Conference Call on the American Recovery and Reinvestment Plan

CONFERENCE CALL ON THE AMERICAN RECOVERY AND REINVESTMENT PLAN

PARTICIPANTS: SENATOR CHUCK SCHUMER (D-NY), CAUCUS VICE CHAIR; SENATOR JACK REED (D-RI); MARK ZANDI, MOODY'S ECONOMY.COM
MODERATOR: REGAN LACHAPELLE

2:38 P.M. EST, FRIDAY, JANUARY 30, 2009

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SEN. SCHUMER: You know, I'm very glad to be joined by my colleague, Senator Jack Reed, one of our great leaders, in the Senate, on so many issues and on the Banking Committee, and Mark Zandi, the chief economist at Moody's, for joining with us.

Now, today's GDP numbers paint a stark picture. We're in a very sad situation when economists breathe a sigh of relief that the GDP has only gone down 3.8 percent. If the economic recovery package gets cut back or bogged down, we may be wishing for only a 3.8 percent contraction in the next quarter.

The American people want Washington to work together, to get this recovery package passed. President Obama has shown really outstanding leadership in managing the process. And he has done everything he can to reach out, accommodate and compromise with the other side of the aisle.

But we were disappointed that instead of meeting the president halfway, House Republicans took a walk.

I have to tell you, I think if he keeps this up, Leader Boehner is really marching his party right off a cliff.

The economic recovery package is one-third tax cuts. That's an olive branch offered to Republicans in the House right off the bat. This week, Republican leaders expressed some problems with the spending portions of the bill -- the money to refurbish the National Mall, so the House took it out. They objected to family planning services. The House took that out.

And in the Senate, Senator Baucus accepted a very large amendment -- something we all support -- AMT relief, at the request of Senator Grassley. So here in the Senate, I think we have a good opportunity to maybe be a little different than the House and hopefully get some bipartisan leadership and to pass this bill.

We hope that our Republican colleagues will compromise with us, because this bill is -- has significant things in it that they like, including a third tax cuts. When President Bush put his stimulus package together, it had no programs for government employment or government on the spending side that many economists believe gets money quicker into the economy. But for the sake of the country, Jack, myself and most Democrats voted for that package. And we passed it.

Now, we're going to be offering some amendments to improve the package and hopefully make it more amenable to some of the Republicans. Some of our Republican colleagues believe there's not enough spending for infrastructure, and so Senator Murray is offering and Senator Feinstein are offering some amendments for infrastructure. I am going to be offering an amendment to include funding for mass transit infrastructure, for instance. Congressman Nadler added 3 billion (dollars) for mass transit in the House package and we're looking to do the same in Senate.

There are some divisions about FMAP, where the money should go. There are rural state senators who changed the formula from a 50-50 and 60-40 spending split. Some of us from states that spend more on Medicaid and have high unemployment rates want to change it back. But the bottom line is there are -- this shows that there's been an open process with lots of room for compromise.

Senator Reid has said he will let Republican amendments come to the floor and be debated. And I believe that Republicans in the Senate will be more engaged in working together. And at the end of the day, because we're approaching this in an open way and because we're willing to compromise, we're going to get more Republican support for the bill in the Senate than there was in the House.

But make no mistake about it: The important number here is not the number of Republican votes. The important issue is getting -- is the number of jobs the bill creates. And getting the 60 votes we need is the key question; not whether we get 70 or 80, but rather can we get the economy turned around with this package?

So, in conclusion, it would be a shame if our Republican colleagues don't step up to the plate and work with President Obama, Leader Reid and Senate Democrats, because the American people spoke in November, loudly and clearly. They said they want us to work together, they want a new approach in Washington, and that they want some real strong help to turn the economy around.

There is real support for the president's plan, and we hope that will reflect itself in the vote and debate that occurs in the Senate. Thank you.

