'This Week' Transcript: Larry Summers & Mitch McConnell

"This Week" Transcript of Guests: Obama's Chief Economics Adviser Larry Summers and Senate Minority Leader Mitch McConnell, R-Ky.

Mar. 15, 2009 —


MARCH 15, 2009




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

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


STEPHANOPOULOS: After a scary Monday...


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

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


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


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



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



(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 Congress respond?

Questions this morning for our headliners, the president's top economic adviser Larry Summers and the Senate's top Republican, Mitch McConnell.



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


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

And, as always, the Sunday funnies.


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



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 hope brought some relief this week. But this morning's headlines on the government bailout has the feel of Groundhog Day.

We learned, overnight, that the insurance giant, AIG, which has received $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'm joined by the president's top economic adviser, Larry Summers.

Welcome back.

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

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

SUMMERS: George, look, 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, 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 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.

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

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

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

What the Obama administration has done, based on the advice of attorneys, is done everything 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.

And, obviously, this whole area is something we're going to have to look at, as we think about regulation in the future. Because no one 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 are contracts. And 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.

STEPHANOPOULOS: There's a second issue that has to do with transparency. 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 Sachs and Merrill Lynch, and some European banks, yet AIG won't say where this money has gone, won't release who these counterparties are.

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

STEPHANOPOULOS: Why were they made completely whole?

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


SUMMERS: ... getting the legal things that are necessary for disclosures. 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...


SUMMERS: We'd like to see as much -- we would like to see as much transparency as is legal and is consistent with -- with market functioning. 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 -- by not needing bailouts and instead being able to limit payments in the way that a bankruptcy does.

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


SUMMERS: ... kind of way.

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

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

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

And Secretary Geithner, as he works on financial regulation, is focused on that -- achieving that objective. But there's a very different situation...

STEPHANOPOULOS: Going forward, not looking back?

SUMMERS: That's a different situation than saying that we can just 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 in the 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 these things. No one wants to see money going for this purpose, with all the needs that our country has.

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.

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

Is an economic bottom in sight?

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

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.

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 the president is doing are starting to have effects, these problems did not get made overnight. They didn't get made in a year. And they're not going to get fixed very rapidly, either.

But what we have to do is put in place a program. And the president is doing that, with jobs, with housing, with the flow of credit; tomorrow, with small business, to put in place a program that addresses the crucial problems and permits stability to be -- to be regained. 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, 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.

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

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

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

STEPHANOPOULOS: Of their down payment?

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

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

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

The president and you pushed back hard yesterday, saying that everyone should have confidence in the American economy. But I wonder, what do you think the premier was doing there? Was that saber-rattling?

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

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

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

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

SUMMERS: We'd love to see Senator McConnell's 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 -- came at a time when it was a Republican president and a Republican Congress that were making the decisions.

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

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

SUMMERS: Thank you.

STEPHANOPOULOS: Let's get the response right now from Senator McConnell. He's down in Louisville, Kentucky. You heard Mr. Summers there, Senator. Will the Republicans in the Senate be providing an alternative budget?

MCCONNELL: Well, first, let's take a look at the budget the president is offering. 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, as you indicated.

What I have said and our colleagues have said repeatedly, it does what 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 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.

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

One other point. We have already authorized this year in the first 50 days of this administration, spending at the rate of $24 billion 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 the first 50 days is more than the previous administration spent after 9/11 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 are going 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 this clock showing that it's been 16 days, 20 hours and 18 minutes and counting since you've had a budget. An outside group called Americans United for Change is putting out this ad this morning making the same point. Listen.


UNKNOWN: The Republican response?




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

That's right. Nothing.


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

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

STEPHANOPOULOS: But no comprehensive budget?

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

MCCONNELL: Well, we're just sort of getting down in the weeds here over procedure. Through the amendment process, we would absolutely reformulate the Democratic plan. 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, just like we had alternatives when they offered the massive stimulus package.

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

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

MCCONNELL: Well, it is an outrageous situation. I wrote Secretary Paulson back in October complaining about the way AIG had been doing its business.

The point here is, if you're going to take the government as a partner, the message here, I'm afraid, to any business out there that's thinking about taking government money, is let's enter into a bunch of contracts real quick, and we'll have the taxpayers pay bonuses to our employees.

This is an outrage. 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. 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 of weeks, but last week, your colleague, Republican Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, made it clear that he wasn't for any kind of a bailout for these banks. In fact, he wants to shut the worst ones down. Take a listen.


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


STEPHANOPOULOS: Do you agree with Senator Shelby? MCCONNELL: Well, I'm open to talking about fixing the financial system. I supported the financial rescue package back in October, and so I'm anxious to look at what the administration would like to do. I don't know whether it will end up requiring our consent or whether it will be done on the basis of authorization that's previously been given 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 happening already. And a number of banks have been closed down by the FDIC, as you know.

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

MCCONNELL: Well, you know, we thought back in October, when we voted for the financial rescue package that the package was going to go after toxic assets. And unfortunately, it ended up being a capital investment. We all kind of held our noses and supported it, because they said that we're going to have a financial meltdown. 74 out of 100 senators believed that to be the case. So we'll have to see what they recommend.

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

MCCONNELL: I want to see what they recommend, George. I'm not just going to say, without even looking at it yet, that this makes no sense. But I have been very, very skeptical of everything that's happened since the initial financial rescue package. We're now moving into basically industrial policy, by trying to rescue the automobile companies who ought to be making very tough decisions themselves. I think skepticism among my colleagues for additional bailouts is very, very high, and that includes me.

STEPHANOPOULOS: OK. Senator McConnell, thanks very much for your time this morning. Congratulations, Louisville winning the Big Eight last night.

MCCONNELL: Big win. Big East.