[ Silence ]
[ Applause ]
>> Welcome everybody.
This is the 2nd of our
series' Leading Voices
in Politics and Policy.
We're very privileged here
to have 1 of the great sons
of Dartmouth, also
Secretary of the Treasury--
happens to be Secretary
of Treasury,
most importantly he's Dartmouth
Class of 1983 with us today.
But I wanna just talk
for just a few seconds
about the lecture series.
We have many other
speakers coming
over the next several weeks
and this is our effort
to begin the process of thinking
about utilizing our summers
to have conversations and we--
the entire sophomore
class as many
of you may know is
here for the summer.
And so we are trying
out the method
of having great speakers come
address the entire sophomore
class plus members
of our community
in having a communication--
in communicating and
having a discussion cross an
entire class.
So we're very excited
about the process that,
there'll be many
announcements going forward.
And so, I just-- my role
today is very simple, I just--
I'm going to introduce
our-- our 2 speakers today.
Andrew Samwick is the Sandra L
and Arthur L Irving '72a
P'10 Professor of Economics.
He's a Director of the
Nelson A. Rockefeller Center
for Public Policy and the Social
Sciences at Dartmouth College.
He is also an instructor
for Public Policy 20:
Contemporary Issues in American
Policies and Public Policy
which is the anchor course
for this lecture series.
Our guest speaker is the
Secretary of the US Department
of the Treasury, Tim Geithner.
On January 26th 2009,
Tim Geithner was sworn
in as the 75th Secretary
of the United States
Department of the Treasury.
Before this nomination,
Secretary Geithner
was the 9th President
and Chief Executive Officer
of the Federal Reserve Bank
of New York where he began
service on November 17th, 2003.
In that capacity, he
served as Vice Chairman
and a permanent member of the
Federal Open Market Committee,
the group responsible
for formulating the
nation's monetary policy.
Secretary Geithner graduated
from Dartmouth College
in the great class of 1983.
Secretary Geithner's family has
said that he is an avid athlete
and known to turn on
the business meetings
in Europe wearing ski boots
and to start pick-up
basketball games with colleagues
in his New York Office.
That is a Dartmouth grad there
for you, that's our kind of guy.
[Laughter] So without further
ado, Professor Andrew Samwick
and Secretary of the
Treasury, Timothy Geithner.
[ Applause ]
>> It's a-- it's a Friday
afternoon, why are you here?
[Laughter] Don't get a
swollen head just yet okay?
Ladies and gentlemen,
thank you for coming.
It's a distinct pleasure to have
the Treasury Secretary with us.
It falls to me to
give some ground rules
for today's activities.
Mostly it concerns the part of
the program that'll be questions
and answers from the audience.
I'd like to stipulate 3 things.
The first, those asking
questions should ask only one
question each, secondly,
that out of consideration
for others waiting
to ask questions the question
must be reasonably brief,
and number three that it
ought to be a question rather
than a statement
or a commentary.
>> I'll take advice.
You can offer advice
if you want.
[ Laughter ]
>> You may get more than
you bargain for with that.
As is my prerogative, I'm
gonna ask at least one
or two questions
to start us off.
The first is that, I think
maybe we could all understand
something better
about fiscal policy
if we knew what the target was.
Earlier this week, the--
>> You're gonna really
begin with economics?
[ Laughter ]
>> If I don't, who will?
[ Simultaneous Talking ]
>> Okay, go ahead.
>> So the CBO released its long
term budget outlook this week.
It pointed to a 9.3 percent
of GDP budget deficit
for the current year and the
expectation that the debt
to GDP ratio will be near 70
percent by the end of the year.
Public discussion about the
budget is sometimes confounded
by the lack of knowing
what we're aiming at.
So, I wonder if you would
start us off today by talking
about what the targets are
within the administration
for both the long-term
and the short-term budget.
>> Excellent question.
So, our basic objective is to
return the country to living
within its means again.
What does that mean?
And for a country, certainly
like the United States today
but really for any country
at a minimum what it means
is you get the deficit
down low enough so
you'd start to bring
down the overall debt burden
as assure of the economy.
You've got to prevent
it from rising too far
but mostly you gotta make
sure you're putting it
on a downward path.
Now for us, given the
structure of the economy,
what that means is, we have
to get our deficit down from
about 10 percent of GDP
to below 3 percent of GDP.
And we have to hold
it there over time.
And if we do that, then the
overall debt burden as assure
of over our economy measured the
way we think we should measure
that held by the public
would stabilize in the 70's
as a percent of GDP and that's
start to come down gradually.
So that's the basic math of it.
But that's not-- that's
the necessary thing
but it's not really
the hardest thing
and it's not really the
most important thing.
The most important thing
is-- is-- is how you do it.
It's the composition of the
reforms and the savings because,
it's the composition that will
affect the ultimate incentives
for investment, it'll affect
the capacity we have to invest
in things that matter for
how he do in the future,
it will affect the incentives
to probably use health care,
how people save for retirement,
and the composition is
important not just politically
because ultimately you have
to figure out a way to do this
as politically acceptable.
We have to do it in a way that's
fundamentally judged as fair
and good for the economy.
And that target you began with
which is what's the objective,
which an economist would
say it's-- it's primary--
sort of modest primary
surplus achieved in 3
to 5 years and then sustained.
That basic objective is embraced
now by a Democratic President,
by the Republican leadership,
by the only bipartisan
budget agreement we have
which is the Simpson-Bowles
fiscal commission.
