Geithner on New Capitalism

Editor & Publisher

Commentary

Secretary Geithner explains the Obama Administration's strategy to rescue the banks during this financial crisis. In brief, the strategy is to keep the "time bombs" (using the parlance of the Visual Guide to the Financial Crisis) from exploding by extending their fuses. The Credit Default Swaps, or insurance guarantees that the banks made to investors of the mortgage derivatives were exploding as the recession deepens and real estate values dropped like a bomb. By extending financing to the banks, Secretary Geithner hopes to delay and defuse the bombs so the insurance guarantees do not kick in and explodes on everyone. Effectively, lifting the value of the entire US real estate market. It is a huge undertaking that only an ambitious Federal government can manage, one that has the united Congress behind it.

Many banks decide to refuse TARP money for the same reason that the strategy will work. Once the panic to sell stops the declining market value, the time bombs have longer fuses and may not even go off when the economy recovers and homeowners no longer default. In fact, those who are buying up the properties at 30% of their value will reap huge benefits and profits within a decade when real estate prices recover.

It is the long time horizon that escape most people in a panic. Secretary Geithner and the Obama Administration is trying to inject a sense of logic and reason into the situation. Whether the media commentators and political pundits will understand the complexity of the situation remains to be seen.

Watch the interview on YouTube.

Excerpts

By Greg Mitchell

Published: March 10, 2009 6:00 PM ET
NEW YORK Embattled Treasury Secretary Timothy Geithner appears on the PBS "Charlie Rose Show" tonight. Criticized from left and right, he is in center of storm over Obama's economic and banking policies, and has been accused of being unclear and not good with the press. So tonight's show is a real acid test.

Near the end, Rose asks, "Will capitalism be different?" Geithner replies, "I think capitalism will be different, and the financial system will be dramatically different. It’s already dramatically different. Again, if you look at the scale of adjustment and restructuring in the financial system, it’s already happened."

Here is the full transcript of the taped interview.
**
[CR]
I hope we can have a conversation here about how you see the crisis, how treasury sees it, and what you are doing and what you intend to do, because as you know, there are a lot of questions in terms of the American public. Let me begin with this. Tell me where we are in this crisis. How severe it is, what's the trend? And then we can look at what we ought to do.
[TG]
It's a deepening recession. You're seeing the recession intensify here and really around the world. You know it started here, but the world is sort of catching up. That's putting more pressure on business and the financial system as we see it. We start with this deepening recession, intensifying housing crisis, a deep fiscal hole in the financial system that's in some ways very damaged. Parts of it are working well, parts of it are still very damaged. It's going to take a lot to work through this. Again, we start with a -- just a deep mess. It is our obligation to clean it up and to fix it and make sure working with the Congress we are very aggressive and very forceful to try to get the competent back on track. We're going to keep at it until we fix it.

[CR]
Is there a risk we'll slide into something as severe as a great depression?
[TG]
Charlie, we're going to be very aggressive. You've seen this administration work at a pace unlike you've ever seen before in history, moving very quickly to put in place this very powerful economic recovery act, to lay out a budget that makes some very powerful investments in things critical to our economic future, things that are going to make the economy grow more rapidly in the future by improving education, addressing healthcare costs, moving us to a clean energy economy, all in a framework that's fiscally responsible framework. We're moving to fix the housing crisis. The president laid out very quickly a comprehensive strategy to help bring interest rates down. Allow Americans to refinance, take advantage of lower rates. And again, help millions of Americans stay in their hopes with some meaningful reduction in monthly payments. We're also moving very quickly to get credit markets flowing again and help strengthen and save lives, the banking system. And those things are all critically important. You're going to see him lead and ambitious agenda to try to get the world moving with us so that the global economy is firing on all cylinders, those four things: getting recovery back on track with aggressive stimulus here, fixing the housing crisis, helping get credit flowing again, making our financial system work with recovery rather than against recovery. And getting the world to move with us are the necessary and critical -- they have to happen together for them to work.

[CR]
You have said before that the lessons of previous financial crisis, you have to move aggressively and you have to move fast and you have to make sure you don't come with too little rather than too much.
[TG]
Exactly right, exactly right. If you look at the lessons have history, you can see this in the United States in the '30s in the great depression. You can see it in Japan in the '90s. There are many, many, other examples. And what typically happens is people understate the severity of it. They wait too late to act. When they act, they do too little. And that makes the crisis deeper, causes more damage, makes fiscal problems worst, deficits larger in the longer term, causing more damage than necessary, and ultimately, costs more to fix it. So the basic strategy underlying what the president is doing is to move as quickly, with as much force as comprehensibly as possible.

[CR]
At the essence is the question of confidence. Has this administration and have you done enough to instill the confidence that things are taking place that will right the economy?
[TG]
Charlie, what is very important for the American people to understand is that this president is going to do what is necessary to get us through this. And he's going to do so with the most effective, most carefully defined, most thoughtfully conceived programs that are available to us as a country. We are a terrifically strong country with abundant resources, and we will get through this. But it just requires action, sustained action, working with the Congress. I think the Congress will follow this president, in this case, and he's going to, again, keep at it until we get recovery back on track.

[CR]
Let's talk about what comes within your jurisdiction specifically. Housing. You have done some -- taken some steps in housing that that have been, for the most part, Republicans and Democrats applauded. You have initiated or have at least set in motion, because of the TARP funds, which we'll give you an opportunity to promote consumer lending.
[TG]
That's right.

[CR]
When will that happen?
[TG]
The lending program you referred to, which is a joint treasury fed program, starts over the next couple weeks. It's going to be sustained over a long period of time. Although we're beginning with the program, this targeted small business lending, student lending, auto finance, consumer credit markets, we're going to expand that program in terms of the scope of types of financial assets. We're going to provide financing and expand the scale, could get as large as a trillion dollars. This is the largest program you've seen in any country, in any period of time, and it's a very important thing. Because it goes around the banking system to try to get the securities markets working again. Those markets typically provide 40% of the financing for, again, businesses and families. And they're not working now the way they need to work. And this is a necessary thing. But it's only the -- only part of the solution. You know, banks play a critical role in the credit process. Banks take the savings of Americans and they lend them to help finance a good idea, a growing business, a family that wants to finance a higher education. And banks are critical to any economy. Credit is, the president said, the life blood of this economy. And although many banks were prudent and careful through this boom, and were not part of the problem and going to be part of the solution, there were other banks that made a bunch of bad judgments.

