models.  And that’s the key.

So our plan – cut taxes, and simplify the tax code.  I love the Forbes 11 percent flat tax.  Cut government spending, cut government regulations.  And I have a whole section in there on expanding domestic oil.  My own analysis last year and a half is that I think there’s about 11.5 million new jobs over four years by expanding domestic oil, offshore drilling, building refineries, updating the pipelines; and about a two percent nudge into ANWR.  And that includes the employment multiplier around those primary jobs at the secondary level.

And so the ninth takeaway is that we need some folks to make some really tough decisions on regard to taxes and government spending and so forth.

And it always works.  Here’s a couple of quick examples.  ’83 to ’88, we had 68 consecutive month where 17 million jobs were created.  From ’93 to 2000, especially in light of the Gingrich Congress that forced the President to balance the budget – and of course, the dot-com era was rolling at that time – but all but six months during that period was job growth and 23 million new jobs.

And Bush does not get enough credit for the fact that post-911 – during which could’ve been a huge, complete retrenchment of the US economy – we actually saw from ’03 to ’07 52 consecutive months of job growth, 4.8 million new jobs created in a post-911 era, while we’re also fighting a war in Afghanistan and in Iraq.  And so again, they love to treat those numbers in a vacuum.  But those are pretty impressive numbers for the kind of time we were in at that particular junction.

And here’s Obama’s plan – let’s create more uncertainty.  Let’s raise taxes.  Let’s increase government spending, let’s increase government regulations.  Shut down domestic oil, bash business, demonize profits.  Let’s even put mortgage interest deductibility on the table as a way to raise funds from our bipartisan Budget Committee that’s looking at things.  They’ve decided arbitrarily that $250,000 means you’re rich.  I always ask, why not $247,500?  Why not $268,350?  Why not $210,820?  Why not $304,000?  Who decided $250,000?

My wife likes to watch “60 Minutes.”  I’m trying to get her off that.  But we had to sit through David Stockman.  Did anybody see that?  He actually said that we could go and take a look at – the $4 trillion of wealth in the top five percent back in the Reagan era has now turned into $43 trillion in the top five percent of wealth in the United States.  And his plan was to just do a flat tax, not on income; a one-time flat tax on your wealth of 15 percent to the top five percent taxpayers.  Without even thinking through the ramifications of what it would be like to liquidate 15 percent of the top five percent of the US wealth.  I mean – and he just sat there without even, you know, flinching.  Let’s just do that, we’ll just send it in.  And then everything will be fine.  So again, I don’t understand that.

A quick example we have in the book – this is a good anecdote – New Jersey business.  The guy has a gal in his payroll.  He pays her $55,000 a year as a quoted salary.  The only problem is it costs him $74,000 out-of-pocket to actually have her at the firm.  And that’s after all the regulations, payroll taxes, FICA, et cetera, et cetera.  And then of course, she takes home – after all her deductions – $31,300.  And so there’s a $43,000 gap between what it costs to hire the person and what she actually gets to bring home.  It’s absurd.  I mean, that’s just – it makes absolutely no sense.

And that’s partly because politicians have no idea what a business is.  They’ve never met a payroll, they don’t know what it is to hire people, they don’t know what it is to stay on budget.  I mean, if you ran a business like we run the government, we all know what would happen – you’d be out of business.  And so it’s just ridiculous.

And so the 10th takeaway you actually can generate more tax revenue.  Did you see the last three years of the Bush years there?  We actually got these windfalls of additional revenue beyond what they had projected.  And they’re all scratching their heads going, Look at that, we had an extra $130 billion come in.  I wonder where that came from?  Tax cuts.  Right?  The economy’s growing.

And now you actually end up with more debt in equity capital, actually good for the capital markets.  Because that’s what people do – they put the money back into the economy.  And it actually lowers the cost of capital over time, makes it more accessible.  And my favorite one is, you actually get even more jobs because of the sustainability of the certainty factor in positive expectations.  So again, more funds available for both private and the public sectors.

And so our book is currently available right now as a PDF download, at  It’ll be out in hard copy in mid-December.  But if you go there, you can plug in our cool promo code.  It’s jobsnow, but it’s actually based on job Snow, because Mary Belle Snow helped us with our idea for  So that’s – it looks like jobsnow but is actually an allusion to Mary Belle.  So thank you for that, Mary Belle.  Okay?  Thank you.

Moderator: We have time for a couple of questions.

