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A Conversation on the Economy with Timothy F. Geithner

Speaker: Timothy F. Geithner, Secretary, U.S. Department of the Treasury
Presider: Daniel L. Doctoroff, President, Bloomberg L.P.
April 26, 2011
Council on Foreign Relations

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(Note:  This event was fed in progress.)

DANIEL L. DOCTOROFF:  (In progress)  -- Council on Foreign Relations meeting with Secretary Timothy Geithner.  My name's Dan Doctoroff.  I'm the president of Bloomberg LP, and I'll be presiding here today.

We are truly honored to have the 75th secretary of the United States Department of Treasury and fellow council member with us here today.  This meeting is part of our C. Peter McColough Series on International Economics.

One housekeeping matter -- actually, a couple:  Please completely turn off -- and it says here in capitals, "TURN OFF" -- not just put on vibrate, your cell phones, BlackBerrys and all wireless devices, to avoid interference with the sound system.  You're not going to miss -- want to miss a second of this.

I would like to remind members that this meeting is on the record and CFR members around the nation and the world are participating via a password-protected teleconference.  This meeting is being webcast by CFR and The Washington Post.

Having served as secretary of the Treasury since January of 2009, and previously as president and CEO of the New York Fed from 2003 to 2009, Secretary Geithner has led the response to the global economic crisis, the design of the ongoing recovery, and has guided the formulation of new rules and regulations to limit the risk of future crises.

Secretary Geithner will provide opening remarks, after which he and I will have a conversation here on stage for approximately 20 minutes.  I will then turn to members for Q&A for the remainder of the hour.

Now, Secretary Geithner last spoke to the membership on March 25th, 2009.  Let's look at the situation then and now.  The Fed and Treasury were on the hook for 2.8 trillion (dollars) through TARP, Fed programs, the purchase of mortgage-backed securities, backstopping money market funds and commitments to Fannie and Freddie as well as the FDIC.  At that time, it was thought that expected losses could be as much as $700 billion.  Today, it is expected that the government will come out with a $24 billion profit.  The combined market capitalization of GM and Ford on March 25th, 2009, was $8.4 billion.  As of the close yesterday, it was $107.3 billion.  On March 25th, 2009, the S&P 500 was at 813.  Today, it is at 1,335; a 64 percent increase.

Having skillfully navigated the financial system and the economy through the crisis, you would think Secretary Geithner could relax just a bit.  But as we all know, unemployment remains stubbornly high, deficits have ballooned, and the political climate in Washington is as poisonous as we have seen in many years, making extremely difficult a long-term deficit reduction agreement that may be necessary to avoid the loss of the U.S.'s AAA rating.  The housing market still seems to be bumping along the bottom.  Long-term growth in the U.S. may be slowing, due in part to gas prices on the rise.  And global crises threaten the stability of the global economy.

Not an easy job.

We are delighted to have Secretary Geithner here today to comment on these topics and many others.

Mr. Secretary.  (Applause.)

TREASURY SECRETARY TIMOTHY GEITHNER:  Thank you, Dan.  That was gracious -- (laughter) -- and generous, very generous.  I had the privilege to watch you from a distance when I was here in New York, and I admire so much what you did for the city and that you played in the arena.

And great to be back at the council.  I had dinner with some people last night, and they said:  So you're speaking to the council.  And I said:  Well, you don't go to speak to the council.  You got to get advice -- (laughter) -- from the council, so I'm here to escape Washington temporarily and learn a little about the real world.  And -- (laughter) -- we'll have a chance to have a little debate about the problems facing the country and how to solve them.

I'm just going to begin with a few minutes of remarks about the three main challenges we have coming out of this crisis, and they are about growth, about financial repair and reform and of course about the deep fiscal challenges facing the country.  And I'm just going to run through these briefly just at the beginning of the conversation.

Let me just start with growth, with economic growth.  I'm going to borrow someone else's characterization.  We started the year with a little less momentum and we've got some new headwinds, most prominently of course in oil.  And growth in the first quarter, if you just look at the consensus of private forecasters now, and the Bloomberg consensus now is likely to be under 2 (percent), many people think, much slower than we ended the year.  But if you -- if you look through weather in January and February and you look through the weakness in construction, the underlying trends in the economy show much more resilience.

And the economy is definitely healing.  And even with the many challenges we still face, I think then if you look at the consensus of private forecasters who look at the U.S economy looking out, they believe that the U.S. economy is likely to grow between 3 (percent) and 4 percent over the next two years, and that seems like a reasonable expectation.

Unemployment, of course, as Dan said, is still very high.  Housing and construction are still very weak, and it's going to take years still to repair the damage caused to the housing market.  And the economy as a whole still feels very hard to the average American, unfairly hard for millions of Americans caught up in the aftershocks of this crisis.  But still, I believe we can be confident that the economy is healing and gradually getting stronger, and there's much to be encouraged about in the shape of this early period of expansion and recovery.

Let me just go through this quickly.  Productivity growth of course, as you know, has been very strong.  The private savings rate in the United States, negative going into the crisis, is now significantly positive, between 5 (percent) and 6 percent.  We're borrowing as a share of our economy now about half of what we were before the crisis, meaning our current account imbalance, our current account deficit is half of what it was as a share of GDP.  Business spending on capital equipment has been very strong and still looks quite strong.  Manufacturing, high tech, agriculture all show broad-based strength, which is testament to the diversity of the U.S. economy.  Export performance has been quite good, and the financial system, which I'll come to in a sec, is dramatically stronger.  The tax incentives we put in place at the end of year provided a very powerful near-term catalyst for business spending on capital equipment, and of course it gave working families a substantial increase in after-tax income, which is helping offset the effects of higher gas prices.

We're about to get America back into the business of trade agreements with these three new agreements, and that will help us start to negotiate a much more ambitious set of trade-expanding measures in Asia and Latin America, but of course what matters most now is not just that we reinforce this process of repair and recovery but that we focus on strengthening the long-term fundamentals that affect potential growth in the future.  

