SECRETARY OF THE TREASURY TIMOTHY F. GEITHNER PARTICIPATES IN A DISCUSSION AT THE NEWSEUM, THE ATLANTIC, AND THE ASPEN INSTITUTE 2011 WASHINGTON IDEAS FORUM OCTOBER 5, 2011 SPEAKER: SECRETARY OF THE TREASURY TIMOTHY F. GEITHNER JAMES BENNET, EDITOR, THE ATLANTIC MARGARET CARLSON, EDITOR, THE ATLANTIC [*] BENNET: We have, I think about 15 minutes together and then we're going to take a couple of questions from the audience via Twitter. The other official who has been grappling with this crisis since it began, Ben Bernanke said yesterday that the -- the recovery is close to faltering. Is he right or wrong? GEITHNER: Well growth is slower, weaker here and around the world then -- then we all hoped and it was from the beginning of the year and why is that happening? I mean it's self-evident now, it's happening because we had a very substantial oil shock. We had a very dramatic disaster in Japan that had big global effects on manufacturing. We have a severe, ongoing financial crisis in Europe weighing on confidence everywhere. We had a very divisive debate in the United States about whether we should meet our obligations as a country that caused a lot of damage to confidence and made people wonder whether our political system is up to dealing with the challenges we had. And all those things hit an economy still healing from the worst financial crisis since the Great Depression, so there's no -- it's not surprising growth is weaker here and around the world, the question is what should we do? What can we do? And in addition to trying to get Europe to act more forcefully to stabilize things there, contain that damage, there are things we can do here to make growth stronger and heal this recovery more quickly. We have a very substantial package of things before the Congress, tax cuts for every working American for every business, larger tax cut if you hire a veteran, you hire somebody unemployed, you hire somebody new to your payroll. And a very smart package of reforms combined with investments to -- to help rebuild the country. And if Congress were to act on that package, which of course we hope they will, it would make a major difference to a recovery that's slower than it needs to be. And if we tie that to the types of long term fiscal reforms we need to do to restore some gravity to our fiscal position, we'd also make a big contribution to greater confidence. And demonstrate, not just to Americans but people around the world, that this political system is up to the challenges we face. BENNET: But to use the chairman's word, if Congress doesn't act, will the recovery falter. GEITHNER: Well if Congress does not act, then growth will be weaker here. And with growth weaker, we will be more vulnerable to other things happening that are way beyond our control. And, you know, you can think about this as protection from the challenges we're facing or seeing Europe grapple with. It's good insurance against that, but it's worth doing on its own. BENNET: Let's talk about Europe for a minute. The EFT has a report today that there's going to be another stress test it looks like. Do you feel -- do you feel that Europe is moving quickly enough to inoculate its banks? GEITHNER: Well, no Europe is -- I do -- would say just to use the words of European leaders, they recognize they've been behind the curve of this, that they're moving too slowly. They're moving not as fast as markets move in today's environment. And they have to do more to build more confidence that they are going to act to hold this thing together. They decided that they're going to escalate substantially and they're now trying to negotiate the details of the terms. But, you know, this is not a question about the capacity of Europe to manage this. They have -- they have financial resources as a continent that are very large relative to the cost of this crisis. It's just a question of moving more quickly and more forcefully and I -- I expect you're going to see them do that because I think the consequences of the alternative are too expensive for them to contemplate. BENNET: What's it like when you're having those conversations with them? I mean have we lost any of our ability to influence the policy direction they take as a consequence of the fact that this contagion began here in the states? GEITHNER: Well I think any American in public life has to recognize that we caused enormous damage to our credibility in the world in the -- in allowing a financial system to get to the point where it did, cause a crisis this damaging both to us and around the world. And, you know, look at our politics today. You know, people look at us, not just Americans and they say -- they're wonder -- they wonder whether we're going to see Washington demonstrate they can do things on a scale commensurate with our challenges. So you have to come to these discussions with countries around the world recognizing we do so -- we do from a position of extraordinary humility in the face of our challenges. But Europe matters a lot to us. We don't want to see Europe weakened by a protracted crisis. They understand that. They've invited us in through the IMF and directly