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ABC’S “THIS WEEK WITH GEORGE STEPHANOPOULOS”

STEPHANOPOULOS: Major milestone this week here in Iraq with the American troops pulling out of the cities. And I wonder if you can put the broader American mission in context. Are we in the process of securing victory or cutting our losses to come home?

BIDEN: Securing victory. Look, the president and I laid out a plan in the campaign which was twofold. One, withdraw our troops from Iraq in a rational timetable consistent with what the Iraqis want. And the same time, leave behind a stable and secure country.

And one of the reasons I’m here, George, is to push the last end of that, which is the need for political settlement on some important issues between Arabs and Kurds and among the confessional groups. And I think we’re well on our way.

STEPHANOPOULOS: You know, your predecessor doesn’t seem convinced.

(LAUGHTER)

STEPHANOPOULOS: John Hannah, Vice President Cheney’s national security adviser, wrote this week that under Obama, Bush’s commitment to winning in Iraq has all been vanished. The vice president warned against a premature withdrawal.

He said: “I would not want to see the U.S. waste all of the tremendous sacrifice that has gotten us to this point.”

BIDEN: You know, it’s kind of ironic. It’s their timetable we are implementing. Cheney and Bush agreed with the Iraqis before we were elected that we’d have combat troops out of the cities by June 30th.

STEPHANOPOULOS: So he’s wrong to be worried?

BIDEN: Well, I mean, it’s — I mean, for this he can’t have it both ways. He negotiated that timetable. We have met the commitment the timetable the last administration negotiated with Iraqis. And we’re totally confident that is the right thing to do.

So I find it kind of ironic that he’s criticizing his own agreement that he negotiated.

STEPHANOPOULOS: You’re also facing a little bit of criticism from the Iraqis. You know yesterday you stood up there with Prime Minister Maliki and talked about your commitment to solve these political problems, yet his spokesman came out after the meeting and said: “This is purely an Iraqi issue, we don’t want the Americans to get involved.”

What do you say to that?

BIDEN: Well, that’s that not what — that’s not what the prime minister said. The prime minister said that we may need you to get involved.

What we offered the prime minister, as well as the speaker, as well as the two vice presidents, was that to the extent — let me give you an example. The United Nations has started a process to deal with what they called the “disputed internal borders.” And that is the debate between the Kurds and the Arabs as to where the line is.

Kirkuk is probably the biggest flashpoint. And we were asked that we would — would we be helpful to the United Nations in doing this? I was further asked that would I communicate to the Kurdish leadership, who I have a close relationship with, that their passing a constitution through their parliament in Kurdistan was not helpful to the process that was under way.

STEPHANOPOULOS: So what’s going on here? Maliki says one thing and his spokesman says another.

BIDEN: Well, look, I think that it’s very important that Prime Minister Maliki and all of the Iraqi leaders are able to in fact communicate, which is true, to the people of Iraq, that they’re now a sovereign nation.

They take directions from no one. That they are able to handle their own internal affairs. And the fact — my guess is, if the spokesman said that — which surprises me, if the spokesman said that, I’d imagine they’re worried about an upcoming election, making it look like the United States is going to continue to try to direct things here.

We are not. That is not why I’m here.

STEPHANOPOULOS: We’re not going to direct things, but what if the Iraqi people — they’ve been dealing with these political disputes for an awful long time, what if they can’t solve them, the violence flares up again?

BIDEN: Well, that’s going to be a tragic outcome for the Iraqi people. We made a commitment.

STEPHANOPOULOS: But are we going to put our lives on the line again?

BIDEN: No. We made a commitment to withdraw our troops from the cities by the 30th, to withdraw our combat brigades from Iraq by next summer — the end of next summer, and withdraw all troops according to the SOFA, that agreement we negotiated with them, by the end of 2011. That is our intention.

STEPHANOPOULOS: But no matter what, 2011, American troops all gone?

BIDEN: That is the intention. We believe the Iraqis will be fully capable of maintaining their own security. And we believe that with the time frame, with their upcoming election — you know they’re having an election in January, I know you know that, they’ll form a new government early — in late winter as a consequence of that election.

And it is our expectation that that election will come off peacefully and that their democracy is gradually maturing, so.

STEPHANOPOULOS: Let me turn to Iran. We’re three weeks out from their election.

BIDEN: Yes.

STEPHANOPOULOS: Do you have any doubt it was stolen?

BIDEN: Well, look, what I don’t want to do is play into the hands of the supreme leader and Ahmadinejad like they’re blaming the British now. You know, there — that the reason why there was unrest is outside influence.

STEPHANOPOULOS: They’re saying they have confessions from reformers saying that.

BIDEN: Well, you know, they say a lot of things. That’s simply not true. The — I think the dust hasn’t settled yet in terms of?

STEPHANOPOULOS: Still, three weeks ago.

BIDEN: Well, no, now here’s what I think. I mean, I think it’s clear that the consequences of the way the election was conducted and the way that the election was declared — who was declared the winner and how, is going to have a rippling effect.

What that effect will be, I don’t know. I think we have to wait to see how this settles out and — before we can make a judgment.

STEPHANOPOULOS: But there’s no doubt now that they responded violently to the election.