[CR]
You have said yourself in a previous interview you're deeply disappointed by some of the leaders of the financial community.
[TG]
Right, they made some exceptionally bad judgments. And not just in compensation practice and how they ran their firms, how much risk they took, but as the crisis intensified. And as they got themselves in the position where they needed exceptional assistance from the government, many of those directors made things dramatically worse by continuing to pay out really unjustifiable bonuses to their senior executives and they were losing tens of billions of dollars. That made this basic crisis of confidence much worse, because people understandably looked at that and said how could that be tenable? And that leaves a deeper loss of basic faith and quality of leadership in our institutions, and we're not going to let that happen again.

[CR]
We'll talk more about that. It has to do with compensation and other things, but let me look at what you have done so far in the number of weeks you have been here. You have initiated this thing called a stress test in which you're looking at 20 banks. Explain what that does and what that will tell you and what will come out of it.
[TG]
A really important thing. The system now is burdened by a bunch of loans that probably should not have been made. These banks can't sell those loans. They're sort of sitting on the balance sheet of the system and they're causing a lot of uncertainty and concern about whether these institutions will be strong enough to be able to lend in the event we face a deeper recession. So to get through this and try to resolve that uncertainty and restore basic confidence, you have to start by doing a careful assessment of how large those losses may be as we go forward. And so --

[CR]
The measurement of these so-called “toxic acids.”
[TG]
Well, that’s the measurement of the potential losses. These firms may face on the loans on their balance sheet in the event we go through a deeper recession, and again, the critical thing governments need to do in this context is to make sure that banks have the resources they need to play their critical role in the funding of credit, credit necessary for recovery. And, again, just to make sure this is really important. Everything we do in this context is designed to protect the system and to make sure that the people depend on banks for credit or are able to get the credit they need to grow their businesses and, again, to buy that house, buy that car, put their kids through college. So everything we do is guided by that basic obligation. And this effort to try to get at the heart of and get a careful assessment about where there may be additional resource necessary for the system is a necessary place to start. And we want to get that right, and on that basis, we’ll decide where there needs to be temporary, targeted capital assistance with conditions to protect the tax payers, so these guys can, again, play their critical role in our economy going forward.

[CR]
You made an assessment at Treasury that as long as those toxic assets were on the balance sheet, these banks would be inhibited and would not have the confidence to lend money.
[TG]
Exactly.

[CR]
As long as they have these toxic assets -- so you’re going in now using the stress test for these top 20 banks, the biggest banks, the ones that you don’t want to fail, especially want to fail, because of the impact they have on the system, and looking at them and trying to determine what they will need going forward.
[TG]
Right, and some will be fine on their own. Some may need additional resources as a cushion against losses in a bad recession and will be able to go to the market and raise those resources, and some will need temporary assistance from the government, and we’re [unintelligible] a backstop to those institutions as they go through the necessary restructuring process. And we are going to make it clear: the president’s said this in public. The secretary of the treasury, the chairman of the Fed, the chairman of the FDIC have made it clear that we will provide the support and resources necessary so they can meet their commitments, because that is essential to make sure, again, they can provide the credit necessary for recovery to get established.

[CR]
All right. You have coming up in the next couple of weeks a program for these toxic assets. There sometimes described as “legacy assets” in some quarters.
[TG]
That’s a euphemism. Bad assets would be [unintelligible].

[CR]
Bad assets, okay, toxic, bad. These are assets that caused the problem in the first place, and decisions made by the financial sector have got the entire economy of the world in trouble. Fair summary?
[TG]
That’s right, absolutely fair summary. Both in the United States and around the world, banks got way too large, took on much too much leverage, made a bunch of loans to people that, in a recession, we’re not going to be able to repay those loans. And that’s the heart of this crisis: a long credit boom that produced lots of concentrations of risk and leverage in the financial system.

[CR]
I mean, the essence of the lesson about this economic crisis so far beyond having to do something and do a lot of it is that the economy can get way overleveraged, and if that happens, you’re going to be in trouble [unintelligible].
[TG]
Exactly. It makes recessions harder to solve, deeper, last longer, requires a much more aggressive response.

[CR]
And I assume at some point later down the road it will be part of the regulatory intention.
[TG]
Absolutely, absolutely.

[CR]
Staying with the toxic assets, what do you propose to do when you announce this plan in the next week or two?
[TG]
So what this plan will do is to make financing from the government available alongside public and private capital so that we can get these markets open and up again. The reason why these markets are not moving now is because there’s no financing available and no confidence in people’s capacity to make judgments about ultimate losses. And so by providing financing, government leverage alongside public and private capital, we think we can make a meaningful difference in starting to open up these markets and starting to trade again. There’s capital that wants to come into the system, but it just can’t get financing. So as an example, just make this one example, so if you had to sell your house tomorrow in a market where nobody could get a mortgage, then your house would be worse much much less in that context, and that’s partly why these markets aren’t moving and why people aren’t selling stuff that otherwise would sell. And we need to break that process and unfreeze it, but it requires all these things. It requires making sure there’s capital available to the system, that these banks have the incentive to start to move this stuff, that there’s a mechanism available to broad financing for those things. That has to happen all together.

[CR]
Let me stay with that idea, because what it requires is private corporations willing to come in and buy these bad assets. Some say they may sell for $10 or $15 on the dollar, 10 or 15 percent of the dollar. Some say that banks will want more than that; they want 50, 60. That will have to be determined.
[TG]
It will be.

[CR]
But you’re saying you have private investors who are prepared to step forward and buy these toxic assets if --
[TG]
If they are able to get financing from the government, because, again, that financing’s not available now, so that’s the -- one of the kind of important things that governments have to do in a financial crisis. Because again, you know, a financial crisis reflects an unwillingness by the private sector to take risk because of uncertainty and things that they just can’t do in that crisis. And that’s why governments have to step in in financial crises and take risks the market would otherwise not be prepared to take. So with financing, we’re confident you’re going to see private investors come in and put some capital to work to sort of unfreeze these markets.

