'This Week' Transcript: Larry Summers & Mitch McConnell

Mar. 15, 2009 — -- ABC'S "THIS WEEK WITH GEORGE STEPHANOPOULOS"

MARCH 15, 2009

SPEAKERS: GEORGE STEPHANOPOULOS, HOST

LAWRENCE H. SUMMERS, DIRECTOR, NATIONAL ECONOMIC COUNCIL

SEN. MITCH MCCONNELL, R-KY., SENATE MINORITY LEADER

[*] STEPHANOPOULOS: Good morning and welcome to "This Week. (BEGIN VIDEO CLIP)

(UNKNOWN): We start with a -- just a (inaudible).

(END VIDEO CLIP)

STEPHANOPOULOS: After a scary Monday...

(BEGIN VIDEO CLIP)

(UNKNOWN): I've never seen the (inaudible)

The Americans have just (inaudible) more fearful than this.

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STEPHANOPOULOS: Stocks climb, and the White House talks up theeconomy.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: We're going to get through this.

(END VIDEO CLIP)

(BEGIN VIDEO CLIP)

(UNKNOWN): What we need today is more optimism.

(END VIDEO CLIP)

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(UNKNOWN): There's no safer investment in the world.

STEPHANOPOULOS: Are we closer to a bottom?

Will Obama's plan speed the recovery? And how will Congressrespond?

Questions this morning for our headliners, the president's topeconomic adviser Larry Summers and the Senate's top Republican, MitchMcConnell.

Then...

(BEGIN VIDEO CLIP)

JON STEWART, HOST OF "THE DAILY SHOW": The financial newsindustry is not just guilty of a sin of commission.

(END VIDEO CLIP)

STEPHANOPOULOS: Has the financial crisis spread to journalists(inaudible)? That, and the rest of the week's politics on our roundtable withGeorge Will, Frank Rich of the New York Times, BusinessWeek's JimEllis, and Robert Kuttner from the American Prospect.

And, as always, the Sunday funnies.

(BEGIN VIDEO CLIP)

CRAIG FERGUSON, HOST, "THE LATE LATE SHOW: Here's how bad theeconomy is. "Sesame Street" has had to lay off 67 people. Now allthe characters are living in garbage cans.

(LAUGHTER)

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ANNOUNCER: From the heart of the nation's capital, "This Week,"with ABC News chief Washington correspondent, George Stephanopoulos,live from the Newseum on Pennsylvania Avenue.

STEPHANOPOULOS: Hello again. Those glimmers of economic hopebrought some relief this week. But this morning's headlines on thegovernment bailout has the feel of Groundhog Day.

We learned, overnight, that the insurance giant, AIG, which hasreceived $170 billion taxpayer dollars will start paying out today$165 million in employee bonuses.

The company says it has no choice. A contract is a contract.

For the first public response from the Obama administration, I'mjoined by the president's top economic adviser, Larry Summers.

Welcome back.

So let's -- let's get this straight, here. AIG informed thegovernment this week. We know that Treasury Secretary Tim Geithnercomplained, on Wednesday, to the chairman, and was told basicallythere's nothing we can do.

And I think a lot of people simply don't understand, how can thisbe, especially when these bonuses are going to be going to thefinancial products division of the company which brought the companydown?

SUMMERS: George, look, there are a lot of terrible things thathave happened in the last 18 months, but what's happened at AIG is themost outrageous, what that company did, the way it was not regulated;the way no one was watching, what's proved necessary is outrageous.

We are a country of law. There are contracts. The governmentcannot just abrogate contracts. Every legal step possible to limitthose bonuses is being taken by Secretary Geithner and by the FederalReserve system.

STEPHANOPOULOS: But, basically, I mean, tell me what's wrongwith this analogy. Had the government allowed AIG to go intobankruptcy, these bonuses wouldn't necessarily have been paid.

We prevented AIG from going into bankruptcy for good publicpolicy reasons, so why doesn't the government to have the right to atleast limit these bonuses?