BIDEN: Oh, there is no doubt about that. There is none. The whole world saw it. And it is — we have to acknowledge as a free and sovereign nation that we abhor the violence that took place. We think it was inappropriate, the way in which they treated those protesters.

And so there is no question, we and the rest of the world looked at them and said, my lord, this is not the way to conduct?

STEPHANOPOULOS: But how do you respond to critics who say the United States should have come out forcefully right away, right away and said, this is wrong, stop it, and they say that would have made a difference?

BIDEN: Well, I don’t — I think the president was absolutely pitch-perfect. I think what the president did is exactly the right way. I think the president did not allow us to be used to as the scapegoat, us to be used as?

STEPHANOPOULOS: There were some reports that you were arguing for a more forceful response earlier.

BIDEN: Well, I think the president did it exactly right. I think he was correct.

STEPHANOPOULOS: And going forward, what next? What should the strategy be right now?

BIDEN: Well, look, the Iranian government has a choice. They either choose greater isolation, and from the whole world, or they decide to take a rightful place in the — in civilized, big, great nations. They can — that’s the path they have to choose.

STEPHANOPOULOS: Haven’t they already shown evidence in the last week of what their choice is?

BIDEN: Well, they have in terms of the way they conducted their election, but they haven’t in terms of whether — the real key issues to now, are they going to continue the nuclear program? Are they going to be braced by what happened? Is this going to alter their behavior internally or externally?

Look, responses that they saw on the street in any country have consequences. It’s hard to predict what those consequences will be.

STEPHANOPOULOS: But what are the consequences for the U.S. relationship? I mean, the president had said he wants to meet with the Iranians over the nuclear program through the P-5. But how does he engage with the Iranians now without breaking faith with those reformers?

BIDEN: Well, the way you do it is if they choose to meet with the P5, under the conditions the P5 was laid out, it means they begin to change course. And it means that the protesters probably had some impact on the behavior of an administration that they don’t like at all. And it believes and I believe that means there’s consequences to that.

Now, if they in fact decide to shut out the rest of the world, clamp down, further isolation, I think that takes them down a very different path.

STEPHANOPOULOS: How do you respond to those who say that it’s the United States now that should hit the pause button, there should be a cause correction, and we shouldn’t rush to sit down…

BIDEN: Well, we’re not. We’re not rushing to sit down.

As I said to you, we have to wait to see how this sort of settles out. And there’s already an offer laid out there by the permanent five plus one to say we’re prepared to sit down and negotiate with you relative to your nuclear program. And so the ball’s in their court.

STEPHANOPOULOS: When I saw President Ahmadinejad back in April, his response to that was that we need to see more from the United States first.

Is it fair to say now that there will be absolutely no more concessions to the Iranians in advance of those discussions?

BIDEN: It’s fair to say the position the president has laid out will not change.

STEPHANOPOULOS: But there will be engagement — if the Iranians want to…

(CROSSTALK)

BIDEN: If the Iranians seek to engage, we will engage.

STEPHANOPOULOS: And meanwhile, the clock is ticking…

BIDEN: If the Iranians respond to the offer of engagement, we will engage.

STEPHANOPOULOS: But the offer is on the table?

BIDEN: The offer’s on the table.

STEPHANOPOULOS: And meanwhile, Prime Minister Netanyahu has made it pretty clear that he agreed with President Obama to give until the end of the year for this whole process of engagement to work. After that, he’s prepared to make matters into his own hands.

Is that the right approach?

BIDEN: Look, Israel can determine for itself — it’s a sovereign nation — what’s in their interest and what they decide to do relative to Iran and anyone else.

STEPHANOPOULOS: Whether we agree or not?

BIDEN: Whether we agree or not. They’re entitled to do that. Any sovereign nation is entitled to do that. But there is no pressure from any nation that’s going to alter our behavior as to how to proceed.

What we believe is in the national interest of the United States, which we, coincidentally, believe is also in the interest of Israel and the whole world. And so there are separate issues.

If the Netanyahu government decides to take a course of action different than the one being pursued now, that is their sovereign right to do that. That is not our choice.

STEPHANOPOULOS: But just to be clear here, if the Israelis decide Iran is an existential threat, they have to take out the nuclear program, militarily the United States will not stand in the way?

BIDEN: Look, we cannot dictate to another sovereign nation what they can and cannot do when they make a determination, if they make a determination that they’re existentially threatened and their survival is threatened by another country.

STEPHANOPOULOS: You say we can’t dictate, but we can, if we choose to, deny over-flight rights here in Iraq. We can stand in the way of a military strike.

BIDEN: I’m not going to speculate, George, on those issues, other than to say Israel has a right to determine what’s in its interests, and we have a right and we will determine what’s in our interests.

STEPHANOPOULOS: Meanwhile, North Korea…

BIDEN: Yes.

STEPHANOPOULOS: … seven missile launches in the last 24 hours, 11 this week. Anything the United States can do about it?

BIDEN: The question is, is there anything that we should do about it?

Look, this has almost become predictable behavior. Some of it seems like almost attention-seeking behavior.

STEPHANOPOULOS: And you don’t want to give the attention?

BIDEN: And — no, I don’t want to give the attention, because, look, I think our policy has been absolutely correct so far. We have succeeded in uniting the most important and critical countries to North Korea on a common path of further isolating North Korea. They’re going to be faced with a pretty difficult choice, it seems to me.