[CR]
This is low interest financing, obviously.
[TG]
Well, interest on -- the art of this is to set the terms at a level that when conditions normalize, people won’t want to come get this financing from the government because it won’t be economic to do it. So the art in this is to set the price for the financing at a level that is very conservative in normal times but still economic in times of crisis, and that’s the way this works. That’s the basic [unintelligible] that’s guided what the Fed’s done in these markets, very, very successfully, in the commercial paper financing facility and a range of other facilities you saw the Fed design over the last six to 12 months.

[CR]
In doing this, are you in any way -- and focusing on the toxic assets like this -- rejecting any policy that was there in the past -- in terms of, or will you continue to find it necessary to take public money and invest in these banks to increase your capital interest in these banks?
[TG]
Well, Charlie, I think what’s important to recognize about this approach is we’re going to try to use a market mechanism to get these markets working again, because it’s not going be as effective and efficient to do it solely on the strength of the government’s resources. We want to get more bang for our dollar. We want to do so in a way that protects the taxpayers, and I think the best way to do that is to get these markets working again. We’re providing in a sense a catalyst, catalytic finance to help that process get going again.
Now there are a lot of people who want us to come in and pay an inflated price for these assets and have the government absorb a bunch of those losses directly to socialize that risk.

[CR]
Well, they are the people who hold the assets in part.
[TG]
They are. And we don’t think that’s the right approach for the American taxpayer, and we’re not prepared to pursue that approach. We want to use a market mechanism that leaves the taxpayer with less risk and better overall benefit in trying to fix the system so we get the credit flowing again.

[CR]
By definition, I assume some banks who hold these toxic assets will say, “Thank you very much, Mr. Geithner. We choose to keep them and not sell them.”
[TG]
And some will want to do that, but we’re going to try to make it compelling to them to clean up their balance sheets and put themselves in the position where it’s going to be easier for them in the future to raise private capital.

[CR]
So if they clean up their balance sheets, they will then be in a position to raise private capital?
[TG]
That’s right.

[CR]
If they raise private capital, they can again -- credit will start flowing.
[TG]
Exactly, that’s exactly right. That’s the basic mechanism. And again, we want to maximize the chance that these guys clean themselves up so that private capital can come in and that’ll make it more likely that the things we have to do temporarily -- these investments we make temporarily get replaced by market investments as quickly as possible.

[CR]
This requires a certain introspection on your part, and I hope you will do it for me. When you had your first announcement, a lot of people expected more detail --
[TG]
They did.

[CR]
-- and they didn’t get it from you. And the market responded negatively to that. When you -- it’s said, and one reason you did not do that is that you changed your mind in terms of what Treasury ought to do, and you were moving and [unintelligible] your own direction toward a public-private partnership, which [unintelligible] fell through before. And that’s why there was a delay at that time.
[TG]
Actually that’s not quite right. What we decided to do from the beginning was to lay out a broad strategy and broad principles at an early stage, so that people could see this is going to require a comprehensive effort on all fronts and that we’re going to bring very substantial reforms to the management of this program that has caused so much skepticism and anger across the American public and in the Congress. So we always were going to start with a broad strategy and follow it up with detailed, concrete announcements on the details so people could see the path forward. And as you saw, we moved very quickly. You know, housing came two weeks later.

[CR]
Right.
[TG]
We moved a week after that to lay out this capital assessment plan and the terms of which we provide a capital back [unintelligible] to the system. We now --

[CR]
A capital assessment is a stress test.
[TG]
Exactly. And we announced --

[CR]
Which is not a failed past estimate. It’s just an assessment.
[TG]
Exactly, it’s just an assessment. It’s like a health assessment or -- and we moved very quickly to put in place this very powerful lending program to get securitization markets starting again, and you’re going to see us move very quickly in the next few weeks to lay out how we’re going to provide financing for these legacy assets.
It was always our intention to lay out that broad framework of strategy at the beginning so people could see the full scope of the strategy and then lay out the details. Now, you’re right. Expectations got ahead of the policy, and part of those expectations which caused disappointment were the hope that we were going to provide a very generous benefit to the banking system on terms that I didn't think was going to be effective -- defensible for the American tax taxpayer.

[CR]
I have to ask you this. When you were at the New York Fed and you and Hank Paulson, then secretary of the treasury and Ben Bernanke, still chairman of the Fed, were looking at all the policy options at the time that you had the passage of the TARP legislation, and the kinds of things you ought to do. Did you, at the same time, consider this public private partnership that you are announcing in the next week or two and reject it? Did that happen?
[TG]
Charlie, this idea, this idea to use government financing alongside private capital is an idea that a few people had back in the fall.

[CR]
Warren Buffet, for one, sent a letter to Paulson suggesting this is a way to go.
[TG]
Among others. And some of us put a lot of merit in that proposal at that time.

[CR]
But it was rejected at that time?
[TG]
Well, I'm not sure it was rejected. I wasn't secretary of the treasury, then.

[CR]
But you were part of the conversation. There was no conversation, no day that you and Hank Paulson and Ben Bernanke didn't talk. You were holding the economy in your hands.
[TG]
Remember, we didn't sit in Hank Paulson's shoes. He faced a set of constraints and judgments at that time about how best to use limited resources. And he decided at that time that he didn't have a viable way to do that. Now, we thought about it a lot since then. We think we figured out a way to do it in a way that's going to make sense for the American taxpayer.

[CR]
But you think -- so you've now come to this, which is a new direction, even though you might have considered it earlier, which is the way to go?
[TG]
We think it's a necessary part of a broad based solution that includes, again, this very aggressive program of financing to help get the consumer lending market, small business lending markets moving again, and as a critical part of this effort to provide a kind of capital back stop to the system and guys tried to raise the kind of private capital needed to restore a sense of financial strength.

