A Conversation with Timothy F. Geithner

Wednesday, June 13, 2012

Secretary Geithner discusses the state of the global economy and the U.S. recovery.

The following CFR resources provide background and analysis on the state of the global economy in the wake of the 2007-2009 financial crisis, with a particular focus on the eurozone sovereign debt crisis and its implications for the U.S. economic recovery.

Interview: Pressures Mount for the U.S. Economy

Policy inertia in Washington has heightened threats to the economy from unemployment, the eurozone crisis, and other global pressures, says CFR's A. Michael Spence.

Interview: The Euro Crisis and the U.S. Economy

The U.S. financial sector is at risk of eurozone sovereign debt contagion that could potentially undermine the fragile U.S. economic recovery, explains economist Richard H. Clarida.

Interview: The Coming Eurozone Austerity Battle

New electoral currents in Europe are threatening the German-backed fiscal responsibility pact and sparking fresh fears of debt contagion, says CFR's Sebastian Mallaby.

Backgrounder: The Role of the U.S. Federal Reserve

In the wake of financial regulatory overhaul, experts continue to differ on the role of the Federal Reserve and its powers.

Backgrounder: The Eurozone in Crisis

The eurozone, once seen as a crowning achievement in the decades-long path of European integration, is buffeted by a sovereign debt crisis of nations whose membership in the currency union has been poorly policed.

Video: The Eurozone Crisis: Three Things to Know

With the eurozone crisis at a "critical" point, substantive interim measures are needed to reestablish stability while long-term fundamental changes are pursued, says CFR's Robert E. Rubin.

Other Report: Beyond the Volcker Rule: A Better Approach to Financial Reform

In this Policy Innovation Memo, CFR Director of International Economics Benn Steil argues that the "Volcker rule" ban on bank proprietary trading won't prevent financial crises, and that the troubled effort to implement it should be abandoned in favor of controls on bank leverage.

Other Report: Renewing America: After Manufacturing

North Carolina, which was struck harder by the loss of manufacturing than another other state, offers a realistic guide for communities across the United States with how best to adapt to this new era of growing international competition, writes economist Roland Stephen.

Foreign Affairs: The World Waits for Germany

Two years, three sovereign bailouts, more than a trillion euros in cheap ECB loans, and dozens of summits later, the latest developments in Germany suggest that Berlin is moving to solve the continent's crisis. But the country's idea of a solution remains a system in which Berlin gets de facto and de jure veto power over national budgets in return for eurobonds, write Mark Blyth and Matthias Matthijs.

Op-Ed: A Fragile Europe Must Change Fast

The Financial Times' Martin Wolf writes that, if a eurozone breakup is too costly and greater fiscal solidarity is unattainable, faster adjustment is the only route to bring the region back to health.

ANDREA MITCHELL: I'm Andrea Mitchell from NBC News and MSNBC, and you all know Secretary of the Treasury Tim Geithner.

I just want to make a few introductory remarks, remind everyone to turn off all of your devices, not just on vibrate.

We are delighted that we have Secretary Geithner here and at a could- not-be-more-timely moment.

The headlines today -- "Threat Spreads Across Europe" in The Wall Street Journal; Financial Times, "Fear Rises over EU Handling of the Debt Crisis"; and of course the timing with the Banking Committee hearings today as well and you going to the G-20 -- and we wanted to give you an opportunity to talk about the crisis in the eurozone; the fact that we see rates rising dramatically today in Italy, which certainly signals that there is some fear in the markets about contagion spreading from Greece to Spain to Italy; and Italy of course would be the big concern. We've got an election in Greece on Sunday, and you're going to the G-20 meeting, which is not called obviously to discuss this, but a lot of the major players will be there and it is an unavoidable fact.

So your perspective on the European crisis, the possibility of contagion, and how well capitalized our system is. Only today we learned that there's a lot that even the best bankers don't know about risks in their banks. So, for all of the assurances that the U.S. now is immune, are we really?

SECRETARY TIM GEITHNER: (Inaudible) -- questions. Well, obviously it's still a very challenging moment for the global economy, for our economy and for the world. In Europe's ongoing crisis, you're seeing growth slow a bit and in most of the other major economies in the world, and we have our familiar challenges here. Europe is in next stage of another major escalation in their strategy to make the monetary union work and contain this crisis, build a stronger Europe. And what they're talking about are -- at least in the near term, are three really important sets of policy changes.

