'This Week' Transcript: Larry Summers & Mitch McConnell

We learned this week, from Citigroup, from Bank of America, from JPMorgan, that they were all -- claimed to be profitable so far this year.

And I wonder what you make of that, and what you think our viewers should make of that. Does that mean -- especially the real problem banks, so far, at least reported to be problem banks, Citigroup and Bank of America -- does this mean they're out of the woods?

SUMMERS: I don't think that -- I wish I could say that. I wish -- just as I wish I could say that the fact that the stock market was up meant that the country was out of the woods or the fact that consumer spending had been strong meant that the country was out of the woods.

SUMMERS: Clearly, it's better for banks to be profitable in this sense, when they're short of capital, than if they were losing large amounts of money. But there are very fundamental issues in the banking system, principally having to do with this very large quantity of so-called toxic assets that people don't understand very well.

And so they don't have the trust on which a financial system depends, and which inhibit, because of all of that uncertainty and distrust, their capacity to lend. And while this is encouraging information, it doesn't mean that that problem is being removed. It's a problem that's going to take time. And it's a problem that's going to take strong policy.

The policy starts...

STEPHANOPOULOS: But I want to get to that because it's my understanding that the president had a meeting of his economic team Tuesday night and finalize the outline of how to deal with these toxic assets. Treasury still working on the details.

Let me try to explain in layman's terms and you tell me where I'm getting it wrong. Basically the government wants to set up a public- private partnership where both the government would try to encourage hedge funds, other private investors to get into these markets to try to buy these toxic assets from the banks by putting up some money, also giving them financing.

And that if the investments made money, the government gets paid back. But if the investments lose money, the most the investors could lose would be their down payment. They're going to have the loan forgiven.

Some economists have criticized that plan, including Paul Krugman of The New York Times. And here's what he says about it. He says: "The administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they're needed, shoring up the balance sheets of key financial institutions. But most of the benefits would go to people who don't need or deserve to be rescued."

Your response?

SUMMERS: Well, I think it's much better to have the president and have Secretary Geithner lay out their approach so that everyone can see it. I'm not sure I understand Professor Krugman's argument. If you support this market, you enable, for example, lower mortgage rates. I think the benefits of that go to the people who really should see those benefits. If you provide support for the credit markets, you increase the supply of student lending because people who make student loans can sell them off their balance sheet and then be in a position to make new student loans.

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