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Geithner Defends Plan for Regulatory Overhaul

June 18, 2009 at 6:20 PM EST
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In an interview with Jim Lehrer, Treasury Secretary Timothy Geithner details the administration's case for a sweeping overhaul of the financial regulation system and discusses the government's role in shaping an economic recovery.
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JIM LEHRER: Now, our interview with Treasury Secretary Timothy Geithner. I talked with him earlier this evening.

Mr. Secretary, welcome.

TIMOTHY GEITHNER, Treasury Secretary: Thank you.

JIM LEHRER: How do you feel about the reactions you’ve received to the big announcement of the new financial rescue plan?

TIMOTHY GEITHNER: Very good so far. It’s early, though, and this is a very a very complicated thing. It’s going to be important to get right, and there’s going to be people on all sides of this, and they’re going to take a long time looking at it carefully. But I think it’s pretty good so far.

JIM LEHRER: The commercial banking industry has come out very strongly against it on the grounds that you went after the wrong targets. They were not the problem; it were all these other financial institutions that caused the crisis, and yet you’ve gone hard against them. How do you respond to that?

TIMOTHY GEITHNER: I don’t think that’s fair. I think anybody looking at what our economy has been through, the financial system has been through would have to conclude that there were systematic failures in the risk management at not just non-banks, but at banks, and systemic failures…

JIM LEHRER: At bank-banks, you mean?

TIMOTHY GEITHNER: Banks, as well. And failures in consumer protection, too. I mean, just look at the damage caused by what happened in the mortgage market, in the consumer credit market.

And look at damage caused by the fact that we had institutions just take on huge amounts of risk. Took themselves to the edge of the abyss, and put a huge amount of stress on the economy, causing enormous damage to lives and fortunes of businesses, families across the country. You know, it really did take us to the edge of a very deep, traumatic recession.

JIM LEHRER: Joe Nocera, financial writer for the New York Times, had a piece today, and he said that your plan is, quote, the Obama-Geithner plan, let’s call it, is, quote, “little more than an attempt to stick some new regulatory fingers into a very leaky dam rather than rebuild the dam itself.”

TIMOTHY GEITHNER: Well, as you say, we’re going to get it from both sides. Some people will think we’re being unfair, doing way too much, overdoing it. And some people are going to say we’re not going enough.

But let me just say the most important things we’re doing. We’re going to put in place stronger protections for consumers; that’s a basic obligation of governments, and our system failed to do that.

We’re going to make sure the system has much stronger shock absorbers, cushions to absorb the stress of future recessions.

And we’re going to make sure the government has better tools for managing future crises. Those three things are very important. They’re the most important things for us to do, and we’ve put a set of very strong proposals to achieve that outcome.

The state of the crisis

Timothy Geithner
Treasury Secretary
Most measures of consumer and business confidence have started to improve.

JIM LEHRER: What's the state of the crisis, as we speak right now?

TIMOTHY GEITHNER: Well, the economy is showing some signs of stability, and the financial system is showing some signs of healing. If you look at the price of credit, the cost of borrowing, it's come down quite significantly. Most measures of consumer and business confidence have started to improve.

But it is very early still, Jim. And I think we still face a very challenging period ahead, a lot of risks still ahead. For most people across America, many people across America, and for many businesses, it still feels and it's going to feel for a while as an exceptionally challenging period with a lot of uncertainty still.

And so we need to keep at this until we're very confident we have a sustainable recovery in place.

JIM LEHRER: Keep at what specifically? What is it that you feel you're keeping at?

TIMOTHY GEITHNER: Two really important things. One is to make sure that there's strong support from central banks and governments around the world to get growth back on track, with a mix of investments in infrastructure, things that help get people back to work and employment back up, and incentives for investment. Those basic things are very important.

The second thing is to make sure that we're getting capital into the financial system, repairing the damage done to the financial system so the financial system can provide the credit necessary for recovery. Those are the two core things that we're doing, working with countries around the world.