STEPHANOPOULOS: But not a task that includes very forceful enforcement of the sanctions. The Russians and the Chinese blocked any boarding of the ships, didn’t they?

BIDEN: No, no. Well, what they did was, if you noticed, the ship had to turn around and come back. Why? Because no port would allow them into their port.

There was no place they could go with certitude that they would not be, in fact, at that point, boarded and searched. And so I would argue that it, in fact, worked.

STEPHANOPOULOS: Is our policy now though basically waiting for the Kim Jong-il regime to collapse?

BIDEN: Our policy is to continue to put united pressure from the very countries that North Korea was able to look to before with impunity. They could take almost any action and got no reaction, no negative reaction.

That’s changed. And it is — there is a significant turning of the pressure. And there are going to be some very difficult decisions that that regime’s going to have make.

There’s a real debate going on right now, George, about succession in North Korea.

STEPHANOPOULOS: Reports that he’s tapped his youngest son.

BIDEN: That is the report.

STEPHANOPOULOS: Do you believe it?

BIDEN: Well, if I had to bet, that would be my guess. But I don’t think anyone knows for certain.

STEPHANOPOULOS: The clock is also ticking on Afghanistan. Key members of Congress made it pretty clear during the war supplemental debate that they’re going to give until early next year to see progress in Afghanistan or they’re going to cut off the funding, move to cut off the funding.

Is that the right approach?

BIDEN: Look, I think the right approach is one we have chosen, the Obama/Biden administration.

We did a thorough review of what our objectives and policies were and should be in Afghanistan.

BIDEN: We set in motion a policy which is now only beginning to unfold. All the troops we agreed to increase are not even all in place at this point. And we also believe, as General Jones accurately said, that, ultimately, the success or failure in Iraq will not rest not on a military outcome, but on a both economic and political outcome internally, getting better governance in place and economic development in that country.

STEPHANOPOULOS: But do Americans have a right to expect that if we don’t see continued progress in the next six to nine months, six to 12 months, then we should think about cutting back and pulling out?

BIDEN: Look, I think the Americans have a right to expect success. And I think the success is measured by how we defined it.

STEPHANOPOULOS: At any cost?

BIDEN: No. Success. And if they conclude that, whatever the policy that’s being undertaken by any administration as not succeeding, they have a right to say, look, cease and desist. But I don’t think that’s where we’re going, George.

STEPHANOPOULOS: There were some reports this week that the president has already made the judgment sending General Jones over to Afghanistan with a clear message — no more troops. This is it, this is all you can get.

And Bob Woodward wrote about it. He talked about the general meeting with various military figures in Afghanistan, and this is what he said — this is what he reports that General Jones said: “If there were new requests for force now, the president would quite likely have a Whiskey Tango Foxtrot moment. Everyone in the room caught phonetic reference to WTF — which in the military now sort of means, what the (blank).”

Are you concerned that this is sending some kind of a chilling message?

BIDEN: No, not at all. Look, here’s…

STEPHANOPOULOS: You don’t want to hear the advice?

BIDEN: Look, no, no. We got the advice.

We spent five months with the entire national security team, the chairman of the Joint Chiefs of Staff, the secretary of state, the secretary of defense, the national security adviser down in that tank, down in that Situation Room, laboriously banging out the plans. The military came in with explicit requests. The president gave them what they asked for. It hasn’t even been implemented yet.

STEPHANOPOULOS: You were on the other side, it was reported, that you didn’t want an expansion of troops.

BIDEN: No, no. I did want an expansion of troops. There was a slight difference about how to layer them, how to proceed.

The president — we all ended up in — you know, this was an open discussion. And the thing I like about the president, he seeks everyone’s opinion.

Well, we reached a consensus opinion, and the consensus opinion of the national security team, of which I’m a part, was to do exactly what’s under way.

The point is — I suspect the point that Jim Jones is making is, hey, it hasn’t even been implemented yet. Troops are still on the way. Slow up, guys.

STEPHANOPOULOS: But to be clear, you’re saying if the military believes there should be more troops, they shouldn’t be afraid to give that advice. They should give that advice?

BIDEN: They should not be afraid to give whatever advice from the field or from the Pentagon to the president and the secretary of defense that they think they need.

STEPHANOPOULOS: While we’ve been here, some pretty grim job numbers back at home — 9.5 percent unemployment in June, the worst numbers in 26 years.

How do you explain that? Because when the president and you all were selling the stimulus package, you predicted at the beginning that, to get this package in place, unemployment will peak at about 8 percent. So, either you misread the economy, or the stimulus package is too slow and to small.

BIDEN: The truth is, we and everyone else misread the economy. The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.

Everyone thought at that stage — everyone — the bulk of…

STEPHANOPOULOS: CBO would say a little bit higher.

BIDEN: A little bit, but they’re all in the same range. No one was talking about that we would be moving towards — we’re worried about 10.5 percent, it will be 9.5 percent at this point.

STEPHANOPOULOS: But we’re looking at 10 now, aren’t we?

BIDEN: No. Well, look, we’re much too high. We’re at 9 — what, 9.5 right now?

STEPHANOPOULOS: 9.5.

BIDEN: And so the truth is, there was a misreading of just how bad an economy we inherited. Now, that doesn’t — I’m not — it’s now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we’re in? And we believe it is the right package given the circumstances we’re in.