SEN. REED: Thanks. This is Senator Jack Reed, and I'm just delighted to join my colleague, Senator Schumer, who has been a leader on so many of these issues, and also Mark Zandi. Mark has provided extraordinarily thoughtful insights into this whole process at a number of hearings, and continues to be someone that we rely upon for very, very sound advice on the economy.

These are no ordinary times. This is not a cyclical downturn that would right itself. This is a crisis of proportions not seen in decades in this country. It stems from many causes: a lack of supervision of our financial markets, a lack of adequate risk assessment by financial actors, an unfunded war and tax cuts tilted towards the rich. And this crisis evolved over several years, through inaction and bad choices.

But now what we need is a smart, coordinated effort. And like Senator Schumer, I applaud President Obama's efforts to reach out across the aisle to ensure that this is truly a bipartisan response to a problem that all Americans face.

As Chuck pointed out, this package includes roughly $342 billion in tax cuts, which our Republican colleagues favored significantly. There is significant infrastructure investment. The key is to put people to work, and these infrastructure investments will help do that.

What we're hearing from some of our Republican colleagues, though, is the desire basically for a repeat of last spring's stimulus, which was not particularly effective -- which is just tax cuts after tax cuts. That's staying the course, and we've got to change course dramatically. We can't afford just additional policies that have led us to this point.

We understand that there's a crisis in employment in this country. My home state of Rhode Island is just behind Michigan, at 10 percent. So we are on the leading edge of a significant erosion of jobs, good jobs. And not having a job, fearful that you can maintain the job you have, together with the steep decline in home prices, has left a lot of families in desperate situations. And they're worried, concerned.

And this bill is not just about macroeconomic stimulation and those issues which are public policy. It's about restoring confidence in government, that this government can move decisively and effectively and be prepared to move again if necessary.

We have a situation where this recovery plan is focused on jobs. We hope to save or create 3 million jobs over the next five years because of the investments in infrastructure, because of other investments. And we also want to make sustainable investments that will benefit our country in the longer run -- a smarter energy grid, green jobs, weatherization of public buildings that will provide energy savings going forward.

This bill will put people to work, but it also will increase our economic capacity. We have an example in my home state of Rhode Island. Route 95, the major north-south road going through Providence, trucks have to get off, detour miles and miles and miles because we have a bridge that's unsustainable of some of these weight loads. That slows down the economy. If we fix that bridge, we're not only putting people to work, but we're going to speed -- literally speed our economic activity.

The other thing we want to do is relieve pressure on state and local government. There are provisions in the bill to provide additional assistance for Medicaid funding. There's additional support for local education, both at higher education and in elementary and secondary. One thing we don't want to do is have a federal stimulus package and then counter stimulus at the states as they cut back on the services, they cut back on their ability to provide support to the local economy.

Another key aspect of this plan that has to be emphasized is, not only are we hoping for a fast and speedy and timely application of funds; we have to have accountability. There is about a hundred million dollars that have been provided for auditors to track these programs, to make sure the work is being done, to make sure the money is getting out. It's going to be transparent. It's going to be extremely important.

Another point I think it's necessary to make is this will complement our efforts to date to assist the financial institutions of this country. If you have increased consumer demand, if you have more jobs, then pressure on credit card bills, pressure on mortgages will be relieved. That will help our banking industry also.

We've got to move quickly. We've got to move decisively. And I believe we will.

And now I'd like to turn it over to Mark Zandi.

MR. ZANDI: Thank you, Senator. And I want to thank both Senator Schumer and Senator Reed for the opportunity to be here today and to participate. I'd like to make just a few points in my remarks.

First, the near-term economic outlook is grim. Senator Schumer pointed to today's GDP numbers. I think it's best represented in the job statistics. We've lost 2.6 million jobs since the downturn began over a year ago, and I think it's very likely we'll lose just as many jobs in the first half of this year. The number of jobs we're losing has accelerated to over half a million per month. And that's likely to continue in early '09.

