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Geithner: Again With the Debt-Limit Debate? ‘I Don’t Understand it’

May 17, 2012 at 12:00 AM EST
Treasury Secretary Timothy Geithner told Jeffrey Brown during a factory tour Thursday in Baltimore that he couldn't understand why the debate over the federal debt limit is back again. They also discussed how regional Federal Reserve bank boards are established and how President Obama will campaign about jobs and the economy.
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JEFFREY BROWN: And we turn to our newsmaker interview with Treasury Secretary Timothy Geithner, now the longest-serving member of President Obama’s economic team.

I met up with him this morning in Baltimore as the secretary visited local businesspeople and companies.

In a company like this, what lessons do you take from it?

SECRETARY OF TREASURY TIMOTHY GEITHNER: They’re growing. They’re hiring. They’re investing. They’re bringing a lot of innovation and technology to improve productivity.

JEFFREY BROWN: Secretary Geithner was talking about Marlin Steel Wire, a small Baltimore company where he took a tour this morning.

For Geithner, this is a model for the kind of growth he and the president want to see, a growing American company that actually makes things, a manufacturer of wire baskets that employs 30 workers and now exports to some 36 countries around the world.

This is a small number of jobs. This is not going to bring back the millions that we. . .

TIMOTHY GEITHNER: No, but there are hundreds and hundreds of thousands of small businesses across the country like this. These guys are making things. They’re making things you can feel. And they illustrate one of the strengths of the recovery so far, which is manufacturing doing pretty well, you know, getting stronger all the time, partly because of export growth and partly because America is becoming such — so much more competitive.

So it’s a good example that, if invest in people and training, and you invest in innovation, you can be very competitive, even in a world that’s much more competitive than it used to be.

JEFFREY BROWN: The visit was also a part of an ongoing effort to get out of Washington to promote the administration’s economic agenda.

And there are some success stories to point to, but there’s also much that make’s Geithner’s pitch a tough sell, sluggish overall job and economic growth, new turmoil in Europe, J.P. Morgan’s spectacular trading losses that put a renewed focus on Wall Street banks, and now in Washington the flare-up once again of a fight over the federal debt limit, with Republican House Speaker John Boehner and President Obama jousting over spending and tax policies, raising the specter of a fiscal crisis by the end of the year.

JEFFREY BROWN: Here we are again this week where the debt-limit question has bubbled up. Do you see –

TIMOTHY GEITHNER: Can you believe it?

JEFFREY BROWN: Can you believe it?

TIMOTHY GEITHNER: I can’t. I can’t. I don’t understand it. I don’t understand it.

JEFFREY BROWN: You can’t because, you can’t understand because –

TIMOTHY GEITHNER: Because look at how much damage it caused the country last August. I mean, it was terribly damaging for the country. And the idea you can govern effectively at this time in American history — you know, we’re fighting wars. We’ve got a major financial crisis in Europe. We have all of these challenges for the rest of the country with political politicians threatening to default if we don’t adopt a partisan political agenda. It’s deeply irresponsible. There’s no basis for it.

And for those who argue you need to threaten default to induce politicians to act, I mean, I would remind people that at the end of this year we have a very powerful incentive in these automatic spending cuts then the Bush tax cuts. That’s a pretty powerful incentive to get these sides, these both sides to come together and agree on some long-term fiscal reforms.

JEFFREY BROWN: Amidst a political campaign, do you think we’re heading for another, yet another impasse?

TIMOTHY GEITHNER: Completely avoidable, completely avoidable, needs to be avoided. What we should do is make sure that we bring people together after the election and agree on a set of reforms that put our deficit on a glide path to a more sustainable level, and make sure they’re phased in gradually so they don’t hurt the economy.

JEFFREY BROWN: Another subject. This week, we learned that JPMorgan Chase, the largest bank in the country, lost $2-plus billion. Today we learn it’s probably at least $3 billion. People who have worried about the banks, the financial crisis, think the banks have not learned their lessons. They think the regulations that were tried have not kicked in enough; the banks have fought those off. What lessons do you learn from this?

TIMOTHY GEITHNER: Yeah, this is a pretty significant risk-management failure. And it makes a very powerful case for the importance of financial reform — tough, effective financial reforms. But –

JEFFREY BROWN: More than we have already?

TIMOTHY GEITHNER: We’re going to make sure they’re tough enough to make sure.

