Transcript: Treasury Secretary Timothy Geithner and Alan Greenspan

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STEPHANOPOULOS: A lot of good news out there this week, but the bad news is, the consumers are still real scared. Even though their income went up, the spending went way down. What more can the administration do, if anything, to encourage the spending to go back up?

GEITHNER: George, you are right that there are signs the recession is easing. And if you think about where we were at the end of last year -- we had an economy in freefall, a financial system on the verge of collapse. And the actions that this administration has taken have been very effective in helping stabilize conditions, help repair the financial system, bring down the costs of credit...

STEPHANOPOULOS: We've (inaudible) a bottom?

GEITHNER: But I think we have a ways to go. I want to emphasize the basic realities. Unemployment is still very high in this country. We need to make Americans more confident about their future...

STEPHANOPOULOS: How do you do that, though?

GEITHNER: And I think -- I think you need to do it through just by making sure people understand we are going to do what's necessary to bring growth back on track. We're going to stick with this until Americans are more confident in their future, businesses have access to credit, families are going to be able to put their kids through college. That's going to be the ultimate test of our (inaudible). And the policies the administration put in place working with the Congress were designed to provide very substantial support to make sure we get through this.

STEPHANOPOULOS: You mentioned the big problem of unemployment, and we're still nowhere near the kind of growth that it would take to create jobs. More than 2.5 percent growth to start to create jobs.

I know the administration has thought that's not going to come until next year, but some private economists now say it could happen in the second or third quarter of this year. They look at these numbers and see that. Do you have any reason to believe they're right?

GEITHNER: Well, I think you're right to say that the broad consensus of private forecasters is you're going to see positive growth in the second half of this year, and expect that to continue.

STEPHANOPOULOS: A growth at the 2.5 percent level?

GEITHNER: Not clear yet, but you need growth before you get people -- businesses to start creating jobs again, and that's what we're going to be very focused on doing.

STEPHANOPOULOS: So should Americans expect that more jobs are going to start getting created this year, or not?

GEITHNER: I think you're going to see -- what you're going to see first is growth turn positive. And then you're going to see the pace of job losses slow materially for the -- they have already slowed significantly, as you said. They're going to slow materially further.

But again, most private forecasters -- and let's use their judgment -- suggest you're going to see unemployment start to come down maybe beginning in the second half of next year.

STEPHANOPOULOS: And what about the flip side? What are the chances that we're actually going to see a second dip later this year?

GEITHNER: I think that's something we're very focused on. Again, we need recovery to be built on private demand, private spending, businesses taking a chance again in the American economy, putting investments to work, starting to rebuild their employment base. That's the ultimate test for recovery. And the very important thing for us is to make sure we're sticking with this until we're very confident we have a strong, private sector-led recovery in place.

STEPHANOPOULOS: And what are you looking at that would give you some cause of concern that we could slip back?

GEITHNER: Well, I don't think you can make that -- see that risk now. Again, and the stimulus program and what we've done in the financial sector are designed to have a sustained impact, again, because the damage we had done to our economy was so great, it was just going to take a long, sustained effort.

STEPHANOPOULOS: And that means unemployment, as you said, pretty high, at least through the rest of this year. At the same time we're seeing reports said up to 1.5 million people could be losing their unemployment benefits by the end of this year.

Does that mean that the administration is going to have to look at extending unemployment benefits again?

GEITHNER: I think that's something the administration and Congress are going to look very carefully at as we get closer to the end of this year. And that's going to be one important thing to look at.

STEPHANOPOULOS: We already know that a million-and-a-half people are going to lose their benefits, don't we?

GEITHNER: Yes. Again, I think the most important thing we need to make sure people understand is working with the Congress, we're going to make sure we do enough to bring this economy back.

But, you know, our job is not just to repair the damage done to this economy, bring growth back, we need to make sure that we're making the kind of investments that are going to build a more productive economy, gains of growth more broadly shared.

And that's why it's so important, as we focus on recovery, we're making investments in health care reform, in education, in infrastructure, fixing our financial system, the kind of things we're working on right now.