through the substantial swap lines we have in place for dollar funding for European institutions and having invited us -- invited us in, we will have some views about -- about what makes sense in that context. And we will be -- we have been very forceful and aggressive in communicating those views, but my experience largely has been they welcome both the support we're giving them and they welcome the advice, although they like to remind people that the U.S. has a lot of challenges to do to and no one feels that more strongly than we do. BENNET: Do you know -- is it knowable what degree of vulnerability our banks have to a -- to a -- to a crisis, a financial crisis in Europe? GEITHNER: I think this is a way to think about that. You know, the -- the people that oversee our financial system have a -- a very good feel for the direct financial exposure of American finance institutions to the countries under the most pressure in Europe. And that exposure, you've heard the chairman say, is -- is very limited. But, you know, Europe is a large part of the global economy and a -- a severe crisis in Europe would be very damaging to growth around the world. And that's why again it makes a lot of sense for us to be investing a lot of effort in getting them to try to move more forcefully and also trying to get Congress to move to strengthen our economy -- our economy here. But our financial system, because we move more -- you talked -- you asked a question about the -- a third possible round of stress tests in Europe. Our financial system is much stronger today than it was before our crisis because we forced our banks at a very early stage, to raise substantial amounts of equity to provide a substantial amount of disclosure to the world. People could make their own judgments about strength to fund themselves more conservatively. We basically crushed the weakest parts of our financial system so they no longer exist in the United States today. And the most vulnerable parts of our system today no longer operate in -- in the shadows of regulation with no oversight and allowed to take on huge amounts of leverage. So we're in a much better position because of those -- those acts. But, you know, this is -- the economy as a whole is still facing enormous challenge, growth too slow. We want to make it stronger and as we do that, we have a huge stake in Europe, you know, moving more forcefully. BENNET: I'd like to step back a little bit from the -- from the news and ask you a couple of questions given your unique vantage point over the last few years. A couple maybe historical, not to use too grand a word for it and another sociological. But, how do you look at the debt ceiling fight that we had this summer? Is this -- given its impact on -- on America's standing in -- in the world, and as a precedent, do you think it's going to look in retrospect like a kerfuffle we got over and moved on? Or do you think this represents a -- a real inflection point of some sort in the way the U.S. does business. GEITHNER: Well it depends on what choice Congress makes now in the next -- in the next three months, the next 15 months. But let me take the optimistic side. It's hard to do and it's hard to be an optimist today about our political system, but let me take the optimistic side of this. In the debt limit debate, we achieved three really important things. A pretty substantial down payment of spending savings over the next decade that solves about a quarter of our long term -- our 10 year fiscal sustainability problem. We took the threat of default, of mucking around with our capacity to meet our obligations of the table definitively for the political calendar. Very important to do that given -- given what people are trying to use that to achieve. And we set in place a mechanism, both with parliamentary procedurals for expedited review, but also a very strong sequester, and a trigger force mechanism to encourage them to act that gives us a -- puts a lot of pressure on the Congress to take another large step towards restoring fiscal sustainability. Those are -- those are pretty good outcomes given how divided the country is and given how divisive the debate is. And we did a lot of foundation laying and I really mean it, foundation laying, for the types of longer term reforms to entitlement programs, mandatory programs and health care elsewhere, and even on the tax side. And even though we weren't able to bridge all those differences over the course of the summer, the discussions we had, the negotiations we conducted with Republican leadership, I'm very confident will be -- will end up being the foundation for what we do. And we may not get all that done in the next three months, we may not get it in the next 18 months, but there's no other place to go than -- than that basic universe of changes and -- and so I -- I'd like to take the optimistic side of that. I'll give you on more -- one more thing of optimism, which is that you know, the great strength of our -- of our economy of course is it's a much more diversified, much more resilient, much more flexible, much more innovative and very productive economy relative