Secretary Tim Geithner Discusses the 'Healthy, but Slow' Economic Recovery

June 17, 2009— -- The following is a transcript from ABC News' Terry Moran's interview with Treasury Secretary Timothy Geithner. Secretary Geithner talked about President Obama's plan for new financial regulations.

TERRY MORAN: Good. So in a nutshell, what is this proposal trying to accomplish? What's the vision here?

SECRETARY TIMOTHY GEITHNER: We need to prevent a crisis like this from ever happening again. You know, this crisis was enormously damaging to the basic lives, businesses, people across the country, across the world, and our basic obligation and our core mission is to make sure we put in place safeguards to make sure this never happens again.

MORAN: So with this proposal can you assure the American people that there will not be that kind of financial collapse, catastrophe again?

GEITHNER: I think if we legislate these reforms and we put these proposals in place and we get other countries to come with us, I think we have a very good shot of making sure that nothing this severe happens again.

MORAN: Why? What in this package today would have prevented what happened last fall?

GEITHNER: Two key things, well, maybe three key things. The first is we need to give consumers better protections against the risk they get taken advantage of. Sold products they didn't understand, take on too much debt, debt they can't afford. That is critical. That's the first most important thing.

The second is to make sure that banks can't take on this much risk and other institutions can't take on risk that threatens the basic fabric of the economy. And so we've put in place much stronger protections, safeguards, stronger constraints on leverage, capital requirements, shock absorbers to reduce the risk that ever happens again.

And the third because we're not going to be able to prevent risk taking everywhere, we're not going to be able to prevent all crises in the future, we need to have better capacity to manage them so we're proposing new authority, not just here but with other countries, to better manage the failure, potential failure of large institutions. Those are the three core things.

MORAN: Now one of the things you're already hearing is that in the effort to protect the system you're stifling it. Too much new regulation and you'll crush the life out of the financial system.

GEITHNER: We've got to get the balance right. I don't think we had it right. So we want to achieve more stability, more protection for the average consumer, average business person, but still preserve what's the great strength about our system which is a great capacity for innovation, for competition.

One of the things we do better than any country in the world is to take the savings of investors, of Americans, and channel them to companies – people that have an idea, want to finance a growing business.

We are excellent at that and we need to make sure we preserve that basic ability, so we have innovation going in the future, but we need a better balance, more stability, too. That's the art in this and we're going to try and get that balance right.

MORAN: One of the things that happened was, as the president just said, there were these new fancy financial instruments and had multiplied to mountainous levels. How will this package of proposals stop the next derivative, the next financial instrument from infecting the system?

GEITHNER: It's important to recognize that innovation is a good thing and to some extent risk management, knowledge, foresight, credit rating agencies, will always be behind, by definition. So what you have to do is to make sure the system has more cushions, more shock absorbers against the possibility that in the future some firm or some innovation gets to the point where it can cause basic risk.

So if you get that – those basic shock absorbers right you're going to make the system less vulnerable in the future to the desirable changes, innovation and structure that are going to have to happen.

MORAN: Give me an example of a shock absorber in this plan.

GEITHNER: We call it capital. Capital is the best shock absorber. So banks are required to preserve capital against losses. They didn't – we were not forced to hold enough. They're required to make sure that they have stable sources of funding, liquidity against the risk that people withdraw their deposits.

They did not have enough liquidity. Those are the two most important shock absorbers and if you get those thick enough, designed well enough and resilient enough, you can do a much better job of making the system less vulnerable to this.

MORAN: Do you want to see in the ideal world, a financial system that while innovative is slower, isn't quite so manic.

GEITHNER: Right.

MORAN: … and slows down the amount of debt that it creates?

GEITHNER: I think we'd like to see less drama and we'd like to see fewer, like I would just say, less substantial swings in these booms of credit, booms and busts of credit, and I think that's achievable.

We're going to have periods where growth is strong, where economies are stable, people feel comfortable taking a lot of risk, but you don't want that to go too far and build up the kind of imbalances we saw that helped provoke this crisis.