We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money.

STEPHANOPOULOS: No, but a lot of people were saying that you needed to do something bigger and bolder then, including the economist Paul Krugman. He’s saying — right now he’s saying the same thing again — don’t wait. You need a second stimulus, you need it now.

BIDEN: Look, what we have to do now is we have to properly, adequately, transparently and effectively spend out the $787 billion.

STEPHANOPOULOS: That’s your job. You’re in charge of that now.

BIDEN: That is my job, and I think we’re doing it well. If you noticed, George, I mean, there were other predictions. This was going to be wasteful and all these terrible projects were going to be out there, and we’re wasting money. Well, that dog hasn’t barked yet.

STEPHANOPOULOS: Well, Senator Coburn has identified some.

BIDEN: Yes — no, he hasn’t, but he did, he identified one hundred ? forty-eight of which we had already killed. And so — and the rest I dispute. So the bottom line though is, I think anybody would say this has been pretty well managed so far.

The question is, how do you now — do we — what we have to do, George, is we have to, as this rolls out, put more pace on the ball. The second hundred days you’re going to see a lot more jobs created.

And the reason you are is now all of these contracts for the over several thousand highway projects that have approved.

STEPHANOPOULOS: But you’re also seeing states across the country cutting back on their programs. Many of the people on unemployment?

BIDEN: Sure.

STEPHANOPOULOS: ? today are going to run out of unemployment in September. That means for a lot of those people, if there is not a second stimulus, they’re going to be out in the cold.

BIDEN: Well, look, we have increased the amount of money unemployed — those on unemployment rolls have gotten, 12 million are getting more money because of the stimulus package.

We’ve increased the number of people eligible by 2 million people. We’ve given a tax cut to 95 percent of the people who get a pay stub. They have somewhere — $60 bucks a month out there that’s going into the economy.

There is a lot going on, George. And I think it’s premature to make the judgment?

STEPHANOPOULOS: So no second stimulus?

BIDEN: No, I didn’t say that. I think it’s premature to make that judgment. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid — the new electric grid.

And so this is just starting, the pace of the ball is now going to increase.

STEPHANOPOULOS: So you’re in charge of the stimulus. You’re the president’s envoy here in Iraq. You’re supposed to settle this dispute between the director of national intelligence and the CIA over who is going to appoint the station chiefs. By the way, have you solved that one yet?

BIDEN: I think we’ve solved that one.

STEPHANOPOULOS: You have?

BIDEN: Well, let me put it this way. I think we’re well on the way to that being solved.

STEPHANOPOULOS: Who won?

BIDEN: They both won.

STEPHANOPOULOS: So they’re going to share the responsibility to appoint to station chiefs?

BIDEN: Not done yet. Let me comment on that next week to you.

STEPHANOPOULOS: OK. Well, let me get to the broader point then. You’ve fixed — you say you’ve fixed a problem that will?

BIDEN: Well they fixed the problem.

STEPHANOPOULOS: ? to find out that they fixed the problem — look to find out the details on all of that. But you’ve got all of these discrete projects now. And when you came in you talked a lot about how you didn’t want to get bogged down in individual projects because you wanted to be, you know, the president’s primary adviser.

Are you’re worried you’re going to far in the other direction?

BIDEN: No. Because all of these projects have end dates on them. You know, they all have sell-by dates, because — and that’s I think that — I hope I’ve brought some real expertise to this job, available to the president.

The things he has asked me to do. I hope I’m relatively good at. And — but all of them have specific objectives.

STEPHANOPOULOS: Finally, Sarah Palin.

BIDEN: Yes.

STEPHANOPOULOS: You were the last person to run against her.

(LAUGHTER)

STEPHANOPOULOS: Were you surprised by her decision to step down?

BIDEN: Well, look, you and I know — and I shouldn’t say that because that implicates you in my answer, so. But those who have been deeply involved in politics know at the end of the day it is really and truly a personal deal.

And personal family decisions have real impact on people’s decisions. I love reading these history books and biographies of people, the reason they made the choice to run or not run was because the state of the economy.

It maybe had a lot to do with what the state of their life was, and the state of their family, et cetera. So I’m not going to second guess her.

STEPHANOPOULOS: She cast herself as the victim of political blood sport in that press conference. Is that how you see it?

BIDEN: No. I respect her decision. I don’t — I don’t know what prompted her decision to not only not run again and also to step down as a consequence of the decision not to run in 2010. And I take her at her word that had a personal ingredient in it. And you have to respect that.

STEPHANOPOULOS: Mr. Vice President, thank you very much.

BIDEN: Thank you.

For immediate release

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Chairman Durbin, Ranking Member Collins, members of the Subcommittee, I appreciate the opportunity to testify before you for the first time as Treasury Secretary on the President’s Fiscal Year 2010 Budget request for the Department of the Treasury.

While we see some initial signs of economic improvement and the financial system is beginning to heal, our country faces very substantial economic and financial challenges.

President Obama and his Administration are working to meet these challenges by getting Americans back to work and getting our economy to grow again; by restoring fiscal discipline to ensure a sustained recovery, and by making the long-neglected investments in health care, energy and education needed to enhance America’s global competitiveness and produce more balanced, sustainable growth over the long-term.

