Transcript: Treasury Secretary Timothy Geithner and Alan Greenspan

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.

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