MORAN: So built-in brakes on booms?

GEITHNER: Yes. I think you want to have a little bit of the capacity for people to step on the brakes a bit as the boom gets going before it goes too far.

MORAN: One of the things in this proposal is more power for the Federal Reserve Board and that is very controversial. There are a lot of people saying that's a dangerous thing to do. The Fed should just be about the money policy and not get involved in regulation. What do you say to that?

GEITHNER: All central banks, including ours, our Federal Reserve, are given responsibility for monetary policy, to keep growth stable over time, inflation low and stable. But alongside that responsibility, in the United States, almost 100 years ago, an in countries round the world, central banks also have this critical responsibility for financial stability.

The question is, and the challenge is to make sure they have the authority to discharge that responsibility well. And we need to give them some tightening up of authority in those areas if they're going to do that job well. And there is no credible alternative to giving the Fed this responsibility. And I think that you're not going to have a system that is more stable in the future without giving them a slightly clearer set of responsibility for maintaining stability and tighter authority to go with that.

But we're not proposing a dramatic expansion, even a very significant expansion from what is the current role they have in the system. And parts of our system that proved too weak and too damaging were largely outside the Fed's capacity to affect. And that is one reason why we have to have a bit of a tightening up of responsibility and accountability and authority with the Fed.

MORAN: Because you already hear on the Hill, Senators – Democratic Senators, saying, we don't want to give more power to the Fed. The Fed is a democratically, unaccountable body. Why should we give them more power?

GEITHNER: Then, again, we listen to those criticisms very carefully and we've adjusted our proposals to reflect those concerns. So, what we're doing is a very modest clarification of responsibility. And we're going to set up a new council, above the Fed, and the other agencies, that brings everyone together, makes sure there are some checks and balances, make sure we're looking at how well these guys are doing their job. Making sure if there are gaps in the system, or mistakes, we can help remedy those things earlier. So we're proposing a balance which I think is very responsive to those concerns.

MORAN: And that brings up another point. You're working with a financial regulation structure that was developed over decades, kind of patchwork.

GEITHNER: Right.

MORAN: A lot of people said, junk it. Start over. Get a 21st century financial architecture for 21st century finance. Why didn't you do that?

GEITHNER: We're doing the most important things that were the principle causes of the crisis. We're trying to make sure we fix the key things that are going to central to future vulner9+ability of the system. And not take on things that would be nice to try to do, if you had lots of time, and political capital, but would not materially improve the stability of the system or the protections consumers get. So there are other things we could have chosen to do. But we're making a basically, cold-hearted, pragmatic choice. Because we want make sure we're preserving our capital to focus on the things that are central.

Now, if you look at countries around the world, a lot of countries have adopted a model where they've mushed everybody together. And they've centralized the boxes into one place. That has the disadvantage of concentrating authority in one place. And outcomes in those countries have not been materially better than what we saw in this country. So, the best thing do to is to get the rules better. Thicker shock absorbers in the system. Better protection for consumers. Better disclosure, more transparency, better tools for managing crisis. And we're going to... simplify, a bit, the current structure. But we're not going to take on challenges that are not going to be –that were not central to the problems we saw and are not going to substantially improve the functioning of the system.

MORAN: The critics say – there are those who say that what you've done is just layer on more bureaucracy. You got a new consumer agency, you've got a new council, you've got just more layers of bureaucracy in an already complex financial regulation system.

GEITHNER: We've got to be clear about this. There were systematic failures in the basic protections our system is supposed to provide and that's going to require stronger enforcement, and better tools. And there's no way to fix these vulnerabilities without having more authority, more accountability for the people who's job is to safeguard this system, protect consumers. So, it is going to require stronger enforcement resources. But we are not substantially expanding the broader layers of supervision and regulation. In fact, we are simplifying them in important respects.

MORAN: Two big to fail? There's now going to be a club if this law passes. Banks and other institutions get to be considered too big to fail, subject to some more regulation. But also, isn't there a guarantee there, that if they do fail the taxpayer will once again ride to the rescue?