[CR]
Give me a timeframe on this.
[TG]
We're going to move in the next couple weeks to lay out the precise terms of this facility. People will see how it's going to operate. And then it will go into place over the following weeks and months.

[CR]
Could we start moving again?
[TG]
It will. And this will be is sustain the program. I want to be clear. Again, we start with a mess, a deep mess, made worse by the deepening recession. And these things are pitting on themselves. And it's very important for people to understand, it's going to take some time to work through this. But what I want people to know is that we're going to do what's necessary to get through it. And these things will get traction. They will start to help unfreeze things, and they will help lay the foundation for recovery.

[CR]
I'm not going to ask you to tell me exactly when these things will turn around, but when will they gain traction? When will be begin to see that?
[TG]
Yeah, well, just to step back for a second. If you look at a bunch of the things we've done already with the Fed, you can see some important results. Mortgage rates are a good example. Mortgage rates typically now are around five percent. They have come down the last few weeks, as the president announced the housing plan. That's being supported and reinforced by a bunch of programs that Fed and Treasury are doing together. So you can see there is some concrete tangible evidence of how these things can get some traction. We're going to keep at that. And if you look at most -- probably what most private economists think about the likely pass of the economy as a whole, you see most people believe that we're going to see a firmer foundation recurrence start to take place in the second half of this year, and positive growth start to reassert itself later this year and later into next year. And the improvement in the financial system, the credit markets that we're going to bring about will help reinforce that process.

[CR]
Okay. Take those 20 banks that you're engaged in this capital assessment. And in which this program of doing something about the toxic assets will play. Some of them, even with the new financing, will not make it. Will be insolvent or not?
[TG]
Let me say it differently. Some have a lot of capital and were very careful and prudent. Some may need some modest additional capital and are going to want to raise that in the market. And some may need significant amounts of capital. We are going to be [inaudible] provide that on terms that make sure we're protecting the taxpayer, that these guys are cleaning up their institution, that from is the necessary -- we have accountability for the mistakes up to this point. And this is very important, so that these institutions can return -- can replace our investments, our private capital as quickly as possible. We want the government involvement to be temporary and short lived with a clean, quick exit strategy so that these positions -- these firms are back operating with a stronger financial foundation, with private capital as quickly as possible. And we're going to make it very clear as they go through this, that government is going to stand behind the system and make sure they have the ability to meet their commitments.

[CR]
Are you saying to the American taxpayers for all this money we're pouring into these banks, the likelihood is that they will get on their feet and be able to pay back all of the money that this government has given them?
[TG]
What we're going to do is make sure -- this is our obligation. My obligation is to protect the financial security of the American people and to ensure that this financial system does what it needs to do to help get recovery get back on track. Everything we do is guided by that basic purpose. So where we put assistance in, it's because we think that is necessary and essential to try to make sure there is more lending capacity so that recovery can get traction quickly. That's what's going to guide our approach going forward.

[CR]
Are these 20 banks too big to fail?
[TG]
Charlie, these banks account for the vast bulk of lending in the United States. We have a rich diverse financial system, 9,000 banks.

[CR]
But these --
[TG]
The top [talking simultaneously] between two thirds and three quarters of the banking system as a whole now.

[CR]
By definition, too big to fail?
[TG]
Their role is essential. We want to make sure they're able to continue to play that role going forward. This is a very important thing to understand. What the world is going through is really without precedent in generations. The scale of the pressure on economies global is so acute, the kind of pressures you're seeing across businesses are so acute that it is very important, and the best most effective way to get the recovery established is to make sure the financial system is doing what it needs to do to support recovery. That's what's going to guide everything we do in this country.

[CR]
But I didn't hear the answer to whether these banks are too big to fail. Are they so crucial to the American economy? We're talking about Bank of America which is deep trouble. Citigroup, which is in trouble. Are they too big to fail?
[TG]
I'll say again, they play a critical role in our markets, in our financial system. We want to continue to make sure they play that role. Now, where they need temporary assistance through the government to get through that, we're going to make sure it comes with appropriately tough conditions so that they emerge stronger and that we're providing a level of conditions and accountability that's appropriate in this context.

[CR]
This is an easy question that everybody asks, though, because it's meaningful and it suggests something you said earlier. American people are saying, you know, why give all this money to these people who called the problems?
[TG]
Exactly.

[CR]
You're demonizing them in part, but they caused the problem.
[TG]
Right.

[CR]
And you have been very critical of them. Yet you're prepared to give all this money to save them.
[TG]
Right, well, we're doing it to save the American economy from the cost of more failures of viable businesses and more trauma to the average American family. That's why we're doing it. There is no way we're going to get recovery established without making sure this system is doing -- the financial system is doing a better job of supporting credit. So everything we do is motivated by the judgment. Now, there are some people, you're right, who say that, look, we should let this thing burn itself out. And that government should play no role in this context. I am sure that that would be a catastrophic mistake. We would consign the American economy with that strategy to a deeper, more protracted recession with more unnecessary damage to the basic portions of Americans. And, you know, I think the American people have a deep sense of anger and outrage about how we got to this point. I share that anger and outrage. It's completely understandable.

[CR]
And it's across the board.
[TG]
And it's --

[CR]
It has to do with banks, it has to do with people who have been paying their mortgage, they look next door and somebody is having their mortgage modified so they can pay it, and they say --
[TG]
And the tragic thing about financial crisis is that the people who are responsible suffer the damage caused by the people who were irresponsible, took imprudent risk. That's the tragic thing. But it is the obligation of government and is the only way for us to get through this, to try to make sure that we're in a sense providing some protection for the rest of the system for the consequences of those bad decisions. And, you know, the president's housing plan is very carefully designed to do that. So it's true that it does provide some capacity for eligible homeowners to benefit from a lower monthly payment so they can stay in their homes, if they meet some certain conditions for basic responsible. But as important to that it allows millions of Americans to take advantage of lower interest rates by refinancing. And it provides the prospect of lower interest rates for all Americans. Around so what we're trying to do is make sure that, again, we're protecting the economy from the consequences of a deeper, more long lasting recession. Not trying to protect the people that got us into this mess.