And what’s the test of reform? The test of reform is not do we prevent banks from making mistakes, do we prevent banks from taking risk or from losing money – because that’s going to happen. Our job is to make sure that when they make those mistakes, they don’t cause broader damage to the economy again.

And these reforms are very effective. And part of the reason why even this large a mistake is going to have no broad impact on the economy is because we were so forceful early on in forcing these banks to hold much more capital against risk. So the fact that this is a manageable loss is a testament to the strength of reform. But it’s also a very powerful argument not to weaken these reforms and to make sure that the rules we still are shaping are tough and effective in protecting the economy from these mistakes.

JEFFREY BROWN:  But many who want more point exactly to the lobbying power of the banks to weaken not kick in some of the things the Volcker rule.

TIMOTHY GEITHNER: Actually, the lobbying effort is very forceful. It’s formidable. They’re putting a lot of money into it, and they’ve got a lot of political support from the president’s opponents. But it’s having no impact so far on our ability to write tough rules reforms. And we’re going to make sure it doesn’t. And so those people who are concerned, as they should be, that this effort to weaken reforms not succeed can feel a little more comfortable today, I think, because again, this failure in risk management is a pretty powerful case for reform.

And I think you’ve even already seen some Republicans start to pull back from their very visible efforts to start to repeal elements of this, of these reforms. And my, our hope is of course, is that their — they take some lessons from this failure and they remember all the damage the crisis caused the economy and they join us in strengthening reforms, not weakening them.

JEFFREY BROWN: But many people point to you as the person in the administration who’s been most resistant to even stronger measures.

TIMOTHY GEITHNER: That’s ridiculous. There’s no evidence for that. I have been incredibly supportive, and the president’s been very tough in trying to make sure these reforms are tough and strong. And we’re going to continue with that. And again.

JEFFREY BROWN: Limiting the size of banks and the too-big-to-fail argument — do you worry about that?

TIMOTHY GEITHNER: Oh, absolutely. But again, people don’t understand this, but the Dodd-Frank Act — those reforms put the toughest limits in place on the size of banks in our country, much tougher than exist anywhere around the world. And our banks have much more capital, have less leverage, are taking less risk today than they did in the decade before the crisis. And we’re going to be stronger as an economy for it. And one good test of that is how well are we absorbing the significant stress we’re seeing from Europe or these failures in the system? And the U.S. economy now — credit, bank credit is expanding again, in part because of the strength of these reforms.

JEFFREY BROWN: One more question on this. This also sheds some light — you focus again on the seeming coziness between Wall Street and Washington. Elizabeth Warren, who helped set up the Consumer Protection Agency for the administration, now running for the Senate in Massachusetts — she said that Jamie Dimon, head of JPMorgan, should not be sitting on the board of the New York Fed, that that just – it isn’t right, because they help regulate those banks.

TIMOTHY GEITHNER: That’s not a new observation, not a new concern. It’s been made by many people over the last several years.

JEFFREY BROWN: Do you think it’s right?

TIMOTHY GEITHNER: I think it is true. And I think it’s a problem that that – the structure of the Fed, established 90 years ago, and it’s true for Federal Reserve banks across the country, creates that basic perception. And I think that’s something worth trying to change. But the American people should understand that although the Fed was set up that way, those banks and the members of the board play no role in supervision. They have no role in the writing of the rules, and they play no role in decisions the Fed makes about how to respond to a financial crisis. Their role is a much more limited role, and the role is to help provide a perspective on what’s happening in the economy as a whole. But I agree with you that the, that perception is a problem. And it’s worth trying to figure out how to fix that.

JEFFREY BROWN: Do you think Jamie Dimon should be off the board?

TIMOTHY GEITHNER: Well, that’s a question he’ll have to make and the Fed will have to make. But again, on the basic point, which is it is very important, particularly given the damage caused by the crisis, that our system of oversight and safeguards and the enforcement authorities have not just the resources they need, but they are perceived to be above any political influence and have the independence and the ability to make sure these reforms are tough and effective so we protect the American people, again, from a crisis like this. And we’re going to, we’re going to do that.

JEFFREY BROWN: The last jobs number –115,000 jobs created — disappointing number. The last GDP suggests a slowing of the economy. You have repeatedly said you see the economy growing, healing. But do these numbers suggest otherwise?

TIMOTHY GEITHNER: Well, I think the economy is still gradually getting stronger. I mean, we have a long way to go, a lot of challenges ahead. But I think most measures of the economy we can all look at and see every day — suggests again, a gradual, continued strengthening. But we face some risk and some uncertainty from Europe now.