The first is what they call banking union, the commitment to a more integrated framework for supervision, for deposit insurance and a broader backstop of the financial systems of Europe. And this is really important, important because of course no economies can function or grow without a functioning financial system.

It's important because of the pressures you're seeing from Greece and elsewhere. And what Spain did over the weekend to commit to a much more dramatic recapitalization of its banking system is a good, concrete signal and illustration of their commitment to move towards broader banking union. That's very important.

The second thing they're talking about is a set of measures -- and this is familiar to all of you -- to try to make sure they have a framework in place to support the countries that are undertaking these reforms. And what these firewalls are designed to do is to make sure that interest rates in Spain and Italy and the rest of those countries are moderate enough levels that they can grow. So it's very important that the second piece of this is that there's a credible financial backstop in place supporting the countries that are reforming. The reforms are going to take time, and they will not work without the ability of these countries to borrow at affordable rates.

And the third thing they're talking about in the near term is some -- let's call it a little bit of a shift towards growth on the basic framework of economic strategies. So they're talking about -- they have a, you know, very large infrastructure bank in Europe. They have a set of infrastructure funds. They're talking about mobilizing a larger scale of resources to support infrastructure, and allocating those to the countries in Europe where growth is weakest. And they're talking about recalibrating their path to fiscal consolidation to give countries that are reforming a bit more time to get there, a little more consistent with the weaker growth outlook in Europe.

So those sets of things -- financial union for the financial system, a stronger backstop to the reforming countries so that they can borrow at affordable interest rates, and these modest steps towards growth -- are important and would be a good next step in terms of the -- the escalation.

But you know this is a very challenging crisis for them still. They recognize they're going to have to do a bunch more to sort of restore a bit of calm and to convince people that -- (inaudible) -- was necessary to make this work. And I think the world's going to have a chance this Monday and Tuesday in Mexico at the G-20 meeting to hear from them where they plan to go next.

MITCHELL: You ultimately see the eurozone staying together, or do you think one or more countries will drop out?

GEITHNER: You know, from talking to them and listening to them over these last two and a half years of crisis, my view is that they've considered this very carefully and they've decided it's in their interest to hold it together. And what they say to us privately is they will do whatever is necessary to hold it together.

Now there's these three -- there's many, but among the many concerns people have looking about -- looking at Europe -- and these are, I think, misperceptions -- they worry, does Europe have the ability, economically and financially, to make it work? And I think they do. Do they have the will --

MITCHELL: But what about politically?

GEITHNER: -- do they have the will to make it work? Do they have the political will to make it work? Martin Wolf wrote in the FT a few months ago -- never that generous to Europe -- he wrote: Never underestimate the political commitment of European leaders to make European integration work, because this is a project decades in the making, a huge strategic and political imperative for the members of the union. And again, what they say to us is, they say, we have -- we will do what is necessary to hold this together.

There's another, I think, misperception out there that people worry about, are they actually deferring their problems or confronting them? Are they actually doing things that'll help make make the underlying economics more viable? Some people fear that the range of actions they've done, even by the central bank, are buying time in order to enable (the countries ?) to not do anything. And that's unfair to them and not true.

They are -- they are doing very difficult, very tough things economically to improve the prospects for long-term growth, to make it easier to start a company, lower the costs of labor, make themselves more competitive, to reduce their long-term fiscal deficits and to restructure their financial system, and they're going to have to do that no matter what.

So I think that they -- this is something they can manage. I think they made the choice, that fateful choice, that they're going to do what it takes to make Europe work. They are doing very tough -- very tough reforms across Europe that are absolutely essential for this thing to be more viable over time.

MITCHELL: We are already feeling at least the psychological impact here, and there are five more jobs reports between now and Election Day -- one, the last, only days before November 6th. What is your outlook for any real improvement, barring some shocks, European and otherwise, that would, you know, change it, but given the current situation, how much improvement can we expect?

GEITHNER: I think most people look at the -- most forecasters look at the American economy today and they still say that they think the economy is going to grow at a roughly 2 percent rate over the next 18 months or so.

Now some people say it should be 2 to 3 (percent). Some people are 1 1/2 (percent) to 2 1/2 (percent). But that's the sort of outlook they say, and that's recognizing the pressures we see ahead from Europe -- (off mic) -- elsewhere.