[CR]
Let me take on a couple of points. Number one, Chairman Bernanke appeared on television today and he made this point that the regulatory architecture has to be changed so that you won't -- this economy won't find itself having to go through this again where they're having to support banks simply because they're too big to fail. Do you agree with that?
[TG]
Absolutely, 100%. The president believes strongly in this. You saw that in the campaign layout, a set of very ambitious proposals for reform. And in some ways, we face these two critical obligations today. One is to get the economy back on track, fix this system, get credit flowing again, arrest this deepening recession, but at the same time we have this great obligation to lay out for the American people and the world a commitment to the kind of comprehensive reform so that the crisis like this never happens again. And we’re going to move as quickly as we can on both those fronts. The president had the leadership of Congress in the Oval Office two weeks ago to start that process on building consensus on a reform. You’re going to see him lay out to G 20 to the leaders of the world a very comprehensive framework. You know, people talk about this a lot, but not much was done frankly in the run up to the crisis, and we have to take advantage of this opportunity, where we’re living with the acute damage caused by those judgments to put in place a set of reforms that will prevent this from happening again. And the president believes deeply in this stuff, and you’re going to find us very aggressive and creative and ambitious in the scope of change we’re going to try to bring about.

[CR]
Can you give me some idea what it will include?
[TG]
Absolutely, you have to start by bringing a much stronger set of oversight over all institutions that could pose risk of damage to the system.

[CR]
Do we need one czar regulator? Is that part of the idea that’s under consideration? One person would be in charge of regulating across the board.
[TG]
You need to have much more focused accountability in one place for the stability of financial systems. President said that in the campaign; that will be the core of these reforms. But that’s not enough. You want to make sure, also, that again, the basic rules of the game that are established for risk-taking induce much more conservativism in future booms. That’s absolutely essential, and we’re going to have to make sure that --

[CR]
[unintelligible] setting some kind of standards in terms of how much leverage is allowed?
[TG]
Exactly. These are basic capital requirements, leverage requirements. Right now, of course, we want to see banks lending and doing what they need to get recovery established, but when we get through this, we want to put in place a set of more conservative, better designed constraints on leverage through capital requirements so that a mess like this never happens again. And those need to be applied more broadly, enforced more firmly across any institution that presents risk of damage to the system as a whole. But that’s just the start. We also got to make sure that these markets, critical markets to the health of the financial system in derivatives and elsewhere, have a basic framework of oversight around them that allows us to manage those risks better, and there needs to be clearer accountability for that to.

[CR]
Gordon Bryant [spelled phonetically] was in to see the president last week, and he suggested that what is needed is global enforcement. Because this was a crisis that started and spread around the world, hardly any country has not been affected, that when we talk about regulation, how do you achieve that kind of global regulation?
[TG]
Exactly. We have to get the major financial centers around the world, and this will happen beginning at the G 20 meeting, around the table and agree on a common set of --

[CR]
[Unintelligible] G 20 meeting in April.
[TG]
It is in London in April. Common set of rules of the game that are applied more evenly across all those critical institutions, and what we can’t allow is a race to the bottom on regulatory standards. We need to make sure we’re having a race to stronger standards, and we’re going to start by -- with [unintelligible] the United States and try to build consensus around the world for a high level of standards applied globally. Not just for these big institutions, but for these markets that are critical to everything, like the derivatives markets.

[CR]
We’ve gone from the G7 to the G20, which means that Brazil and Russia and India and China are now included. The Chinese now hold a more American debt than any other country on the face of the earth. Are they still at this time aggressive about taking -- about American debt?
[TG]
I think you see now -- you’re right that a large fraction of American debt held by the public is held outside the United States by investors around the [unintelligible], including in China, but also around the world. And I think if you look at what’s happening today, you see very substantial interest still around the world in holding treasuries. And that’s because our markets are still the most liquid markets in the world, and frankly there’s a lot of confidence still in our capacity to manage this and get through it. And everything we do in moving aggressively to fix this crisis is guided by that basic obligation we have, not just to American investors but around the world to do what’s necessary to try and get this economy back on track to strengthen our fundamentals and put us on a path to fiscal sustainability in the future. So very important in the president’s budget, you saw him not just lay out this very ambitious set of investments in improving education outcomes, in addressing rising health care costs and in improving infrastructure and putting us on a path to a more energy-efficient, green economy, but you saw us do that in a framework that will bring our fiscal deficits back to the point where they are sustainable over the medium term, and people need to see that basic commitment, that basic anchor to responsibility. And this budget was the most candid, honest and clear set of commitments to sustainability you’ve seen in a very long time, and that’s very important to, again, laying a foundation for a continued confidence in the American economy.

[CR]
On the other hand, you get arguments that go like this: This economic crisis is so huge and so threatening that the focus just ought to be on the short term. It ought to be getting credit flowing, getting people back to work, and we can worry about long term issues of education, health care and the environment at a later time. Right now, let’s not muddy the message, and let’s focus on taking care of the near term needs of economy.
[TG]
As you know, the president doesn’t share that view, and I think he’s right. I think you have to do both --

[CR]
You’ve heard the criticism before.
[TG]
I do, but I don’t think it’s right. I think that, again, there are large parts of our country, large parts of policy where we have not done a good job of what governments have to do to make economies perform well and for the gains of economic performance to be broadly shared. And you see the consequence to that in our education system. You can see it in our health care system. You can see it in our infrastructure, and you can see it in the energy area. And the costs of inaction in those areas are very damaging. And it’s very important as part of recovery that we start the process of remedying those failures of policy.

[CR]
And that does not detract from creating jobs right now.
[TG]
Absolutely not.

[CR]
That does not detract from --
[TG]
No, and I think that again, the really important thing to do is to make sure that people see us laying the foundation for a more productive economy, an economy that can grow faster in the future. And these are necessary things to do it. Now, there is a -- I think this is the best way to frame it. It’s economically sensible because it’s going to make us more productive, more competitive. It’s fiscally responsible because we have a better capacity to live within our means in the future, and finance is -- it’s to make sure that we’re improving our capacity to grow in the future. And there’s a basic moral obligation in many of these areas, again, to provide better education opportunities and outcomes to all Americans so they can participate in this economy slowly, and to make your health care system deliver better results at lower costs to businesses or Americans who are suffering from the burden of this health care system.