Treasury’s Key Priorities

To achieve these goals, we are repairing and reforming our financial system so that it works for, not against, a recovery that serves all Americans.

To restore growth and meet our fiscal goals, we are redesigning and bolstering enforcement of our tax code so that it is both fairer and more efficient.

To advance our interests globally, we are working with other nations to promote economic recovery and financial repair, and to ensure more open markets for U.S. business.

And to protect the country, we are deploying all of the tools at our disposal to exclude terrorists, proliferators, and other illicit actors from the international financial stage, and thereby secure our financial system and combat threats to our security.

The Fiscal Year 2010 Budget that you have before you will allow Treasury to pursue these core missions assigned to the Department by the President and the Congress. The $13.4 billion request includes a $676 million, or 5.3 percent, increase over enacted 2009 levels.

Of this increase, $14 million would go to bolstering the staffs of our Domestic Finance and Tax Policy offices, which are at the epicenter of Administration efforts to support rigorous analysis and implementation of revenue policy and to redesign and improve our tax policies and tax code.

Some $137 million would be devoted to more than doubling our Community Development Financial Institutions (CDFI) Fund to ensure that the benefits of our financial repairs reach beyond our major banks and businesses to help economically distressed communities. These communities were underserved by our financial system even before the current crisis, and have been deeply hurt by the job losses and business failures that the crisis has spawned.

A total of $332 million would be devoted to new Internal Revenue Service (IRS) enforcement efforts, including $128.1 million to add nearly 800 new IRS employees to combat offshore tax evasion and improve compliance with U.S. international tax laws by businesses and high-income individuals. Another $130 million would go to bolster the security of the IRS information technology, improve the efficiency of its business systems and upgrade its fraud detection capabilities.

Although not directly under the jurisdiction of this Subcommittee, our Budget also includes funds to meet our international obligations to help us in mounting a global response to the crisis and in creating mutually reinforcing growth around the world.

As we seek these additional funds to respond to our nation’s troubles, we have cut back on some programs that are either ineffective or that we believe can be safely delayed.

For example, while the Earned Income Tax Credit (EITC) continues to be one of the most effective anti-poverty programs that the Federal government administers, the Advanced EITC, a related program which provides benefits in advance of filing a tax return, has been prone to exceptionally high levels of error and low use by those eligible for it. Accordingly, our Budget proposes to end this latter program for savings next fiscal year of $125 million.

Similarly, even as we seek to increase capital investment for the IRS, our Budget would reduce the Department-wide capital investment account by 65 percent for a savings of $17 million.

The Treasury Budget would reduce the number of international economic attachés from 20 to 16, saving $2 million next fiscal year. It would absorb a portion of our non-pay inflation through more efficient use of contracting and other cutbacks, saving $18 million. It would take advantage of the growth of efficient electronic filing of tax returns to reduce the IRS processing budget by $8 million next fiscal year.

Given we have had control over the budget for fewer than five months, the reductions that I have just described represent a first attempt to do more with less. As we begin work on the Budget for Fiscal Year 2011, Treasury has prepared itself for a more rigorous assessment of its spending.

I have already issued guidance to Treasury senior staff that says, in part: “To afford any new investments, we will have to take new approaches to solving old problems. I expect each bureau and policy office to identify opportunities for innovation that will transform how Treasury fulfills its missions in order to both improve performance and reduce cost.”

In addition, the President has announced his intention to nominate Dan Tangherlini to be our Assistant Secretary for Management and Budget. Consistent with the President’s mandate, I will look to Mr. Tangherlini to scour the Treasury’s budget for efficiencies and cost savings. He comes to the job with an impressive track record of working on budget, management and performance issues with District of Columbia Mayor Adrian Fenty, and I am convinced that he will bring the same results-oriented approach to the federal government.

Repairing and Reforming the Financial System

The President has assigned the Treasury to repair key sectors of our economy so that they help revive growth and produce broadly shared prosperity.

The Treasury has been working to repair and reform every major element of our financial system, and to fill gaps in the system so that it benefits all Americans.

Last month, federal banking supervisors announced results of the stress tests that we asked them to conduct on our 19 largest financial institutions. The aim of these assessments was to ensure that these institutions have sufficient capital buffers to absorb the losses that they could suffer under worse-than-expected economic conditions and continue to make the loans necessary to sustain recovery.

The clarity and transparency provided by the tests has helped improve market confidence in the banks, making it possible for them to collectively raise nearly $90 billion through private equity offerings, bond issuances without government guarantees and sales of business units.

On housing, Treasury is working with HUD to bolster our housing markets by helping to drive down mortgage interest rates and by assisting responsible homeowners to refinance into more affordable mortgages or modify their at-risk loans to avoid preventable foreclosures.

In terms of the non-bank financial sector, Treasury is working to revive critically important securitization markets for both new and old asset-backed securities.

We have begun to boost new consumer and business lending by re-starting the markets for asset-backed securities that financed almost half of all lending in this country before the crisis. There were more securities of this type issued the four months after we launched our effort than in the preceding nine.

Additionally, Treasury is about to join with private investors in seeking to restart the markets for legacy mortgage loans and securities that are now stuck on bank balance sheets, keeping these institutions from making new loans to families and businesses.