Of course that's not -- that growth is not strong enough -- (off mic) -- make a lot progress getting more Americans back to work and bringing down the employment -- unemployment rate faster.

And that's why it's so important that we do what we really can do uniquely in the United States, which is to put in place more things now that would make growth stronger.

And we have the unique capacity now -- because we're judged a relatively safe place for the savings of the world, we have a unique capacity now to combine some growth-improving investments in infrastructure, more teachers, tax incentives for business investing, things like that, combined with long-term fiscal reforms that'll start to restore gravity to our fiscal position. And if we could do those things now, we'd be in a stronger place to withstand the uncertainty you're going to face from Europe over a protracted period of time.

MITCHELL: There are now 42 senators who have signed up and said that they are prepared to revisit Bowles-Simpson. Is it time -- even if he cannot move a grand bargain between now and Election Day, but is it time for the president to readdress that, as many business leaders are saying, and give some stronger signal that he would be willing to embrace those tough choices to give the markets a better sense of confidence going forward?

GEITHNER: Well, let me say what I think would be most helpful right now. I think, again, the most helpful things that you could see from Washington in the near term would be a willingness to legislate things that would strengthen growth now, a commitment to extend what are called the middle-class tax cuts that affect 98 percent of American taxpayers -- no reason those should be put in jeopardy as we face the challenges of the -- at the end of the year.

Take the risk of serial threats of defaults off the table. Those are very damaging to confidence. They have no value -- no role in trying to get us to a better position on these things. And both sides should commit to negotiating a balanced framework of tax reforms and broader spending savings that will help bring our deficits down over time, you know, at a pace that's consistent with the recovery -- you know, phasing gradually on a glide path to reform.

MITCHELL: If that's not going to happen, why not take Bowles-Simpson --

GEITHNER: Well, that's why I just said that --

MITCHELL: -- and take that framework and -- by name and have the president send this very strong signal?

GEITHNER: Well, the -- we believe -- and the way I usually say it is this debate about what's the right path to fiscal sustainability -- it really began with Bowles-Simpson and that's where it's going to end. And the framework the president laid out, although it differs in slight -- in small respects from that basic framework, is very close to that basic design. That's the -- that's the -- (inaudible) -- in which we've planned to govern. We think that's the only path to resolution politically, growing essentially economically, and I think that's where it's going to end up. And again, what that requires is tax reforms that raise a modest amount of revenue tied to spending savings across the government, but still preserving some room to invest in things that matter to how we grow our way forward.

And I -- and I think it would be -- it would be helpful to confidence to have both sides say, we've done it, that we're willing to negotiate a framework that moves in that direction. And again, we -- that's -- this is where this has to go. There's no -- there's no, I think, plausible way to get there economically or politically without that type of balanced framework. Again, it marries tax reform with broader spending reforms so that -- reduce the rate of growth in the long-term commitments on health care.

MITCHELL: Could there be even a temporary extension of all the Bush tax cuts as Bill Clinton and Larry Summers have suggested?

GEITHNER: I don't think that's quite fair to them, but I want to revisit that history because I know you've talked about that.

But, you know, our view right now is that -- and I think this is right -- is that we need to take advantage of the incentive created by the sequester and these expiring tax cuts to force this town to confront and take on the things that divide us now in these long-term fiscal reforms so that we can go ahead and govern and start to address the other many problems the country faces. And for people to say we're going to put that off, I think would be damaging to confidence.

Again, this is a -- this is a place where, you know, people spend a lot of time worrying -- and it's a bit of a cloud over the American economy now -- about whether Washington can work again. And for Washington to say we're going to defer, I don't see how that'd be helpful to confidence.

MITCHELL: The data that the Fed reported on Monday indicated that the recession --

GEITHNER: So I want to be -- just be clear: We would not support that.

MITCHELL: Understood.

GEITHNER: Is that clear?


The Fed reported that as of their -- (audio break) -- 2010, the recession was so much deeper than anyone had expected or reported, that the median -- middle-income Americans lost 39 (percent) to 40 percent of their wealth. This is a devastating loss of a generation of wealth for middle-income Americans. How do you, as a policymaker, take that in and translate the effect on average American families?

GEITHNER: Well, I think it tells us what we already know and, of course, what Americans understand, which is the crisis was much deeper, and the damage to confidence and to wealth and to people's basic sense of security much greater even than people sort of could see in the numbers at the time. You know, remember, the economy was shrinking at an annual rate of 9 percent in the fourth quarter of '08, and the stock market and house prices had fallen very dramatically at that time.