You know, I was just in China, just in Europe again, where the president worked very early to try to build a stronger coalition so that we're moving with other countries together to confront what, you know, still remains the most challenging economic crisis in generations.

JIM LEHRER: Is it your feeling generally that the system itself -- I'm talking about the financial system now. We'll get more to -- back specifically to the recovery generally in a moment, but to the financial system, do you feel that you've got that fixed now and it just has to now kind of carry on or you've still got some huge repairs to be done?

TIMOTHY GEITHNER: I think we've made a lot of progress. I think -- you know, remember, we're two years into this. This didn't begin -- it didn't begin yesterday.

But we're two years into this. There's been a lot of adjustment. We just saw, after we concluded the stress test on the banking system, a lot of new capital coming into the banking system, substantial capital coming back to the government.

So I think things are better. They're more stable. They feel better. Some of these markets that were frozen for a long time are starting to open up again, but I would emphasize the challenges still.

And we want to be very careful not to get ahead of ourselves, not to let people feel too confident yet until we're more confident, again, we've achieved more repair, more stability.

Aims for recovery

Timothy Geithner
Treasury Secretary
we want to see the unemployment rate start to come down and come down substantially. We want to see costs of credit, availability of credit come back to a more normal place.

JIM LEHRER: What's the benchmark that you're aiming for immediately, right now? What would you like for it to happen or look for in the next week or two or month or so to know -- talking about particularly credit, frozen credit, getting money moving again?

TIMOTHY GEITHNER: Well, again, I would say ultimately we'll want to see the economy growing again. We want to see jobs...

JIM LEHRER: But growing is defined in what way?

TIMOTHY GEITHNER: Positive growth. And we want to see the unemployment rate start to come down and come down substantially. We want to see costs of credit, availability of credit come back to a more normal place.

It's not going to go back to where it was between 2004 and 2007. That was an unsustainable boom. Borrowing costs were unsustainably low. That's what helped produce this huge boom in credit, huge boom in housing prices, asset prices. We can't go back to that.

But we want to have the credit more available than it is today on more reasonable terms than we're seeing today.

JIM LEHRER: Unemployment, most people predict it will be at 10 percent. It's moving up, up, up, up. It's close to 10 percent. Some people are now -- some of the experts are now saying it's going to go to 11 percent sooner rather than later. Do you see the same thing coming?

TIMOTHY GEITHNER: I think it's clear that -- and this happens in all recessions -- that even when growth starts to come back and you see the economy growing again, that unemployment is likely to rise for some period of time.

So that's likely in this case, hard to tell how far it goes, but that's one reason why we want to make sure that we've got recovery coming back as quickly as possible so we can start to get that unemployment rate down and reduce the risk that it goes substantially further above its current rates.

JIM LEHRER: You and your experts looked at a situation or various scenarios. And are you confident from looking at these various scenarios that there are, in fact, a real possibility that there are going to be jobs for everybody when all of this thing finally unravels and finally gets together again?

TIMOTHY GEITHNER: Oh, absolutely. I think, you know, ultimately, the economy will start to grow again. We'll go through the adjustments we have to go through still. You know, people are going to have to save more and spend less for a substantial period of time. The government is going to have to ultimately shift to save more, reduce these deficits.

But this economy will start to grow again. We have a very strong, resilient economy and a very productive economy. And it will take some time, but we'll get back, this economy back again.

JIM LEHRER: You know, the recent polls, just a couple of them the last 24 hours, show a growing pessimism that that's going to happen. A lot of people don't believe there are going to be enough jobs for everybody when it's all said and done.

TIMOTHY GEITHNER: Right. No, I agree. I think you see a mixed sense in those polls. In some ways, you see more optimism about our long-term economic future than you've seen in some time, but you see what you'd expect to see, which is still substantial uncertainty, anxiety, natural in an economy with unemployment this high, and you see substantial concern about our long-term fiscal position.

And I think that's ultimately a healthy thing. It's sort of a recognition of the reality and the challenges we face. And that will help make it more likely we have the political will to bring those deficits down over time once we get this economy growing again.