And of course as you all know, that's all about education, about innovation, about public investments in things like infrastructure and incentives for private investment.  And of course our challenge is to make this economy once again the best place in the world to start a business, to try to grow a business, and that is completely within our capacity to do.  And I think we have a very good chance of emerging from this crisis with underlying potential growth rates in the United States as strong as they were before the crisis.

Briefly on the financial system, how are we doing, how far have we come and what's still ahead?  Our basic responsibility, our core objective is to make the United States again the strongest financial system in the world, the best at channeling the savings of investors around the world to finance the ideas of growing companies with the strongest protections for investors and a much better set of shock absorbers, cushions against future shocks and crises.  

And I believe we are well on the way to that objective, far ahead of countries that were caught up in this mess and are coming out of it, too.  And we're ahead of them because we were much more aggressive strong and early in recapitalizing the financial system with private capital, restructuring the system to clean out the weakest parts of the system very forcefully and then legislating reforms to modernize the basic checks and balances all financial systems require.

So we brought more than $300 billion in private capital into our largest banks in a relatively short period of time.  Compare that to what's happening in Europe.

The shadow banking system in the United States, so important to the vulnerability in the crisis, is a shadow of its former self.  We were the first mover, first to lay out the broad new rules of the road to modernize oversight so that we could shape the global outcome on financial reform.

And as Dan said, the overall economic costs, the overall direct financial costs of our financial programs is likely to be trivially small, perhaps positive.  That means if you do the Fed -- all the Fed (clutter ?) programs, all the losses in the GSEs we still -- we still are working through; all the investments we made in the banking system, automobile industry, in the insurance sector -- all in are likely to be tiny in -- measured against the overall size of the U.S. economy and a tiny fraction of what a much more modest crisis, the S&L crisis cost, which, as you know, was roughly 3 percent of GDP for the American taxpayer.

Of course, the main (challenges ?) to a lot of us in the finance -- (inaudible) -- the middle of this still are in the housing finance system, where we're just at the beginning of trying to figure out how to fix that mess, in trying to make sure we create a better balance of efficiency and resiliency, better shock absorbers, less complex to administer, less risk of contagion and without just pushing risk outside the regulated institutions and to other markets; and of course, finally, to make sure that as we do this we do so with as much of a level playing field across countries as possible.

Now, third is about the fiscal imperative, about the budget imperative, the debt imperative.  We obviously have unsustainable fiscal deficits.  To quote Richard Haass, we have wars of choice and wars of necessity.  This is a war of necessity.  There is no alternative.  Democrats have to understand that our capacity as a country to finance things Democrats believe in like education, like a minimal guarantee of protection in health care (and ?) the safety net, require demonstrating we can live within our means; and Republicans have to understand, of course, that deficits matter, that they are unsustainable and they hurt growth left unaddressed.  Tax cuts don't pay for themselves.

I think that basic reality, if you listen closely beneath the political rhetoric, that basic reality is seeping in now.  And of course, the challenge in fiscal reform is not just an accounting challenge, it's not simply a math challenge, it's not -- it's not just deciding on the level of cuts.  The fundamental policy challenge is doing so in a way that leaves you with good incentives for future growth, capacity to support future growth and doing so in a way that is judged fair by the bulk of the citizens of the country.

And this is going to be a formidable challenge for us, much bigger challenge than anything we've faced as a government in the last several decades on the -- on the budget side.  But it is a manageable challenge for the United States.  It's not as hard as what we've just achieved in averting the risk of a second Great Depression.

The president laid out two weeks ago a broad strategy for restoring fiscal sustainability.  And I just want to list the most important critical elements of a credible strategy, and then we can have a conversation about how to achieve this.

First, you have to commit to bring the budget deficit down to a level that will put our overall debt burden on a declining path as a share of the economy.  This requires achieving what people call primary surplus, primary balance, meaning what you take in has to exceed what you spend, less interest.  You have to do this in a time frame that is -- that is present.  You have to do it, in our -- in our thinking, by 2015.  That's the first thing.  You have to commit to a target for sustainability on the overall debt level that starts to put the debt burden on a declining path.

You have to have a comprehensive and balanced approach with spending savings across the core functions of the government, from defense through entitlements.  And you have to include tax reform.  Comprehensive is important, because it allows the burden to be shared and spread across the core functions of government and makes the savings and the effects and the costs to the economy more manageable than if they were concentrated.

Third key point -- these cuts and reforms have to be phased in over time to avoid damaging the expansion.  The biggest mistakes countries make in financial crises, apart from waiting too long to act in the face of the gathering storm, is they put on the brakes too early.  They shift too prematurely to abrupt contraction-rate strategies that put at risk the incipient expansion.  So you have to be -- you have to lock these reforms in, but you have to phase them in to reduce that risk to the economy as a whole.

You need to protect -- and this is fourth -- you need to protect investments in things critical for future growth -- again, like education or like innovation, incentives for investment.  So the reason why you want to live within your means is so you preserve room for doing things that matter to the overall basic quality of growth and opportunity creating for the country.

And finally, you need a -- an enforcement mechanism.  You need discipline that works that will force Congress to make choices to live within constraints that is viewed as broadly credible to the market, that will force Congress to deliver reforms in the event they find a hard time agreeing on them.

And if we are able to legislate a broad framework with these key elements, that locks in reforms over a multi-year period, constrains the ability of future Congresses and executive branch officials to live -- constrains their ability to live with larger deficits, then we do not need to resolve immediately all the basic choices that still divide so much of the country, that still divide Republics (sic; Republicans) and Democrats, like on how to do tax reform or what balance of reform is necessary to make our health care costs more sustainable for the economy as a whole.  We can buy some time to resolve those longer-term questions if we lock in a multi-year framework of constraints that imposes a credible, binding fiscal rule on the U.S. government.  

So our objective is to try to take advantage of this present moment and build a bipartisan consensus.  And it has to be bipartisan.  You can't do anything with just one party, these days, of course.  And I think we have a chance to do that now, because if you listen carefully, again, beneath the political rhetoric of the moment, there is broad agreement among both Republicans and Democrats now on the scale of the deficit reduction you need to commit to and achieve.  And there's substantial agreement on some of the components of that, and that gives the chance now to lock something productive in place today.