SUMMERS: The government -- look, I'm not a lawyer, George, andwhen the original agreements were reached, I wasn't part of thegovernment and party to them.

What the Obama administration has done, based on the advice ofattorneys, is done everything it can to, within the law and within thetradition of upholding law that we have in this country, to limitthese bonuses.

And they have, as a result of Secretary Geithner's efforts, beenscaled back.

And, obviously, this whole area is something we're going to haveto look at, as we think about regulation in the future. Because noone can be satisfied with -- with what's happened. And in many cases,we just can't continue to do it -- to do it in this way.

It is outrageous. We are a nation of law, where there arecontracts. And there is one other reality we have to recognize, whichis that these companies have to be enabled to function, if thegovernment is going to maximize the prospect of getting its moneyback.

STEPHANOPOULOS: There's a second issue that has to do withtransparency. About $50 billion that went to AIG, from the taxpayers,has gone straight to their counterparties.

Now, it's been reported that these are banks like Goldman Sachsand Merrill Lynch, and some European banks, yet AIG won't say wherethis money has gone, won't release who these counterparties are.

And, secondly, a lot of experts wonder -- and Gretchen Morgensonasked this in the New York Times this morning. Why weren't thesecounterparties forced to take some kind of a haircut?

STEPHANOPOULOS: Why were they made completely whole?

SUMMERS: George, both questions are very fair questions. TheFederal Reserve is the party to that portion of the agreement withAIG. And my understanding is that they're working with AIG on exactlythis issue and getting the legal...

(CROSSTALK)

SUMMERS: ... getting the legal things that are necessary fordisclosures. In just what way or just when, I can't tell you.

STEPHANOPOULOS: But the president wants that disclosed?

SUMMERS: Because it's the Federal Reserve...

(CROSSTALK)

SUMMERS: We'd like to see as much -- we would like to see asmuch transparency as is legal and is consistent with -- with marketfunctioning. We don't have the ability, under law -- and it's one ofthe crucial things that, as we move to financial regulation, that thepresident 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 inwhich you're able to work these things out by -- by not needingbailouts and instead being able to limit payments in the way that abankruptcy does.

But it's not something, as, frankly, we saw in the aftermath ofwhat happened at Lehman, that you can just do in arbitrary or ahiggly-piggly kind of...

(CROSSTALK)

SUMMERS: ... kind of way.

STEPHANOPOULOS: So, again, there's nothing that can be doneabout it?

SUMMERS: No, there are things -- there are things that can bedone. That's why, in the context of financial regulation, we'reworking to put all these derivatives on exchange, and so it can all benetted out across all the parties, rather than simply being a contractthat somebody is saying has to be -- has to be enforced. STEPHANOPOULOS: But to be clear, the president would like toknow who got these funds, and you believe that there should be ahaircut?

SUMMERS: I believe that, in principle, in situations of thiskind, there should be a framework that permits -- that permitshaircuts, so that the situation can be worked forward.

And Secretary Geithner, as he works on financial regulation, isfocused on that -- achieving that objective. But there's a verydifferent situation...

STEPHANOPOULOS: Going forward, not looking back?

SUMMERS: That's a different situation than saying that we canjust change the rules -- change the rules ex-post.

Look, if you start changing the rules, ex-post, on financial --on these kinds of contracts, you may get a feeling of satisfaction inthe short run. But the president said something very, very important,George, in his State of the Union speech.

He railed and spoke very powerfully against what has happened.And then he said, "but we can't govern out of anger."

And what's being done here -- no one wants to be doing thesethings. No one wants to see money going for this purpose, with allthe needs that our country has.

But at the same time, if we don't contain this situation; if wedon't respect laws on which people reasonably relied, the potentialchaos, disruption, lack of credit, resulting unemployment will be thatmuch greater. Those are the agonizing judgments that our financialauthorities have to make.

