WHEN: TODAY, FRIDAY, FEBRUARY 11TH
WHERE: CNBC’S BUSINESS DAY PROGRAMMING
Following is the unofficial transcript of a CNBC interview with Treasury Secretary Timothy Geithner. Excerpts of the interview will run throughout CNBC’s Business Day programming beginning with “Squawk Box.” (6AM-9AM ET). All references must be sourced to CNBC.
STEVE LIESMAN: Mr. Secretary, thanks for joining us.
TIMOTHY GEITHNER: Good to see you, Steve.
STEVE LIESMAN: Let's begin with what is the overall concept of the plan here. Where do you want to bring housing finance in this country?
TIMOTHY GEITHNER: We want to rebuild a private market and carry the major burden of providing finance for houses. That requires we wind down the GSC's. Wind down Fannie and Freddie. We put in place a stronger market, better underwriting standards, better capital for mortgages. Better protection for consumers. Oversight of servicers. And it requires we preserve a much more targeted and transparent set of programs to help Americans who need help afford a home.
STEVE LIESMAN: What timeframe are you looking at and-- what will happen to the costs of housing?
TIMOTHY GEITHNER: Well, the important thing is we need to build a market where homeowners put more equity in their home. Hold more equity in their home. The government pulls back. When we provide-- support its more targeted and transparent. And, again, we want the private market to play the dominant role.
And this is going to take time, 'cause, as you know, the housing market's very fragile still. And we still don't have in place the rules of the game to allow the private market to flourish. So this is going to take-- time. And we're going to do it very, very carefully, 'cause we're not going to take any risk of impeding the process of repair that's underway in the housing market. And we want to make sure that overwhelming we're still helping support this-- economic expansion.
STEVE LIESMAN: Some people say that the government involvement is already impeding it. How do you-- back off and-- and take so much time backing off and make every-- ensure the private sector comes in?
TIMOTHY GEITHNER: Yeah, important point. But, again, the best way to do it is to make sure that gradually you raise the fees the government agencies charge to guarantee mortgages. You lower the conforming limits that exist to determine eligibility for government guarantee. And you put in place stronger rules over the private market so that investors can say with more confidence as they put more capital into that business-- they're going to see a reasonable return. That process though, you know, has to take time. And, again, we're going to make sure that we move very carefully so we don't impede or undermine the process of repair that is still underway in the housing market.
STEVE LIESMAN: Will the costs of a mortgage go up for an average American?
TIMOTHY GEITHNER: Over time, over the long run, the cost of a mortgage will rise modestly for the average American homeowner. But, again, we think it's very important for the government to continue to play a role, targeted role-- a more targeted role, a transparent role, in making sure that Americans that need help to find a home, to rent a home or own a home get that help.
STEVE LIESMAN: You-- at the end of your report here you lay out three options. FHA only, FHA with a crisis guarantee and then FHA-- with a reinsurance. But you don't pick one. Why not?
TIMOTHY GEITHNER: Because we think it's important now-- the Congress asked to lay out options, not to give them a final plan. And we think it's important for the people in Congress that ultimately have to legislate to get more deeply in to the relative merits of those choices.
And what we do in the report is narrow the options. You know, we rule out ones we think that make no sense for the country. And we put in the table a narrower mix of options. And, you know, we're going to have a good debate about-- about-- what the best mix of options makes sense going forward.
There's very broad consensus now in the Hill and in-- among the expert community and the administration about the transition path to that. You know, we've moved gradually to bring the private sector back into this market. In those long-term options, though, we have some time to have a good debate about what the best choice is.
STEVE LIESMAN: How concerned are you about the political dynamic when it comes to housing? There are strong lobbies. Strong interests all over the place. And they don't necessarily cut evenly across-- party lines?
TIMOTHY GEITHNER: They do. I mean our job is to figure out what's in the broader public interest. And-- and, again, I think if you listen carefully to what Republicans and Democrats are saying, there's more consensus now. Not just on the-- on the fact that we need to wind down Fannie and Freddie, but that we have to-- in having a market where homeowners hold more equity in their home as banks hold more capital against mortgage risk. But that-- we want to move gradually over that period of time. And ultimately we want to make sure where the government provides a role it's going to be in support of a more stable housing market in the future.
STEVE LIESMAN: When would you hope to have a bill written? When you have to-- hope to have a bill passed?
TIMOTHY GEITHNER: Well, you know, we can't wait too long. So I think-- I think it's important Congress legislates some time over the next two years.