And this is going to be, of course, the key test of our political system.  It will be essential to restoring confidence in a country -- confidence that was very damaged by the crisis.  And it's very important of course to act now before a crisis forces action.

You know, this crisis just caused enormous damage, not just to the economy, not just to the basic economic security of all Americans -- it's the fabric of confidence we all rely on, confidence in the ability of government to act -- it caused a huge amount of confidence to our credibility globally, confidence in our financial system.  

And, you know, much of the world is getting better at these things.  They're not standing still.  So this is a moment where we need to -- where we need to move in.  We have to find a way to demonstrate that we have a political system that will work, that can solve problems, that can bring people together and deliver reforms that are commensurate with the size of our challenges, to demonstrate that we can do things together even where many things still divide us.

And I'll just end with confidence.  I think -- again, I think we can do that.  It's completely within our capacity to do that.  You know, I sit in this office occupied by -- in Hamilton's office occupied by 73 other men.  It will be women at some point, but so far it's only been men.  And if you -- the politics feel terrible now.  They feel very hard.  And anybody who looks at Washington from a distance thinks -- well, they -- I don't know what they think.  (Laughter.)  But you could -- you could -- you could forgive them for wondering.  (Laughter.)

But if you think back of what it's been like, just to go back to the beginning, there have been times when politics have been much, much worse.  And I would take our challenges today over anybody -- any of the challenges facing the other economies, as a whole, and I think we're completely up to those challenges.  And I'd be happy to have a conversation with you about what's hard and, of course, as I said, take some advice.  Thank you.  (Applause.)

DOCTOROFF:  So Mr. Secretary, just following up on one thing that you've said specifically -- triggering mechanisms -- could you be a little bit more specific about the types of triggering mechanisms?  There's short-term triggering mechanisms.  There's long-term triggering mechanisms.  Republicans, at least some of them, have suggested a triggering mechanism of, you know, debt to GDP, et cetera.  What do you think more specifically?

GEITHNER:  I'd like to start by saying, you know, you can't put all the burden on a trigger.  Again, you need something that people will look at and say, is that a constraint?  This is enough -- are there enough reforms in place that you'd be confident, again, we're going to get ahead of this problem?  

So you don't want to put all the burden on the trigger itself, but for the -- for a trigger to be designed sensibly and -- you need to anchor it in this basic primary balance concept.  You need to have a target that will produce a deficit that is below 3 percent of GDP and will stay there.  And if you do that, then you can show the world that our debt burden as a share of the economy will first stabilize at an acceptable level and then start to decline, fade over time.

And so the anchor of the framework has to be, you know, what economists call modest primary surplus by 2015.  I say '15 just because you can't -- if you put it off too far, it's -- (chuckles) -- it's not credible, and if you make it too quick, again, it's too much risk that you force too much -- too much weakness in the economy too soon.  

So that should be the anchor for the rule, and for a -- and a force mechanism to work, it has to be scary to people.  It has to be scary enough -- politicians will not want it to go into effect.  And it has to be balanced.  It has to cover both spending, what we call (classic ?) spending and spending in the tax code, as Marty Feldstein would say it, so that politicians have an incentive to act ahead of the trigger.  That would be the art.  

But again, it can't be all in the trigger.  It has to be -- it has to be policies in place to get you some distance to that target.  Otherwise people will look at us and say, how do we know that they're actually going to deliver?

DOCTOROFF:  You also stress the importance of phasing in whatever is done to reduce the deficit, something that arguably has not been done in Britain by Prime Minister Cameron and Chancellor of the Exchequer George Osborne.  Do you think they've made a fundamental mistake?

GEITHNER:  I don't.  I think -- I think they're in a fundamentally different situation.  They do not have the luxury we have.  Our challenges look large, of course, but they're fundamentally different, much more manageable than in -- those in the U.K. and other parts of Europe as a whole.  And that's because our -- the structural piece of our balance, the piece that's not the product of recession and the product of the emergency measures you put in place in the recovery act -- that piece of our deficit is much smaller than theirs.  And I think realistically -- you know, we don't stand in their shoes, but they, I think, had no alternative but to adopt a much more aggressive path.

Now of course if you look at our projected deficit path too, it's not -- it's not dramatically softer than theirs.  It's very similar.  I saw George Osborne the other day, and he was looking at what the president announced and said, gee, that's a -- that's a pretty aggressive path.  But it's easier for us to do because our economy has much better underlying growth potential, is much more diversified, and a much larger piece of our deficit is just the temporary cyclical effects of recession.

DOCTOROFF:  You recently said that there is, quote, "no risk" that the United States will lose its AAA credit rating.  S&P's action to put the U.S.'s AAA rating on credit watch or negative watch implies a one-third chance of a downgrade in the next two years.  Of course they cited fears that there won't be a long-term deficit reduction plan.  What gives you the confidence that we'll actually be able to reach an acceptable budget agreement?

GEITHNER:  Again, I think if you look -- and I know it's hard to do, because Washington is such a hard place to understand, but if -- again, if you look through the rhetoric, it is incredibly important that the leadership of both parties now, embracing the basic fiscal imperative and embracing the same basic magnitude of adjustment over the same basic time frame that is essential to get us on a sustainable path -- and I think that the odds of an outcome that helps start that process are much better today than they've been, I think, any time in the last decade.

Now a lot separates these two parties, and the country's still fundamentally divided on how you think about the right balance, how to do tax reform, again, how to do entitlement reform.  But you have to -- when you start with that recognition that there's no alternative but to put these things in downward path, you've made the most important choice.  And then you can have a debate about the best strategy, best composition within that, and that's a good debate to have -- good debate, necessary debate to have.

The other thing that's important to recognize about us as a country -- again, you know, we're a much younger country than the other major economies.  We have much better underlying growth rates, in part because our -- more openness to immigration.  We have a -- we started with a much lower overall debt burden as a share of our economy.  The size and expense of our commitments in the safety net are a much smaller share of the economy as a whole.