STEPHANOPOULOS: I did want to get to that. And as we pull out of the recession, the other big worry going forward is deficits. You heard that from the Chinese this week. Our next guest, Alan Greenspan, has warned this as well.

And Senator Charles Grassley, the Republican ranking member of the Senate Finance Committee has cited CBO estimates, Congressional Budget Office estimates, that your budget will add $9 trillion to the national debt over the next decade.


SEN. CHARLES GRASSLEY (R-IA), RANKING MEMBER, FINANCE COMMITTEE: Our debt, as a percentage of the economy, will grow in excess of 80 percent, a level also that has not been seen since this country was in World War II.


STEPHANOPOULOS: That is a very, very high level. And I know you believe that passing health care is essential to getting the deficit under control, but independent analysts also say that even with that, you're going to have to find new government revenues.

The former deputy treasury secretary, Roger Altman, said: "It is no longer a matter of whether tax revenues must increase, but how." Is he right?

GEITHNER: George it is absolutely right and very important for everyone to understand that we will not get this economy back on track, recovery will be not strong and sustained, unless we are -- can convince the American people that we're going to have the will to bring these deficits down once recovery is firmly established.

Remember, we inherited a $1.3 trillion deficit. The cumulative consequences of policies this country pursued over the last eight years left us with $6 trillion more debt than we would have had by making a bunch of commitments to cut taxes and add to spending. Without paying for those, we are not going to be able to afford to do that. And it is very important people understand.

Our first priority now, though, is to get this economy back on track, make sure this financial system is repaired. Without that, we're not going to get our deficits under control.

And the necessary path to fiscal responsibility, the necessary path to getting this country living within our means again is not just health care reform, to bring down those costs, but we're going to do a range of other things. And that's going to be a very difficult challenge to this country.

We can do this, it just requires the will to act.

STEPHANOPOULOS: Including new revenues?

GEITHNER: Well, we're going to have to look at -- we're going to have to do what is necessary. Remember the critical thing is people understand that when we have recovery established, led by the private sector, and we have to bring these down, deficits down very dramatically.

We have to bring them down to a level where the amount we're borrowing from the world is stable at a reasonable level. And that's going to require some very hard choices. And we're going to have to try to do that in a way that does not add to the -- unfairly to the burdens that the average American already faces.

STEPHANOPOULOS: But that's the dilemma...

GEITHNER: That is the dilemma.

STEPHANOPOULOS: ... isn't it? Because even when you look at health care reform again, I know you believe it's going to bend the cost curve over time, but the Congressional Budget Office says at best the health care reform plans out there are going to be deficit-neutral over the next 10 years.

So to bring the deficits down there's not enough money in the discretionary budget. We all know that. That means more revenues. The president has said that taxes won't go up for any Americans earning under $250,000.

But it doesn't appear he's going to be able to keep that promise if you're going to bring the deficits down.

GEITHNER: George, again, we can't make these judgments yet about exactly what it's going to take and how we're going to get there. But the very important thing, and no one is going to care about this more than the president of the United States, is for people to understand that we do not have a choice as a country.

That if we want an economy that's going to grow in the future, people have to understand we have to bring those deficits down. And it's going to be difficult, hard for us to do. And the path to that is through health care reform.

But that's necessary but not sufficient. We're going to do some other things as well.

STEPHANOPOULOS: So revenues are on the table as well?

GEITHNER: Again, we're not at the point yet where we're going to make a judgment about what it's going to take. But the important thing...

STEPHANOPOULOS: But you're not ruling it out. You can't rule it out.

GEITHNER: Well, I think that what the country needs to do is understand we're going to have to do what it takes. We're going to do what's necessary.

STEPHANOPOULOS: Let me ask you about health care. The negotiations seemed to stall out in the Senate. They're going to try to come back by September 15th. The House committees have all passed the bill.