All had the same basic
framework for the objective,
at least for the
next 3 to 5 years.
And when you have that,
that's good because then
when people agree in the
objectives, you can fight
about the composition and
we're having a big fight
about the composition.
But that's the first step.
And when we last
did a significant,
meaningful fiscal deal in the
United States it was in the '95,
'96 period, and what
made that possible is
when then President
Clinton decided
to join what was then a
broad Republican [inaudible]
to say we're gonna
balance the budget.
And when you had, you know,
those parts of the American
[inaudible] come together
and say, we have to do this and
the debate is just about how--
then you've passed the
most difficult step.
>> So as you say, the target
would be a mild primary surplus
when there're no other
factors acting on the economy.
>> Okay.
>> So, you might say
that a target would be
to run a balanced
budget or close to it
over a complete business cycle?
It seems like the way we do our
budget policy is very asymmetric
in that when it's a weak economy
there's almost no measure
that we wouldn't
pass in order to try
to drive the economic
growth forward.
But in the good times,
there is a tendency
to be a little careless
and not run the surpluses
that we would need to--
>> That's possible when your
overall debt burden is much
lower than this today,
it's possible
when your starting point
running deficit struck lower
than they are today.
But it's not possible today.
And it's not gonna be
possible for the next--
for the next decade really.
We-- We've lost the
chance, we, you know,
we squandered the surpluses
we had at the beginning
of the last decade, spent
them, expanded the commitments
by the government
without paying for them
when [inaudible]
trains the dollars,
dug ourselves a huge hole and
we no longer had the luxury
of that kind of keep deferring
it approach to the future.
So, anything we do now is
gonna have to be subject
to a much more constrained
set of choices
and if we have a negative
surprise in the economy, again,
sometime for that period of
time we'll have to make it up.
We have to temporarily
borrow this
for governments during
a recession.
But we'll have to at some
point pay off that debt so we--
so we stay in this
path of sustainability.
But again, the hard thing is
about the debate we're
having now which is how
to make sure you do this
in a way that's gonna be
broadly acceptable, you know,
how are you gonna
achieve reforms
in the long-term
health care spending
that preserved the necessary
commitment we make to seniors,
give them the certainty
of access to health care
at some level in the
future but in a way
that is more affordable.
How do we change how people use
medicines is what your great
President has made a life--
lifetime study of how
do we change instead
of how people use
medicine deliberate
so that we can make this
affordable, that's hard.
>> How do we get better outcomes
out of our education systems
who are more competitive,
how do we make it more likely
that people will come invest in
this country in a larger scale,
so we're building more things in
this country and not overseas,
how do we make our tax system
less distorted, more fair,
a better burden across things,
those-- those are the difficult,
difficult challenges, it's
not fundamentally a problem
of math and accounting.
>> So, I keep thinking back
to when the recession
was first upon us
and when it was pretty clear
that something was
gonna have to be done.
There was a mantra
that was repeated often
in Washington policy circles.
It was about timely
targeted and temporary.
That's how you should
do fiscal stimulus.
And the people who
were proponents
of this were both not slouches
and then eventually went
on to serve in some pretty
important places in government.
The phrase may have originated
with a column written
by Jean Sperling.
It was picked up and developed
further in Larry Summers' speech
in December of 2007
at Brookings,
a month later Doug
Elmendorf, Jason Furman,
all these people very
senior and involved
in Washington wrote a
primer on fiscal stimulus.
So, I've wondered about
timely, temporary and targeted.
To what extent do you feel
that that's been the guidepost
for how the Obama administration
has tried to do fiscal stimulus?
>> I think-- I think
we generally met
that test given the
constraints we operated on.
But I think you should
step back--
you step back for a second
just look at the basic strategy
that we embrace or
forced to embrace
to prevent a second grade
depression and it was more
than stimulus in
the fiscal side.
You know we had the full arsenal
of it now possibly deployed
as we-- as we needed to.
You had very creative, very
aggressive, no precedent for it,
actions by the Fed
through monetary policy.
We had a very aggressive
program to recapitalize,
we structure the financial
system, open the pipes of credit
so the economy was not
starved for oxygen.
And then we had a
very substantial,
this was a NIST program.
And you ultimately
need all those things,
they wouldn't have
worked if you just use one
of those-- of those weapons.
And the stimulus program was
very quick in terms of the speed
of agreement on the plan so
it was definitely timely.
Absolutely temporary, in
fact it's now on the--
it's now fading quite
dramatically in terms
of the impulses providing
the economy.
Was it targeted enough?
I mean you know the balance,
there was a bunch of tax cuts
in there that you
wouldn't think it
from the political rhetoric
in the country today.
Very substantial tax cuts
individuals and corporate.
There was a substantial amount
of infrastructure spending
which has slower spend out rates
but that made it more sustained
and a range of other
things in there.
But, you know, we--
this is about governing.
You know, the task of governing
is to figure out how to--
how to reconcile the idea--
reconcile the idea with what's
feasible given the political
reality of the moment.
And our judgment was we had
to do as much as quickly
as we could 'cause at
that point, you know,
the economy was really falling
off the cliff and, you know,
Greenspan and Bernanke
both said that the shock
that hit the US economy
was larger in magnitude
than the shock that caused
the great depression.
And at that point it
was gathering momentum
in terms of downturn.