Now, those measures of wealth and income started to move up really quite early in the first half of '09, so the value of people's pension savings started to go up again beginning in the second quarter of '09. And income growth, median income growth started to recover again beginning there -- over that period of time.

But, you know, it was a deep, traumatic hole far across the economy still, and we've got a long way to do to grow out of that -- I mean, to dig out of that -- repair that damage. Absolutely.

But most of that damage was done -- that damage to wealth in that report, in the Fed's report, you can see in -- what happened to equity prices and home prices. And that damage -- those things started to improve and reverse or at least start to stabilize when the president's policies and the Fed's policies started to get more traction.

And they got traction very quickly. Again, if you look back over that period of time, really remarkable. You know, you went from an economy falling at an annual rate of 9 percent a year, and we had positive growth in the summer of '09. So in a six-month period, you went from an economy that was really falling off the cliff to an economy growing.

Now, growth has not been as strong as any of us would have liked, in part because of Europe, in part because of the headwinds from fiscal contraction at the state and local level, and partly because of the digging out of excessive debt that helped create the crisis. But I think in some ways that story is a story of how effective and how quickly you saw the economy start to stabilize and recover because we were -- did move very forcefully.

We went in very hard and very fast, and we did the hard, very difficult (sort of things ?) very, very quickly. And that made a huge difference. Didn't solve all our problems, still a lot of challenges ahead, but that was very important. And I think if you look at everything, you look at Europe over the last two and a half years, is a justification for that basic lesson of crisis management.

MITCHELL: It's a given that Americans -- the average American does not understand private equity, does not understand Wall Street, doesn't understand the banking system very well, except to worry about it a lot now. What is your response after the testimony today by Jamie Dimon that in fact the best banker or the best known and certainly the banker with the best record on Wall Street for handling risk did not know the size of these bets and did not know all the risks entailed, and that Federal Reserve and Office of Comptroller of the Currency regulators embedded in New York and London at JPMorgan Chase were unaware?

What does it tell us about the regulatory system and the inherent risks?

GEITHNER: I think it's a good reminder of three really important things. One is that this task of risk management is inherently uncertain, because nobody knows the future. What makes this a challenge is, you cannot confidently predict how any position's going to behave on the basis of the last three weeks or the last three years or the last three months, and that is what causes financial crises and that's what makes everything about managing risk complicated in this context. And it's good to know that, because you need to have a lot of humility about the basic uncertainty we live with about our capacity to predict those things.

The second thing related to that is, therefore the best defense against that particular inherent unavoidable problem is to make sure these firms run with less leverage, more capital, more conservative funding against the risk they take. And there is no rule and there is no reform and there's no supervisor that can define their objective as preventing these firms from taking risks or making mistakes.

The only test, and he most important test of reform, is whether you make the system strong enough those mistakes don't matter. The best way to do that is to make sure firms hold -- which we have done -- hold much more capital against risk so the losses they make are small relative to their capacity to absorb those losses, and the rest of the system has similarly stronger shock absorbers against this.

And this was a pretty good test of that central premise of reforms, because these losses -- this risk-management failure, as a pretty significant risk-management failure -- was manageable given the basic capital position of that institution. But it's another example of why we all have a big stake in these reforms that are still being deigned and implemented.

We need to let them get some traction in place, because if we preemptively allow them to be weakened, relax those basic constraints, then we'll be much more vulnerable to these mistakes of individual firms causing broader damage. So I completely agree that it's a good reminder of the inherent uncertainty you live with. And that's again related to the reality that we cannot confidently predict the future. The best way to deal with that reality is to recognize that and to force these firms to hold much greater cushions, to protect them from their ignorance and ours.

MITCHELL: The argument being made on the Hill by Jamie Dimon was that there has to be inherent risk in banking. That's what the business is. But that said, do you think, looking at it from the outside, that they did anything wrong?

GEITHNER: Oh, no, they -- I mean, I would say that one strength of what they've said in response to this stuff is they were direct and clear and crisp in admitting the scale of the error and in trying to get very quickly to what produced that and to be very quick in trying to figure out how to put in place a framework that would make that less likely in the future. And that's a good thing.