STEPHANOPOULOS: You say we can't govern out of anger. You andthe president were also trying to inspire hope, this week, on theeconomy; some signs of some progress, and of course, that move in thestock market this week.

Is an economic bottom in sight?

SUMMERS: George, no one can make that -- no one can make thatjudgment. You know, the president said something else that was verywise. He said, you know, "It's never as good as people say it is whenthey say it's good and it's never as bad as people say it is when theysay it's bad."

Clearly, the fact that consumer spending was like a ball fallingoff a table through the holiday season, and that there does seem to besome sign of stability in January and February is better than if thatwere not the case.

But we've got an economy that's losing 600,000 jobs a month.That's probably not going to stop imminently. And so, while there is signs that some of the things that thepresident is doing are starting to have effects, these problems didnot get made overnight. They didn't get made in a year. And they'renot going to get fixed very rapidly, either.

But what we have to do is put in place a program. And thepresident is doing that, with jobs, with housing, with the flow ofcredit; tomorrow, with small business, to put in place a program thataddresses the crucial problems and permits stability to be -- to beregained. But it's going to take some time.

STEPHANOPOULOS: How about the news on the banks, specifically?

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

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

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 wasup meant that the country was out of the woods or the fact thatconsumer spending had been strong meant that the country was out ofthe woods.

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

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

The policy starts...

STEPHANOPOULOS: But I want to get to that because it's myunderstanding that the president had a meeting of his economic teamTuesday night and finalize the outline of how to deal with these toxicassets. Treasury still working on the details.

Let me try to explain in layman's terms and you tell me where I'mgetting it wrong. Basically the government wants to set up a public-private partnership where both the government would try to encouragehedge funds, other private investors to get into these markets to tryto 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 paidback. But if the investments lose money, the most the investors couldlose would be their down payment. They're going to have the loanforgiven.

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

Your response?

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

Whether it's car loans, what have you, restarting our capitalmarkets is essential if we're going to be able to get this credit flowgoing. And this credit flow is, in turn, essential for consumerconfidence using...

STEPHANOPOULOS: Even if that means taxpayers taking almost allof the risk?

SUMMERS: Well, they're not taking all. They're not takinganything like all of the risk, George. No taxpayer in thesearrangements is going to lose money until the investor who put up themoney has lost 100 percent of their...

STEPHANOPOULOS: Of their down payment?

SUMMERS: Down -- of the money they put up. So until whoever itis who buys it, whether it's an insurance company or a hedge fund,until whoever it is who buys it is completely wiped out, thegovernment financing isn't going to be touched at all.

And there could be a lot of care given to make sure that those ineffect down payments are large enough that the government's interestis protected.

STEPHANOPOULOS: Yesterday -- earlier on Friday, we saw theChinese premier, Wen Jiabao, say that he was worried about hisinvestments, $1 trillion investment in U.S. Treasury bonds.

The president and you pushed back hard yesterday, saying thateveryone should have confidence in the American economy. But Iwonder, what do you think the premier was doing there? Was thatsaber-rattling?

SUMMERS: Oh, look, I have a hard enough time, frankly,understanding the motives of all of the things that political peoplehere in Washington say without trying to establish the politicalmotives of political statements that come out of China.

But I'll say this, George, what has been very striking in thistime of financial distress, even with all of the financial problemsthat we've had, is the way in which capital has flowed into the UnitedStates. In the way in which people have seen U.S. Treasuries as aplace where their money is safe, where there is a liquid and deepcapital market.

Now we've got to make sure to keep it that way. And that's whythe president's budget puts a lot of emphasis on the need to have thebudget deficit he inherited over the next four years, and put thecountry's finances on a sound basis after the -- as the economyexpands.

STEPHANOPOULOS: I want to get to the budget because Mr. --Senator McConnell is about to come up, the Republican leader in theSenate. He says he has only three problems with the president'sbudget. It spends too much. It taxes too much. And it borrows toomuch. Your response?