to the other more mature major economies even with all our challenges today. And we've always had the political system that, you know, in the -- in the famous words, "Always does the right thing" in the end ... BENNET: We're doing everything else. GEITHNER: ... in the end. Does the -- does the right thing. And, you know, we're testing that basic confidence in the fiscal system today, but if you look at how the world looks at us, still. How they -- how they -- how they view us in relative terms, there's still a lot of confidence around the world that those basic strengths of the American political system will be -- will be -- will be justified again. And we're trying to, you know, earn that confidence, not depend on it. But I think you can't answer that question without knowing and looking very carefully to what -- what actions Congress was -- and you know, it would be a terrible thing for people to sit here and decide that because we're in the political season and we've got what, 13 months left? Fourteen months left? That we're going to put policy actions on hold that have traditionally had a lot of bipartisan support, unambiguously good for the economy. And at, at time when there's still so much damage left over from the crisis and the world is fragile, not to -- not to act. BENNET: Here's a more purely retrospective question, you moved quickly as -- as a group to apply lessons that were learned to our determent during the Great Depression about how to respond to a crisis like this. Also lessons that you learned in the Latin American Debt Crisis and in Asia. You've talked a lot about the need to move decisively with overwhelming force in a -- in a situation like this. Does that turn out to be enough? Have you learned new lessons over the course of this crisis that we should keep in mind if we ever find ourselves in this situation again? GEITHNER: Good question and, you know, I want to think about that. We -- we learned a huge amount about how to do things better than they were done in the past in our experience and people are going to be pouring over those judgments for a long period of time. And it's really -- it's sort of unfair to reduce them to the simple thing, but I think it is simple better in this case, which is the more forceful you are at the beginning, the quicker you get growth back, the quicker you're able to dial back those things. And the less long term damage you do to your fiscal position. And how you do that is very important. But what we tried to demonstrate is that if you use a strategy that puts enormous burden or pressure on private capital to come in, you take more of the burden off the taxpayer and the public sector. Remember -- remember for us as a country, people were confident across the political spectrum in the fall of '08, early '09 that this was going to cost us trillions of dollars of the taxpayer's money to resolve. The direct cost of the financial intervention and if you look at all in from the Fed to the FDIC what the Treasury did, what the Fed did in New York over that period of time, because of the -- the strategy we adopted, and we have a long way to go, we have a very good chance of having put out the financial fire at very low cost to the taxpayers. BENNET: Is there anything you would have done differently? GEITHNER: Oh, there's -- I'm sure there are many things. And you know, I spend all the time still thinking about would this have been possible, how we made that possible. But the -- what you're seeing in Europe now and you see also in the United States, ultimately there are limits to what you can do or a function of what the political system provides authority to do. And ultimately if you can't relax those constraints, then you're left with something burning much longer, much greater risk. And what matters most in financial crisis management, apart from the design of the policy instruments, is how you relax those political constraints dramatically so you can do the terribly unpopular things you have to do to ultimately make the damage, you know, less -- less painful to the innocent. And -- and that's the hardest challenge and, you know, the basic problem and reason why governments make these things harder over time is, what happens is the political cost of the initial response is so difficult, so devastating as you're seeing in the United States, that people tend to pull back too early, and if you leave the job unfinished, and that's not a mistake we're prepared to make. BENNET: Here's the sociological question or psychological maybe and it's about -- it's about Wall Street. It's something I actually really don't understand. You never worked on Wall Street? There's some confusion on that point, but you're a career public servant, aside from a stint with Henry Kissinger who I think Walter is interviewing on the stage tomorrow. But you know that world well. And as you said you worked very ... GEITHNER: Not -- not as well as people think. BENNET: Not as well -- well enough to have participated in rescuing the financial system as you said. And I think it's fair to say that you may quarrel with this premise that no one has been a greater direct