Unemployment, which is 7.2 percent, likely will rise to over 9 percent by the end of the year. Every industry, occupation and region of the country is now engulfed in the downturn. So, point one is the economic situation is worsening, it's not stabilizing.

Second, even prospects for some stabilization by the end of this year into 2010, which most economists believe will happen, depends on a number of very aggressive policy responses that need to be taken over the next few weeks. I think very important is an effort to stabilize the teetering financial system. Some of the remaining TARP money (had/has ?) to be used to purchase and guarantee troubled assets on the balance sheet of the financial system.

Moreover, some of the TARP money, I think, also has to be used to fund an aggressive foreclosure mitigation plan. Most of the loan modifications that have occurred so far have been unsuccessful. Redefault rates on those loans have been very high, in large part because the modifications have not included mortgage writedowns, and I think that's key to any mitigation plan going forward if it's going to be successful.

And most importantly currently is the passage of an aggressive fiscal stimulus plan.

Increased spending and tax cuts are necessary to fill what is now a growing void left by the slump in the private economy.

Third point is that the fiscal stimulus plan that was passed by the House and is now making its way through the Senate won't reverse the current economic downturn. It will be severe, regardless. But it will provide a very vital boost to the flagging economy if it's passed quickly, in the next few weeks.

With a stimulus similar to the House plan, my estimate is that there will be 3 million more jobs than there would have been otherwise by the end of 2010. The unemployment rate would be 1.5 percentage points lower by 2010 than without the stimulus. And if we don't get stimulus, I think it's very clear that unemployment will rise well into the double digits by this time next year, and we won't get back to full employment, which is close to a 5 percent unemployment rate, till 2014, 2015.

Fourth point is that the benefit of the stimulus critically depends on how quickly the government spending can occur. As you are aware, there was a CBO announcement showing that historical spend-out rates can take a while, and if past is indeed, you know, prologue, then we may be overestimating the economic benefits of stimulus. So it's very important that projects are funded that can be implemented quickly and mechanisms should be established that will provide the necessary oversight to ensure that these projects are conducted in a timely way.

Finally, let me just say that there are real -- there are very reasonable concerns that the cost of all the actions that policymakers are taking to quell the crisis will overwhelm the government's resources and further exacerbate the nation's daunting, long-term budget challenges. And there's no doubt the federal debt load will rise -- the federal debt-to-GDP ratio is currently 40 percent. And if you take most projections of coming deficits, it will rise to 60 percent of the deficit -- 60 percent of GDP a couple, three years from now.

So it's important to consider -- it is important to consider that the nation's budgetary problems would likely be even worse if policymakers do not respond aggressively to the crisis because the sliding economy would undermine tax revenues and result in much higher government outlays in support of all the folks that would be losing their jobs.

And while running massive deficits are clearly very undesirable, the resulting debt load, 60 percent debt to GDP is still manageable. Global investors are fully expecting this and remain avid buyers of Treasury debt. Interest rates are still low, and so I think it's very important if it -- for the U.S. to maintain its financial standing, policymakers have to not only be very aggressive with the steps they're taking now, but also immediately begin to address the nation's long-term fiscal challenges.

With that, I'll turn it back to Regan, I guess, or to Senator Schumer.

SEN. SCHUMER: I think Regan is in charge. (Pause.) Hello?

SEN. REED: Chuck, why don't you moderate the questions. Just give us the questions --

SEN. SCHUMER: Okay. Yeah. I thought Regan was on. Okay.

Q Are we taking questions?

SEN. REED: Yes.

SEN. SCHUMER: Yes.

Q This is Kevin Diaz at the Minneapolis Star Tribune. Senator Schumer, you -- I think you said in your remarks that you think that the key question is whether you're going to be able to hit 60. Fair to say that if they resolve the situation in Minnesota, your burden would be a little lighter here?

SEN. SCHUMER: Of course.

Q Could you elaborate on that?