So we felt that we had to
do as much as we could,
as quickly as we could.
And you wouldn't look
at any of the stuff
and say it was perfect
in design.
So, I would-- I wouldn't have
met any test of what people
and academics who are in
the markets might judge
as idea at the moment.
Nothing in Washington
would ever meet that test.
But it met the critical
test of doing
as much more force [inaudible]
possible and, you know,
this is really a
remarkable thing.
If you look at any history
of financial crises,
the speed with which growth
went from negative to positive,
the speed of which you've
got stability come back
to financial markets, cost
of credit coming down,
equity prices and wealth start
to rise again was
incredibly quick relative
to any experience we had.
And if you look back at the cost
of the things we did I'll just
take the finances as an example.
You know at one point we had 2.8
trillion dollars in exposures
to the financial system because
of the all the emergencies we
did with people estimating
losses ultimately
for the taxpayer, you
know, some people said
in the 500 to a trillion range.
And if you look at the
cost of this intervention
that we designed even
conservatively today is gonna be
less than 1 percent of
GDP, less than one third
of the cost of the crisis.
And incredibly cost
effective creative rescuing
of the financial system,
very politically difficult,
damaging for the President.
Very damaging politically, you
know, I said once that because
of what he did, we saved
the financial system
but we lost the country
doing it.
But the-- that's the
lesson of financial crises.
If you-- they burn and they
cost trains of dollars or a lost
out for GDP take
years to recover
when politicians sit there
and are willing to act
because they're scared of the
political consequences of it.
And with the present day which
was the hardest thing to do was
to recognize that if he
didn't do all that early on,
nothing was gonna be possible
and yet the political cause
of all that stuff was
gonna be deeply damaging.
So that's a long
answer to your question,
was it timely targeted
or temporary?
Basically yes.
Could have it been
designed better?
Not a chance given the
constraints we were operating
at that time.
>> So we learned today
that the final estimate
of first quarter GDP growth was
1.9 percent of the annual rate.
That's down from a 3 percent
number in the prior quarter,
and you're hearing words
like double-dip recession
coming about, is timely targeted
and temporary still the playbook
if more action is needed?
>> What now for policy
do you mean?
>> Yes.
>>Well, if-- I think-- I think
what's important to look at is,
you know, what is
actually happening
to the American economy today?
And, you know, we've had
roughly average growth rates
since growth began
about 2 years ago
in the 2 1/2 to 3 percent range.
We started the year
with people expecting
that first half would be
between 3 and 4 percent,
it's gonna be more
like two percent.
>> Why is that and what
should we conclude from that,
what can we do about that?
>> It's mostly lower because
we have the combination
of oil prices high, catastrophic
shock in Japan, terrible weather
that pushed construction
down, big unanticipated slow
down in defense spending, a
lot of concern about Europe--
risk from Europe and a bit
of tightening of policy
in the most rapidly
growing parts of the world.
That's a lot of things to
accommodate at once and most
of the slowdown that we've
seen so far, you can explain
by those-- those specific
factors and accumulative effect.
The risk in them of course,
is that weakness accumulates
in people still scarred by
the damage of the recession,
the crisis, still so tentative
to pullback because of that.
But I think most people
look at the economy
and say the underlying trend is
still getting gradually stronger
and I think the second
absolutely stronger
and hopefully that is the case.
So I think the most
important thing that we can do
in Washington now is bring
to Earth quickly a sensibly
design balanced comprehensive
long-term fiscal
plan and structure it
in a way that's good
for growth over time.
If we do that, then we
can turn our attention
to all the other chances
facing the country
so there are many 'cause
unemployment is still very high,
we have huge challenges
as a country but we--
there is no path to addressing
those challenges politically
or economically or financially
until people have
more confidence
that we can get our arms
around this unsustainable
fiscal problem,
put it on a more
sustainable path.
Demonstrate to people that this
political system can put the
country back to [inaudible]
abandon all the bad practices
of the last decade, re-impose
on the basic disciplines
and constraints and if we do
that, then we'll have more room
to turn these other challenges
still facing the economy.
>> So let's turn to politics
which I think is occupying
a lot more of your day
than the economics might be.
I look and I think
my students look
at this political wrangling
over the debt limit.
It seems like maybe it's a
technicality of some sort
and somehow that it has been
inflated in-- in importance.
And my students are
too young maybe
to pose the question this way,
but I understand you were a
government major when you were
at Dartmouth and
focused on East Asia
if I'm remembering correctly.
[ Simultaneous Talking ]
>> No Economics, just 1
economics course unfortunately.
[ Laughter ]
>> One in fact is enough
if you do it right.
[ Laughter ]
>> I took some later to
try to make up for that,
but not-- but not here.
>> Right. So, the
question I would ask
and maybe you'll just indulge me
on it 'cause maybe it's
just a question I have.
Would we be engaging
in what I would refer
to as partisan shenanigans
over raising the debt ceiling
in the era that I grew up
in or when I was the age
of the students today--
it was the Cold War,
I cant' imagine this nonsense
happening on Capitol Hill
if we were still
facing what we perceived
to be a well armed
existential threat?
>> We are fighting, you know,
we're fighting [inaudible]
Americans--
well, let me state
this more carefully.
We're still a nation
at war in many ways.
So what is all this about?
I mean-- I think you all know
this, if you look at this,
we ran out of borrowing
capacity in early August--
August 2nd, and nobody ever
in Congress likes to vote
to raise the debt limit.