GEITHNER: Our objective is just the opposite of that. The critical, and the sort of tests of credibility for reform is to try to make sure the system is going to be strong enough to withstand the potential failure of large institutions. We want to reduce the risk it happens. But it will happen and we want to make sure it happens because it is not a good strategy for the country to protect them from their errors. But for that to happen you have to make the system strong enough to withstand the effects of their failures. So by forcing stronger capital requirements, stronger shock absorbers in the system, you help achieve that outcome. And we're proposing stronger authority that we now have for small banks and thrifts to help manage the failure, resolve these large institutions, allow for an orderly unwinding of institutions that get to the point where they pose risk to the system.

So, what we're trying to do is reduce the risk in the future. That we have institutions that are too big to fail, and make sure if we get to that point, you have a large institution whose failure would threaten the system we have a better capacity to manage that failure. That is the objective our proposal.

MORAN: So, the notion that a bank or institution might considered too big to fail, is not going to encourage more risk taking? Not the sense that, well, the government is there to back me up?

GEITHNER: Look our system is actually less concentrated, has less consolidations than the financial systems of most countries around the world. You know we have 9,000 banks around the United States. The 10 largest banks in the United States account for a much smaller fraction of financial activity than is true in Canada, most of Western Europe, certainly in Japan. And we want to preserve that balance, where we have the benefits, the flexibility, the diversity that comes from having thousands of small banks across the country, operating alongside these large institutions. But by holding them to higher standards, tougher capital requirements on large institutions, and having this better authority to deal with the potential failure of those institutions. We will reduce the risk, the moral hazard risk in having institutions that get to be that size.

MORAN: Let's talk about a big failure: In retrospect, was letting Lehman Brothers fail, and you were there, was that a mistake?

GEITHNER: It was a tragic mistake for this country that we came into this crisis without the ability and the authority – not just to prevent that kind of risk from developing–but without the authority to manage that failure affectively. And the basic reality was we came into September of 2008 without that authority. That's why the previous administration had to go to the Congress, in a very short period of time, and get authority that put capital into financial institutions, better tools. And even today, we still don't have the capacity to deal with a future AIG, a future Lehman. That's why we're proposing these better tools for crisis management. So it was a tragic thing for the country, the government did not have the ability at that point. But they did not make a choice. It was really – they had no ability at that point, given what Lehman, the sort of the size of capital needs of Lehman, to come in at that point and prevent failure.

MORAN: If you had had the authority it would have been better to keep Lehman afloat?

GEITHNER: I believe it would have been better, but we would still have faced enormously power financial crisis at that point. And it probably would not have saved us, still, from a very deep recession and a risk of substantial further failure across the financial system. Because at that point this global storm already had enormous force; Lehman was a sort symptom of the power of that storm. And it's failure did make things worse. But it would have been a terribly traumatic period for the U.S. economy, global economy, anyway, and we would have still had to do extraordinary things to stabilize the system.

MORAN: Were there times during those weeks and months that you thought this whole thing could go down?

GEITHNER: Absolutely.

MORAN: The whole financial system could collapse?

GEITHNER: Absolutely. I think we did. We were really at the edge of the abyss. And for the first time in really almost a century, we faced the prospect of a catastrophic failure of our financial system. And that's why it was so important. What Congress ultimately did, which was to provide exceptional authority for the government, was absolutely important to help stabilize the system. And it's our -- you know it's take extraordinary actions just to bring the system to the point where we are today where you're seeing a little bit more stability, a little bit more confidence and the beginning of the process of repair.

MORAN: Are we out of the woods?

GEITHNER: We are in a better position than we were three, six, nine months ago.

MORAN: Is that a yes?

GEITHNER: I think we are in a better -- much better position to get through this. But not -- only because your president, working with the Congress and countries around the world, was willing and able to put a substantial force at work to help get people back to work, help bring confidence back, help provide some stability to the financial system.

MORAN: As somebody who's spent a lifetime in these matters, in those weeks and months when were at the edge of the abyss, as you say, were you scared?