SEN. SCHUMER: It would be a little lighter. (Laughter.) I think it will be. (Laughs.) (I think you ?) -- it's a very simple answer.

But I will say this --

Q I mean, does it enter into calculation --

SEN. SCHUMER: I think, you know, that we do believe that Al Franken has the lead and will keep the lead. We don't think that Norm Coleman has brought up any new issues. We've been through an extensive fair bipartisan recount, and most of the decisions the recount made were five-nothing by the commission, Democrats and Republicans joining together.

So Norm Coleman has the right to his day in court, but I think there's got to be a limit to how many times the same issue can be tried and retried.

Q But to follow, we're getting mixed signals here, because, on the one hand, we're hearing from you guys that you think you've got stuff in this bill that's going to win you Republican support. On other hand, it looks like it's touch-and-go whether you even get to 60.

SEN. SCHUMER: No, I don't think it's touch-and-go whether we get to 60. I'm pretty confident we'll get to 60.

Q Thanks.

Q Senator, can you talk about the "bad bank" idea and what your thoughts are there and whether that's going to survive --

SEN. SCHUMER: Could you just identify yourself?

Q Sure. It's Alison Vekshin with Bloomberg News. Do you think that's going to survive the weekend of negotiations? And do you support the idea?

SEN. SCHUMER: Well, I don't think the good bank, bad bank or any of the other macro ideas on the problem in financial system are going to be part of this stimulus. These are huge problems, and they're very complicated. And we're in uncharted waters. I know the administration is talking about these, but I don't think that there's an intention of tying this to the stimulus. In fact, (if you ?) -- that job one is to pass the stimulus bill, and then there's job two and three and four, which will occur rapidly after, one of which is overhaul -- is to deal with the real problems in our financial system --

Q What do you think of the idea of --

SEN. SCHUMER: -- not only in terms of a regulatory point of view.

On the bad bank/good bank, I mean, there are two issues. How do you price the assets, and how much is it going to cost? And until you're able to adequately answer those, bad bank sounds good, but it's not so easy.

SEN. REED: If I can step in -- I think one of the approaches is how -- and this is easy in concept, difficult in practice -- to figure the least-cost option to the federal government. You know, we tried to inject capital into banks, to think that that would provide them kind of a -- the strength to continue to lend and to move beyond this. Consideration of buying some of the assets or guaranteeing some of the assets, I believe, should be on the table. And my sense is it might be a combination of all these factors. But at the heart of it is trying to limit the overall exposure of taxpayers -- you know, the least expensive solution is the problem.

Q What about on foreclosure relief? What kind of plans should the administration put forward?

SEN. SCHUMER: Well, I think the administration's of the belief that you need a carrot and a stick. A carrot: some real incentives so that people can refinance, particularly those who have an ability to pay, and there are lots of people who might go into foreclosure because the mortgage (they have issued don't ?) fit them, but do have the ability to pay. And then second, a stick, to sort of force some of the more intransigent bondholders who hold little pieces of the bond to bring them to the table. And most of us feel, and I believe the president as well, that the bankruptcy provision -- change in the bankruptcy law would provide that stick. As to what vehicle that's all put together in, that's still to be determined.

Q Senator --

SEN. SCHUMER: But it will happen rather -- it'll happen rather soon, I think.

Q Senator, this is David Hirschenhorn (ph) with the New York Times. A number of your colleagues, both Democrats and Republicans, (have said ?) there should be more on housing, though, in the stimulus, as the vehicle. Can you talk about whether there's some openness and what that might look like?

SEN. SCHUMER: Well, there -- I think there's some openness to changes on the tax side -- you know, how much you would get off for buying a home? Should it be a new home? Should it be an existing home? Is the existing $7,500 enough? Should it be forgiven or just repaid? These questions. But there's lots more to do on housing. And I do believe that the administration, working with us, is intent on doing a housing package in the near future that would be more comprehensive than just this particular area.