So to raise the debt
limit to get the votes
for that people wanna say
they voted for something
that restores some
responsibility
to the fiscal position, a
totally reasonable thing
and so we're trying
to negotiate that.
There's a little danger in this
'cause, very unpopular vote
and as you've seen, you
know, cutting, spending
and raising taxes is
not popular either.
If you combine those two things
together it's not necessarily
easier and there is a big risk
in this calculation now 'cause
there are a lot of people
on both sides of the American
political spectrum now
that would rather have a fight
than actually do something.
And there're a lot of people who
are living with this illusion,
it's a dangerous illusion
that solutions that somehow
if defaulted on our debt,
stop paying our obligations,
that'd be a way to
balance our budget.
No responsible person believes
that and the leadership
of the Congress understand
that's not possible.
And so we'll have to
work this out and--
and I think it's important that
even the Speaker of the House
and the Minority of the
Senate, those republican leaders
who have said they wanna get
this done as quickly as possible
so that we don't put the
country in the position
of taking too long and causing
concern around the world
that America might decide that
it won't meet its obligation,
that's not something we--
it will be devastating
to the economy to let
that concern build up.
So we have to work this out.
What-- why-- why is it so
divided now-- divisive now?
You know, the politics
are terrible now.
Of course if you read
about American history,
I'm reading [inaudible]
letters--
it wasn't so great then.
If you read about, you know,
Hamilton's time in office,
it was-- it was terrible
then too.
It feels pretty bad now though.
And, you know, the country--
country is very divided very
ambivalent of our government,
huge loss of faith in
public institutions
and the crisis caused a
lot more damage to faith
in public institutions,
no trust I think,
really in the overall
quality of judgment.
And that makes it much harder
I think for people to be able
to want to take risk
to work together and--
but that's ultimately what
we're gonna have to do.
You know, we have to find a
way to rebuild some confidence
that Washington can
solve problems and that--
and even in a divided country
there are things we can do
together, work together
without solving those deep
biological divide.
And that's what this
debate is about, it's--
it's the ultimate test
of political system.
When you're faced with a
difficult challenge with this,
can you find a way to get the
fields to come together and try
to solve something
practical and if we can do
that I think it will
help repair some
of the damage done
to confidence.
And I think it would be
good for the economy,
good for people's
confidence around the world
and the United States but we've
got to earn that confidence.
>> You do seem to
be remarkably calm
for somebody who's
facing what you are facing
over the next six weeks.
[ Laughter ]
>> Now people say this
to me, they say, "Boy,
why do you look so calm?"
But, I-- I explained to
them that, you know, this--
this country in the period
between really the summer of '07
and the first half of '09
was really on the edge
of a catastrophic collapse.
It was really reasonable
prospect it would be like the--
the great depression again,
and nothing we faced today is
as difficult or as challenging
as what we went through to avoid
that outcome, nothing is
as challenging as that.
And, you know, there's
a lot of politics now
but these are manageable
problems for us
as a country there's no reason
why we can't solve them.
We know how to solve them
it just takes a little will.
And you're gonna, you know,
you should be patient.
You know, you'll see a lot of
political theater around this
in the next couple of weeks
and they'll be, you know,
6 episodes of failure before
people do the right thing.
>> Well that's great, thank you!
[ Laughter ]
>> I think what I'd like to do--
is maybe turn the program
over to the audience
for some questions.
Our custom here is that we have
ushers with microphones who come
through the isles and if I
could have you have start sort
of closer to the front
of the auditorium
that would be great 'cause
I see a lot of our students.
>> I think-- I think the
present should be ineligible.
[ Laughter ]
>> You can say that.
>> I was really struck hearing
that you only took
1 economics class
and you're now the
Secretary of Treasury.
>> I dropped at Dartmouth.
[ Laughter ]
>> At Dartmouth, yeah.
>> But that's-- that's
all that matters.
So, you-- we tell our
students all the time
that the Liberal Arts
education doesn't prepare you
for a single job but it prepares
you to tackle as we love
to say it, as John Sloan Dickey
says troubles of the world.
Can you reflect on your
experience here at Dartmouth
and how studying East
Asian studies prepared you
to tackle something as
difficult as the job
that you're currently in?
>> Sure. I mean, I think
that [laughter] you know,
what you want in education is
you want to have the privilege
of work working with great
professors who teach you how
to think and how to make
choices, how to make decisions,
you know, I love your habits
of the mind framework as a way
for people to think about those
kind of questions and I think
that much more important
than the discipline
of what you're studying.
Much more important than the mix
of things you have
you know I think my--
my life so far at least
has been, you know,
this just continued
situation over and over again
of being confronted with a set
of problems that we had no,
frankly, idea what we're
gonna do to solve them.
No, no play book, no
precedent, no easy path,
and that experience is something
that's ultimately the most
important thing.
But you're much better equipped
when you come to those--
those problems if you
had the privilege I had
at this great place of having
people teach you the joy
of discovery and the ability
to think and make choices.
And I was so fortunate to
go to such a great place.
And if you are successful
in sustaining
that tradition here
in under reg.
education in Arts and Sciences
then you will have done a great
thing, even-- even greater
than your revolution
that you're gonna bring
to healthcare delivery.
[ Laughter ]
[ Applause ]
>> Great! We have some
students over here.