And so we're in a much better position to manage through this.  And the reforms that are going to be necessary for us to put in place, they're going to be difficult, but there's things that we can absorb and adjust without risking substantial damage to our growth potential, long-term growth prospects.  Again, if you do it in the right way, it's a balanced way.  It's a much more manageable problem for us than would be true for many of the other major economies.

DOCTOROFF:  Still, you are facing a situation in Congress where a huge percentage of the Republicans have entered into no new tax pledges.  How do you overcome that?

GEITHNER:  Well, I think that's an excellent question, and that, I think, is probably the most difficult political problem for them to have to solve.  But they're going to have to solve that problem, because, again, if you just watch this debate carefully now, what's happened over the last few weeks or so?  One is, you had this -- you know, you had this very divisive, difficult fight over how to fund the government, which tested people's tolerance and sort of illustrated what the consequences are for going way too deep in education, for example.  And you saw people go up to the edge of the cliff and pull back because they said, I can't support that basic cut; that sort of helpful recognition you can't balance the budget through cuts on 12 percent, what's 12 percent of the budget.  That's very important.

Second thing that's happened is that you see in the plan that some Republicans embraced what happens if you force all the burden for fiscal sustainability on cuts in Medicare and Medicaid, and mandatory programs for the disabled and the poor.  So if you put all the burden of this on that part of the budget, you have to cut -- you know, just to be unfair; well, I think this is fair -- you'd just have to cut savagely deeply into those basic programs.  And you will find people will -- across (here ?) will not embrace that.  They cannot defend it.  They won't be able to do that and they will move away from that quickly.  That's sort of helpful.

The other thing -- the other thing that's very important to hear -- to say is that, you know, the president laid out this $4 trillion deficit reduction plan over a 12-year period -- again, same broad magnitude of cuts that the Republicans embraced, much more balanced package, and you found Democrats largely embraced that imperative.  

And again, this is a -- this is a problem within our capacity to solve, and we have a moment where we can take advantage of this recognition, greater recognition of the magnitude of the problem, and try to lock in something useful.

DOCTOROFF:  Let me switch topics.  In introducing you a few moments ago, I mentioned some pretty remarkable statistics about progress since you were last here.  Despite these achievements, the president is often perceived by the business community as being anti-business.  And even in Bloomberg's last global investor poll, taken in January, only 44 percent of U.S. investors rate your performance as favorable versus --

GEITHNER:  Forty-four (percent)?  (Laughter.)

DOCTOROFF:  -- versus 52 percent unfavorable.

GEITHNER:  Forty-four (percent) is unbelievable.  (Laughter.)

DOCTOROFF:  So my question is, where's the -- (laughter) -- these are investors.  This isn't the public.  (Laughter.)  So my question is, where's the love?  Really, where's the disconnect, do you think?  What is it that's not being communicated, if anything?

GEITHNER:  You know, I don't -- you know, these are complicated problems, but I mean, you know, think -- just as you did -- you -- well, and you, when you were introducing this -- the subject, unemployment is basically 9 percent, as you measure it.  It's much higher in many parts of the country.  You just saw more damage to people's basic wealth and economic security than we'd seen since the Great Depression.  It is very hard for our people to understand why that was necessary, why it can't be better quickly.

DOCTOROFF:  How about the business community, though, specifically?

GEITHNER:  Oh, I don't -- I wouldn't -- I don't think too much about that.  I mean, the business community is -- well, I'll give you an anecdote.  (Laughter.)  You know, I spend a lot of time with people who run businesses in the United States now.  So we've talked to the average non-U.S. business, and they look at us; they say, I don't know what those guys are complaining about.  I would much rather be an American company established in the United States today, operating under your set of constraints, rules of games, not -- I would say, across most industries, that's what people say to us.

Again, if you look at the basic balance sheet of American companies; you look at the basic improvement in productivity, in profitability; you look at the broad improvements they're demonstrating across the board just in the last couple of years, they're in a much stronger position than they would be without the actions we took.  And I think they basically understand that.  I think most of what you hear in the rhetoric is the understandable desire businesses always have to lower their tax burden and make sure they get more influence over the basic regulatory framework in which they operate.

There's nothing new in that.  That's an old traditional game, and some people play that very well, some people less well; but they all play it aggressively.  And I view most of the rhetorical stuff that you hear through that prism.

DOCTOROFF:  By the way, to reinforce your point, in the Bloomberg global investors' poll, your approval rating outside the United States was much higher than in the United States.  (Laughter.)

So the jobless rate has dropped nearly a full point in less than a year; yet there are now, as you pointed out, lower forecasts for growth this year.  A year and a half from now -- sort of an insignificant date, a year and a half from now -- where do you think we'll be on jobs and growth?

GEITHNER:  You know, I'm not an economist.  I don't forecast.  But, you know, again, if you look at the consensus forecast for the U.S. economy, it's 3 (percent) to 4 percent growth over the next 18 months or so.  And if you -- you're growing at that pace, then the private sector in the United States is likely adding jobs a little north of 200,000 a month.  And again, that'll feel -- anybody who doesn't have a job, still knows somebody who doesn't have a job, not working as much as they do -- that's not going to feel strong enough.  But it's probably what you can expect for an economy coming out of a crisis caused by these basic imbalances.

Again, the basic tragedy of this financial crisis and the constraint on recovery is that you -- people have to bring down their debt burden after a period of living beyond their means, just as the government's going to have to do.  And you're not going to have -- it's going to take a while again, it's going to take several more years, to repair the damage in housing markets and construction.  You do not have the normal avenues governments have to induce or help foster much stronger growth in that.  And that is the reality we're left with.

But that is the -- that is the tragic constraint imposed by the crisis.  It's not fundamentally about the policy choices people can make in Washington.  Washington can make it worse, but the hard thing for people to understand is that it'd be hard to make it dramatically better than that.  Very important:  you know, again, first do no harm.  And I think one reason why you want to make sure we take advantage of this fiscal moment is you do not want to take any risk that you cause damage to this process of repair and confidence building that's happening across the economy today.