Q: Yes, I’d like to raise the question about mark-to-market, and how it negatively impacted the stock markets in 2008.  And Congress convened some special groups to talk about it in the fourth quarter.  The Financial Accounting Standard Board changed its principles of accounting.  Want to know your thoughts on how negatively mark-to-market impacted our financial situation.

Moderator: Okay, thank you for that.  Who else?

Q: Yes. The uncertainty factor is obviously huge.  Within that, we’re hearing a lot about legislative uncertainty, in that – especially the very short term.  But we’re hearing a lot about the obvious inflationary pressure of monetization and the like, but not very much about the deflationary pressure of the whole credit bubble – the risk of further defaults and the ripple effects of all that.

Moderator: Got it.

Q: How do we bring back American companies back to our soil?

Moderator: Okay.  Anyone else?

Q: I hear wonderful future libertarian economic principles, which we all love.  But what I don’t hear is how we go from this addiction to deficit spending to an era of more growth, without a depression.

Moderator: Okay.  One more. Anybody else [urgent]?

Q: In 1994, the Republicans took over Congress.  And the economy got better.  And guess who took credit for it?  Clinton.  The Republican Congress – now, the problems we’ve had in the last couple years happened two years after the Democrats took over Congress in 2006.  Nobody talks about it.  Now the Republicans are taking over Congress again.  Things are going to get better.  And we have to be careful that they get the credit, not Mr. Obama.

Moderator: One more, yeah, over here.

Q: I want to ask Congressman Royce  who’s been a lone voice on Fannie and Freddie.  But I want to not just the policy problems of Fannie and Freddie.  But what worries me, particularly with the way the Republicans in Washington, the establishment, approach it – Fannie and Freddie, as you know – and we need to deal with – you said [the story] of how we got here is the [ground zero] of the worst set of corruption, political corruption, in the history of the United States, by far.  And it started particularly under Jim Johnson.  Frank Raines was only carrying out – we have a National Security advisor who’s involved.  The corruptions are so deep.  But when they modeled it, they not only bought all the Democrats with it in Washington – the lobbyist, the consultants – they bought all the Republicans, too.  And that’s why nothing has happened.

What I want to ask is how do we get to the core of that corruption, how do we deal with that problem?

Moderator: So we got a good flavor from the audience.  By the way, Congressman Steve King is here, too.  And thank you for your work on the economic issues as well. So we’ll go down the line. The panelists can each take a bite at whatever they’d like.  Can we start with you, Steve?

Steven Moore: First, I just wanted to remark on something you said about California.  Can we all agree on something?  I mean, I want to start a website –  No bailout for these people.  No bailout for Governor Moonbeam.  And they will come – they will be coming, hat-in-hand, within the next year for $50 billion.  So that’s a good way to start.  Yeah.  We ought to.

On deflation versus inflation – just one kind of interesting thing.  It is true – prices are falling in consumer products.  They’ve been falling for 20 years.  I mean, if you look at what’s happened just over the last 10 years, and you look at textiles, cars and trucks, computers, software, any kind of technology – I mean, you mentioned the iPhone.  It was, what, $499 when it came out; now it’s like $99.  This is the magic in the market, right?  It reduces prices.  So a kind of deflation of prices happens because of growth in technological development.

What’s interesting is there’s only two areas in the economy today where we have raging inflation.  Anybody know what those two are?  Education and healthcare.  Now, isn’t that interesting?  Who runs those two industries?  You know, government does.

My son wants to go to Northwestern.  He’s 18 years old, he’s applying to schools.  Anybody want to take a wild guess at what Northwestern costs per year all-in right now?

Unidentified Speaker: $54,000?

Steven Moore: $56,000 a year.  Is that thievery, or what?  I mean, I told my son, “Look, Justin, I’ll just write you a check for $200,000.  You can play computer games for four years, and we’ll both be better off.”  He said, “Well, that sounds like a pretty good idea.”

But I don’t – I’m not a deflation believer – I don’t think we are headed for deflation.  I do think we are headed for inflation.  And the best predictor – somebody said this yesterday; I couldn’t agree more – what’s the best predictor of inflation?  The gold price.  The gold price is the ultimate value of the dollar.  What’s happened to the gold price?  Two and a half years ago, three years ago, gold was at $1,000.  And it’s, what $13,060 now, $13,075?  So that’s a 37 percent increase in prices, or a 37 percent devaluation of the dollar.  So inflation is going up, and interest rates are going up.  And we shouldn’t worry about deflation.