>> You study East Asia, I
should just say that, you know,
I had this other great privilege
in life which is I grew
up overseas and my professor,
Susan Blader is sitting there
who taught me Chinese early
in life and, you know,
I had that great
fortune as an American
of spending a huge amount of
time outside the United States,
looking at the United States
through the eyes of others,
seeing how other countries look
at the challenges facing the
world and that is a great,
a great privilege and a benefit.
And I think one thing you
can make me optimist here
at this country now is that over
the last 25 years there's been a
revolution in the-- just
sheer numbers of Americans
who by the time they
graduate college and had
that same experience then
that'll make us a much better
country a much stronger,
much wiser I think, yes?
>> Mr. Geithner first of all,
thank you so much
for being here.
I wanted to ask what was the
main economic motivation behind
the releasing of the 30
million barrels of oil
in the past couple of
days and was it done
to combat the oil price
speculation or was it done
as a sort of alternative
quantitative easing
or was it a purely
political move?
>> No, no, no.
[ Laughter ]
>> -- on those string of things,
it's really as simple as this,
you know, there is a war
in Libya it costs between 1
and 2 billion-- million barrels
a day interest of lost output.
I think 140 million barrels
off the market so far.
It's a type of crude
affected by that--
not easily met by where
their [inaudible] capacity
like in Saudi Arabia.
We tend to have a lot of
reserves of that type of crude,
classic supply disruption.
Reserves exist to help mitigate
those kinds of disruptions.
And we have to organize a
coordinated global international
response to help ease
some of that pressure.
You can think about it
as like a bridge to--
a temporary bridge to when
that additional production
from Saudi Arabia that's
on stream now can--
can make it to refineries
and refineries have the time
to adapt a process in a way that
meets the short fall as you see,
so that's the rational for it.
Those are what the
reserves exist for
and if you're not prepared to
use them for something like this
which is a clear,
identifiable, substantial,
sustained supply disruption
then you'd be I think act--
not act imprudently.
>> Great, another question?
>> Secretary Geithner, I hate
to be a pessimist but it seems
that government financial
regulation--
>> A lot of pessimists, it's
easy to be a pessimist today.
[ Laughter ]
>> It seems that government
financial regulation has failed
to keep up with financial
innovation leaving our country
vulnerable to those
on Wall Street.
So what specific rules
and regulations do you believe
can successfully reduce systemic
risk and address the
moral hazard problems
that are US financial
system faces?
>> Excellent question.
You know, the crisis is cost
by lots of different things.
But at its core what happened
was you had a huge increase
in leverage in the financial
system, people not being careful
about the risks of a
deep recession pull
on housing prices,
didn't hold enough capital
against the potential risks.
>> And it was sort of worse
than that in a classic sense
because we allowed a whole
parallel of financial system
to grow up, build up outside
the basic protections we put
in place up after
the grade depression
around the banking system.
And when the storm hit
that pile of leverage
and risks just came crashing
down and caused a huge amount
of collateral damage
to the country
and it's gonna take us
years still do dig out
and repair that damage.
The most important thing
you can do about that is
to force institutions that are
banks in the business of banking
to hold more reserves,
more capital, more cash,
more cash cushions against
the risks that are inherent
in a world like ours today.
They were too low, we're
pushing them higher,
you're gonna see
announced I think
over the weekend another way
of reforms globally to put
in place more conservative
constraints on leverage.
That's really the most
important thing you can do.
You know you can't-- you'll
never be able to run a system
where you take all
the risk out of it
or where you can anticipate
that kind of shocks coming
and preemptively just fuse
them, twist a few dials
to take the risk of crisis out
of it, it's just not feasible.
It's beyond the capacity
of humans to have
that understand enough
about the future to do that.
The only thing you can do is to
make sure the firms that operate
at the core of the system, the
economy depends on so much,
hold more conservative
shock observers,
cushions against the inherent
uncertainty on the world.
And you wanna make sure you're
gonna apply those constraints
on the entire system.
If you only apply
them on one part
of the system then all
you'll see happen is a whole
parallelism build up again
outside the banking system.
In our system it was
the investment banks,
Fannie and Freddie,
AIG to some extent,
some huge finance companies that
were not regulated for capital.
And that was a catastrophic
avoidable error.
And the most important thing
that this new financial form
of legislation does is make
sure we have the authority
to apply enforce more
conservative shock absorbers
in this system as a whole.
Now, at the same time, you
wanna make sure that investors
and people running these
institutions don't operate
with the expectation the
government is gonna be there
in the future to save
them from their mistake.
And the other thing this law
does is it substantially limits
the discretion, the ability
of the Central Bank, the FTSC,
the government to
come in and save,
preserve those institutions
that mismanage themselves
to the edge of the cliff.
We have much more limited
authority that helps
in the moral hazard front
because it reduces the risk.
And again, people act rationally
in the expectation we'll
save them from their mistakes
and very dangerous to run a
system on that expectation.
You know, we're gonna have our--
we'll have our crisis
in the future.
You can't take crisis out
of the financial systems,
they're inherent.
But we can make them much less
frequent, much less severe,
much less damaging, much
less collateral damage
to the innocent, and we
have a very good chance
of doing that I think.
>> Let me turn over here.
Yes, in the middle.
[ Pause ]
>> Secretary Geithner,
we had Senator--
former Senator Gregg here
yesterday and he abdicated
for the tax reform set
out in the Simpson-Bowles.
