Treasury's Geithner on the State of the Economy - BusinessWeek

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Maria Bartiromo talks to Treasury Secretary Timothy Geithner

By Maria Bartiromo

MARIA BARTIROMO

Is there enough capital in the system?

SECRETARY TIMOTHY GEITHNER

You're seeing a really dramatic improvement in access to credit. But parts of the system are still very damaged, access to credit for small business remains constrained, and there are markets, such as mortgages, where progress is enormously reliant on the government.

Right. Look at the cash-for-clunkers deal. Car sales went from horrible to great to horrible again. What happens when the stimulus is gone?
A recovery that's going to work requires a recovery led by private demand. But you still have to make sure there's enough support to reinforce that process of recovery. That's a difficult balance to get right. We're not going to make the mistake many countries made in the past of putting the brakes on too early and creating the risk of a weaker recovery with even higher levels of unemployment.

Do we need a second stimulus?
No. But Congress is looking at unemployment insurance and other programs critical to recovery. And there's a good case for extending them.

People are nervous about 2010 and new taxes. Are you going to allow the Bush tax cuts to expire if the economy remains flat and unemployment is still high?
The overwhelming responsibility of people in government today is to make sure we have an economy that's growing, unemployment coming down, factories going back to work. That is the critical imperative. That's why we cut taxes for 95% of working Americans and for businesses across the country. It does not make sense to raise taxes in a recession.

How worried are you about the deficits?
When we have an economy that's growing again and we get unemployment down, we're going to have to bring those deficits down. And we need to make sure people understand we will do that. Because if they're not confident in that, the recovery will be weaker, interest rates will be higher, investment will be constrained, and you'll have higher unemployment. Deficits can be very damaging to growth.

When do you expect growth in jobs?
I'm not an economist, and I don't forecast, but if you look at what business economists say now, you're going to see the economy growing at a significant rate for the rest of this year. Then positive growth in 2010 at a level that will begin to gradually bring down the unemployment rate.

World Bank President Robert Zoellick recently said that the U.S. should not take for granted the dollar's preeminence. Would you expect, at some point, that the dollar will not be the world reserve currency?
I wouldn't. But I think the dollar's role in the system requires us to do everything possible to keep inflation low and make sure we're getting our fiscal house in order. That's really important to confidence [in the dollar]. We take that very seriously—nobody more than me.

Here we are at Dow 10,000, and JPMorgan (JPM) and Goldman Sachs (GS) are once again reporting great numbers and paying record bonuses. And yet 10% of the country is unemployed. Some people out there are saying: "Did we get snookered again? Have we learned anything?"
We're not going to let this financial system go back to where it was, and we're not going to let the practices reemerge that caused this crisis. That's very, very important, and the financial community has a huge interest in a more stable framework with better protections for the industry. The best-run firms were disadvantaged by the worst-run.

But we're still dealing today with too big to fail, aren't we?
At the center of any reform process is making sure institutions are not living with the expectation the taxpayer is going to save them from their mistakes. The object of reform—apart from what we're trying to do on the consumer side—is to make sure we have a system in which we can let firms fail without taxpayers being on the hook. And we're going to do that.

Won't a consumer protection agency just be one more bureaucracy?
This basic balance between [financial] innovation and protection is really important to get right. But we got it wrong. There's no way to look at our system the way it was run and say we did an adequate job of protecting consumers and investors. Of course we want to make sure there's innovation and choice, but I think we found that balance in the proposals we made to Congress.

Some people feel there's real class warfare going on, and when you look at some Administration policies—whether it's cap and trade or higher taxes, or in some cases higher health-care costs—it feels a little anti-business. Is this Administration anti-business?
Absolutely not. And the President and the people around him understand deeply that for our economy to be more productive in the future, it requires an atmosphere in which businesses are willing to innovate, invest, and take risk. There's no path to growth, no path to lower unemployment, no path to broad-based gains in income that doesn't come from and rely on an atmosphere in which investors are confident and companies are confident.

