Secretary Tim Geithner Discusses the 'Healthy, but Slow' Economic Recovery

June 17, 2009— -- The following is a transcript from ABC News' Terry Moran's interview with Treasury Secretary Timothy Geithner. Secretary Geithner talked about President Obama's plan for new financial regulations.

TERRY MORAN: Good. So in a nutshell, what is this proposal trying to accomplish? What's the vision here?

SECRETARY TIMOTHY GEITHNER: We need to prevent a crisis like this from ever happening again. You know, this crisis was enormously damaging to the basic lives, businesses, people across the country, across the world, and our basic obligation and our core mission is to make sure we put in place safeguards to make sure this never happens again.

MORAN: So with this proposal can you assure the American people that there will not be that kind of financial collapse, catastrophe again?

GEITHNER: I think if we legislate these reforms and we put these proposals in place and we get other countries to come with us, I think we have a very good shot of making sure that nothing this severe happens again.

MORAN: Why? What in this package today would have prevented what happened last fall?

GEITHNER: Two key things, well, maybe three key things. The first is we need to give consumers better protections against the risk they get taken advantage of. Sold products they didn't understand, take on too much debt, debt they can't afford. That is critical. That's the first most important thing.

The second is to make sure that banks can't take on this much risk and other institutions can't take on risk that threatens the basic fabric of the economy. And so we've put in place much stronger protections, safeguards, stronger constraints on leverage, capital requirements, shock absorbers to reduce the risk that ever happens again.

And the third because we're not going to be able to prevent risk taking everywhere, we're not going to be able to prevent all crises in the future, we need to have better capacity to manage them so we're proposing new authority, not just here but with other countries, to better manage the failure, potential failure of large institutions. Those are the three core things.

MORAN: Now one of the things you're already hearing is that in the effort to protect the system you're stifling it. Too much new regulation and you'll crush the life out of the financial system.

GEITHNER: We've got to get the balance right. I don't think we had it right. So we want to achieve more stability, more protection for the average consumer, average business person, but still preserve what's the great strength about our system which is a great capacity for innovation, for competition.

One of the things we do better than any country in the world is to take the savings of investors, of Americans, and channel them to companies – people that have an idea, want to finance a growing business.

We are excellent at that and we need to make sure we preserve that basic ability, so we have innovation going in the future, but we need a better balance, more stability, too. That's the art in this and we're going to try and get that balance right.

MORAN: One of the things that happened was, as the president just said, there were these new fancy financial instruments and had multiplied to mountainous levels. How will this package of proposals stop the next derivative, the next financial instrument from infecting the system?

GEITHNER: It's important to recognize that innovation is a good thing and to some extent risk management, knowledge, foresight, credit rating agencies, will always be behind, by definition. So what you have to do is to make sure the system has more cushions, more shock absorbers against the possibility that in the future some firm or some innovation gets to the point where it can cause basic risk.

So if you get that – those basic shock absorbers right you're going to make the system less vulnerable in the future to the desirable changes, innovation and structure that are going to have to happen.

MORAN: Give me an example of a shock absorber in this plan.

GEITHNER: We call it capital. Capital is the best shock absorber. So banks are required to preserve capital against losses. They didn't – we were not forced to hold enough. They're required to make sure that they have stable sources of funding, liquidity against the risk that people withdraw their deposits.

They did not have enough liquidity. Those are the two most important shock absorbers and if you get those thick enough, designed well enough and resilient enough, you can do a much better job of making the system less vulnerable to this.

MORAN: Do you want to see in the ideal world, a financial system that while innovative is slower, isn't quite so manic.

GEITHNER: Right.

MORAN: … and slows down the amount of debt that it creates?

GEITHNER: I think we'd like to see less drama and we'd like to see fewer, like I would just say, less substantial swings in these booms of credit, booms and busts of credit, and I think that's achievable.

We're going to have periods where growth is strong, where economies are stable, people feel comfortable taking a lot of risk, but you don't want that to go too far and build up the kind of imbalances we saw that helped provoke this crisis.

MORAN: So built-in brakes on booms?

GEITHNER: Yes. I think you want to have a little bit of the capacity for people to step on the brakes a bit as the boom gets going before it goes too far.

MORAN: One of the things in this proposal is more power for the Federal Reserve Board and that is very controversial. There are a lot of people saying that's a dangerous thing to do. The Fed should just be about the money policy and not get involved in regulation. What do you say to that?

GEITHNER: All central banks, including ours, our Federal Reserve, are given responsibility for monetary policy, to keep growth stable over time, inflation low and stable. But alongside that responsibility, in the United States, almost 100 years ago, an in countries round the world, central banks also have this critical responsibility for financial stability.

The question is, and the challenge is to make sure they have the authority to discharge that responsibility well. And we need to give them some tightening up of authority in those areas if they're going to do that job well. And there is no credible alternative to giving the Fed this responsibility. And I think that you're not going to have a system that is more stable in the future without giving them a slightly clearer set of responsibility for maintaining stability and tighter authority to go with that.

But we're not proposing a dramatic expansion, even a very significant expansion from what is the current role they have in the system. And parts of our system that proved too weak and too damaging were largely outside the Fed's capacity to affect. And that is one reason why we have to have a bit of a tightening up of responsibility and accountability and authority with the Fed.