And I was wondering if you
could comment on the wisdom
of reducing tax rates
and tax expenditures
and also the political
feasibility of getting rid
of popular tax breaks like the
mortgage interest deduction.
>> Ultimately we're gonna have
to fundamentally
change large parts
of the American tax system
today, because as you know
and as you implied both in
the taxation of businesses
and individuals we have a
system where there are--
it is built, it is riddled with,
stuffed with very expensive
tax expenditures, deductions,
loop holes, and they-- their
discretionary, they're unfair,
it means that companies in very
different businesses would pay
hugely different tax rates
for what they earn,
it makes no sense.
And individuals face
a similar challenge--
this is a little unfair in
its simplicity but if you look
at our system today there're
two huge simple problems
of unfairness in our
current system today.
On the corporate side we have
very high statutory rates
because we have a huge amount
of expensive tax expenditure
to corporations and it makes
sense to try to change that
and we're gonna propose
a broader reform
that we hope will bring
down the statutory rate,
doing it in a revenue
neutral way, improving status
for investment in the country
and make it more fair make it--
make people pay more even across
industries so it's not lobbyists
and politicians deciding
what economic activity
to favor in a general scale.
For individuals, you know,
you all live with this system.
Its complexity is
primarily produced by this--
the extent of special
benefits built into the system
to favor certain activities
and these things like that.
We wanna make it more simple
but fundamentally we have
to correct the biggest problem
on our taxes today which is
that it's just basically unfair
on the structure and the burden.
You know if you are fortunate
enough to make, you know,
to be among the most
of the richest,
the most fortunate
point 5 percent,
one percent of Americans today,
your effective tax burden all
in is sort of in the low 20s.
Lowest it's been in decades
and decades and decades,
lower than somebody who might
make substantially less,
you know, Warren Buffett is a
classic example, he pays less
in taxes share of income
than his secretary.
And there is no way
we're gonna be able
to solve our fiscal problems and
preserve some room for investing
in education and things
like that unless we make what
will ultimately be relatively
modest changes in that
distribution of the tax burden.
I'll say it in a different way,
and I'll do it symmetrically.
Even republicans today,
will say, "Look I'm willing
to see revenues raised by
changes of tax policy but only
if I am confident those
revenues are gonna go
to reduce the deficit to dig
a way out of this hole not
to sustain unsustainable
commitments
on the spending side."
And we have a chance
to do that now
because we're gonna negotiate
a fiscal set of constraints
that might offer that.
Democrats say or many democrats
would say, "We recognize
that our commitments in
healthcare unsustainable,
we're gonna have to find
a way to lower the--
not just rate of growth in cost
but bring more gravity
to those things.
But I'm not gonna do that.
I won't do that if those
savings are gonna be used
or sustain a tax system where we
have hugely expensive very low
effective rates for the
most fortunate Americans.
So, you could say so
there's the deal in there.
We can find a way to do more,
entitlement savings may
feel more accepting to it,
if there's more shared sacrifice
in the other side
we can find a way
to do a little bit better
burden sharing in the tax side
if people are more
confident it's gonna go
to deficit reduction and that's
basically what we're trying
to negotiate.
It's not-- you're not gonna
solve it by doing things
that we have to do
which is to narrow--
narrow or scale back the things
we do for oil and gas companies
or for corporate jets or the
whole range of other loopholes
and special privileges
that are a part
of what we're negotiating now.
Those will help, but they're
gonna be modest relative
to the size of the problem.
We're gonna have to
do some other things
to make the system more
fair and more balanced too.
But if you do this in
a way that's balanced,
spread across all the
functions of government,
it's an acceptable burden
to ask people to share.
We try to do it all on,
you know, a narrow slice
of the budget and you'll do
something that's much worse
for the economy even
if you can--
it's hard to legislate 'cause
it's just-- it's unfair.
And if you do it, alright,
these are big challenges
but if you do it in a way that's
broad and balanced you can do it
with a way that the economy can
manage, people who judges fair.
>> Great. Yes, in
the middle again.
[ Pause ]
>> As a participant
in formulating public
economic policy,
new addressed fairness
what is your process
or I guess the process
more generally
of determining what is fair?
>> The judgment of what's
fair is a political judgment.
It's what political
systems decide and work out.
It's, you know, why
we have elections
and of course fairness
is in the eye of the--
of the victim or
the beneficiary.
[ Laughter ]
>> So you're right I was--
I was using a laden term.
But I'll do it in a more
pragmatic or economic way again,
and it's been a good-- a
big I think a really healthy
improvement in the quality
of debate about this
on the fiscal side just over
the last six months or so
because you've seen a whole
bunch of competing plans
out there and people
can look at them
and say not just what's gonna
be good for the economy,
what's gonna be good for me,
what's fair, what's gonna work,
what can we legislate and that
helps make people much more
aware of the tradeoffs.
>> Ultimately, this is just a
trade off between, you know,
what you do for a range of
benefits, people we've come
to count on, what you do to
improve investment incentives.
What's gonna be fair.
How much more progressive
should we make the taxes
and those things are things
critical systems can--
have to resolve.
But you can't do anything
now without republicans
and democrats together
doing something.
You can't do it just
with republicans you can't
do it just with democrats.
There just has to be
compromise on both sides
and there ultimately
will be compromise
and in the negotiations
I've been participating
in with the Vice
President, there's been a--
you wouldn't know it from the
rhetoric but there's been a lot
of pragmatic, realistic
openness to compromise.
