[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




                          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:
       http://www.gpoaccess.gov/congress/house/budget/index.html


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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.



    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.



    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.



    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.



    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.



    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.


    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.
     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.
     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.
     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.
     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.
     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:]
    
    
    
        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:]
    
    
    
    [Whereupon, at 12:14 p.m., the committee was adjourned.]

                                  
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