STEVE LIESMAN: I sat here across from your predecessor two years ago or-- or almost I guess three years ago-- when he took over the-- Fannie/Freddie. Was it more costly than he thought? Was it the right thing to do? Was it worthwhile?
TIMOTHY GEITHNER: It was absolutely a necessary thing to do. It was-- it was-- absolutely necessary to do that. And because of the actions that we've taken since, we've helped stem the bleeding in those two entities. And now we're in the position where losses over time are going to decline and we're going to work very hard to make sure we recoup as much of those losses for the taxpayer as we can.
STEVE LIESMAN: Is the perfect better now than it was back then?
TIMOTHY GEITHNER: If you look at it going forward, yes, it is much, much higher quality-- because the underwriting standards are more conservative. Where Fannie and Freddie are making a guaranteed mortgage, they're doing so more carefully. Homeowners are holding more equity in their homes. And so the basically quality of what they're doing now is better.
STEVE LIESMAN: Mr. Secretary, time is limited, so I want to just switch to go to a couple other topics. Next week-- the administration, we understand, will submit a budget. How aggressive will it be in deficit reduction?
TIMOTHY GEITHNER: Well, the big question facing the country is how we put in place a strategy that allows us to grow in the future. And part of that requires making better investments in education and innovation and improving public infrastructure. Better incentives for investment.
But to do that we're going to have to make sure that we go back to living within our means so we have the room to make those investments. And that requires that we lay out a plan and get support from the Hill on a plan to bring down our long-term deficits quite dramatically over time.
And what the President's budget will do is to lay out a very detailed set of reforms that cut our deficits very sharply over the next three to five years, but still preserve room for those critical investments that'll help determine how fast we grow in the future.
STEVE LIESMAN: You say dramatically over time. Do you have-- can you put some numbers and timeframe on that?
TIMOTHY GEITHNER: You'll-- you'll see it Monday. But dramatically over time. And, again, the challenge is-- is not just to cut spending and reduce deficits. The challenge is how to do so in a way that's going to be supportive of long-term growth. Make us more competitive. Make sure our children get a high quality education. Make sure our companies remain the most innovative and the most competitive in the world.
STEVE LIESMAN: One of the things-- our viewership cares a lot about is this issue of corporate taxes. How aggressively will the administration pursue corporate tax reform?
STEVE LIESMAN: And lowering corporate tax.
TIMOTHY GEITHNER: We think this is-- there's a lot of promise in reform that would bring down the rate and broaden the base by removing special tax benefits, tax expenditures, closing loopholes. We think we can do that in a way that's revenue neutral and still make-- American companies more competitive over time.
And we're running a very active process of reaching out people on the Hill, Republican and Democrats, and to people in the business community across all sorts of sectors, to see if we can build consensus for doing that. We think it's a good thing to do. We think there's-- there's a lot of promise now-- for reform that would meet those basic tests. Again, the basic tests are make America more competitive, help encourage more investment in the United States, but we have to do so in a way that doesn't add to our long-term deficits.
STEVE LIESMAN: Again, do you have a number and a timeframe for-- implementing that number?
TIMOTHY GEITHNER: Well, I think you want to bring down the rate-- substantially if it's going to work. So, again, the challenge to do that is a way that-- that-- doesn't add to the deficits. And to do that you need to eliminate and reduce these special tax benefits, corporate loopholes, that now litter the system.
STEVE LIESMAN: Huge issue coming up before Congress soon, which is the debt ceiling. How critical is it for Congress to raise that debt ceiling? And-- do you have concerns for the financial system if they do not?
TIMOTHY GEITHNER: Of course. It's absolutely essential they'll do it. And of course they'll do it. They've always done it in the past. There'll be a little political fear around that. But it's not something you play tough politics with. And it can't be used as a bargaining chip.
The debate we should be having-- and the-- we're-- we're going to have, is how to make sure that we have a strategy to allow our country to grow in the future. Bring down the long-term deficits. And we can't take any risk now that we do things that would-- that would hurt the economic expansion that's now underway.
STEVE LIESMAN: There's a proposal that's been out there that's gotten a lot of talk in a Congressional committee hearing earlier this week about paying only the interest on the debt. What do you think of that plan?
TIMOTHY GEITHNER: Well, it just doesn't work. I mean think of the average family. You're sitting around the table and you decide you're going to not pay your electricity bill, not pay your credit card bill, not pay your car loan so that you can keep paying your mortgage. It still would amount to default. And it's just not a serious way, a responsible way, to help make sure we can get our obligation-- you know, remember, this is the United States of America. We pay our bills. We meet our commitments. And we're looking forward to an important debate with Republicans and with Democrats on how to make sure we bring down our long-term deficits. That's where our focus should be on.