That's absolutely true in this debate about the debt limit, which is a ridiculous debate to have.  I mean, the idea -- the idea that the United States would take the risk people would start to believe we won't pay our bills is a ridiculous proposition -- irresponsible, completely unacceptable basic risk for us to take.  But it's also true that on a fiscal debate you don't want to put this off indefinitely and if -- because if you do that, there's a risk that you will magnify the unease people still feel about whether Washington's going to be able to get ahead of these basic problems.

DOCTOROFF:  Same answer with respect to housing, where clearly, as we both acknowledge, it's just sort of bumping along the bottom but we've got huge unresolved issues with the GSEs?

GEITHNER:  Right.  Yeah, I think, again, in housing we have -- you know, we still have the -- I don't know how to say it elegantly.  We have to clean up the mess of the basic servicer problems you see across the country still.  But then you have to put in place a housing finance system that'll allow private capital to carry the dominant role of financing a mortgage for people; have the government recede from the role it's playing today.  And that requires, you know, not just winding down Fannie and Freddie and in a sense pricing them out of that business gradually; but it requires putting in place a set of incentives, disclosure requirements, capital requirements, reform to the (security issuing ?) business so that people will bring capital back into that market.  And we're -- as we all know, we're at the very early stage of putting in place that architecture; not least, you know, having it get some traction.  And that's going to take a long time.

DOCTOROFF:  Just one more question, and then we'll turn to the members.  The G-20 this month described a global recovery that is, quote, "broadening and becoming more self-sustaining."  At the same time, energy and food prices are climbing, particularly in the emerging markets; unrest continues in the Mideast -- Middle East; Japan is obviously hobbled seriously; and the European debt crisis remains completely unresolved.  Which of these in your view poses the greatest threat to the global economy in the next year?  (Laughter.)

GEITHNER:  Well, I think that's a good list.  (Laughter.)  I think that -- I think -- I guess I'd answer it that way.  It's just -- this way -- it depends a lot on how people manage these challenges.  I mean, the -- what's happening in oil is obviously potentially very significant.  And at current levels, on its own, it won't put the recovery at risk.

The question really is -- I think, in one way, is, how do emerging markets manage the rising inflation problem that they face?  Because they're growing so rapidly.  It is a manageable problem, lots of experience trying to do that well.  But that's important.  Europe, as you said, has got a lot of challenges, but it's completely within their capacity to manage.  They just have to choose to solve those on terms that are going to be reassuring to the world, they can do that.

Again, I would say that I'd prefer our challenges over those facing any other country.  And for us, the big challenge is to try to build a political consensus around a reasonable, balanced fiscal sustainability strategy that makes sure we don't get behind this basic problem.  I think that's the most important thing.  And if we -- if we do that, then we'll be in a much better position as an -- as an economy to manage all of the pressures, tensions, other things out there still.

DOCTOROFF:  So at this point I'd like to invite members to join our conversation with your questions.  When called upon, please stand.  Wait for the microphone and state your name and affiliation.  And importantly, please limit yourself to one question and try and keep it concise so we can allow as many members to get involved in the conversation.

Yes.

QUESTIONER:  Hello, Secretary Geithner.  Ginny Kamsky.

GEITHNER:  Hi, Ginny.

QUESTIONER:  Ginny Kamsky.  Secretary Geithner, you have a strong history, knowledge and understanding of China.  You talked about --

GEITHNER:  I wouldn't say understanding, but -- (laughter).

QUESTIONER:  You talked about the financial crisis and how you believe the United States responded well and, in a way, better than other nations, and I believe you were referring to Europe.  I'd be interested in your reaction to how China responded to the financial crisis, and whether or not you think we can learn from the Chinese response, and overall your reaction to how China is performing today in the engagement of Treasury with China.  Thank you.

GEITHNER:  Well, China is -- you know, China is still at the early stage of this transition to a more market economy, a more mature economy, and they've got a long way to go.  It's important to look -- you know, if you even -- even with the amazing accomplishments of growth, broad-based growth, over the last three decades or so, they still have an economy that's still overwhelmingly dominated by the state, and they're just beginning to dismantle and move away from that.  And that's a difficult challenge, as you know, for governments to manage.

I think that, in the crisis, they did all the necessary right things.  You know, they did a well-designed but very substantial fiscal force, which they had to do at that point, and that helped compensate for the shortfall in export demand.  

But what -- right now what they're trying to do is to put in place a growth strategy that's less export-dependent, reflects the reality that they're too big, too large a share of the world economy to run an export-driven growth strategy.  And they're starting to dismantle gradually the basic elements of that strategy.  An undervalued exchange rate they're letting rise gradually against the dollar at least.  And they're starting to open up the capital account to allow more convertibility, more capital flows, and they're beginning to unravel those basic elements of the export-driven growth strategy that's served them relatively well but is completely unsustainable now.  I think the challenge right now is, you know, they're going into a -- what they would call an election, and it's slowing the -- it's slowing the -- it's sort of slowing the pace of reform a bit, because it -- elections tend to induce a little caution.  

But I think they did really quite well in the crisis, and I think that they look like -- to me, today, they look like they're handling the near-term tensions, pressures relatively well.  And of course, we have a huge stake in this economic relationship, and are doing as much as we can to help deepen and strengthen it and reduce some of the basic underlying sources of tensions we still face on the economic side, and not just because of the exchange rate but because of a range of other things they do to disadvantage U.S. producers.

Yes, sir.

QUESTIONER:  Good morning.  Marshall Sonenshine, chairman of Sonenshine Partners.  Mr. Secretary, pleasure to be with you today.

In his introductory remarks, Dan Doctoroff gave a nice overview, which I think many of us -- I certainly -- agree with, and cited some metrics as to the successes of the management of the financial crisis.

And there is, of course, alongside that a narrative that says we did what we could and what we had to do, and in fairness we did no harm and we did what we absolutely had to do, but then alongside that we have left in place an accident-prone financial system for no -- for no other reason than it is still highly concentrated in terms of numbers of institutions being low and financial assets that they control being very, very high; and in lieu of addressing that, we have put a burden of regulatory oversight on this government that it has never before had.