One of the things that Senator Grassley, we just saw, is asking about is that he says he wants some assurances, some guarantees, really, that whatever deal, if they strike a deal -- bipartisan deal in the Senate Finance Committee, it's going to hold all the way through the process: the Senate floor, the House floor, the Conference Committee.

Can the administration give him that assurance?

GEITHNER: I think that's what every legislator wants. They want that to degree of confidence.

STEPHANOPOULOS: They're not going to get it, though?

GEITHNER: You know, we want to have an outcome that meets these core principles that the president laid out, which is we want to make sure that we're doing something that's going to reduce the growth in costs over the long term, expand access, improve the quality of care, do that in a fiscally responsible way that does not increase unduly the burden on average Americans today. That's the basic test. And we're going to try to make sure that we achieve that with the broadest consensus as possible.

STEPHANOPOULOS: You want a broad consensus, but Senator Grassley, his colleague Senator Enzi are saying they need those assurances. They can't get them?

GEITHNER: Well, you can't, you know -- we want to make sure we get this done, and we're going to -- as the president said, we're going to look at anything reasonable consistent with those principles that's going to get this done.

STEPHANOPOULOS: Why not do it (ph) through consensus? The president said he wants a bipartisan bill, if possible, but do you believe it is possible if necessary to get meaningful health care reform with Democrats only?

GEITHNER: George, I think that, again, this is a big, consequential reform for the country. And as many people observed, ideally you want to do this with as broad a base of consensus as possible. But people on the Hill are going to have to make that choice, do they want to help shape this and be part of it, or do they want this country, the United States of America, to go another several decades without doing what every other serious country has done, which is to give their citizens access to basic quality care.

STEPHANOPOULOS: But if the Republicans can't come to an agreement with the Democrats, are the Democrats and the White House willing to go it alone?

GEITHNER: George, again, we're going to try to get this done on the best possible terms consistent with those principles. Can't tell you what it's going to take, but you see what the president is trying to do.

STEPHANOPOULOS: Let me ask you about the TARP. The TARP inspector general, Neil Barofsky, has criticized your department for not being transparent. He's also said that the taxpayers can be on the hook for up to $23 trillion in liabilities. I know you dispute that figure, but what can you tell us about where the TARP stands right now, and how much of the $700 billion that has been appropriated taxpayers can expect to get back?

GEITHNER: Let me just emphasize what's important to Mr. Barofsky and the other oversight panels and to the president and to the secretary of the treasury, is we want to make sure we have the highest level of transparency on these programs, and we are doing everything we need to make sure that they are delivering the benefits they need with as little risk of fraud as possible. And he has made a number of reforms we've adopted, a very helpful role in shaping these programs, and we are committed to do everything necessary to achieve that.

Now, the program itself -- we're in a much better position than I thought we were going to be, frankly, if you just look back four months ago, three months ago or six months ago. The financial system today is more stable. The cost of credit -- credit is more available. Cost of credit is down significantly. Broad concern about the collapse of the financial system has receded dramatically, and that is very, very, very important to the prospects of...


STEPHANOPOULOS: We're not going to see a collapse, are we?

GEITHNER: No, not at all. That's not going to happen. It's absolutely preventable, and again, there's much more confidence today than we've seen the last I think even in a year, in the basic stability of the U.S. financial system, and that is a very, very important accomplishment. And we have done that -- when I was here four months ago, we had roughly $40 billion of authority left in the TARP. Today we have roughly $130 billion, in partly because we have been very successful in having private capital come back into this financial system. And we've had more than $70 billion...


GEITHNER: ... come back into the government. And that money goes directly to reduce our debt.

STEPHANOPOULOS: How much more are you expecting to be paid back?

GEITHNER: Can't tell, but substantial additional sums will come back. And we are getting -- we've already earned about $6 billion for the taxpayer on those investments, and you know, this program is delivering very important improvements in availability of credit, which is the ultimate test.

STEPHANOPOULOS: So it's going in the right direction, it's going up. Can you say now with certainty that you're not going to have to come back to the Congress for more money?