We just got to build on
that so we can do something
to help restore confidence in
the ability of Washington to,
you know, to do some things.
But, you know-- you know,
this is-- again, fairness is--
fairness is a laden thing
but it's important to be able
to recognize that, you
know, it's not just
that unemployment's 90 percent
and you've had this huge damage
to wealth and economic security
caused by the crisis but,
you know, I think you have 1
in 12 Americans on
food stamps today.
I think 40 percent
of Americans born
in United States today
are born to families
where the birth is paid for
by Medicaid and you look
at the quality of the
outcomes we're getting
in public education
across the country today.
You look at the quality
of infrastructure
in the United States today.
You know we-- there are
things we're gonna have to do
about these challenges
that are gonna cost money.
They're not beyond
our capacity to afford
but they require money,
they require spending,
it's a bad word but it's true.
So what the challenge we face
politically is find a way
to make sure we can
pay for those things
because we can't borrow to
pay from the scale doing
and that's gonna force
fundamental changes,
not just in the spending
side but it has--
we have to come on
the revenue side too.
>> Other questions?
Yes over here.
>> Thank you for being
here Secretary Geithner.
I guess I have a long term
projection sort of question.
You did speak of the surplus.
I was wondering, in your
opinion all things considered,
when do you think the
United States will be able
to regain its surplus?
Thank you.
>> Its budget surplus?
>> Yes.
>> You know what?
I know its sounds terrible
to say it this way,
but that's not the right
objective for the government.
You know the government
is not like a family,
it's not like a business even.
It's different in that context.
So we think about a
family as typically having
to balance its budget
and business over time
of course have to generate
enough revenues to do that.
But for a government, it's
perfectly reasonable to borrow
at a modest level of
income to finance things
that improve the long term
growth potential of the country
and there are things
governments have to do,
only governments can do,
you know, education is one
of those things, national
security is one of those things.
Infrastructure has a substantial
public good component to it,
there's a range of other things,
this is your profession
not mine.
And so-- and it's-- and
in recessions, you know,
you have to run deficits.
You know, when the private
sector pulls back in a crisis
like we saw, the only
way through that,
you can't sit there and
let it burn its self out.
The only way through that is
for the government temporarily
to expand, to borrow.
So of course, over the long
run, you wanna run rough balance
so you have some room to
do those kinds of things.
But for the next decade or so,
the more modest objective we
have, is the right objective
which is to get to what
we call primary balance
which is your revenues, balance,
cover your expenditures
except for interest.
If you do that, then the
debt will start decline
to ensure the economy.
That's the right
objective for the near term.
Great!
>> Yes, walk back a little bit.
Let's--
>> Mr. Secretary,
are you optimistic
about the near term ability
of the country to come
around to satisfy those near
term objectives and if so,
what are the key
components of your optimism?
>> I do think it's a hard
time to be optimistic again
because you look at-- you look
at the political spectacle
in Washington and you look
at the scale of the challenge
that you're facing and it does
make you wonder and you see
that concern and how people
talk about the country today
and it's completely
understandable I think given
what we've been through
and given how daunting
these challenges look like.
But I think I'm fundamentally
optimistic
because of the following.
You know, its not
just if you look back
at the United States you know
is I'm gonna misquote Churchill
but he said you know ultimately
after having explored
all the alternatives,
America does the right
thing, its not just that
and I think that's right.
But I think most of what you see
in the economy today and most
of what feels bad and dark
about the American economy today
is really just the aftershocks
of what caused the crisis and
the damage caused by the crisis.
You know, it's just the fact
that we borrowed too much--
people borrowed too much,
there was too much leverage
in the financials and we
built too many houses,
huge distortion, really a lost
decade in terms of choices
and we're working through those
things and we're making a lot
of progress working
through those things.
And the amount of debt
people have is coming down,
it's still too high for
them, but it's coming down.
Saving rate is higher.
The financial system
is much stronger today,
fundamentally restructured much
stronger today, you know, we're,
I don't know, two-thirds of
the way through the adjustment
in housing, working off the
housing thing that we're going
through which is so difficult
and paying for people.
And most of the weakness you
see is caused by the aftershocks
of that pain and crisis.
And if you look at the rest
of the economy, less affected
by those things, I think
you should be fundamentally
optimistic about
the United States.
And I was just in Manchester, I
met with a bunch of businesses,
mostly small businesses in
manufacturing and I think,
you know, a lot of Americans
wondered do we make anything
in the United States.
You know we make a lot of
things in the United States.
We're very good at it and if
you look at the early shape
of the recovery, exports have
been really pretty strong
private investment today
has been pretty strong,
agriculture very dynamic,
innovative productive,
high-tech even manufacturing,
people are saying
for the first time,
in a long time,
certainly many European
companies,
Japanese companies would say
there's no much better place
to run a business than
anywhere else in the world.
And I think that should make
us fundamentally optimistic.
But, you know, we'll
put that in jeopardy,
if Washington isn't
able to demonstrate
to people they can come together
and solve these problems,
not just spend the time fighting
about these kinds of things.
You know I'm a-- as I said, you
know, having been we're through
and given what we
live through in the--
as we sort of look
into the abyss,
I think we should be
fundamentally optimistic
about what we can
do as a country.
We just got to-- we're got
to get the political system
of the country to catch up to
where I think average people
are and what they feel.