GEITHNER:  On this system.

QUESTIONER:  On this system that it has never before had.  And there are some great democracies that have handled those burdens well.  Canada would be a -- I think a good example -- perhaps Israel.

Are we equipped in this crazy land that we call Washington and that you refer to obliquely as a tough place -- are we equipped to actually execute on the second step of that plan, whether it be through the Financial Oversight Committee or the other structures, or are we still unfortunately despite all of our best efforts in triage -- which I think all of us give you enormous credit for -- are we still beholden to an accident-prone system?

GEITHNER:  Excellent question.  I think it's exactly the right question.  Of course, you won't know the answer to that question -- (laughter) -- you won't -- you just won't know honestly for a long time till we face something substantial in terms of the next large shock.

But I'm much more optimistic.  Let me just take issue with a couple of things you began with.  It is true that our financial system, if you look at banks, is more concentrated than it was before the crisis, but there is no plausible path out of the crisis that did not result in at least temporarily some greater concentration.

We have a much less concentrated financial system, again, than any other major economy -- dramatically less concentrated.  Banks as a whole are only half of the credit -- (inaudible).  So even that measure too, our banks -- even our largest ones together -- are a much smaller share of our economy than is true for any other country.  Just -- again, just to do the numbers, our banking system in total now, even encompassing what we used to call investment banks, is about one times GDP, one times the total annual output of our economy.  It's five times GDP in the U.K., eight times in Switzerland, three or four times in Germany.  So that's one thing.

Second is, we forced -- you referred to triage, which is a nice, elegant term for it -- but we forced dramatic restructuring in our system.  We either allowed the market to crush -- or I won't use that term -- the weakest -- the weakest parts of the system, so that what was left was able to meet a market test for viability, attract enough capital to sustain itself.  And that's hugely important.

And as I said earlier, we were way ahead of everybody else in designing a basic set of restraints that average people could have a chance of enforcing to make sure we bring a little bit more resilience to the system in the future.

The most important thing to do and the greatest failure that led to this crisis was the inability to apply sufficient constraints on leverage, on liquidity risk for those core institutions.  You know, we did it not well enough for banks, but not for entities that were functioning as banks, the (institutions ?) alongside banks that were as large in total as the entire banking system.

And one of the most important things that this reform thing does is allow us to impose requirements that force better, thicker shock absorbers into the core parts of the financial system.  And if you get that -- you won't get it perfect.  If you get that better, you have a much better chance of allowing an economy in the future to withstand pretty dramatic shocks that result in the risk of failure of large institutions.  And I think we have a very good chance of doing that.

DOCTOROFF:  Sir, right there.

QUESTIONER:  Thank you.  Dick Huber, Antarctic Shipping.

You touched upon it when you addressed the question of China, but we've had a steady and quite substantial devaluation of the dollar over the last couple of years.  And in a way, we're taxing holders of our debt in a way to solve our problem.  Now, has that been largely due to benign neglect, or is that part of Treasury's strategy?

GEITHNER:  Well, I'll give a slightly deeper answer to your question, but I just want to make it clear to everybody that our policy has been and will always be, as long at least I'm in this job, that a strong dollar is in our interest as a country, and we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners.

Now, I want to -- if you step back a little bit and you think about the world as it's evolved over the last few years in particular, it's worth noting that at the darkest moments in this crisis, really every time, even after you come out of the depth of the fall of '08, first quarter of 2009, when there's been concern about the basic fabric of finances really globally, people have wanted to be in Treasurys and in dollars.  And when risk has receded a bit, confidence has started to come back, growth looks a little more resilient, people start taking risks again.  You've seen that start to unwind, come back.

And that's a very encouraging thing because it still shows that -- and you see the markets today still -- that people have retained a fundamental confidence in the ability of this country to manage our challenges, and to do so, on average, better than many other countries will do.  And I say that not because -- really, to emphasize that you have to earn that and you have to make sure you earn that all the time.  And of course, it depends a lot on the Fed's capacity to keep inflation low over time, which of course they will do.  It depends a lot on our ability to put in place a set of fiscal reforms that will deliver sustainability over time.  It depends a lot on acting aggressively to fix what was damaged in our financial system; make sure that you have a basic framework of integrity, disclosure that all systems require as a whole.

Those are things you have to -- again, you have to work at very hard, you have to earn over time.  And of course, we're going to -- we're going to keep doing that.

DOCTOROFF:  Yes, on the aisle.

QUESTIONER:  Secretary Geithner, thank you so much for coming to talk with us today.  Chris Faulkner-MacDonagh, with Ziff Brothers Investments.

So I had a question on the -- on the debt ceiling; in particular, what you see as your plan B.  I know you released a letter -- had a chance to read it -- on what -- the steps you could take.  It was very comprehensive.  Thank you.  But let's say the debt ceiling isn't increased towards the end of this year.  And we will -- you know, and with the interest payments receiving priority, isn't it possible you could just continue to pay interest on the debt and let expenditures on everything else suffer?  And if not, then what do -- what do you see as your plan B?

GEITHNER:  Let me -- let me do the basic constraints and flexibility we have, just so people understand that.  On current estimates, we hit the debt limit on about May 16th.  We have a set of tools Congress gives the secretary of the Treasury to allow -- that gives Congress more time.  We can buy Congress a little bit of time.  If we use all those tools, we can give Congress until roughly the end of June, before they go on their July 4th recess, to act.  And of course, they will act.

You know, we're the only country in the world, I think, that imposed -- where Congress has imposed on itself this particular burden of torture on their members.  (Laughter.)  And they recognize they have to act, and of course the leadership recognizes it, both Republican and Democrats.  And they'll do what's necessary.  I'm completely confident they'll do what's necessary.

What I want to make sure they don't do is to take us too far into June, to take us too close to the edge again, because you don't want to -- at a moment like this, you don't want to leave people with any concern that they -- that they'll take too much time.  And so our basic message to them is:  Let's get this done and get it moving.