GEITHNER: We do not plan to ask for more money, and I think it's quite unlikely that we do. But the important thing, George, as you just said, is that people need to understand that we will do what is necessary to make sure that viable businesses, families that have been very conservative (ph) and prudent have access to credit at reasonable terms. That's the basic purpose of these programs, and we're going to do what's necessary to achieve that.

STEPHANOPOULOS: The issue of executive compensation for those banks, a lot of them are trying to get out from under the TARP restriction because they want to get out from the compensation restrictions. The House passed a bill on Friday to give shareholders more rights to vote on executive compensation, also the SEC more power. The Republicans in the House were very critical. Take a look.


(UNKNOWN): This bill continues the Democrat majority's tendency to go to the default solution for every problem -- create a government bureaucracy to make decisions better left to private citizens.


STEPHANOPOULOS: Is the government getting too involved?

GEITHNER: Absolutely not. And I think that really, everybody understands that we cannot have our financial system go back to the practices that brought this economy to the brink of collapse.

STEPHANOPOULOS: Do you think that's happening?

GEITHNER: No, I don't think we're at that point yet, but it is going to take fundamental reform of our financial system.

Compensation reforms are an important part of that, but we need to go beyond that. And that's why the president has moved so early in this administration to propose very far-reaching reforms to provide much stronger protection for consumers and deliver a more stable financial system and give us better tools to manage future crises.

And the broader fundamental reforms to protect consumers, create a more stable system are absolutely important, one of the president's top legislative priorities this year. And I think, ultimately, you're going to find very broad-based support for those reforms.

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

GEITHNER: Good to see you.

STEPHANOPOULOS: Now, for another perspective on the economy, let's bring in former Fed chairman Alan Greenspan.

When he joined us last September, his view could not have been more sobering.


GREENSPAN: This is a once-in-a-half-century, probably once-in-a-century type of event.

STEPHANOPOULOS: Is it the worst you've ever seen in your career?

GREENSPAN: Oh, by far. There's no question that this is in the process of outstripping anything I've seen. And it still is not resolved and it still has a way to go.


STEPHANOPOULOS: And Alan Greenspan joins us again now.

Welcome back.


STEPHANOPOULOS: So, last September, a once-in-a-century event, the worst you'd ever seen. Is it over?

GREENSPAN: Not quite, but we're getting very close.

The -- as the Treasury secretary just mentioned, there's been a very significant improvement in the financial system. And it's been the financial system where the problems have been...

STEPHANOPOULOS: And collapse isn't going to happen?

GREENSPAN: Collapse, I think, is now off the table. We were teetering for awhile, but I do think that the TARP program, for example, was very helpful in shoring up the capitals, that stock of banks and the like. And not an insignificant event is the $3.5 trillion increase in the stock market value of American corporations.

Because there are capital gains and they flow out throughout the system, and you could see their impact in the credit markets and in the equity markets.

STEPHANOPOULOS: How about the broader economy? Have we hit a bottom, and are we going to see a bounce?

GREENSPAN: Well, I'm pretty sure we've already seen the bottom. In fact, if you look at the weekly production figures for various different industries, it's clear that we've turned, perhaps in the middle of last month, the middle of July. And indeed you're seeing a major increase in assemblies in auto and trucks before the clunker issue even arose.

STEPHANOPOULOS: Has it helped?

GREENSPAN: Well, obviously, it's helped. It's an interesting issue. I mean, I have qualms about the concept, but there is no doubt that that very extraordinary response is a very important indicator that the state of confidence in the economy is beginning to pick up.

If we had been -- the clunker program had been put in place six months ago, it would have probably been a dud.

STEPHANOPOULOS: Well, that's interesting because, you know, you also saw, about five months ago, the administration also putting out a credit for first-time homebuyers.

Has that made a difference?

GREENSPAN: I think it has, but the problems in homebuilding and home sales and mainly home prices is much broader than that. In fact, the way I would define it is that, unless home prices stabilize within, say, maybe, 5 percent down from here, we're going to run into some...

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...


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...


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...


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...


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...


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.