As we have made repairs to the financial system, we have understood that repair alone is not enough. We must also reform the system so that it is less prone to crises of the dimensions that we now face.

In the next few weeks, we will outline a comprehensive plan of reform that will include systemic risk regulations to ensure that no large and interconnected firm or market can take on so much risk that its failure could destabilize the entire financial system. The plan calls for bolstering consumer and investor protections. And it will streamline our out-of-date regulatory structure so that our regulatory system matches the size, shape and speed of our modern financial system. Together, these changes will help prevent another crisis of the magnitude that we have just lived through, and give the government new tools to better cope with similar problems should they occur in the future.

In addition to the financial system, Treasury is helping to ensure that the nation has a viable auto industry in the future. We are working with General Motors and Chrysler to make sure these companies make the changes necessary to again prosper. As President Obama has said “we cannot…must not…and will not let our auto industry simply vanish.”

The resources for administering key elements of both our financial and auto repair efforts were authorized by the Emergency Economic Stabilization Act.

These activities are being handled by our Office of Financial Stability (OFS), which is focused on ensuring that TARP funds serve the public purpose of economic and financial stabilization; that they are fulfilling this purpose in ways that protect taxpayers; and that we can provide a clear account to the Congress and the American people about the effectiveness of the funds’ use.

In order to administer TARP and ensure compliance by TARP recipients, OFS has had to quickly assemble a substantial staff. OFS staffing levels, which were at 88 when I arrived in office, had risen to approximately 165 by the end of last month and are expected to rise to 225 by next fiscal year. The office’s budget for next fiscal year will total $262 million, a 6 percent decline from the current fiscal year’s $279 million. The change is largely due to a decline in estimated spending on contracts as part of the program’s initial start-up.

While TARP is proving effective at improving the immediate stability of the financial system, the scope of the issues that this Administration and this Department face extend beyond TARP to include striking the delicate balance between intervention and allowing market participants latitude to operate; devising a new financial regulatory structure for the future; and working through the tough problems of what form our government-sponsored enterprises, Fannie Mae and Freddie Mac, should take as we emerge from this difficult period.

All of these issues fall to Treasury’s Office of Domestic Finance, which, together with OFS, is having to operate on new policy terrain, tackling problems that the country has not faced in generations and for which we have few guideposts in our immediate past.

That is why the workload of the Office Domestic Finance has already expanded greatly, and is all but certain to expand still further. And it is why we are seeking to modestly increase its size and bolster its expertise in several critical areas.

Our Budget requests an additional $8.7 million for the office to add 26 full-time equivalent (FTE) positions to the staff. This represents a 26 percent increase from the office’s current fiscal year staffing of 101.

The additional funds will be used to create two new Deputy Assistant Secretary positions, one for housing finance, small business and consumer issues, and a second for capital markets. These two new officials will lead teams that will perform the economic and institutional research necessary to ensure that we understand all of the policy options in each of these areas and choose the most effective ones for solving our problems.

As we seek additional funds for Treasury, we must also seek them for the front-line institutions that will sustain our economic recovery and ensure that its benefits are broadly shared.

Our Budget would more than double the resources of the Community Development Financial Institutions (CDFI) Fund to $243.6 million. The fund’s mandate is to help low-income, economically distressed communities that were poorly served by our financial system even in economic good times, and – although they had nothing to do with causing current conditions –have been significantly hurt by the economic and financial fallout of the crisis that we now face.

The $136.6 million, or 128 percent increase in funding, would allow this program to support financial institutions in making job-creating investments and in providing access to capital in communities that are often considered too risky for mainstream financial institutions to serve. By targeting lenders and borrowers in these communities, the Fund would help some of our most vulnerable populations weather the crisis and benefit once recovery is underway.

The aim of the fund is to make sure that we provide distressed communities with more than simply government grants and aid.  We must also build the capacity of their local financial institutions to ensure that capital is flowing to homebuyers and businesses so that they can finance their own economic futures. Since its inception in 1994, the fund has directed nearly $1 billion to distressed communities, and allocated $19.5 billion in tax credits through its New Markets Tax Credit program.

Financial institutions funded through the CDFI program make loans to small businesses and micro-enterprises and take equity positions in them.  They provide mortgages to low-income homebuyers, and finance developers of low-income housing and community facilities, such as charter schools, health clinics and child care centers.

One example can be seen right here in the Anacostia neighborhood of Washington, DC. City First Bank – a local CDFI – and Charter Schools Development Corporation partnered to provide a $13.3 million New Markets Tax Credit for the Thurgood Marshall Academy, the city’s first charter school focused on law, serving 360 students in grades nine through twelve and achieving a 100 percent college acceptance rate for its first three graduating classes.

Historically, the CDFI program has been heavily oversubscribed and has had to turn away qualified applicants. For example, in the current fiscal year, the program for CDFI financial and technical assistance awards is budgeted at $55 million, but it expects to receive applications for more than $500 million in funding.

Redesigning the Tax System for Fairness and Efficiency

The President has asked Treasury to redesign and bolster enforcement of our tax code so that it supports growth, sets the stage for our return to a sustainable fiscal path, and accomplishes these goals in a manner that is fair, efficient and supportive of our society’s broadest goals.

To make good on the President’s assignment, our Budget requests a modest increase in funding for Treasury’s Office of Tax Policy and more substantial increases to expand IRS enforcement activities and to improve its information technology.