SUMMERS: We'd love to see Senator McConnell's concretealternatives that gets closer to a balanced budget. The situation thepresident inherited of nearly $1 trillion deficits, before he didanything, came at a time -- came at a time when it was a Republicanpresident and a Republican Congress that were making the decisions.

I believe the approach that the president is taking, whichrepresents the first serious effort to contain health care costs inmany years, that is going to stop going forward the practice ofearmarks, that's going to monitor every federal expenditure in thisstimulus program where people can see it on the Internet, I think it'sthe right kind of approach. It's the largest cuts in, you know, thiscategory, George, so-called domestic discretionary spending.Basically, the non-Social Security, non-Medicare, non-defense part ofthe budget, it's getting cut more strongly than it has in any budgetthat's been proposed in many years.

So I think what the president is proposing is a strategic budget.It is making substantial cuts, but it's also providing support in someimportant areas, like education, like health care, like taking thesteps that are necessary to make us less dependent on foreign oil andstart addressing global climate change that will let us have a soundeconomic expansion.

STEPHANOPOULOS: OK, Larry Summers, thanks very much for yourtime this morning.

SUMMERS: Thank you.

STEPHANOPOULOS: Let's get the response right now from SenatorMcConnell. He's down in Louisville, Kentucky. You heard Mr. Summersthere, Senator. Will the Republicans in the Senate be providing analternative budget?

MCCONNELL: Well, first, let's take a look at the budget thepresident is offering. That's his responsibility. The majority has aresponsibility to lay out their plan, George, for the next few years,and they've done it. It will double the national debt in five yearsand triple the national debt in 10 years. It taxes too much, itspends too much, it borrows too much, as you indicated.

What I have said and our colleagues have said repeatedly, it doeswhat the president's chief of staff -- he was pretty candid about it-- they're taking advantage of a crisis in order to do things that hadnothing to do with getting us into the crisis in the first place. They want to have a massive expansion of health care. An energytax, which many people are now calling a light switch tax, of another$600 billion. It's sort of bait-and-switch.

What we really ought to be doing here is concentrating on fixingthe financial system, which you did ask Secretary Summers about a goodbit, and the housing problem. But not using this crisis as an excuseto go on an explosion of spending.

One other point. We have already authorized this year in thefirst 50 days of this administration, spending at the rate of $24billion a day, or $1 billion an hour. Another way of looking at it,just putting it in context, this $1.2 trillion that we've spent in thefirst 50 days is more than the previous administration spent after9/11 on Iraq, Afghanistan and the response to Katrina.

STEPHANOPOULOS: Well, Senator, there's a lot of criticism there,but no alternative. And the Democratic Party and the White House aregoing to make a real push to paint you as the "just say no" party.

Look what the DNC has put up on their Web site. They have thisclock showing that it's been 16 days, 20 hours and 18 minutes andcounting since you've had a budget. An outside group called AmericansUnited for Change is putting out this ad this morning making the samepoint. Listen.

(BEGIN VIDEO CLIP)

UNKNOWN: The Republican response?

UNKNOWN: No.

UNKNOWN: No.

UNKNOWN: No.

UNKNOWN: So what kind of budget have the Republicans proposed toget us out of the mess they created? Here are the details.

That's right. Nothing.

(END VIDEO CLIP)

STEPHANOPOULOS: So will you have a budget, and are you worriedabout that attack?

MCCONNELL: No, we are going to offer a number of amendments tothe Democratic proposal.

STEPHANOPOULOS: But no comprehensive budget?

MCCONNELL: Well, it will reframe what the Democrats recommendfor America over the next five and 10 years. And I assure you, theamendments that we offer will not lay out a blueprint for doubling thenational debt in five years and tripling it in 10 years. That is notwhat we think... STEPHANOPOULOS: But shouldn't you have to have a comprehensiveapproach that lays out the tradeoffs? If you just have rifle shotamendments, you don't have to make all the tradeoffs that you have tomake in the overall budget.

