The American Economy: Recovery When?

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

David Newton: Thank you, Larry.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And Bush does not get enough credit for the fact that post-9/11 — during which could’ve been a huge, complete retrenchment of the US economy — we actually saw from ’03 to ’07 52 consecutive months of job growth, 4.8 million new jobs created in a post-9/11 era, while we’re also fighting a war in Afghanistan and in Iraq.  And so again, they love to treat those numbers in a vacuum.  But those are pretty impressive numbers for the kind of time we were in at that particular junction.

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

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

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

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

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

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

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

Moderator: We have time for a couple of questions.

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

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

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

Moderator: Got it.

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

Moderator: Okay.  Anyone else?

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

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

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

Moderator: One more, yeah, over here.

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

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

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

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

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

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

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

Unidentified Speaker: $54,000?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ed Royce: Part of it.

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

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

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

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

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

Thank you.

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  • jacob



  • Ian Fletcher

    The real problem with our economy is free trade, which is killing jobs and running down our industrial base. *Real* economics doesn't suport free trade.

    See my book "Free Trade Doesn't Work" for details; the website is at

  • USMCSniper

    Yaron Brook says: Government intervention is not the cure for our economic troubles. It is the cause. To understand why, we must first recognize that the key economic activity that causes growth is not consumer spending but production. Economic growth means an increase in the amount of wealth that exists in a country–and all wealth must be produced. Houses, health care, air-conditioning and transportation do not come ready-made from nature. We have them only to the extent that individuals and businesses bring them into existence. The focus of today's stimulus packages on consumer spending is therefore completely backward. Consumption is a consequence of production.

  • WilliamJamesWard

    Now who is it that has made fools of the wise?……………William

  • Fred Dawes

    when one word NEVER, Its all over here the next move is into the third world.

  • alexander

    2 grey-cell amoeba called Pelosi said that unemployment comp helps economy…let's make it better – fire everybody and then put everybody on unempl. dole. What a great idea,
    Nancy, you taxidermist meisterstuck