Treasury has moved quickly in implementing the more than 30 tax provisions of the President’s economic recovery plan. Treasury also has played an integral role in designing the tax provisions of the President’s Fiscal 2010 Budget, and it will play a similar role in implementing these.

The President has made clear that he will not seek any major revenue increases until 2011 when the recovery should be firmly in place. He has, however, been equally clear that once recovery is underway, we must get our fiscal house in order or risk having government borrowing crowd out productive private investment. Treasury and the White House will work with Congress to make the tax changes that are necessary to reduce deficits and to do so in a manner that is fair to all Americans.

As part of our efforts to make sure that the tax system is working for recovery and is operating fairly, we have designed new policies to curb the use of off-shore tax havens, close the international tax gap, remove tax incentives for companies to shift jobs overseas, and replace these incentives with ones that encourage creation of jobs at home.

Our tax work on the recovery plan, the Fiscal Year 2010 Budget, and these international tax issues are just the beginning of an ambitious agenda for this Administration.

On health care, the President has made clear that the road to fiscal discipline and to solvency for Medicare and Social Security runs through overall health care reform. Although much of the cost of the President’s reform plan will be covered by savings from the system, we will need to design programs to cover some of the costs in ways that are fair to all Americans and do not harm the economy. Treasury is deeply involved in this effort and in the related work to expand coverage and improve our health care system in other important ways.

On retirement and economic security, Treasury and, in particular, the Office of Tax Policy, is taking the lead in developing and actively working with Congress to flesh out the initiatives proposed in the President’s budget to help enhance retirement security and savings for the half of working Americans who have no retirement provisions beyond Social Security. These proposals would make it easier for people to save for their own retirement, either through their workplaces or on their own, and would move us toward universal retirement savings coverage.

On climate change, Treasury is already working closely with Congress to design the auction mechanisms that will be needed to implement the Administration’s greenhouse gas cap-and-trade program.

Our Office of Tax Policy has been deeply involved in all of these issues from the outset of the Administration. Like our Office of Domestic Finance, its workload already has substantially increased and is certain to grow as the health reform, retirement security and climate change debates get underway in earnest.

At the moment, the Office of Tax Policy’s career staff includes 30 lawyers and 44 economists as well as support staff for an overall staffing level of 93. This is lower than its usual complement of over 100 professionals.

Our Fiscal Year 2010 Budget would increase the office budget by $4.9 million to add 15 full-time equivalent (FTE) positions in order to increase overall staffing to 108, and would therefore represent a return to historical norms. The additional staff is needed to perform analysis and revenue estimates for new policy proposals, conduct research for, among other things, congressionally mandated studies, and develop regulations and guidance for new legislation.

The vast majority of the new funds that we request in this Budget are for improving the enforcement efforts and the information technology of the IRS.

As I have said, $332 million would go to new IRS enforcement efforts, including $128.1 million to improve international tax compliance. The balance of these funds would be used to support three critical programs: 755 employees to increase examinations of tax returns for businesses and high-income individuals; 300 employees to expand the IRS document matching program, which compares tax returns to other forms such as W-2s and 1099s; and an additional 491 employees to improve collection operations and build two new IRS automated collection center sites.

Turning to IT, our Budget requests a $90 million increase in funding to protect taxpayers’ personal records from the increasing number and sophistication of Internet-based attacks. With these funds, the agency will deploy state-of-the-art, automated tools to improve record access management, risk assessment and system auditing. This effort would address concerns noted in the past by both the Government Accountability Office and the Treasury Inspector General for Tax Administration.

Our Budget also requests an additional $18 million for systems to help the IRS return review program detect noncompliance and fraudulent refunds, and a $22 million increase to continue modernizing the agency’s core taxpayer account database and modernized the e-File web-based platform.

Reengaging with the World on Economic Issues

The President assigned Treasury to ensure that this country reengages with the world, not just on issues of war and peace, but also on the current crisis, and on issues crucial to our common economic futures.

This is a global crisis. Recovery here depends on recovery abroad. We are working closely with other major economies to put in place the fiscal stimulus and make the financial repairs necessary to ensure U.S. and global recovery.

The U.S. is seeking to mobilize the financial resources of the better-off nations to help the emerging and developing economies that have been especially hard-hit by this crisis. We are doing this for more than simply humanitarian reasons; as recently as last fall, these economies accounted for fully 42 percent of all U.S. exports.

Last month, the President and leaders of the other G-20 nations agreed on the need to make more than $1 trillion in financial resources available to support global growth and trade.

Those funds include our commitment of up to $100 billion for an expanded New Arrangements to Borrow, a permanent back-up mechanism that provides the International Monetary Fund with supplemental resources to help emerging markets and developing nations weather the crisis.

As part of our effort to rekindle global growth for the sake of our own recovery, we are seeking to meet our past and present financial commitments to the multilateral development banks that help emerging and developing countries.

Although the funds to do this are not directly within the purview of your Subcommittee, I mention them to illustrate how Treasury’s entire budget is tailored to let us fulfill the missions that the President has set out for us. Our budget request includes $2.5 billion for international programs, most of which would serve to meet our past and present commitments to the multilateral development banks.

Our financial reform effort in the United States must be matched by similarly strong efforts elsewhere in order to succeed.