MCCONNELL: Well, we're just sort of getting down in the weedshere over procedure. Through the amendment process, we wouldabsolutely reformulate the Democratic plan. Whether you have acomprehensive approach or whether you offer an amendment approach issomething that parliamentarians can debate, but the point is, we'regoing to have alternatives, just like we had alternatives when theyoffered the massive stimulus package.

MCCONNELL: We would have spent half as much money, we would havefixed housing, and put money back into pockets of taxpayers. So wehave offered alternatives all along the way, and we will offernumerous alternatives on the budget when it comes up.

STEPHANOPOULOS: Let me ask you about AIG. You heard me talkingto Mr. Summers about that earlier, and he said, you know, he'soutraged. The president is outraged and as angry as anyone else, butthere's nothing the government can do. Do you accept that?

MCCONNELL: Well, it is an outrageous situation. I wroteSecretary Paulson back in October complaining about the way AIG hadbeen doing its business.

The point here is, if you're going to take the government as apartner, the message here, I'm afraid, to any business out therethat's thinking about taking government money, is let's enter into abunch of contracts real quick, and we'll have the taxpayers paybonuses to our employees.

This is an outrage. And for them to simply sit there and blameit on the previous administration or claim contract -- we all knowthat contracts are valid in this country, but they need to be lookedat. Did they enter into these contracts knowing full well that, as apractical matter, the taxpayers of the United States were going to bereimbursing their employees? Particularly employees who got them intothis mess in the first place. I think it's an outrage.

STEPHANOPOULOS: And on the bank plan, the president's bank plan,we're going to be seeing the final details in the next couple ofweeks, but last week, your colleague, Republican Senator RichardShelby of Alabama, the ranking Republican on the Senate BankingCommittee, made it clear that he wasn't for any kind of a bailout forthese banks. In fact, he wants to shut the worst ones down. Take alisten.

(BEGIN VIDEO CLIP)

SHELBY: Close them down. Get them out of business. If they'redead, they ought to be buried. We buried the small banks. We got tobury some big ones, and send a strong message to the market.

(END VIDEO CLIP)

STEPHANOPOULOS: Do you agree with Senator Shelby? MCCONNELL: Well, I'm open to talking about fixing the financialsystem. I supported the financial rescue package back in October, andso I'm anxious to look at what the administration would like to do. Idon't know whether it will end up requiring our consent or whether itwill be done on the basis of authorization that's previously beengiven to them, but I'm willing to listen to them.

STEPHANOPOULOS: So you're not for closing down the banks?

MCCONNELL: I'm for closing down -- a lot of that is happeningalready. And a number of banks have been closed down by the FDIC, asyou know.

STEPHANOPOULOS: But how about the big ones like Citigroup, Bankof America, the large banks that could lead -- that some people claimare too big to fail?

MCCONNELL: Well, you know, we thought back in October, when wevoted for the financial rescue package that the package was going togo after toxic assets. And unfortunately, it ended up being a capitalinvestment. We all kind of held our noses and supported it, becausethey said that we're going to have a financial meltdown. 74 out of100 senators believed that to be the case. So we'll have to see whatthey recommend.

STEPHANOPOULOS: But you're open to it, to be clear, open toincluding more funds then?

MCCONNELL: I want to see what they recommend, George. I'm notjust going to say, without even looking at it yet, that this makes nosense. But I have been very, very skeptical of everything that'shappened since the initial financial rescue package. We're now movinginto basically industrial policy, by trying to rescue the automobilecompanies who ought to be making very tough decisions themselves. Ithink skepticism among my colleagues for additional bailouts is very,very high, and that includes me.

STEPHANOPOULOS: OK. Senator McConnell, thanks very much foryour time this morning. Congratulations, Louisville winning the BigEight last night.

MCCONNELL: Big win. Big East.

STEPHANOPOULOS: See you soon.

END