Of course, the harder thing is the thing we spend most of our time talking about, which is how you -- how you legislate a framework that can lock in meaningful fiscal reforms that get these deficits down to a sustainable level.  And you know, that's going to be a challenge to do.  I think that's something we can do.  But the Congress will -- they'll pass the debt limit.

DOCTOROFF:  Yes, right there.  Go ahead.

QUESTIONER:  Jim Zirin, Mr. Secretary.

I wondered whether you weren't disturbed by the dearth of criminal prosecutions that have come out of the mess.  (Laughter.)

GEITHNER:  That's a -- that's a good question.  It's not a -- it's not a -- it's not something that, as you know, in our system I get to solve.  (Laughter.)

And I will say that -- the obvious, which is that, you know, you had this colossal loss of basic trust and confidence in the integrity of the system, and we have to rebuild that.  And rebuilding it is not going to come just from what we do on leverage requirements for large, complex financial institutions.

It's going to come from making sure that you have a credible enforcement capacity that people believe will be a little bit more proactive, hold people accountable.  And you need -- you need to demonstrate that that will be there in the future, because you need the deterrent power that brings to affect behavior.  And I agree that we have some ways to go to rebuild -- to rebuild that confidence.  

And again, it's not -- it's not just about derivatives oversight or about disclosure in securitization products.  It's going to be about making sure you have people in these jobs in enforcement authorities that have the -- understand these things -- these are complicated, complicated things -- understand them well enough, are talented enough, not just brave enough, to make sure you hold people accountable.

DOCTOROFF:  Do you think that's ever really possible, to have the regulators stay equal to or ahead of the regulated, given all the incentives that exist among the regulated?

GEITHNER:  I think that's the -- that's the existential question about oversight.  

But putting the enforcement piece of it aside, which is what your -- the question was, if you -- if you think about the rest of the system, to simplify a little bit, you have -- you have two schools of thought.  You have people who believe that you can design a better radar system.  It will look over the horizon.  It can identify pockets of risk and leverage.  And then all you do, you just deploy your army and go preempt that -- those pockets of leverage and risk.

And you have another school, and I'm -- as you can tell, I'm in the -- I'm in the latter school -- which says that, you know, we're human.  The people who occupy these jobs are human.  They will not have perfect foresight and wisdom.  It is not economically or financially tenable to know exactly what the future brings and what of the shape of the tail looks like, and what the vulnerability (there is to ?) -- to shocks is.

So what you can do and what you have to do and is absolutely necessary, if not always sufficient, is you need to build deeper, thicker shock absorbers into the basic system so that you are better positioned to withstand and deal with the fundamental uncertainty that exists about the nature and scale of shocks ahead, because you cannot predict, you will not be able to predict and anticipate, you will not be able to preempt.  You could try to do it, but you need a safeguard and thicker cushions.  And by cushions, shock absorbers, I mean capital, liquidity, funding in institutions and in the basic markets where firms come together, so that when firms make mistakes and court failure, which they inevitably will do, those things don't threaten to bring down the rest of the system.

DOCTOROFF:  Yes, sir.

QUESTIONER:  Gordon Bell, Legacy Growth Partners and Bed-Stuy Restoration, Bed-Stuy Restoration started by Bobby Kennedy some 40 years ago.  So this question comes from both sides.  And let's turn to some of the more positive aspects of what you are able to do going forward in terms of growth.

How can the treasury secretary and how can we, Congress and the nation, focus on investing in ourselves?  So Bed-Stuy has education.  It's got housing.  It's got green initiatives.  How can we make sure in this budget we support the places that get leverage and put in private hands strong businesses that -- (inaudible) -- people in jobs?  Thanks.

GEITHNER:  Excellent question.  And that's, again, why you have to bring a comprehensive approach to putting us on a path to -- within our -- where we're living within our means, because if we don't do that, we will not have the room and the capacity to target investments and things that only governments can do; you know, like education and things that have high, broad economic and social returns.  It just requires choices.  And it's another reason why you can't restore balance by focusing just on a piece of the budget, particularly a piece of the budget where you have most of the power to improve future growth and opportunity.

So again, just to say it again, just to make it simple, if you do it on education, you'll be, you know, eating the future, as Paul Krugman wrote.  It's the reason why you have to do something that's comprehensive, that has the right balance.  You have to go -- you have to look at defense, you have to look at tax reform, and absolutely you have to get more savings out of -- out of -- out of health care as a whole.  Without that, you have no -- you have no choice.

You know, governing is about recognizing that you -- we have limited resources, making choices within those constraints.  That's what governing's about, and that's why this debate about how to do it is so important.

It's good to get beyond the point about whether we have to do it.  That's good.  But the more difficult challenge is figuring out how to do it in a way that is not going to leave the economy weaker in the future or leave Americans with less (basic ?) confidence the system is fair, with a fair burden shared by everybody.  

DOCTOROFF:  Did we miss a huge opportunity with the stimulus package in early 2009?

GEITHNER:  Opportunity to do what?

DOCTOROFF:  To make those kinds of investments.  

GEITHNER:  I don't -- you know, I think that -- again, it's hard to look back and know what might have been possible given the constraints at the time.  But in fact, what the stimulus package did quite well is, you know, apart from the mix of tax incentives and (support ?) for states and local governments and some targeted infrastructure things, that it did put significant material additional amounts of resources in things like NIH, in basic science, in -- a modest amount of money to provide incentives for education reforms that Arne Duncan is (leading ?) across the country.  

So the recovery act, you know, had that -- had a complicated and pretty diverse mix of what people called, you know, classic near-term catalysts for investment or income support for individuals and families, but it also had a modest amount of targeted things in things that we know are essential to how economies grow over time.  

DOCTOROFF:  Right.  Yes, sir?

QUESTIONER:  (Off mic.)

DOCTOROFF:  Can you identify yourself, please?

QUESTIONER:  Yes.  I'm sorry about that.  Matthew Levey, Kroll Associates.