The last thing is this whole issue that the gentleman in the back mentioned about, you know, the counterpoint to 1994.  It is true that what happened in 1994 – you actually had a great combination from 1994 to 2000.  You had a Republican Congress and a Democratic President.  And, you know, look, I think a lot of Bill Clinton’s personal behavior was detestable.  But he was actually a fairly fiscally conservative President, especially once you had a Republican Congress.

And in fact, if you look – yeah, after 1994.  Now, here’s the – I mean, Bill Clinton was a  true New Democrat.  You know, we used to say – remember the whole thing about, you know, what do Bill and Hillary have in common?  They both love Bill.  You know, and Bill loved Bill, and he wanted to stay in power.

The real question, the genesis of your question – and I don’t know the answer to this – is, does Barack Obama have it in his DNA?  Is he capable of moving to the middle?  I don’t know if he can do that.  And I think that means you’re going to have hand-to-hand combat over the next two years.  We present our ideas, they present theirs.

And on this cutting the budget, I have four or five ideas right off the top – eliminate the Department of Education, eliminate the Department of Energy, eliminate the Department of HUD.  And the last thing I’ll say – can we all agree on this as a bare minimum – and Steve [King] and Ed [Royce], will you please work on this for us – can we please defund National Public Radio?  Let George Soros pay for it.

David Newton: In California, we have several venture forums that we do.  And we talk to the entrepreneurs who come to our forums that we sponsor.  And the main issue right now is that the certainty factor is just completely in the tank.

As entrepreneurs are looking out, the recognition of what’s coming, and the costs that are still up in the air – for instance, Andy’s running a billion-dollar company, my co-author.  And he has outlined very clearly that Carl’s Jr. and Hardee’s each year at CKE – they spend out of their retained earnings about $19 million a year for new restaurants and for refurbishing existing restaurants.  They did the analysis of just the first look, on a conservative, low-end basis, of what Obamacare would cost CKE.  And it would cost – take a guess – about $17.9 million.  And that’s on the low end.

So what he is essentially saying is if you impose Obamacare on our company, it means the end of opening new restaurants and refurbishing existing ones.  And think about, again, the secondary job creation that goes around those primary jobs.  You’re essentially going to take jobs out of the economy.  And that’s the low-end costs.

Another good colleague of mine at the University of San Francisco, Mark Cannice – he runs an entrepreneurship, a venture capital – take the pulse of the VCs in Silicon Valley every quarter.  And again, the VCs right now are saying, We’re not doing a lot of deal flow right now for the purpose of just wondering when it’s time to pull the trigger.

Let me give you one good anecdote.  We had a deal in the Central Coast, where I’m at, in Santa Barbara – a $400,000 venture capital deal – actually [assuming] is an angel investor deal.  And maybe four or five years ago, a $400,000 deal would typically be maybe three angels – one at $200,000, maybe two at $100,000 each, or something like that.

Well, we had a $300,000 angel deal for a startup company we closed in July.  And it was 30 investors at $10,000 each.  And that’s the mentality again – is that even the angels are recognizing that it’s not a good time to invest because of the uncertainty that’s out there in the market.

And so when you sit down – and we do consulting projects with startup and emerging growth companies all the time – they’re starting to think about, where do we want to open our second location?  Where do we want to open our third location?  And sad to say, it’s not going to be in California.

The regulatory hurdles you have to go through – to open a new Carl’s Jr. restaurant, there are 57 hoops to jump through to open up the restaurant, including digging for Native American bones in the ground, and so forth.  And when you compare that to opening a new restaurant in Texas, your first $400,000 in Texas almost gets you to the opening day of the restaurant.  Your first $400,000 in California gets you to the Coastal Commission Wetlands Review.

Ed Royce: Just to respond to some of the questions that weren’t addressed here – the mark-to-market  issue in ’08, and the contribution it had to the problem that we found – if you went back to the Depression, you’d find that at one point the Roosevelt Administration had to actually suspend mark-to-market.  If you looked at the data in the ‘80s, when we ran into a declining value in property, you would’ve had to find every major insurance company and bank undercapitalized at one point – and Forbes has written about this – if mark-to-market had been deployed.

So the application of mark-to-market created a situation where, for many performing assets, in areas where you didn’t have a functioning market, it wasn’t possible, really, for banks to extend that line of credit or to roll over those loans.  You have to allow bankers to be bankers.  You can’t, you know, enact that kind of a rigid interpretation, or allow, in this case, the FASB to do that, and then translate that instantly into a dictat which freezes – in those areas of the country where we did not have a functioning market – freezes the economy in terms of the liquidity necessary to roll over loans.  And that had an adverse effect, and it should’ve been addressed.  And it’s another example of Congress not taking decisive action at a time when we should’ve.