[CR]
There’s also this criticism, and just at two levels. One is that the message has been muddled. Do you expect that criticism at all, that somehow part of the problem has been not a clear message coming out of Washington.
[TG]
I don’t so necessarily. I think that, you know, again, you have to realize where we started. And we started from a deepening recession here and globally and a huge fiscal hole. And to address that crisis which we inherited, requires the government to act with substantial resources quickly. Now to make it work, you’ve got to make sure that those resources are going to be effective in getting people back to work and stimulating private investment. And you want them targeting areas, which again, which are going to make America stronger in the longer term. And what we’ve tried to do at the same time is make sure people understand that when recovery is firmly established, we’re going to get back to living within our means as a country. Now, to do the alternative path, which is to say we’re going to hope this crisis burns itself out will leave us with deeper deficits longer term and much weaker growth. To just do the stimulus and recovery without telling people how are we going to get back to sustainability, will leave people must less confident that we have the will to fix this longer term.

[CR]
I have read where you’ve said that. We may even want to get back to an economy in which people live within their means. Tell me what you mean by that.
[TG]
Well, you know this crisis is caused by lots of things. It is caused by a bunch of very irresponsible judgments by the financial system, but it’s also --

[CR]
By individuals.
[TG]
By individuals, too -- by individuals running these institutions, but if you look at the amount the American people were borrowing relative to income, you just had a huge unsustainable rise in the basic debt obligations of the American people.

[CR]
That’s what the president said, in fact, I think at the inaugural, that we all -- the whole range of people -- their responsibility for this, most of all the people in the financial sector, but other somehow had a contributing affect.
[TG]
You know, people borrowed and spent beyond their means. Governments borrow and spend beyond their means. And you know, we’re now dealing with the consequences of that and --

[CR]
And corporations will over-leverage in terms of the business practices that they began to employ.
[TG]
Mostly banks were over-leveraged, but some corporations were too.

[CR]
All right, there’s also this. People look at the budget that has been proposed, and they say this is a giant redistribution -- a redistributionist budget. They look at the fact that -- especially some of the conservatives who are non-Keynesian look at this and say, you know, this is the direction this country has never gone in. What do you say to those people who are critical of the budget because of the taxing policies that are built into it.
[TG]
Let’s look at the concrete facts in the budget. What the budget does is propose -- again, once recovery is established, to restore the tax rates on the most affluent Americans to the level that was prevailing in 2001. Now, most Americans will see a significant -- will see no rise in their taxes around many Americans, working Americans, will see a significant reduction in their tax burdens. That moves us to a fair, more balanced system. But it's a modest change, completely consistent with having an economy that's going to grow in the future with the gains more broadly shared. Again, we're talking about restoring the tax rates on the most affluent Americans to a level that prevailed in 2001, and if you look at the decade of economic performance in the United States, in the decade before then, you saw a period where private investment was growing very rapidly. Productively gains were outstripping what you saw in any other country around the world, and again, you saw broad-based, much more broad-based sharing of those gains across the economy as a whole. So this is a -- not just a fiscally responsible package, but it provides more fairness and balance to our tax code in a way that I think is in the long term interest of the American people.

[CR]
And what do you say about taxation on capital? Because people on my program and other places have said, you know, I understand in terms of the tax cut for the middle class taxing people more, I may be even in favor of eliminating itemized deduction. They go a long way on that. On the other hand, they say I have some concern about the taxation level or capital.
[TG]
Right. But again, even there, what the president's budget proposes is when recovery is firmly established, we're going to restore those rates to a level that prevailed at a time of great economic performance for our country.

[CR]
Those rates were?
[TG]
They were -- it's a modest increase in those rates.

[CR]
Exactly.
[TG]
But the real important thing again, Charles, is look at how well the economy fared when those rates were in place. Because, again, if decade of the '90s was a remarkably productive decade for the American business and for the American worker. And we have got to put this economy back on the path where we're making investments. We need to be stronger in a way that's going to be fiscally responsible. We're going to do things that not everybody is going to like. But this is a carefully designed responsible package of changes. It will leave the economy stronger.

[CR]
As you know, questions have of been raised about the assumptions you made of putting together this budget. Private sector has different kinds of assumptions, other governmental agencies have their own assumptions. How are the assumptions formed for this budget?
[TG]
Very important question. We have a very careful independent process that the council of economic advisers runs with complete independence to make their best view about the likely path of the economy going forward. And if you look at that forecast, not just over the next three years but over the next five to 10 years, it's within the range of estimates, not just of CBO, the Congressional Budget Office after measuring the impact of stimulus, but it's within the range of estimate with private forecast. Now, there is some forecasters who think the economy is not going to recover quite as quickly, or recovery will be somewhat delayed. But it's within those estimates, and it's a realistic forecast, and we have a careful process where sometime in July, I believe --

[CR]
You're comfortable with the assumptions you made?
[TG]
Well, they were made at that time. Best judgment of those people at that time. And again, I think they're a realistic forecast. The really important thing is for the long term fiscal position, is the assumptions that you make for growth and inflation and interest rates over the longer term. Those assumptions which are the most important ones for the long term fiscal forecast, again, are absolutely right within that title average of private consensus forecast.

[CR]
Are we going to look at, for a number of years, growth rate between 1 and 2% of the GDP?
[TG]
Well, a recession that follows a kind of huge boom in leverage in credit like this, normally recovery is slower. And comes late and slower than in a recession caused by a period where --

[CR]
[talking simultaneously]
[TG]
But I think, again, most economists show a relatively quick path to growth rates that are above our sustainable rate. You know, our economy normally would grow at a rate between 2 1/2, 2 3/4% over the longer period of time. If you look at most forecasts, they show recovery producing growth rates significantly above that for a period of time, as we work off this -- work down that higher unemployment burden. So again, if you look at the contours of most recoveries, most forecast view recoveries, you'll see a period where growth is going to be above long term trend for a period of time. But again, this recession started more than a year ago and is, you know, very deep and acute in terms of the damage it's causing. It's going to be longer than a typical recession, just because of how large the boom was --

[CR]
Longer means what?
[TG]
Well, again, most private forecasts, particularly administration forecasts shows recovery starting in the second half of this year.