Conclusion

Before I end, let me say a word about the Department’s staff.  I have the honor of leading a team of smart and dedicated individuals who are working to make our government more effective and our society fairer, who are following a long tradition of debating policies fearlessly on their merits, doing what is right and not what is expedient, and drawing on the best ideas and expertise that are available. They are performing an incalculable service to our country in these challenging times, and I am immensely grateful to them.

The Department of the Treasury is responsible for promoting the nation’s economic prosperity and protecting its financial security. We advance our interests around the world through the strength not only of our economy but of our ideas.

This President and Treasury have already begun the hard work of recovery and reform. Our Fiscal Year 2010 Budget will allow us to pursue these critical goals, and deliver the balanced and sustainable growth that the American people seek and deserve.

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Current economic and financial conditions and the federal budget

Before the Committee on the Budget, U.S. House of Representatives, Washington, D.C.

June 3, 2009

Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget.

Economic Developments and Outlook
The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.

However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households’ spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline–a precondition for any recovery in homebuilding.

Businesses remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall’s sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizable portion of the reported decline in real GDP in that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production.

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.

In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.

Conditions in Financial Markets
Conditions in a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies as well as the somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.

Among the markets where functioning has improved recently are those for short-term funding, including the interbank lending markets and the commercial paper market. Risk spreads in those markets appear to have moderated, and more lending is taking place at longer maturities. The better performance of short-term funding markets in part reflects the support afforded by Federal Reserve lending programs. It is encouraging that the private sector’s reliance on the Fed’s programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions. The issuance of asset-backed securities (ABS) backed by credit card, auto, and student loans has also picked up this spring, and ABS funding rates have declined, developments supported by the availability of the Federal Reserve’s Term Asset-Backed Securities Loan Facility as a market backstop.

In markets for longer-term credit, bond issuance by nonfinancial firms has been relatively strong recently, and spreads between Treasury yields and rates paid by corporate borrowers have narrowed some, though they remain wide. Mortgage rates and spreads have also been reduced by the Federal Reserve’s program of purchasing agency debt and agency mortgage-backed securities. However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.

As you know, last month, the federal bank regulatory agencies released the results of the Supervisory Capital Assessment Program (SCAP). The purpose of the exercise was to determine, for each of the 19 U.S.-owned bank holding companies with assets exceeding $100 billion, a capital buffer sufficient for them to remain strongly capitalized and able to lend to creditworthy borrowers even if economic conditions over the next two years turn out to be worse than we currently expect. According to the findings of the SCAP exercise, under the more adverse economic outlook, losses at the 19 bank holding companies would total an estimated $600 billion during 2009 and 2010. After taking account of potential resources to absorb those losses, including expected revenues, reserves, and existing capital cushions, we determined that 10 of the 19 institutions should raise, collectively, additional common equity of $75 billion.

Each of the 10 bank holding companies requiring an additional buffer has committed to raise this capital by November 9. We are in discussions with these firms on their capital plans, which are due by June 8. Even in advance of those plans being approved, the 10 firms have among them already raised more than $36 billion of new common equity, with a number of their offerings of common shares being over-subscribed. In addition, these firms have announced actions that would generate up to an additional $12 billon of common equity. We expect further announcements shortly as their capital plans are finalized and submitted to supervisors. The substantial progress these firms have made in meeting their required capital buffers, and their success in raising private capital, suggests that investors are gaining greater confidence in the banking system.

Fiscal Policy in the Current Economic and Financial Environment
Let me now turn to fiscal matters. As you are well aware, in February of this year, the Congress passed the American Recovery and Reinvestment Act, or ARRA, a major fiscal package aimed at strengthening near-term economic activity. The package included personal tax cuts and increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in federal purchases, and federal grants for state and local governments.

Predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face. For example, households confronted with declining incomes and limited access to credit might be expected to spend most of their tax cuts; then again, heightened economic uncertainties and the desire to increase precautionary saving or pay down debt might reduce households’ propensity to spend. Likewise, it is difficult to judge how quickly funds dedicated to infrastructure needs and other longer-term projects will be spent and how large any follow-on effects will be. The Congressional Budget Office (CBO) has constructed a range of estimates of the effects of the stimulus package on real GDP and employment that appropriately reflects these uncertainties. According to the CBO’s estimates, by the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3-1/2 million jobs.

The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year. The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability–defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth–requires that spending and budget deficits be well controlled.

Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

Federal Reserve Transparency
Let me close today with an update on the Federal Reserve’s initiatives to enhance the transparency of our credit and liquidity programs. As I noted last month in my testimony before the Joint Economic Committee, I asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public.¹ That group has made significant progress, and we expect to begin publishing soon a monthly report on the Fed’s balance sheet and lending programs that will summarize and discuss recent developments and provide considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged. In addition, the reports will provide quarterly updates of key elements of the Federal Reserve’s annual financial statements, including information regarding the System Open Market Account portfolio, our loan programs, and the special purpose vehicles that are consolidated on the balance sheet of the Federal Reserve Bank of New York. We hope that this information will be helpful to the Congress and others with an interest in the Federal Reserve’s actions to address the financial crisis and the economic downturn. We will continue to look for opportunities to broaden the scope of the information and supporting analysis that we provide to the public.