In terms of Pat Caddel’s question about the corruption – and this is one of my real concerns about what happens, Pat, whenever political pull replaces market discipline.  You see it in much of the moral hazard that’s been created in Washington.  I think most of the responsibility was with those who were on the committee.  Because we were the ones being approached by the Federal Reserve chairman and by Fed presidents, who were sharing with us their worry about the systemic collapse of the economy if they weren’t allowed to at least be regulators and overcompensate for some of the things that we had done in Congress.

And remember that Fannie and Freddie were viewed at that time, at least by the Fed, as the most powerful lobby on the Hill.  They were in a position then to put projects in every member’s district.  They had wiped their competitors out.  Because Congress, in giving them that backstop, or at least that perceived federal backstop, it created a situation where these entities could borrow at 100 basis points less than their competition.  So their competition had been driven out of business.  This is why I think it’s important that someone chairs the committee that was on the right side of that issue at the time.

And you’re right about this being an ongoing problem.  And I’ll explain why.  In the sense that Fannie and Freddie became government-sponsored enterprises because of that implied federal backstop, in a sense that they’d created that moral hazard, you now have a situation where systemically significant firms will have that same advantage over their competition.

If you’re a creditor, and you’re going to loan money to one firm or the other, the costs of borrowing are going to be 100 basis points [approximately less,] for the systemically significant firm now.  Because the perception is that you won’t face a bankruptcy judge if that entity goes into receivership.  Instead, you will face this resolution authority.

And here’s where the political pull comes in.  The market has already seen the reaction or the result in terms of the Chrysler bailout.  Just because you’re a secured creditor doesn’t mean that somebody who’s politically connected isn’t going to come above you in terms of the process in the bankruptcy.

And so, realizing that, what we’ve now got is a rush to Washington, in terms of people trying to become very well connected.  And here’s the worry about those who were correct at the time about Fannie and Freddie.  Their worry is that these firms will now expand much faster than their competitors, who will be viewed as too small to save; will create the same kind of enormous power on the Hill, because political pull is now part of the process, in theory.

We’ve added one other component to this that is very worrisome.  And that is, with this Consumer Financial Protection Bureau – here’s my issue with that, Pat.  If you’d given the safety and soundness regulators, the Prudential regulators, the ability, the right, to regulate for safety and soundness – but no, you’ve done the same thing you did with Fannie and Freddie – you’ve created, on one hand, HUD for the mission – you know, that’s what was done there – and the safety and soundness regulator.  And you’ve allowed HUD to make these decisions where politicians could come in and muscle the market down, and say zero-down payment loans; you know, could prevent the regulator from trying to control leverage and allowing a 10-to-one standard to go to 100-to-one.  You’ve created the potential for that.

Unidentified Speaker: It seems to me that the genesis of the housing crisis – what it all comes down to – is these low-down payment loans.  And –

Ed Royce: Part of it.

Unidentified Speaker: Fortunately, you are going to be the committee head.  If we could just – why don’t we – I’m old-fashioned.  Let’s go back to 10 to 20 percent down on houses.

Ed Royce: But it’s not just that.  Twenty percent down is what Fannie and Freddie originally wanted, right?  And ACORN wanted three percent or zero, and ACORN won.  But that’s only one part of the problem, my friends.  Because there still is the responsibility of controlling leverage, over-leverage.

And in fact, there were other mistakes made – the investment banks being allowed to over-leverage at 30 to one.  That should’ve been 10 to one.  We could get into a series of bad decisions which all contributed to this.  But in terms of the collapse of the housing market, this was the reason for that collapse.

All of this goes to the issue of having the public better understand these principles.  And that’s why we have to call witnesses.  And we have to get out in front of the media, not only the regulators, to speak about this.  Because every regulator was concerned about the Dodd-Frank bill that we just passed, in terms of the issue I just discussed.  Everyone came into my office and raised this issue, and said, Can this be addressed?  Can we control safety and soundness?  And the answer at the end of the day was no.  This has to be revisited.

But in order to win on these issues, we’ve got to go out and explain to the public what happened.  And we’ve got to be willing at the time to stand up to powerful interest groups and lobbies, whatever they are, and simply speak truth to power about these issues.  And lastly, we have to have accountability after the fact, in terms of how we got there.

Thank you.