STEVE LIESMAN: Recent numbers from the government on employment were very confusing, but precipitously dropping unemployment rate but no payroll growth. How do you, as the Treasury Secretary, make sense of these numbers?
TIMOTHY GEITHNER: Well, the-- you know, the economy is getting stronger. And you see all the signs point to gradual acceleration in economic growth. And with that you're going to see more people back to work. We're already having more than a million private sector jobs created in-- during this recovery, which is more and quicker than we had the last two recoveries.
And I think all evidence suggests that the labor market is gradually improving. More people are coming back to work. More people are being asked to work longer hours. And I think that's really encouraging. But, again, our basically responsibility now is to make sure we're doing things that help reinforce that process.
STEVE LIESMAN: So you kind of believe the decline in unemployment or is it somewhere in between when you—
TIMOTHY GEITHNER: Well, I think it's somewhere in between. I think the-- unemployment rate's a little surprising. Probably overstates the strength. And I think the somewhat disappointing new jobs created number probably understates the strength of the labor market. The truth is somewhere in between. You know, what you've seen is-- with every new report the data people have gone back and revised upward-- their numbers on jobs created in the private sector. And that's encouraging.
STEVE LIESMAN: I want to ask you some questions about potential areas of systemic risk. The Middle East and what's happening in Egypt. Does that strike you as an area of potential systemic risk?
TIMOTHY GEITHNER: Well, obviously, we're watching there very closely. And I'm going to leave it to my colleagues in the-- in the National Security to comment about that. But I think if you look at the world as a whole now, there is more confidence outside of the United States too that-- the world economy's expanding out at a sustainable pace.
Obviously people are concerned-- that Europe go ahead and take the next step-- to put in place a stronger financial strategy to help manage those pressures. And they're moving towards that. And you see emerging economies around the world facing the classic signs of rapid growth. A little more inflation pressure.
But that's a challenge they know how to manage. And I think they'll be able to gradually adjust policy so they can help make sure growth is sustainable there too. So I think overall, even outside the United States, the United States is-- is significantly stronger. But even outside the United States I think it seems-- a greater confidence that you have a recovery in place that's going to be sustainable.
STEVE LIESMAN: And you feel less concerned about what's happening in Europe these days?
TIMOTHY GEITHNER: I think the Europeans are-- have made it clear to markets and to their own citizens that they will do whatever it takes to make sure that they help the countries in Europe under so much pressure have to go through these reforms. That they back-- back those reforms with a substantial financial commitment so that they can make the change they have to-- they have to make without Europe itself facing the kind of financial pressure they saw in the first half of last year.
STEVE LIESMAN: I've been asking you the questions about the dollar and China for so long it's hard to know what-- what to expect now. What can you tell people-- what-- when we will expect some real progress when it comes to Chinese currency valuations?
TIMOTHY GEITHNER: Well, you know, China is moving. It's important to recognize it. It's gradual and slow. But they're moving against the dollar at a pace of roughly five to six percent a year now. And if you adjust for inflation, 'cause inflation in China is much higher than it is in the United States-- the real exchange rate against the dollar's moving now about 10 percent a year. And if they sustain that over time, that would bring about a very substantial-- strengthening of the currency, which is necessary for them, good for the world, good for us.
STEVE LIESMAN: So is that something that you expect to see? A meaningful appreciation over the course of the next year?
TIMOTHY GEITHNER: Yeah, you're seeing it. And-- and, again, I think that's going to continue because it's very important to China-- that it continue. They need more flexibility to help make sure that they're going contain the risk of higher inflation. And to do that they have to let the exchange rate move.
STEVE LIESMAN: There's a lot of talk on the United States about the concerns over the municipal bond market. The Federal Reserve chairman recently said that it was not the Fed's role to come in-- and-- and rescue the states. How much of a concern do you have over what's happening with financing at the state and local level?
TIMOTHY GEITHNER: Well, you're right that, you know, a number of states still face a lot of pressure. And it's going to-- that process of-- getting through this is going to be very tough still. And they've got a lot of tough choices to make. But my view is that they can manage those challenges. It just requires stronger leadership at the state level.
And in general because the economy's getting stronger, you're seeing revenues at the state level increase. Even the states with the worst problems. And that's going to I think diminish the pressures on them. They're not going to be intensified.