But you know, again, the job of -- the job of reform, the job of oversight, the job of supervision is to force them to hold more capital against risk, do as much as we can to make sure they understand those risks and they limit them to a tolerable amount, so again they can't -- when they make mistakes, they can't cause damage to the rest of us.

You began -- I'd just link this -- you began with a related question which is how comfortable should we feel about the strength of the U.S. financial system in this more uncertain world now. And I think this is a good test of that in many ways. We've had several tests like this over the last three years.

These -- the core of the U.S. financial system we forced to raise $300 billion in common equity since the peak of our crisis.

They have much less risk than they did. They're funded much more conservatively. They have reduced their exposures to their -- to the most obvious source of the risk in the world dramatically over that period of time.

But I believe we're in a much stronger position than we were any time over the last three, six months, eight months, nine months, two years, three years to withstand the effects of what's happening in Europe. But Europe is a large part of the global economy, and its challenges are hurting growth here and elsewhere around the world. And so we have a big stake in helping them deal with this more effectively. And again, we're going to spend a lot of time next week trying to do that.

MITCHELL: Why do you think Wall Street is putting its money in Mitt Romney's camp by 37 million-plus (dollars) to 4 million (dollars) so far reported, and that 21 big contributors to President Obama's election campaign in '08 have now switched sides?

GEITHNER: Well, I think it's -- I can't really speculate on the motives, but I suspect it's because they believe that they are more likely to get a more favorable hearing in terms of relaxing these reforms if the Republicans have a stronger hand in Washington. I think it's straightforward.

MITCHELL: Just remind you --

GEITHNER: Is that fair, you think?

MITCHELL: Well -- (laughter) -- from your perspective.

Mitt Romney was asked during a debate back in October 11th --

GEITHNER: I don't think they'll be successful, by the way, just because I think that -- I think the core reforms are -- we're going to fight to preserve them and we're going to fight to keep them, and there is an overwhelming and compelling case to do so just because, you know, we're -- again, we're still living with the scars and the damage caused by those basic errors in --

MITCHELL: Under your analysis, you've just contributed more money to the Mitt Romney campaign.

GEITHNER: (Chuckles.)

MITCHELL: But what Romney said in October of 2011 was, when asked what he would do if there were another financial crisis --

GEITHNER: (Inaudible) -- I think anybody responsible governing the country would have a huge stake in preserving these core reforms. (Laughter.) Because why would I want to leave the country vulnerable to another crisis?


MITCHELL: Point taken.

And just to finish up what he said in answer to how he would handle a financial crisis, "I can tell you this: that I'm not going to have to call up Timothy Geithner and say, 'How's the economy work,' because I've spent my whole life in the economy."

GEITHNER: Who's that? Who said that?

MITCHELL: Mitt Romney. (Laughter.)

GEITHNER: You want me to respond to that?

MITCHELL: Sure. (Laughter.)

What about the messaging in this campaign? I mean, the president came out on Friday --

GEITHNER: I'm not the right person to asking about messaging.

MITCHELL: Well, the -- (chuckles) --

GEITHNER: (Chuckling.) It's not -- really not my thing. (Laughter.)

MITCHELL: In terms of the president's comment, we know what he meant in response to the jobs report the week earlier, but when he said that the private economy is -- the private sector is doing just fine, how do you explain to the American people, you know, what he meant, what's at stake? We are in the middle of a -- of a very closely fought campaign.

GEITHNER: I think we've tried to say this right from the beginning -- you know, it's a very tough economy still -- (off mic) -- huge amount of damage left over, a long way to go to repair that damage, growth not as strong as we would like. What we've tried to do is to put out, as clearly as we can, as powerful and creative a set of proposals for helping resolve that as possible and to legislate as many as we can. And we've tried to choose ones that have had a tradition of broad bipartisan support, in the hopes that would ease the prospect of legislation. And that's what we're going to keep doing.

Of course we can't just focus on growth now. We've got to worry about growth longer term. But we believe, as I think many people believe, that those things would be best combined with balanced long- term plan to restore fiscal sustainability. And that's why you have to about -- think about these two things together.

But you know, we've having a -- you know, we're having a debate about -- and it's an important debate to have -- about not just how to solve the long-term fiscal problem but what's the right way to help growth now, broad-based growth right now.

And what we're trying to do is to meet the tests you meet if you govern, which is to lay out what we're for.