JEFFREY BROWN: But are you sure about that? Because most people don’t seem to see that. I see a new poll by the Quinnipiac group, a survey; it said more than two-thirds of Americans believe that we’re still in a recession; more than 40 percent think that they’re financially worse off than they were four years ago. They don’t seem to see the improvement. What do you?

TIMOTHY GEITHNER: Well, it’s still, it is still a very tough economy, absolutely. And again, think of what the country was through in the crisis, and you’re still seeing a huge amount of damage leftover from the crisis. And that had, you know, deep, lasting scars on the basic confidence of Americans. But everything we can see and feel in the economy supports this picture of gradual, continued strengthening.

You know, the economy’s been growing now for more than two and a half years. There’s more than 4.2 million Americans back to work in the private sector. Those are two good concrete examples of it. But if you look across the country today, even here where we are today, you can see evidence of companies expanding, hiring people, innovating, exports, and that’s all encouraging. What we need to do is do more of that. And that’s going to require, again, you know, trying to get Congress to do some more things to help the economy.

JEFFREY BROWN: Well, I’m wondering if this is frustrating for you. I went back and looked at an interview you did with Jim Lehrer for our program two years ago. Very similar situation, even some of the same language about scars, about how long it takes, about seeing some signs of progress but not enough. And here you are two years later still saying the same thing.

TIMOTHY GEITHNER: Absolutely.

JEFFREY BROWN: Is that frustrating?

TIMOTHY GEITHNER: No, I think that was the reality we faced. Again, remember, the things that caused this crisis, the worst financial crisis since the Great Depression, were a long time in the making, and they were going to take a long time to work through. I mean, I’ll just give you a couple examples. You know, people borrowed too much relative income and needed to bring that debt-to-income to a more reasonable level. There was a huge amount of increased risk in the financial sector leveraged in the financial sector, that had to come down. America really bought – built and bought too many houses.

Those things take time to work through. There’s no quick path to that.

JEFFREY BROWN: You’ve been at this, though, for three-plus years. When you look back, are there, are there, are there mistakes you think you might have made or things you wish you could have done differently vis-à-vis economic growth policy?

TIMOTHY GEITHNER: You know, as you know, I have a lot of experience in financial crises around the world, watched them over a long period of time. And I am very confident that the actions the president took helped take – and he was building on some of the initial steps my predecessor took – were remarkably effective and critically important in getting growth starting again. Remember, when he took office, the economy was shrinking at an annual rate of 9 percent a year, the worst financial shock since the Great Depression. And within six months, the economy was growing again.

JEFFREY BROWN: And here we are, of course, again, in another campaign. So you think he’s got a record on jobs and the economy that he can proudly run on.

TIMOTHY GEITHNER: Absolutely. And again, if you look at — look at how we’re doing relative to any other major country in the world today. Look at how we managed our crisis relative to what, not just how the U.S. managed in the past or how Japan did, but look at Europe today, and if you look at any measure that we can point to of economic strength, they provide overwhelming support for the choices he made early on. And remember, those were tough – very tough choices, put out the financial fires, get growth started. He did it with almost no help from his opponents, deep political costs, and those things made us — make us stronger today.

Now again, we’ve got a lot of work to do. We’ve got a lot of work to do still.

JEFFREY BROWN: Well, speaking of Europe, every time it seems as though it’s — there’s a new deal, or it’s solved, and then it flares up again. I saw an interview you did April 25, not long ago. You said Europe is doing a better job of managing their crisis. Then we have a couple of elections, and things suddenly look bad again. And today you have British Prime Minister Cameron worrying about huge risks for everyone. Now it’s his turn. How worried are you about the dangers?

TIMOTHY GEITHNER: You know, this is the thing about politics and elections. But Europe does have better tools for managing the crisis now. And you’re seeing a very welcome and encouraging debate now in Europe with these elections about how to get a better balance between growth and austerity, how to make sure they’re doing things to help get these countries growing again, and that’s very important. And even Chancellor Merkel yesterday said on behalf of Germany, they want to keep Greece in the euro area, and they want to help make that possible. So I think obviously they recognize they’re going to have to do more, and it’s still a very challenging period for Europe. And the president, as you know, is meeting with the leaders of Europe, parts of Europe, this weekend; he’ll have a chance to talk about that with them.

JEFFREY BROWN: Treasury Secretary Timothy Geithner, thanks for talking to us.

TIMOTHY GEITHNER: Good to see you.