Transcript: Treasury Secretary Timothy Geithner and Alan Greenspan

STEPHANOPOULOS: Well, the Case-Shiller has shown that they probably have stabilized some.

GREENSPAN: Well, they have stabilized temporarily. And the problem with the data on home prices is they're very difficult to measure in their regional data.

It is possible. I don't think it's going to happen, but I do think it is possible that we could get a second wave down. But the important issue is, if we don't -- and I think the probability is that we won't, that we are close to stabilization.

Under those conditions, you will begin to get a very significant change in the underlying confidence in the consumer area.

STEPHANOPOULOS: And then you might see that in the consumer area; you might see that in the stock markets. So that is the -- is the trigger, possibly -- you say it's unlikely -- that that could be the trigger to a second dip?

GREENSPAN: If you get another dip and a renewed decline in prices, we're going to run into an acceleration of a number of homes that are mortgaged and are underwater; that is that the value of the properties are less than the debt.

If that happens -- and, clearly, looking at the structure of where debt and values, it would, if, for example, home prices fell by 10 percent or more, that would create a major acceleration in foreclosures. And I think it could be a factor...

(CROSSTALK)

STEPHANOPOULOS: On the other side, what's your best estimate right now of when we're going to see that kind of economic growth that can create jobs, above 2.5 percent, 3 percent, 3.5 percent?

GREENSPAN: Well, first of all, let me just say this, that the unemployment rate is going to continue to rise, but more slowly than it's been. We'll continue to have job loss, but that's slowing as well.

It strikes me that we may very well have 2.5 percent in the current quarter, and the reason is that there's been such an extraordinarily high level of inventory liquidation that the production levels are well under consumption. And as that slows down -- as it has to, I mean, you can't go below zero on inventories -- production moves up, and that could be quite significant.

So I wouldn't put out of the question that...

(CROSSTALK)

STEPHANOPOULOS: So you're fairly optimistic right now.

GREENSPAN: I'm short-term optimistic, but with many caveats. The home price issue will be a critical one, and then, as you heard me quoted on earlier, the deficits...

STEPHANOPOULOS: That's what I want to press you on, because you watched Secretary Geithner there. He says the administration takes it seriously, they're going to do what it takes. Two questions on that. Do you believe that this health care reform that is now being debated is part of the solution to deficits? And number two, must new revenues be on the table?

GREENSPAN: I would say yes to both. That there is no question that the core of the problem on the long-term deficit is Medicare specifically, and health care more generally, in the sense that it affects revenues.

This is an issue which, remember, existed at the beginning of the year. In fact, Medicare at that point was only half-funded. And you can't get around the fact that when you have this big shift in the baby boomers retiring that things fundamentally change. And my view is that we have to attack both the original shortfall and make sure we fund whatever new initiatives that occur in the health care area.

It's not adequate to be strictly revenue-neutral, because there's a lot more to be done to get...

(CROSSTALK)

STEPHANOPOULOS: So the plans on the table don't go far enough, in your view?

GREENSPAN: That's my view, and in fact, I think that -- I thought the secretary's remarks were, frankly, quite well balanced, and I think that is the strategy of the administration. But what he didn't spell out, which he can't actually, at this particular stage, is that very significant additional actions are going to be required to make certain that the deficit does not...

(CROSSTALK)

STEPHANOPOULOS: That means control of Medicare, control of Medicaid, control of Social Security, but also we're going to have to see some kind of broad-based revenues. Roger Altman, who I quoted, the former secretary -- the former deputy treasury secretary, says that the real answer in the long term has to be that we move towards the value-added tax or sales tax.

GREENSPAN: I don't like a value-added tax, but I agree with Roger. I think that there is a fairly significant probability that the least worst solution to the problem will end up to be a value-added tax, because it's the only thing that raises revenue in significant quantities without significantly impacting on the economy.

STEPHANOPOULOS: You said you were cautiously optimistic just a couple of minutes ago. One of your predecessors at the Fed, William Chesney Martin, 1951 to 1970, said the Fed chairman's job is to take away the punch bowl just when the party is getting started. He of course was referring to raising interest rates to combat inflation. Are we anywhere close to that point, where that's going to have to be considered?

GREENSPAN: No, but remember that there's an awful lot of liquidity, latent liquidity in the system, and at some point, that is going to have to be sopped up. And what that means is higher interest rates from the Federal Reserve.

Now, that's not immediate, but it's out there in the intermediate future, because as this economy picks up -- assuming that it does -- and as I said, there is an outside possibility it may be a little faster than we expect -- then the Federal Reserve is going to have to rein in credit and raise rates. They know how to do it very well...

(CROSSTALK)

STEPHANOPOULOS: The Fed chairman says we have a couple of years. Is that about right?

GREENSPAN: I hope they have a couple of years. I don't think they do.

STEPHANOPOULOS: Mr. Chairman, thanks very much for your time today.

GREENSPAN: My pleasure.