MITCHELL: You just disproved your own point, because you are right on the message. So given --

GEITHNER: That wasn't the message. It was just my version of --

MITCHELL: Given what you said in the past about wanting to just serve for the first term in this very, very tough job, have you rethought whether if the president's re-elected, you would stay in some role in the administration?

GEITHNER: No, I have not -- (laughs) -- I have not rethought that. Thank you for asking, though. (Laughter.)

MITCHELL: Well, you've had so much fun in the first three years.

Well, now we come to that -- the time when the audience joins in. And just to remind everyone, you know the drill: Please stand, state your name, your affiliation, keep questions concise, wait for the microphones to reach you. Right here in the front row starting. Thank you very much.

QUESTIONER: Hi. Steve Charnovitz at GW Law School. Thanks for coming back to the council.

You said that we needed a balanced plan for fiscal sustainability as well as room to invest. I wanted to ask you, as the Treasury secretary, how do you tell the difference between government spending that is investment and spending that is not investment?

GEITHNER: Good question. Excellent question. And people will disagree on that. Economists will disagree, and people disagree on both sides of the political spectrum.

But when we say it -- and this is really the only place where we're proposing meaningful changes in what we spend -- we say we want to limit it to areas where we think there's a pretty high economic return, where the private sector's likely to underinvest in that, where you won't see it happen without the government claiming some broader role.

And the examples I like to cite about that are public infrastructure -- overwhelmingly compelling case for doing that. Obviously, private markets aren't investing to the level you need in that context. It's straightforward and self-evident. Education, in all of its dimensions -- very high returns to education. And we've seen a significant erosion in the basic -- relative quality of a U.S. education relative to the rest of the world -- unacceptable for us as a country. And there is a pretty good case for investments in basic scientific research, as we've done for decades and decades -- and maybe going beyond that to support development in areas where -- like clean energy, where, again, you're likely to see the market under- invest in what probably makes sense longer term. That is a relatively limited list of things.

Now, of course, huge part of what matters is what you do for the incentives for private investment. And so we -- the president's proposed a broad framework for corporate tax reform that we think would improve the incentives for private investment here, not just, you know, things like permanent advantage for research and development in the United States, but to clean up all the muck in the corporate tax code and use that to lower rates to a more competitive level. So those are some of the things we think.

But you're right, we say investments, other people say spending. But if you put -- if you put -- if you look outside of Medicare, Medicaid and Social Security, what's happening to the -- what we proposed happened to the role of (governing ?) the economy is you're going to see -- we expect to see a significant restraint across the rest of government, reserve room from those three or four areas of what we think are investments with pretty good economic returns.

QUESTIONER: I'm Mitzi Wertheim with the Naval Postgraduate School. I had the opportunity to hear Adair Turner talk a few months ago. And I actually don't know what his title is, but my understanding is five days before he took over the job, everything collapsed here. And he had a combined responsibility of oversight for all the British financial systems, plus the climate -- a rather complex job.

He said that when he got there, he couldn't begin to understand how the system worked. And he pulled together a team. It took them six months to identify how our system in the U.S. worked and who were all the players and who talked to one another and who didn't talk to one another. And he sort of said, if you don't understand that, how do you know what to fix? So my question is, if we understand it, why isn't it made public? Why can't we -- and I mean, I think --

GEITHNER: You're talking about the complexity of the oversight structure?

QUESTIONER: Well, no, he was talking about the complexity of how the system -- what went on in all the banks. I mean, he was looking --

MITCHELL: Of the financial system.

QUESTIONER: In the whole financial system and how all of that worked, and my view is that process really matters, and you ought to be educating us on these unbelievable processes so we can see when you make a decision, it actually makes sense.

MITCHELL: Well, let me pick up on that and just say it -- there is so little education really about how our financial system works and how the oversight works so that when something like a $2 billion number with JPMorgan Chase happens, everyone goes, oh my god, the sky is falling. And maybe it is, but the average person doesn't know how to deal with it.

GEITHNER: I think that's true about a lot of things in the -- not just in the recent crisis, but in our system today because these numbers are unfathomable to most people. Even in the discussions about the fiscal trajectory, you know, we talk about 10- year numbers and needing to find three to four trillion (dollars) in savings. No idea to dimension to something that they can -- I agree about this, and we do have a much more complicated financial system and financial oversight structure than is typical in many countries.

And what makes our system unique and different is, in our system, banks provide about half the credit the economy needs, and the rest of the credit comes from broader capital markets -- excuse me -- outside of banks, directly from investors, in that context.