GEITHNER: I was very worried about the basic fabric of the stability of our system. Absolutely. I think, again, it was something I don't think anybody had ever seen in their lifetime. And as you saw from the events that followed, it was clear it was going to cause enormous damage to the basic lives of millions of Americans and people around the world.

You know you saw economic growth fall off a cliff. You say the value of people's savings plumate. Wealth destroyed. People facing the prospect that they work 20 more years beyond what they thought they were going to. Millions of people losing their homes. Enormous, enormous damage to the productive capacity of this country, leaving us and this president, when he came into office, with huge deficits and a real risk of things deteriorating further. So it was absolutely an extraordinary, challenging period.

MORAN: And the markets were panicking. You came in, you made your maden speech. The markets tanked 380 points that day. What was that like for you?

GEITHNER: You know, I knew when we came in, and we spent a huge amount of time with the president in the weeks of December thinking through our strategy, but we knew at that point it was clear that the world was -- growth was falling off the cliff. You know, the U.S. economy shrank at a 6 percent annual rate in the fourth quarter. Industrial countries around the world were falling at a sharper pace. Trade just stopped. And you saw, you know, trillions of dollars of wealth destroyed.

And so what you saw in January and February and March were the effects of those pressures on confidence in the financial system. So as we came in and even as Congress passed stimulus, those data -- the data on how bad the fourth quarter was -- were coming into the public attention. That caused another wave of damage to confidence. And again, huge pressure on the financial system. But . . .

MORAN: But then you stepped before the microphones and this -- and the market doesn't like you.

GEITHNER: Yes. Well, you know, again, what we did at the beginning, I think this was the right judgement to do is, we gave an initial framework, laid out the broad plan we were going to pursue in the financial sector, and then we went and did it. We went and put in place the more -- a comprehensive program on housing that's been very helpful in helping slow the erosion of the housing markets. We've put in place this substantial program to bring more transparency and disclosure to bank balance sheet and its allowed, you know, substantial amounts of new equity to come into the financial system, helping stabilize the banking system.

We've put in place these very powerful programs to help repair the securitization markets that are central to consumer lending, small business lending, student lending. Those markets are getting slightly better. And a program to help free up these markets for real estate related loans that were the center of the crisis. We -- in that initial framework, we laid out the broad strategy, but people wanted to see us act. But we did act. We act on each of those fronts and that's helped lay a better foundation for confidence.

MORAN: Now, look ahead. What kind of unemployment rate is the country looking at?

GEITHNER: Well, I think unemployment is almost certainly going to rise further before it peaks.

MORAN: Right (ph) at 10 percent?

GEITHNER: Well, it's going to rise from its current level, which is, you know, enormously high. And, you know, even that understates the amount of damage you've seen because people are working less, even when they're employed, and a lot of people having a hard time finding a job, stay unemployed longer. So we're at exceptionally high levels. They reflect a huge amount of damage. They cause a huge amount of uncertainty. So it's going to go higher even as growth starts to recover. And it's going to take us a while still to get through this and for growth to come back to the point where you're going to start to see businesses creating jobs rather than simply shedding them at a historic pace, which we've seen so far. That's the beginning. It's an important beginning. We've got a long way to go, though.

MORAN: When is growth going to return, do you think?

GEITHNER: Well the -- most private forecasters now see growth showing positive numbers in the second half of the year. At least by the fourth quarter. But it will be slower than is typical because, again, this economy, we've borrowed to much. You know, people across the country -- took on to much debt and they're going to want to save more. They're going to want to pay down those debt bubbles and that's going to slow the pace of recovery. That's a healthy thing. It's an important thing to go through, but it's going to mean a slower, slower recovery.

MORAN: The federal government's debt is going to 70 percent the Gross Domestic Product. Are you concerned about the inflationary? Is the country going to see raging inflation? People are concerned about that.

GEITHNER: Right. We are not going to have high inflation in the United States.

MORAN: How can you say that?