Maria Bartiromo is the anchor of CNBC's Closing Bell and writes the blog Maria Bartiromo's Investor Agenda at investoragenda.cnbc.com

Bank Regulators Resist Reform

By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Wednesday, August 5, 2009

The nation's banking regulators are defying pressure from the Obama administration to line up in support of key proposed reforms, testifying before Congress on Tuesday that elements of the plan would actually weaken oversight of the financial industry.

Treasury Secretary Timothy F. Geithner summoned the heads of half a dozen agencies for a caustic scolding Friday and told them they were interfering unacceptably in a political process, according to people familiar with the meeting.

The warning, however, had no discernible impact on testimony Tuesday, as four of the regulators who were reprimanded told the Senate Banking Committee they had particular concerns about a centerpiece of the plan, the proposed creation of a new agency to protect consumers of bank products, including mortgages and credit cards.

The resistance comes as progress has stalled on other key administration initiatives, notably climate change and health-care reform. Organized opposition has fostered growing public skepticism, undermining the administration's prospects.

While Republicans on the banking committee welcomed the regulators' dissent, leading congressional Democrats said the basic elements of financial reform command a much broader consensus than the embattled initiatives. These Democrats said they remained confident they would pass a comprehensive regulatory bill by year's end.

"For someone who's involved in health care and this, this is very different," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Banking Committee, and also a leading player on health care. "We remain in very good shape" on regulatory reform.

Working Over Recess

Democrats plan to begin writing legislation during the August recess, working from hundreds of pages of polished drafts the administration has sent to guide the process.

The broad outlines of the plan remain stable after months of hearings -- Dodd said his committee has held 28 hearings on the subject -- and increasingly heated lobbying by industry and consumer groups. Democrats want to give the government new power to oversee large financial companies and important markets, and to shut down troubled firms in an orderly fashion. They want to create a consumer protection agency, removing that responsibility from banking regulators. And they want to rein in Wall Street, including by placing limits on bonuses and restricting investments made with borrowed money.

"These things are going to happen," said Steven Adamske, a spokesman for Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "It's complicated. It's not easy to do, but we are trudging through it."

The idea of a new agency to protect consumers has proved particularly popular on Capitol Hill, forcing some critics to drop their outright opposition and instead press for its powers to be circumscribed. The heads of the regulatory agencies argued Tuesday that the new agency should write rules, but that banking regulators should continue to ensure that companies comply with those rules, and punish those that do not.

Enforcement of consumer protection laws "should stay with the bank regulators, where it works well," said John Dugan, head of the Office of the Comptroller of the Currency.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., and John E. Bowman, acting head of the Office of Thrift Supervision, also argued that banking regulators should retain enforcement powers. Federal Reserve Governor Daniel K. Tarullo declined to take a position, but senior Fed officials have said they want to retain that power, too.

New Dedication

Regulators, who under the proposals would maintain responsibility for bank health, argue that protecting consumers is a vital aspect of that job. While acknowledging failures in recent years, the agency officials argue that they are newly committed to consumer protection.

Administration officials have dismissed these arguments, saying that the record of failing to protect consumers, ensure the health of banks and prevent the financial crisis speaks for itself. Some legislators were equally dismissive.

Sen. Charles E. Schumer (D-N.Y.) said the regulators' arguments were motivated by "turf, turf, turf."

Republicans, by contrast, celebrated the regulators' concerns as evidence of independent opposition to the administration's plan.

The ranking Republican, Richard Shelby of Alabama, asked each witness to affirm that their testimony "was not in any way influenced by Secretary Geithner's tirade against you the other day?"

An administration official expressed few concerns about the debate on Capitol Hill.

"In the scheme of lawmaking, we're doing quite well," said Michael S. Barr, the Treasury Department's assistant secretary for financial institutions. Barr also offered a milder account of the Friday meeting. "We were having a conversation," he said. "We told them, 'As each of you pursue your own points of view, let's not lose sight' " of the broader goal of achieving financial reform.

Another person familiar with Geithner's remarks said he warned that regulators were impeding the progress by sniping at details.

The hour-long meeting at the Treasury included the four regulators who testified as well as Fed Chairman Ben S. Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Gary Gensler, chairman of the Commodity Futures Trading Commission. Geithner's confrontation with the regulators was first reported by the Wall Street Journal.