[CR]
And believe that's true?
[TG]
I believe --

[CR]
When recovery starts, you stop the slide?
[TG]
Yeah. What will first happen -- you can see this in parts of the economy today. You see the pace of decline start to decelerate. Then you'll see a little bit more of a bottom of the foundation. You'll see a recovery come back.

[CR]
You expect that to happen?
[TG]
I do, absolutely, expect that to happen. We're going to keep at it to make sure that that absolutely happens. We're going to make sure we have a set of policies in place sustained over a period of time with as much reinforcement on all fronts as possible to make sure that that recovery comes.

[CR]
When you were head of the New York Fed, Hank Paulson was secretary of the treasury -- Hank Paulson was secretary of the Federal Reserve. You guys worked together. Are you -- what's different today? I mean you're the secretary of the treasury. In terms of the way this team puts together economic policy? You've got Larry Summers in the White House. You've got Sheila Bair still running the FDIC. You, it is said, and it is noted in even today's Washington Post, don't have a full staff working with you. Is that part of a challenge for you?
[TG]
Charles, we have a very talented strong group of people working very hard at the treasury now. It's been true for the last several weeks. We're building that team very quickly. You're going to see us announce some more senior appointments --

[CR]
Including a deputy secretary of the treasury?
[TG]
Including people on the full financial front relative --

[CR]
A well known attorney from New York who has been clearly suggested might be the new appointment for deputy secretary of treasury.
[TG]
Well, you know, remember, in this period of time, you have seen an administration, before it came into office, get Congress to pass very substantial additional resources for the financial system. You saw a stimulus package of unprecedented scope and power move through both houses of the Congress. You saw the president lay out a budget that makes these very ambitious long term investments in education, healthcare, energy, within a framework of fiscal responsibility. You saw movement on the housing front very quickly. We've got a terrific team of people working to help figure out how to get the automobile industry back on a path --

[CR]
I want to come to that.
[TG]
-- of viability. And you've seen us move very aggressively to help get this financial system in a position again where it can provide credit to the economy. So we're moving very quickly across all these fronts. We don't really have the luxury of doing these piecemeal.

[CR]
But there is no problem in the vetting process that's leading you not to have a full staff in place. People who have been advising you, worked on the transition team, and the like?
[TG]
We're trying to get -- make sure we have some of the best talent available in the country to come play this critical -- I don't think you've seen any administration fashion challenges this difficult and severe. And we want to make sure we have the strongest --

[CR]
You're saying that whatever problems we may have had in ruling out our programs is not because we didn't have efficient staff.
[TG]
Absolutely not.

[CR]
Autos --
[TG]
And again, if you look at the pace of action, scope and pace of initiative, in these last five weeks, six weeks, I am confident you've never seen a government move this quickly. In -- you know, most of the things we have done in six weeks have taken governments years and years to do in crises as severe.

[CR]
There has been some criticism for you, as you know. What do you attribute that to, then?
[TG]
I think a lot of this just comes with the job.

[CR]
You make decisions and some people are not happy?
[TG]
That's absolutely the case. I think some people want clean, crisp resolution. Some people want us to do things that are going to be beneficial to their financial interests on more generous they remembers than we're prepared to do.
So you want to make sure there is a firm hand on the tiller and that they know what they're doing, and that they have a clear sense of the direction they want us to go.

[TG]
They do. They want to know when we're going to get through this, how we're going to get through it, and we're going to get through it. This president is going to make sure he -- together, with the Congress, do what is necessary. I believe the Congress will follow him.

[CR]
All right. Looking at autos, tell me -- what you decided to do now, there was some talk of an auto czar. You dismissed that idea. Now, you and I think it's Larry Summers sort of in sharing this group that is going to do what?
[TG]
We have a task force of the cabinet appointees from energy, transportation, labor, commerce environment who represent the full set of policy interests we're facing, together around the table shaping strategy. And we have a team of people with manufacturing expertise and financial expertise on the ground. Actually, they’re either in --

[CR]
[Unintelligible].
[TG]
Michigan today, working through --

[CR]
Riding the new GM car that --
[TG]
I don’t’ know which car they’re riding, but they’re trying to work with the basic stakeholders and try to figure out how to get a plan in place that we can support that will leave this industry in a stronger position.

[CR]
Okay, what’s your philosophy about what ought to be done, though, because as you know, in the same way they talk about the financial sector, a lot of people say, “Let them go bankrupt. They have managed this thing bad, and let them go bankrupt they can have a new relationship with unions, and they can go about becoming a different kind of company.”
[TG]
Part of what this industry --

[CR]
And a lot of people lose their jobs.
[TG]
The industry is just facing exceptional challenges, part of those challenges they brought on themselves, and part of those challenges are just the function of the fact that we are facing such a huge collapse in demand around the world in a very difficult financing environment, and what we want to do is figure out what restructuring plan will leave these firms in the position where they’re going to be viable over time without government support.

[CR]
But that’s a big “if.” I mean, do you believe that with more money, General Motors can become profitable again?
[TG]
This is not a great analogy, but we’re looking under the hood to try to make sure we have a best sense possible of what it’s going to take to achieve that outcome and how best we can help --

[CR]
Okay, but the question being asked is whether this is right direction to go in. I mean, there’s no overriding commitment to do something until you make an assessment as to whether it’s worth doing.
[TG]
I think that we’re going to look very carefully at the kind of restructuring that will leave these firms in the position where they’re going to be viable longer term, again, without government assistance. And there’s a good public policy case in that context of providing temporary support with assistance given, the importance of these firms to our economy at this particular time, and again, where we think there’s a case for helping making restructuring happen, we’re going to look at how best we can do that.