SEN. REED: I think, adding to Chuck's point, there are opportunities -- could be opportunities to fund some programs that were already authorized: Capital Magnet program that was designed to incentivize the construction of portable housing by getting private investors as well as public funds involved.

You know, Chris Dodd has a very good program to try to avoid foreclosure. And that could be funded. But my sense is that this stimulus package is seen as part of the larger picture, which is the last or at least the next tranche of the TARP funds. And that will have some significant, I think, foreclosure mitigation money that's involved in it.

SEN. SCHUMER: The 50 to 100 billion commitment that was made, when we voted for the second part of the TARP, to put that into housing relief, is very real. And I know the administration is working on a solution and not backing off one iota from that larger commitment.

Q Do you think they need to put that forward to help you, get you through some of these votes, that they have to really detail that out in the early part of next week?

SEN. SCHUMER: Well, I think that there has to -- I mean, certainly large numbers of people, on both Democratic and Republican sides, believe that housing has to be part of the solution.

I think it's less important whether it's in the stimulus or coming shortly thereafter. And I do think there are active discussions about what is going to come thereafter. And I think there's a general confidence that the administration is going to tackle this.

If they were to -- you know, if there were some, particularly on the Republican side, who say, well, housing is standing in my way of voting for the package, I wouldn't -- my guess, knowing how they work, is the administration would talk to them about what they're planning to do on housing.

Q Senators, this is Marty Crutsinger with the AP.

Do you have an estimate? How much more than the 350-billion second tranche in TARP will be needed? You talked. In the Geithner confirmation, you used 1 trillion to 2 trillion on this bad bank idea. Are we talking about that kind of money?

SEN. SCHUMER: Well, look, I think that if you're going to do instead of a bank by bank or financial institution by financial institution but a very large solution, one of the questions is, one of the problems is, it's very expensive and certainly, probably costs more than the TARP money. How much more is a question that they're debating right now.

I mean, I've talked to the leaders and the administration on this, and the cost depends on what you do. Do you guarantee the bad assets, or do you actually buy them? That would be a big difference in cost. How many types of -- do you buy all bad assets? Just housing assets?

There are a lot of unanswered questions, and that will determine the cost. But make no mistake about it, this solution, which is, you know, probably at the end of the day better than "death of a thousand cuts," is going to be expensive. And it's one of the reasons that people are cautious about it.

SEN. REED: And Senator, I think --

SEN. SCHUMER: Jack?

SEN. REED: It's important to point out that the range of expenditures to fix the banking system -- if we don't act in a timely way, as Mark Zandi suggested, on this stimulus package, the banking system, I think, will cost us more to ultimately rectify.

I don't think you can lose sight of the interrelationship between stimulating the economy, giving people confidence in the fact they have a job and also that, you know, hopefully, home values stabilize -- that will help them to not only begin to pay their credit card bills and their other bills, but also, we hope, encourage them to increase demand for products. That is going to aid the overall economy.

And I think the message that is important to emphasize again is that, if we don't move in a timely fashion with respect to this stimulus package, our problems with the bank sector, in my view, get much worse, and the price tag gets much larger.

SEN. SCHUMER: Yeah, Jack makes a great point. Most economists thought that the 700 billion (dollars) that we voted for in the TARP -- I guess it was in early October -- was enough at that point. But because the economy has deteriorated so, the condition of the banks has similarly deteriorated, and it's not enough. So acting on the stimulus quickly is very important, because right now the trouble in the banks and how much it costs is a moving target.

Q Senator Schumer, Jeremy Pelofsky with Reuters. Wondered if -- you mentioned that handful of the things that were taken out of the stimulus to address some Republican concerns, and some openness to tax provisions from the Republicans. Do you anticipate the spending to go down and the taxes to increase, and by a large margin? Or is it more just sort of fiddling at the edges?