JIM LEHRER: The polls show that people are really concerned about the decision of the Obama administration to get involved in trying to save General Motors and Chrysler. Do you have any second thoughts about that?

TIMOTHY GEITHNER: Absolutely not. Remember, we started and inherited an economy in deep recession, the automobile industry in acute crisis, a financial system that was deeply damaged and causing a deeper recession than was necessary in that context.

We did not choose to inherit those problems. They came with the office when we started and this Congress started.

And the previous administration chose to take initial steps to help support those automobile industries. We decided just to carry those forward and help support the kind of long-term restructuring that was necessary to make them viable, able to survive without government assistance over the longer period of time.

I think that was the right decision then, and I think it was the right decision for the president to see that through. But we did this with extreme reluctance. No one will want to be in the position of having to do the things we did in this context, but we did them only because we thought they were necessary to improve the odds we get the economy back on track, job growth positive again, incomes positive, and get out of this mess more quickly.

Deficit worries

Timothy Geithner
Treasury Secretary
We had to temporarily increase the amount we borrow in order to provide support for investments and tax cuts to get the economy back on track, fix the financial system. Those were necessary things to do.

JIM LEHRER: Now, all of this is costing a huge amount of money, and the polls also indicate that. That's the number-one concern of the American people now, is the debt over a trillion dollars, and who knows when it's going to stop rising? What do you say to that?

TIMOTHY GEITHNER: Well, I think that it just underscores how important it is that we bring those deficits down once we get the economy growing again. And the president is committed to do that. It's very important we do that.

Because if we don't convince the American public, investors around the world we have the will to do that, then we will face the risk that interest rates rise, they choke off incipient recovery, we're left with higher unemployment, lower private investment for a longer period of time.

But you remember where we started. We started with a deficit at close to 10 percent of GDP. The costs of fixing this mess were going to be significant, no matter what.

We had to temporarily increase the amount we borrow in order to provide support for investments and tax cuts to get the economy back on track, fix the financial system. Those were necessary things to do.

If we had not done that, then we would have been faced with a deeper, more protracted recession, more job loss, more business failing, higher long-term deficits. This was the necessary step to take to try to bring the economy back.

JIM LEHRER: There's no question in your mind that these things had to be done? The alternative would have been what?

TIMOTHY GEITHNER: Absolutely. Just think about where we were at the end of last year. We had an economy falling at a rate of 6 percent a year, deepest recession we've seen in many, many decades, a financial system at the edge of collapse. Now...

JIM LEHRER: How close to the edge of collapse?

TIMOTHY GEITHNER: In September, in the fall of 2008, the U.S. financial system and the global financial system was at the edge of collapse.

JIM LEHRER: Define "collapse."

TIMOTHY GEITHNER: There was a general loss of confidence in the system, and we were at the edge of people pulling their investments, resources out of our financial system.

That would have caused -- if we had let that happen as a country, that would have caused much, much greater damage than we already saw to equity values, to pension values, to wealth, to borrowing costs. We would have seen much more traumatic damage to -- in terms of foreclosures, unemployment, businesses failing.

And the fact that we were able to bring it back and achieve some stability now is really remarkable this quickly and very important. And it is the result of this president and this Congress acting forcefully.

You know, countries have a lot of experience with financial crises, Jim. And if you look at what countries have normally done, they have normally waited too long, they've been tentative early, tried to avoid acting, underestimate the cause of the problem, and that has invariably produced much deeper, longer recessions at greater costs to the taxpayer, greater damage to the fortunes of Americans, and the president was not prepared to take that risk and not make that mistake.

And that's why we moved so aggressively. And that has helped bring about these initial signs of stability that you're now seeing. Without those actions, the economy would have kept shrinking. The financial system would have been at the edge of further trauma. And it was necessary and essential for us to act to avoid that risk.

