March 15, 2009 -- Though the markets rose this week for a change and some big banks announced small profits, President Barack Obama's top economics adviser warned this morning that it's too soon to tell if the economic bottom is in sight.
"No one can make that judgment," said Lawrence Summers, director of the White House National Economic Council, on "This Week with George Stephanopoulos."
"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 said.
He warned that the road to reviving the economy will be long.
"While there is signs that some of the things that the president is doing are starting to have effects, these problems did not get made overnight," he said. "They didn't get made in a year. And they're not going to get fixed very rapidly, either.
"Clearly, the fact that consumer spending was like a ball falling off a table through the holiday season and that there does seem to be some sign of stability in January and February is better than if that were not the case," he added. "But we've got an economy that's losing 600,000 jobs a month. That's probably not going to stop imminently."
On reports that Citigroup, Bank of America and JPMorgan have been profitable so far this year, Summers said that, while promising, the progress does not indicate that public trust in the banking system has been restored.
"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," he said. "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.
"While this is encouraging information, it doesn't mean that that problem is being removed," he added. "It's a problem that's going to take time. And it's a problem that's going to take strong policy."
Summers: 'AIG Is the Most Outrageous'
Summers slammed insurance giant American International Group's plans to award senior executives hundreds of millions of dollars in bonuses and retention pay -- but said the government, despite committing $170 billion in bailout money to AIG, was limited in its power to stop the bonuses.
"There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," he said. "What that company did, the way it was not regulated, the way no one was watching, what's proved necessary, it is outrageous."
Treasury Secretary Timothy Geithner phoned AIG CEO Edward Liddy on Wednesday and told him that it was unacceptable for the company to award $165 million in bonuses after the government's funding. The lifeline given to AIG to stay afloat was far more government bailout money than has been awarded to any other firm.
In a letter to Geithner Saturday, Liddy agreed to restructure some of the payments, but wrote that "quite frankly, AIG's hands are tied." AIG's chairman and CEO argued the firm would risk a lawsuit if it denied bonuses to its top executives.
Summers argued that the Obama administration has made efforts to limit the bonuses awarded by AIG.
"We are a country of law," he said. "There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.
"What the Obama administration has done, based on the advice of attorneys, is done everything that it can to, within the law and within the tradition of upholding law that we have in this country, to limit these bonuses. And they have, as a result of Secretary Geithner's efforts, been scaled back," he said.
In defense of the bonuses, Liddy said the government's demands could affect AIG's ability to retain "the best and brightest talent to lead and staff the AIG businesses," if, "employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.
"There is one other reality we have to recognize, which is that these companies have to be enabled to function if the government is going to maximize the prospect of getting its money back," he added.
Republican: Obama Team's Failure to Curb AIG Is 'an Outrage'
In a separate interview, Senate Minority Leader Mitch McConnell, R-Ky., agreed it was "an outrageous situation" but disagreed with Summers' claim that the government's response is restricted by AIG's pre-existing contracts.
"This is an outrage," he said. "And for them to simply sit there and blame it on the previous administration or claim contract -- we all know that contracts are valid in this country, but they need to be looked at.
"Did they enter into these contracts knowing full well that, as a practical matter, the taxpayers of the United States were going to be reimbursing their employees -- particularly employees who got them into this mess in the first place?" he added. "I think it's an outrage."
Summers also fielded questions on transparency. There are reports that roughly $50 billion that went to AIG from the taxpayers has gone straight to their counterparties -- banks like Goldman Sachs and Merrill Lynch, yet AIG won't say where exactly the money has gone and won't release who the counterparties are.
"We'd like to see as much transparency as is legal and is consistent with market functioning," Summers said. "We don't have the ability, under law -- and it's one of the crucial things that, as we move to financial regulation, that the president and Secretary Geithner have emphasized that we need to have, a so-called resolution regime. It's a technical thing. But it's basically a legal framework in which you're able to work these things out by not needing bailouts and instead being able to limit payments in the way that a bankruptcy does.
"No one wants to see money going for this purpose, with all the needs that our country has," he said. "But at the same time, if we don't contain this situation, if we don't respect laws on which people reasonably relied, the potential chaos, disruption, lack of credit, resulting unemployment will be that much greater. Those are the agonizing judgments that our financial authorities have to make."
On Republicans' objections to the president's budget, Summers challenged McConnell to come up with "concrete alternatives that gets closer to a balanced budget."
"The situation the president inherited of nearly $1-trillion deficits, before he did anything ... came at a time when it was a Republican president and a Republican Congress that were making the decisions," Summers said. "I think what the president is proposing is a strategic budget. It is making substantial cuts, but it's also providing support in some important areas, like education, like health care, like taking the steps that are necessary to make us less dependent on foreign oil and start addressing global climate change that will let us have a sound economic expansion."
McConnell, however, said the Republican Party doesn't intend to offer an alternative budget in the Senate, but will instead offer numerous amendments to the president's budget.
"First, let's take a look at the budget the president is offering," McConnell told Stephanopoulos. "That's his responsibility. The majority has a responsibility to lay out their plan, George, for the next few years -- and they've done it. It will double the national debt in five years and triple the national debt in 10 years."
"It taxes too much, it spends too much, it borrows too much," he added. "What I have said and our colleagues have said repeatedly ... [is that] they're taking advantage of a crisis in order to do things that had nothing to do with getting us into the crisis in the first place. They want to have a massive expansion of health care, an energy tax, which many people are now calling a light switch tax, of another $600 billion. It's sort of bait and switch."
Asked why the GOP isn't going to offer up a comprehensive alternative budget, McConnell said, "Well, we're just sort of getting down in the weeds here on procedure.
"Through the amendment process, we would absolutely reformulate the Democratic plan," he said. "Whether you have a comprehensive approach or whether you offer an amendment approach is something that parliamentarians can debate. But the point is we're going to have alternatives. ... We have offered alternatives all along the way and we will offer numerous alternatives on the budget when it comes up."