I think, you know, I think
Americans by history are,
you know, a very
confident, very optimistic,
fundamentally generous people.
Very pragmatic people
and I think most politicians
don't treat Americans
like that today.
They treat them as if they're
unable to handle, you know,
basic fundamental changes,
sacrifices that I think we
can handle as a country,
so I'm trying to say optimistic.
I'll try to be optimistic.
>> You're doing a
remarkably good job actually.
[ Laughter ]
>> But of course you are
paired with an economist.
So sometimes it's easy.
>> I'm paired with an economist.
[ Laughter ]
>> In deference to your time
and how generous you've been
with us today, we'll
take one more question.
>> I'm actually not getting
on a plane, so if you want me
to spend five more minutes,
I'll be happy to do that.
I'm just driving, so.
>> Let's hope maybe that
will be 2 questions--
>> Do you want me
to get out of here,
I'll be happy to get to go?
[ Laughter ]
>> We've got a gentleman
down here in the front.
[ Pause ]
>> Thank you for being
here Mr. Secretary.
As someone who witnessed the
breaking down of the barriers
between conventional
and investment backs
in the treasury during the '90s
and the subsequent consequences
while you were secretary,
what are the positive
reasons we should continue
to allow the complete
marriage of investment
and conventional banks
and why shouldn't there
or why shouldn't there be
complete legal boundaries
between the two?
>> You know I don't-- no one
can know for sure if what I'm
about to say is true, but I get
to tell you my view on this.
I think that the
end of [inaudible],
the end of the separation
had almost nothing to do
with our financial crisis.
Our financial crisis was
cause by banks, regular banks,
fancy banks, investment
backs, mortgage companies,
all making a similar mistake
that banks have made
throughout history which is
to not project them into
the future the possibility--
not prepare for the
likelihood the world was
to be more unstable, that
we'd face recessions,
house prices might
fall, not always rise
and that mistake was made
across the American economy,
across the American
financial system.
>> It's not a fancy
complicated mistake,
it was made in complicated ways
but it was a simple
common error.
It was rating agencies missed,
what governments missed,
banks missed, so people missed.
People borrowed too
much in the expectation
that that will continue.
And it wasn't in really any way
meaningfully affected by that.
That change in the basic
divisions and the solution
to it is what we just discussed
and the only solution to it.
And it sounds too simple but
it really is a simple solution
which is you're taking risk,
the world is uncertain,
you won't know how fast
the economist gonna grow
or how stable growth is, how
bad the next recession will be,
so you run with a
cushion of resources,
sufficient to cover the
possibility of a darker outcome.
And whatever you think about
all the fancy complicated staff,
derivative of CEOs, fancy
mortgages, the basis error
and everything was
that simple error
and I don't know a
better solution than that.
>> Well let me follow up for--
>> And it happened
in countries--
it happened in countries--
remember the universal
rule really
in almost all countries
is complete integration
of commercial investment
banking.
Canada, much more stable
system, much more simple system,
has no meaningful division
did not suffer a crisis
like this, why was that?
Because they made it hard
for people to borrow too much
against the value of their home
and they required their banks
to run more conservatively
and they only five of them.
We have 8,000.
[ Laughter ]
>> It's easier to keep track.
You know the European systems
let their banking system grow
to be massive relative to the
size of their economy, much,
much greater size of economy
than ours in some ways.
Had a lot of problems in some
ways much worst than ours
and much farther behind
ours in solving them,
but it was all a
similar mistake.
>> Following up maybe to ask
the question in a different way.
Did the ability to combine those
different banking entities lead
to institutions that were
at the time too big to fail
and that may still
be too big to fail?
>> This like too
big to fail problem,
the basic moral hazard
problem is inherent
in any financial system.
And when you do what we had
to do to solve this crisis
by definition, the risk
is you make it worst.
In our case, of course we had to
do all these exceptional things
to hold the system together
and our system's more
concentrated today in part
because we try to put as much
of the burden on solving it
on the private sectors.
So banks got bigger, the ones
that are stronger got bigger
'cause they absorbed a lot
of the weaker, better than
the tax bureau absorbing it.
But our system today is
much less concentrated
than any other major economy,
remember Canada's got
five banks, the dominance
of this relatively
few is much greater
in all the other major economies
and it's worst than that
because again their banking
systems are much larger in terms
of economy and they have no
realistic prospect really
of letting those
larger institutions fail
because they are much more
dominant supplier of credit.
We have much more flexibility to
let them fail, much less ability
to save them from their mistakes
because of these reforms,
much more capital in the system
which reduce the risk of failure
and to improve the
odds that the rest
of the system can absorb
the shock that comes.
But all financial systems
have moral hazards.
There's always a risk and if we
have another crisis as severe
as this one, we'll have to
do exceptional things again,
not to protect the
institutions and you don't do it
for the banks, you do
it for the innocent
and if you let it burn then
and they will all come crushing
down, what matters is no
that people who own equity banks
lose money or the banks fail.
You could say that's just.
What matters is the scale
of the collateral damage
to the innocent and the reason
you have to do these things
in a crisis that are so
politically difficult seems
so unfair is because if
you don't, you let it burn,
you cause much more
damage and we--
all countries learn that
lesson by getting it wrong once
or twice and I think we
got that right this time.
>> All right, well you're the
one who's gonna cut us off
so let's--
[ Applause ]
>> Thank you.
[ Applause ]
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