STEVE LIESMAN: I'm going to circle back to the housing-- story here. Is this as big an effort as Dodd Frank regulatory reform? And it seems like a piece of this is finishing Dodd Frank as well?
TIMOTHY GEITHNER: That's right. I think you're exactly right. Again, for this to work you need the housing market to gradually repair, improve. Repair the damage caused by the crisis. You need to create the conditions that allow private capital to come back into the housing market. And that requires setting out new rules of the game for oversight, for capital, for risk retention, for standardization and mortgage products-- reforms to how servicers do their business.
And it requires, again, making sure that the government is receding from this market at a measured, gradual pace. So it's-- it's an important thing to get right. And we're going to be very careful, again, to proceed in a way that helps support this process of not just economic growth but repair in the housing market.
STEVE LIESMAN: Are you concerned about criticism that you were too vague in this report? That you didn't come out on with a strong recommendation? And of the three options, do you have one that you prefer?
TIMOTHY GEITHNER: You know, in the three options I-- again, what we're doing is narrowing the debate to what we think are the most important choices. You know, how much support should the government provides low and moderate income Americans to make sure they can have a house or rent a home?
What role should the government provide in crisis to make sure that a recession doesn't turn into the kind of crisis we saw this time around? Should the government provide on an ongoing basis a much more limited, targeted guarantee, a form of insurance? That is a much more narrow set of choices we've seen in the debate. And I think you're going to see debate converge to those choice. And you could ultimately adopt a mix of those options. They're not mutually exclusive.
STEVE LIESMAN: So yesterday on set-- famous short seller Jim Chanos gave me a bet that-- five to one that the Fed would not do a third round of quantitative easing. And they asked me to ask you if you wanted a piece of that action?
TIMOTHY GEITHNER: You're asking me to comment on monetary policy?
STEVE LIESMAN: Absolutely.
TIMOTHY GEITHNER: I never do that.
STEVE LIESMAN: Okay, great. Let me just ask you this question. Do you think that-- do you have concerns about the criticism-- that the Federal Reserve is monetizing U.S. debt?
TIMOTHY GEITHNER: Absolutely not.
STEVE LIESMAN: Why not?
TIMOTHY GEITHNER: Because we have an independent Federal Reserve with a remarkable record, substantially built on the legacy of what Paul Volker did, that's provided a long period of low, stable inflation in the United States. And inflation expectations in the United States-- reflect today a lot of confidence in the Fed's capacity to manage those pressures. And I'm very confident that the political leaders in Washington will ultimately do what is necessary to make sure that we're putting in place reforms that will bring down our long-term deficits.
STEVE LIESMAN: And your outlook for this summer when this Q.E. runs off, do you feel like we'll be in a place with sustained job growth at—
TIMOTHY GEITHNER: That's—
STEVE LIESMAN: --that point in time?
TIMOTHY GEITHNER: --that's a monetary policy question. But, again, the economy itself is showing-- much more encouraging signs of a stable expansion now. And I think if you listen to corporate executives across the country, you look at what private forecasters are saying now, there really is more confidence that you have-- you know, it's-- again, it's a gradual, moderate improving recovery.
And it's across the country. You know, exports are strong. Manufacturing's strong. High tech is strong. You see more strength in services. The financial sector itself is in a much stronger position. And that's all the fact-- all the result of the fact that not just the Federal Reserve but this President and this Congress acted very, very forcefully, much more forcefully than many countries did, at the worst moment of crisis so that we're restarting economic growth. And you're starting to see that translate into more confidence.
STEVE LIESMAN: Mr. Secretary, you've been kind enough to have us down and give us-- is there anything else you want to add on the housing story that-- make sure people understand your point of view on this?
TIMOTHY GEITHNER: No, we're going to do-- I just want you to know, we're going to do fundamental reform, but we're going to do it in a way that is carefully phased in over time. So we're reinforcing, supporting this process of repair in the housing market. 'Cause as everybody knows, there's still a lot of trauma in the housing markets as a whole. And we want to make sure that process of-- of repair continues.
STEVE LIESMAN: There was one other issue. What about the obligations of Fannie and Freddie, both the ones they made before and the ones we'll make going forward. Does the United States stand behind those obligations?
TIMOTHY GEITHNER: Absolutely. And-- we-- as we have-- as I have said consistently, and you'll see in the report, is reaffirm the commitment that we will make sure that they have the resources they need and the capital they need-- to meet those obligations.
STEVE LIESMAN: Mr. Secretary, thanks for your time.
TIMOTHY GEITHNER: Nice to see you, Steve.
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