That's very different from Europe. Most of Europe banks are three- quarters of credit in that context. And that creates a whole -- that has a bunch of advantages to us in many ways, because if you could see if some parts of the system are weak, others can compensate. But it does -- it does -- it does make it a more complicated system to manage.

We also have left in place a very complicated oversight structure. We have banks regulated at this --

QUESTIONER: But how do you tell the public -- (off mic)?

GEITHNER: But you're -- you -- (chuckles) -- I'd love to spend more time talking about it.

MITCHELL: (Inaudible.)

GEITHNER: It is a complicated thing. But you're right, it's a complicated system. And you're right that people do not have a lot of confidence that it works, because they just lived through the worst financial crisis since the Great Depression -- completely understandable.

And the reforms themselves, although at their core they are simple in terms of capital, limiting risk-taking and leverage, in their design, they are complicated for a lot of reasons. And that makes it much harder to help people understand and believe that this system we're putting in place today is going to be better at protecting them than it was in the past.

But -- and I think you're right. We have a substantial hill to climb in trying to make that case and explain that, because it's complicated. And we can do a better job of that.

MITCHELL: And the rule writing has taken so long.

GEITHNER: And the rule writing is taking -- and the rule writing is taking longer, in part because we have too many people writing the rules, frankly. (Chuckles.)

MITCHELL: Yes, sir. Going back.

QUESTIONER: Allan Wendt. Mr. Secretary, what is the U.S. interest as regards the euro? Does it matter to the U.S. whether or not Europe proceed -- continues with monetary integration or whether one or more countries drops out of the euro?

GEITHNER: I think it does matter, because we have a long interest, as you know, in supporting this European project towards closer integration. I mean, they've chosen the -- this path. We didn't choose it for them. And we have an interest in it working and helping make it work, but we can't choose for them how to do that.

But yes, I think we do have an interest in seeing -- do what they need to do to make this monetary union more viable.

MITCHELL: And what role do we play? Some have suggested that we're not playing a strong enough role.

GEITHNER: Well, you know, there's a phrase we use -- it's a little unfair to say it this way -- colleague -- former colleague of mine used to say this way, is that, you know, we can't want this more than them, and we can't make these choices for them. It's 17 countries, incredibly difficult politics. The economics and financials of this is very tough, and so they're going to have to figure out what works for them.

And what we are doing is what I think we can do, the maximum we can do, is we're trying to be as helpful as possible, as persuasive as possible. They come to us all the time to ask us for ideas on what might work. They look at the lessons from our experience and -- (inaudible) -- were willing to give that advice and help in that context, and where we have the capacity to help them financially, we're doing that.

The Federal Reserve is doing what we can do uniquely, which is giving them access to dollar swap lines, which are very, very important to what they're facing now, which we've done -- we've done quickly and on a very substantial scale. And of course we're supporting what the IMF is doing in that context.

And you know, there are people who say that we should be louder in telling them what to do, and that would be more helpful. I don't think so. And there are people who say we should go write them a check so they don't have to write a larger check to help underpin the monetary union. I don't see how that's -- how that's defensible. You know, they're a very rich continent. This is within their capacity to manage, and if we, the world, try to limit the burden and then to fix it, then the credibility of their commitment to the endeavor will look weaker, and that won't help.

It matters to the U.S. because we need a strong Europe; better for us that they're strong and growing over time.

We do not benefit from a long period of European weakness and -- (inaudible) -- which was what we're seeing. So it has huge implications to us, not just because of the direct effects we're seeing now in growth and confidence.

QUESTIONER: (Inaudible) -- last October -- (inaudible) -- in New York -- (inaudible) -- asked you this question: Does the Europeans have the financial power to solve this issue? The question to you today, are you satisfied with the German position on this crisis? Have the Germans made up their minds?

GEITHNER: It's -- I know there's a lot of focus on Germany, but I think it's a little unfair to look to Germany as the sole source of the problem now. Now, what Germany is saying is make a monetary union work. We're prepared to put a substantial commitment of resources behind this broader endeavor. But for that to work, it needs to be in support of reforms, changes in the institutions so they'll be locked in -- can't erode over time.

And that is a very reasonable position. You can differ with lots of elements of the strategy, how it's evolving and how quickly it's evolving. But on that basic premise -- and I -- not to quote Martin Wolf again, but he wrote this today in a good sense -- in a good way too, is: That's perfectly reasonable and acceptable.