JIM LEHRER: Now, though, this rising concern in terms of confidence that, oh, yes, yes, all of this has happened, but it's cost an incredible amount of money.

TIMOTHY GEITHNER: It does.

JIM LEHRER: And can the United States of America and the rest of the world afford to do all these things that are being done?

TIMOTHY GEITHNER: Oh, absolutely. And, again, if we had not had acted, then we would have had a deeper recession, longer recession, greater ultimate cost to the taxpayer in terms of lost productive capacity, higher long-term deficits, harder to solve.

And, again, I think that's the basic lesson of crisis, not just for the United States in the '30s, but for Japan in the '90s. And we can afford to fix this problem.

JIM LEHRER: We can? We can? No question in your mind?

TIMOTHY GEITHNER: We can. No question. It is completely within our capacity as a country to solve this problem. It just means that we have to act and we have to keep at it until we fix it and not prematurely step on the brakes and declare victory, allow complacency to set back in.

You know, that's why we've moved so quickly early, because we think it was the necessary -- in some sense, the conservative, prudent step. It would have been -- we'd take more risk with the lives of Americans if we'd sort of sat back and hoped this thing would solve itself.

The scope of intervention

Timothy GEithner
Treasury Secretary
We had the worst financial crisis in generations because of basic failures in the design of regulation.

JIM LEHRER: What about those who are now saying, "OK, fine, you did all this, but the end result is going to be the U.S. government's going to be running automobile companies, it's going to be running banks, it's going to be deciding how much money people make on Wall Street." It's essentially we've got a government-run not only economy, but a country in every nook and cranny there is.

TIMOTHY GEITHNER: I don't think that's a viable criticism, but let me do each of the pieces of that.

JIM LEHRER: OK.

TIMOTHY GEITHNER: In the financial sector, the financial markets require well-designed regulation. We did not have well-designed regulation. We had the worst financial crisis in generations because of basic failures in the design of regulation.

So our job is to get those better. And it's not going to require more of them; it's just going to require better design, more effectively applied, more broadly applied to contain risk, protect consumers.

In the financial sector, we've taken a very limited investment only where necessary. And you saw two weeks ago -- in fact, yesterday, we got $70 billion in capital back from some of the nation's major banks. We had another $70 billion raised by some of the nation's major banks from the private markets so that we don't have to be in there.

We are working as hard as we can to make sure we get out of those investments as quickly as possible because we do not want the government of this country in the business of running those private institutions. That's not good for the taxpayer, not good for the economy.

And the automobile industry, as well, again, exceptionally reluctant actors in that context. And we've had to take, for unavoidable reasons, an equity stake in those companies, but we're not going to get -- we're not going to run those companies. We're not going to get involved in day-to-day management. And we will get out of those as quickly as we can.

JIM LEHRER: Finally, President Obama said yesterday that the real cause of all of this was a culture of irresponsibility. You've worked in and around the financial industry for years. How would you describe that, what that culture was? What caused it?

TIMOTHY GEITHNER: I've never worked in the financial industry, just to say. I've always worked in public service and the government.

But what caused it? I think that, at its basic level, people were too confident that the future would be stable, so people borrowed more than they should have, and banks and investors took more risks than they should have, in the view that was mistaken, that the world would be stable in the future.

And these institutions let compensation practices get completely unmoored from gravity, any reasonable appreciation of risk, and those incentives overwhelmed the basic checks and balances in the system.

I think those are the things that happened: too much confidence about stability in the future and failures in basic checks and balances, risk management supervision, in part because compensation overwhelmed those checks and balances.

JIM LEHRER: And that culture is now done and over with?

TIMOTHY GEITHNER: Not yet. Not yet. It's very important people recognize we can't go back to the way it was. We need to put in place much stronger protections against this happening in the future, because, again, we've seen just enormous damage. And that's why the president is moving so quickly on financial reform, because we felt we needed to act while the memory was searing still.

JIM LEHRER: All right. Mr. Secretary, thank you very much.

TIMOTHY GEITHNER: Thank you, Jim.