SEN. SCHUMER: Well, I think it's more filling at the edges. I do think there are Republicans, as well as Democrats, who think there ought to be more infrastructure spending. And I think it's pretty clear there are going to be some amendments to increase infrastructure spending without taking it away from anywhere else. As I said, I have an amendment to just increase mass transit by 3 billion (dollars), but there's highways and water and sewer and other things like that.

And second, I would say that it's going to be up to the amendment process. And one difference between the House and Senate -- it's sort of interesting. The House sort of goes first because they have more control, and that gives them certain advantages, but the Senate, because of our amendment process and because Senator Harry Reid has said we are going to allow Republican amendments, there's a good way to sort of clean up the bill. And if there are things that Republicans find objectionable, they can offer an amendment and get a majority vote to take them out. Or if they want to make a switch between the ratio of tax cuts to spending, they can try.

Now, I will say this. I, speaking for myself, and I think I speak for most Democrats -- Jack can add in -- I think the level of tax cuts is about as high as it ought to go. And a major -- and as I said, Senator Grassley's amendment increased the tax cut side, something we all support, but the tax cut side, by 75 billion (dollars), in the Finance Committee markup, I'm not sure they get much Democratic support to greatly cut back on the spending side and further increase the tax cuts.

SEN. REED: I think Chuck is right in terms of the tax portion. And part of that is being provided as a -- hopefully, a quick infusion of cash into household budgets so that, you know, their discretionary spending will pick up again. The other side, the infrastructure side, is more targeted towards increasing employment and maintaining employment

There's one other aspect in terms of the size of these various categories of money. On the infrastructure side, we have to be sensitive to the capacity issue, the ability of projects to effectively be, you know, put in the ground. And also I think we have to be very sensitive to capacity issues of state governments, which will be the primary agents in terms of deploying the money. And that's something I think we have to be sensitive to.

Simply putting -- saying, well, I want more money and more money -- it only makes sense if it can get into the economy quickly.

MS. LACHAPELLE: Okay. We'll take one more question.

Q Senator Schumer --

SEN. REED: I feel kind of bad. Mark Zandi hasn't been able to respond. You've got one of the most foremost economists in the country, so -- Mark, do you have a comment, or do you want to -- or a question for Mark?

MR. ZANDI: Well, you know, I think the thing is I get to talk to some of these guys all the time, and they get -- this is their opportunity to talk to you.

SEN. REED: Okay. All right.

MR. ZANDI: So I'm perfectly fine with that.

SEN. REED: All right.

Q I have a question for Senator Reed. This is -- (name inaudible) -- speaking for NHK. A lot of people in Japan are worried about the "buy America" provision in House and the Senate version that might potentially lead a domino effect into protectionism in the U.S. economy. Can you kind of comment on that, please? Thanks.

SEN. REED: Well, I will comment, there's real concerns here that these monies go to stimulate employment in the United States. That's quite obvious. But also, the nature of many of our projects sort of necessitate "buy American." When -- you know, when we're building roads, the concrete, the local contractors -- that's hard to outsource. So I don't think it -- I don't think it raises the kind of concerns that some people are nervous about.

But I would hesitate to add, we have to be very, very careful, not just in the stimulus package but in the longer term -- not just the United States but our major trading partners -- not to embark on sort of a nationalism based on credit. One of the concerns I think is more serious is that if there's a significant nationalization of banking institutions across the globe, that might lend to credit being directed internally and not having the flows of capital we need.

So that's a legitimate question. But I think in the context of what we're trying to accomplish, the nature of the projects -- the school construction, weatherization -- those things are inherently local. And I don't think this will signal a departure from open markets.

SEN. SCHUMER: I would just add one other point. If we get the American economy going again, Japan has such a huge export-oriented economy that it will clearly help Japan.

MS. LACHAPELLE: Okay.

SEN. REED: Thank you.

MS. LACHAPELLE: Well, thank you, everyone.

SEN. SCHUMER: Thanks, everybody.

MR. ZANDI: Thank you.

END.

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