And recognize you need both for this to work. Just to simplify, you need reforms that will endure with institutional changes that look like they're -- you can't go back. You need a substantial commitment of financial resources to give them the time for it to work. You need both those two things. And that means it's not just about Germany. It requires other countries being willing to move towards them.

MITCHELL: Next, in the back -- the gentleman. Can we have a microphone back there, please?

QUESTIONER: (Inaudible) -- Dow Jones. (Inaudible) -- Secretary for doing this. So the G-20 is going to review Europe's progress next week.

I assume that the G-20 is not going to do much other than that on Europe. I'm wondering, do we have time for an 11th-hour action by Europe once again next -- later in the month? Spain's yields are beyond sustainable, et cetera, et cetera. Do we have that time?

GEITHNER: I think you're right -- and many people observe this -- that if you wait to move in these things and you let the market get ahead of you, then you increase the costs of the solution, and you make it harder to get there because you get too much momentum. It's very costly. There's no argument for -- once you decide we have to -- there's no argument for doing it slowly. You get there as quickly as you can.

Now, they're having a summit at the end of this month. What they're trying to do is negotiate a new set of reforms so that they can lay them out to the world at that summit. You're asking the question, will the world wait for that? And you know, they have a pretty strong incentive -- not just because they're coming to the G-20 early next week, but because of the Greek election and because, you know, the world is waiting for them, they have a -- they have a big incentive to add as much clarity to those plans as early as they can. They can -- they can help with confidence. To have the major players in Europe to state what their intentions are, even if it's going to take a little time to negotiate the details of that stuff -- that itself can be reassuring.

So I think what you're going to see coming -- going into the G- 20, certainly at the G-20 and after, even ahead of their summit, you're going to see the world look still to Germany and the other major players and -- for them to lay out a little bit more clarity what these broad objectives mean on banking union, on a firewall for the reforming countries and on the growth stuff. I think -- I think more clarity there would be better sooner.

MITCHELL: Right here.

QUESTIONER: Oh. Ted Truman, Peterson Institute for International Economics.

So following up on the last question, Mr. Secretary, you named three -- listed three things: banking union, growth -- I can't remember what the third one is -- firewalls, a support mechanism. And implicitly you said that's what has to come out of the summit.

GEITHNER: Out of their summit.

QUESTIONER: Out of their summit, right?

GEITHNER: Yeah. Yes.


GEITHNER: I was taking their words, their plans, their elements.

QUESTIONER: Are you confident that you'll get all three, if I may put it that way? And --

GEITHNER: Well, what they're saying --

QUESTIONER: Let me finish the question, Mr. Secretary. (Laughter.)

GEITHNER: When we worked together, you interrupted me all the time, so -- (laughter).

QUESTIONER: Yeah, but this time I'm going to give you the last word. Are you confident? And what -- you know, and what -- I think this reflects the general questions on Europe here this afternoon -- is what is the risk that if they -- of their falling short? I mean, and what -- and what -- I think this goes to the consequences, including for the broader financial system, including our own.

Thank you.

GEITHNER: Well, I think the stakes are very high for them and for the rest of us. We have a -- you know, they have an interest -- and again, we can't -- their interest is more powerful than anyone's in wanting to avoid that risk.

So how confident am I? You know, I try to -- I try to emphasize the positive. They've laid out pretty clearly where they want to go in these dimensions. They're -- they've put some pretty capable people in charge of trying to design the details of that framework. And based on what they say to us directly, they're serious about it and they intend to move. And I think they recognize the importance of moving now.

You know, this is not like it's been. I think I said at the beginning, this is the fourth major escalation, not just in the crisis but in their response. And this is different from the way it's felt before, in the sense that they're not minimizing the risks. They're not telling us that they feel they have a whole bunch of time.

And hopefully, that's encouraging.

MITCHELL: Well, with that, I'm told by our colleagues here at the council that we have no more time and that Ted Truman has had almost the last word.

GEITHNER: (Laughs.) (Inaudible) -- as he deserves. He deserves the last word.

MITCHELL: Well, we want to thank Secretary Geithner and your team for making this possible. (Applause.) And I should point out, with all of these cameras here, it's very obvious, but just to make sure everyone knows, this was entirely on the record.

Thank you.







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