[CR]
Why not let them go into bankruptcy?
[TG]
You know, Charlie, again, we’re going through a very challenging period for the American economy as a whole, and as the president said, and the previous administration said, a disorderly failure of these firms [unintelligible] would cause enormous damage in terms of job loss across a whole range of industries, and, you know, you, in a recession like this, you have to be pretty considerate of things you would never consider in a more normal economic environment.

[CR]
Hank Paulson, your predecessor, said, “It’s the hardest sell in the world,” saying you want to do things because if we don’t do these things, things will be worse.
[TG]
Exactly. It doesn’t -- it’s very hard for people to appreciate that and understand that, but it’s right.

[CR]
What have you learned about this job that you didn’t recognize when you simply were a part of a triumvirate exercising policy in the previous administration?
[TG]
You know, Charlie, I don’t know if you know this, but I spent most of my professional life in the Treasury --

[CR]
I do.
[TG]
-- in an earlier period of time.

[CR]
[Unintelligible] for a fellow named Larry Summers at one point.
[TG]
And a fellow named Bob Rubin [spelled phonetically].

[CR]
Bob Rubin.
[TG]
And a range of other secretaries. And so I had the great fortune at an early stage in life at working at one of the most competent, respected, affected arms of the U.S. government with terrific people, and I got a great sense of that point and full scope of the responsibility of this job and I had the great privilege, again, of being in those jobs at a time of great crisis globally, too, and significant challenge to the United States, although the challenges we face today are much more acute than we faced then. So I had the benefit of that basic exposure back then.

[CR]
But bear with me on this. You clearly did, and then at the New York Fed, you were associated with a lot of intelligent and smart people. But did you see this coming?
[TG]
[Unintelligible].

[CR]
Yes, did you see Citibank, which was under your jurisdiction in New York, was in deep trouble? Did Bob Reuben see they were in deep trouble? Did a whole range of people who had performed well in different circumstances see what was going on?
[TG]
Charlie, most people missed this --

[CR]
Because?
[TG]
-- didn’t see -- you know, it’s a hard thing to understand. I think that probably was, you know, we had a long period where growth was becoming more stable. People became more optimistic of the future. They projected that optimism in the future and that created the conditions where people took more risks than they should have, and they, frankly, didn’t pay enough attention to the possibility that when this ended, came apart, that the consequences would be as damaging as they did. Now, I spent almost every day from the first time I walked into the New York Fed about five years ago working with my colleagues on ways to try to make the system stronger so we were going to be better able to withstand the kind of pressures [unintelligible] when this came apart, and we did some very important, powerful things, but many of the things didn’t have enough traction, and we share with really all parts of the financial oversight bodies here and around the world a deep responsibility for not having done more and a really deep obligation for trying to fix this quickly and put in place the kind of reforms to prevent this from happening again. But I was, like many of my colleagues, deeply worried about the boom and leverage and it’s possible consequences --

[CR]
And the bubble in the housing market and all of that.
[TG]
Yeah, exactly. And you know, as you saw in the United States, the Federal Reserve did move very, very aggressively, so as the crisis began in the middle of ’07, the Fed was very, very aggressive in trying to cushion and contain the damage caused by this catastrophic adjustment in the financial system.

[CR]
I remember saying to you in May of 2008, what is surprising about this? And you said to me how fragile the system is --
[TG]
Yeah, yeah. Our system --

[CR]
-- how fragile it had become.
[TG]
Our system was not designed to sustain a shock, a crisis of this magnitude. It’s the tragic failure of financial regulation in this country. It was just not designed to tolerate anything of this magnitude. The critical test of any financial system in some senses is how you deal with stress and shock because you want a system that’s going to be strong and resilient enough to handle almost anything it could face. And this system didn’t meet that test because we had a regulatory framework that was designed, largely, 90 years ago and did not adapt to take account of these huge changes in the structure of our financial system.

[CR]
Will capitalism be different?
[TG]
I think capitalism will be different, and the financial system will be dramatically different. It’s already dramatically different. Again, if you look at the scale of adjustment and restructuring in the financial system, it’s already happened. It’s profound in scope already. So if you just look at the system today relative to what it was through three years ago in terms of the institutions that existed then, and their basic shape has changed dramatically. And there’s going to be more changes ahead.
But I think it will emerge stronger. This will clean out a lot of the excesses and bad practices, and those that don’t get cleaned out just by experience and knowledge now, better regulation oversight, better rules to the game, enforced more cleanly, we’ll fix.

[CR]
Final question: Why are you confident that we’re going to come out of this? What is it that makes you, when you see the numbers that you never imagined seeing, when you see a trillion dollar deficit, when you see General Motors tottering close to bankruptcy, when you see General Electric having the kinds of problems -- these are icons of American might -- when you see people going through what they’ve gone through, when you see unemployment climbing up beyond 8.5 percent, why are you, in the center of this -- who knows everything or knows most of the stuff, you hear the bad news and the possibilities -- confident?
[TG]
Because this is not about ability; it’s about will. And it’s about the will of government to do what’s necessary to act to fix this. And I’m confident that this president of this country will have the will to do that, and if you look again at the experience of other crises across history, the crises become deeper and longer lasting because of failures of government to act effectively. And if government marshals the resources of this country, as we are doing now to get people back to work, to stimulate private investment, to fix this financial system, to get credit flowing again, then this recovery will come. It will come more quickly with a firmer foundation, and that’s what the president’s committed to do.

[CR]
And the essence of the American experience will not change.
[TG]
Yeah, and as a nation, we have a great record when confronting huge adversity, of coming together and moving to fix it. And we’ve done that in the past. I’m sure we’re going to do that now. It’s just a matter of acting, and the present strategy will be a strategy of action and a commitment to keep at it until we get recovery back.

[CR]
Thank you for joining us.
[TG]
Nice to see you.

[CR]
Tim Geithner, the Secretary of the Treasury. He is one of the people charged by the president to see us out of this economic crisis and provide the kind of leadership and confidence and proposals and policies that will make that possible. It is a global crisis. It is a crisis of profound dimensions, and on this program, we thank you for joining us. See you next time.
*
E&P Editor Greg Mitchell's new book is "Why Obama Won." For more about it, go to:

http://gregmitchellwriter.blogspot.com/