Secretary Geithner, you just hit on the health care part of the equation.  What gives you confidence, given the bruising nature of the fight on our first go-round in health care reform, that -- as you say, looking past the rhetoric in Washington -- that there's a fundamental consensus about what needs to be done with Medicare, Medicaid and other health care programs?

GEITHNER:  There's no -- there's no consensus.  And -- I agree with you completely, there's no consensus on how you generate the savings you're going to need.  But I think it's worth stepping back for a second and just reminding ourselves of what is the basic health care cost problem we face as a country.  

It's not just, of course, the cost of the commitments we made in Medicare and Medicaid, it's the rate of growth in overall health care costs across the economy as a whole.  And if you're going to solve that broader economic problem, you have to figure out a way to change the incentives for people -- for how people use health care and how the providers of health care provide health care, so that you're slowing the rate of growth and costs economy-wide.  

You can't just try to shift them from, let's say, Medicare beneficiaries -- to Medicare beneficiaries in a way that'll have enough basic traction and power.  And you're absolutely right.  I'd say if you listen, you know, health care -- there's the sort of recognition that the commitments we made even with the Affordable Care Act savings ultimately don't go far enough.  But no consensus yet on how to go further.  

And, you know, again, I think you have to do anything and everything that offers the prospect of some improvement in the incentives and try those, figure out what works and then do more of those things over time.  And that's going to take a long time to get better.

But -- and, you know, again, the important thing to recognize about this thing -- just to end with a little bit of optimism again -- is that, you know, these deficits are large, they're unsustainable, they're going to have to come down over time, but if you do it in a balanced, comprehensive way, you do not need to dismantle the basic safety net that millions of Americans, not just seniors, rely on.  

You don't need to dismantle it.  You don't need to cut that deeply into it.  You need to reduce the rate of growth in those costs, you need to reform how those benefits are structured in many ways, but you don't need to dismantle it, as long as you're prepared and willing to do a balanced approach that -- that touches all the basic things government is doing, including, for example, the amount of spending we do (through ?) the tax code.  

DOCTOROFF:  One more question.  Sir?  

QUESTIONER:  Farooq Kathwari, Ethan Allen.  This is about jobs, and middle-class jobs.  While the economy's certainly healing, but there is a tremendous issue about increasing jobs here.  The president has talked about increasing exports.

I was wondering, where would these jobs come from, when the fact of doing business in the United States is extremely high, especially compared to the emerging markets?

GEITHNER:  I think that -- again, that's the deep question still hanging over all of us, which is are you going to see a level of job creation in the economy as a whole that'll bring down the employment rate -- unemployment rate fast enough to meet a set of basic expectations of the citizens of the country.  I think -- I think that's the essential question.

But again, let me try to take the slightly more optimistic side of this debate.  I think we've had close to 2 million jobs in the private sector created since growth resumed.  That's a much stronger pace, much earlier than happened during the last two recoveries.  And they were milder recessions, so important context in that context.  

If you just think more broadly -- and again, if you look at -- you look -- you know, you look at the basic shape of this recovery, it's important to recognize again that, you know, we're 5 percent of the world's population.  We're about one-fifth of global GDP.  The most populous parts of the world are going to grow much more rapidly than the major economies for the next several decades.  And we are really as a country uniquely positioned to benefit from that basic growth, because we are still uniquely good and productive at things that are going to be very important to help those economies (grow going ?) forward, and that's why, even at this early stage of recovery, you're seeing a broad-based improvement in manufacturing, in agriculture, in high tech reflected in export growth here.  And of course, that's translated into jobs.  

Now, construction is not going to be a source of strength for some time in the United States, and for people that made their living in that basic business, it's going to be very hard and very -- and very tough for them.  But again, if you look outside those inevitable pockets of weakness that we still have, you're seeing pretty broad-based signs of basic improvement, which demonstrate a lot of -- a lot of basic innovation, dynamics and make the U.S. companies as a whole look pretty good, relative to their international peers.  Of course, for -- to sustain that, we've got to make sure that we do a better job of educating our people, we make the incentives better for growth; you know, we're going -- we're going to take a run at corporate tax reform to improve investment incentives in a responsible way.  And again, you've got to make sure as you do this fiscal reform, you do so in a way that doesn't leave starved or underfunded things that only governments can do to make those basic growth fundamentals stronger going forward.  But I'd take the qualified, optimistic view just based on the initial experience with recovery.

DOCTOROFF:  One final question from me.  A lot of the people in this room work very hard, but few jobs are as demanding as yours.  You haggle with Congress on a Tuesday, you fly to China on Wednesday, you're back here to deal with complaints from the business community on Thursday, a Cabinet meeting on Friday.  

Can you continue to do this job at the pace you've been doing it -- (laughter) -- seriously, after the 2012 elections, assuming President Obama's re-elected?

GEITHNER:  You know, Dan, I've never really done anything else.  It's -- I'm sure I'm (employable ?) in other -- (inaudible) -- (laughter).  You know, I --

DOCTOROFF:  Fifty-eight percent of American investors (think that ?).

GEITHNER:  Yeah.  (Laughs.)

DOCTOROFF:  I'm kidding.  (Laughter.)

GEITHNER:  And I think they have a point.  (Laughter.)

Could I end with a -- with a compliment?

DOCTOROFF:  Absolutely.

GEITHNER:  This is just a Pete Peterson tribute.  I was in -- I was in London, I don't know, some time ago in my youth on a trip, and I got a phone call from someone who claimed to be Pete Peterson.  And he said, you know, I heard about you, and I wanted to know whether you'd come talk to the Board of the New York Fed about running the New York Fed.  And I regret that call every day -- (laughter) -- but no less than I think Pete Peterson does.  (Laughter.)  

No, I am incredibly grateful to him not -- again not just for what he's done for this institution and so many others, and for being such a stubborn advocate of confronting basic fiscal reality, but for what he -- for the privilege he gave me in coming and working for my country in this capacity.  I'm grateful for him.

DOCTOROFF:  Great.

GEITHNER:  Nice to see you, Dan.

DOCTOROFF:  Thank you.  (Applause.)


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