beneficiary than the financial community of the policies of this administration. You saved their companies by and large, you saved their jobs. You even saved their bonuses. And they cannot stand this president now. Even people who supported him four years ago. Why? What explains that? GEITHNER: I think it's inexplicable. They -- they I think, you know, people resent when they need help, it's a natural thing. They resent the huge amount of public anger they've been subjected to because of the cause of the crisis. They -- they sometimes claim that was created by us, that anger. Which I think is a deeply unfair judgment. And they -- they react to what is pretty modest as commonsense observations about the system as if they're deep affronts to the dignity of their profession. And I -- I don't understand why they're so sensitive. But they're very wounded and they've seen a huge amount of damage to people's confidence in their capacity to not just manage risk and to meet the needs of their customers, but in the broader public consciousness, they'd like us to heal that for them. And they ask me all the time, "Why can't you heal that for us?" And I say to them, I think reasonably, "That's something you've got to earn back yourself. We can't -- we can't do that for you." BENNET: Do you feel any sympathy for the Occupy Wall Street movement? GEITHNER: No, I feel a lot of sympathy for what you might describe as the -- as a general sense among Americans is whether, you know, we've lost a sense of possibility. And whether after a -- a pretty bad lost decade of interest income growth or fiscal responsibility or other things that like, followed by, you know, a devastating crisis, huge loss of public institutions, people do wonder whether -- whether we have the ability to do things that can help the average sense of opportunity in the country. And I -- and I -- I definitely sympathize with that. I think that's why those of us in -- in Washington carry such a huge burden. You know, we're not just trying to clean up a terrible mess, but we have to try to figure out how to do that at the same time we're trying to restore faith in public institutions and that's an essential thing to do. Because we are having a terrible debate, a huge debate, an important debate about what is the role of government in the economy and economy and society as a whole and what we need to do is restore some basic confidence so that the government is able to perform those critical functions that the market can't provide. So that's -- that's the big debate we're having. BENNET: I think Margaret now I go to you for the good questions? CARLSON: This is well put, this is from the audience. Do you have any key differences with Larry Summers, or are you, Larry and Bob Rubin the same person operating in three bodies? (LAUGHTER) BENNET: Bob Rubin is coming up next. GEITHNER: They'd be -- I'm sure they'd be offended by the comparison. I have huge admiration for them. We're -- they're very different people and I think anybody who knows us and has worked with us, knows that we debated and fought and battled over many, many issues. And really came to any debate -- we all came from different background, different experiences and rarely came to the debate with -- with the same basic framework. But -- but we usually came to pretty good places and I'm very -- I'm very honored to have worked with them so closely and very privileged to have been part of so many things we were able to do together. CARLSON: And I have seen you all in the same room together, so we assume you're not the same person. On the -- in the -- in the ... GEITHNER: I really should say have they met? If they've me, have they met them? (LAUGHTER) GEITHNER: I mean who would think? (LAUGHTER) CARLSON: Your shirt is tucked in. Your tie is clean. GEITHNER: I don't mean that I mean they're ... CARLSON: The family -- the people ... GEITHNER: And I think they'd be so -- so offended by the comparison with me. But -- but go ahead. CARLSON: I think Larry will be flattered. Yes and we'll ask Bob when he arrives. Has enough been done ... GEITHNER: I was in government before them. I just want to point out that I was a public servant sitting in the Treasury a long time before the privilege of meeting them and working with them. But, anyway ... (CROSSTALK) CARLSON: How did that rumor that you were at Goldman Sachs get so rooted in the consciousness? (CROSSTALK) GEITHNER: I was in New York yesterday and I met someone obviously they knew and this person is a person of some stature and knowledge and he said to me, "Yeah I sort of thought that too." BENNET: They'd also say you were born in Kenya or something. (LAUGHTER) CARLSON: Yeah, yeah. You will be holding up your long form birth certificate before you leave. GEITHNER: It's true when people -- I was a little busy in the early days of the administration and I'm still a little busy, but I do remember when I -- when I first read that stuff I said, "That is ridiculous. No one is going to believe that." But they did tend to believe it. CARLSON: It's the world we live in. And now we're out of time. So, thank you James. Thank you Secretary. END