GEITHNER: Because we have an independent Federal Reserve who's core responsibility is to keep inflation low and stable over time. And if you look at this -- the Fed's record on inflation, over the last 30 years in particular, they have done an exceptionally good job as proof given their power to do.

Now we are going to have to work with Congress to bring those deficits down over time to a sustainable level as soon as we get through the crisis. So what the president proposed when he came in was, as soon as we have recovery back on track, we're going to have to bring those deficits down quite quickly quite far because unless we do that, there's a risk that interest rates will go up in the future and recovery will be arrested just as it starts getting going.

MORAN: And right now China has been buying more of that debt, financing American spending. That's not sustainable. They're saying that they are now concerned about the value of their investments in the United States.

GEITHNER: Let me just say this. No one is going to be more concerned than this president and this secretary of the Treasury, this economic team, about the important challenge of getting our fiscal position back to -- back down to earth. It is a critically important thing for us to do.

You know, when I was last serving the Treasury in the late 1990s, we helped put in place a fiscal program that produced surpluses, helped generate very high rates of private investment, a huge amount of confidence in U.S. financial assets, a big wave of growth in productivity improvements. We have a -- we also have lived through what it means to achieve that. And we all understand what it will mean for the economy if we fail to produce sustainable, fiscal position.

So we're going to work very hard at that with -- it's going to require the Congress too. But I think if you listen carefully now, and this is encouraging, I think there's much broader awareness in the Congress about the risks in running large deficits. You know, if you just -- it changed a lot relative where it was five, six, seven, eight years ago where people thought it was responsible to go out and substantially cut taxes permanently and borrow to finance those tax cuts and take the risk of adding to our long term deficits.

So I think there's much more -- much stronger political support for getting to this point. But our first responsibility is to get growth back, get unemployment down, and get businesses back investing. That's our first responsibility.

MORAN: So do you think that this relationship between China and the United States -- massive creditor, massive debt -- has to change?

GEITHNER: I would say the thing about us and the world, China's part of that. That's really us and the rest of the world. We're going to have to save more as a country. Average families in America are going to have to save more. The government's going to have to spend less, consume less, bring those deficits down.

And the world is going to be less able to depend on us and the American consumer to pull the world out of these downturns. So we're going to need the rest of the world doing more to strengthen their economy, because they're going to be less dependent on us, that they won't depend on us. And we're not going to allow a recovery. We're going to do our best to avoid a recovery that's financed by excessive borrowing again.

MORAN: Last Question. Is there a lack of understanding, do you think, in the financial community by how close they came to the American taxpayer rescue?

GEITHNER: I do think there was a period of stunningly bad judgments by the leaders of our financial systems, by their boards of directors. And I think that made the crisis worse. And I think that helped precipitate a loss -- big loss of confidence and trust in the financial system as a and confidence. Did a lot of damage to that trust and confidence, and I think we need to do a lot to earn that back.

And that's going to require a period where they demonstrate that they're prepared to avoid and not get back into the kind of practices, behavior that got us into this mess on compensation practices. But in the communities where they operate and lend, they need to work very hard to make sure that they're demonstrating to businesses in their communities, the people that depend on them, why it is important to have a financial system that works better and can meet their needs.

So I think we have a ways to go to rebuild that trust and confidence.

MORAN: So you don't think they get it?

GEITHNER: Yes. I'm sure many of them get it. But again, it's like life, you know. They're going to have to earn back the confidence of the American public, and that's going to take a lot of effort.

MORAN: And how are they to do it?

GEITHNER: Again, I think they need to show, in judgments they make about how they pay their executives, and judgments they make about how they use the privileges they get from being banks in the United States with the protection the government offers. They're prepared to take a chance in the American business. It's got some idea they want to finance. And they're in there again, again taking responsible chances on the American economy. That's going to take -- that's a good way to start.

MORAN: And you're going to be riding herd on them?

GEITHNER: We're going to be encouraging it. We're going to make it compelling for them to do that.

MORAN: Thank you very much.

GEITHNER: Nice to see you.