"KAREN FINERMAN INTERVIEW WITH LARRY SUMMERS" 3/1/2010
KAREN FINERMAN: Larry, thank you very much for sitting down with us. I've known you for a lot of years in a lot of different roles. You're obviously one of the world's foremost and experienced economists, and you're facing here a multitude of seemingly intractable problems. Now you're in a position to be able to affect policy. How can you or how can this administration help lead the world out of this economic slump?
LARRY SUMMERS: Karen, I think we've already made quite remarkable progress. If you look back a year ago, people thought a depression was a real possibility. There was talk of a complete meltdown in our financial system. Because we took strong actions, because the President led the way in pushing a major recovery act and injected nearly $900 billion into the economy, encouraging other nations to do similar things, because we took strong actions to force much more transparency on the banking system, to set the stage for private capital raising, it's run to hundreds of billions of dollars, we've got a very different economic situation than we had a year ago. Economy declined 6 percent in the first quarter; it rose by nearly 6 percent in the fourth quarter. To be sure, we've got an enormous problem that will be with us for the next several years of excessive unemployment, people without jobs, that's got millions of people claudient (sp). But we're in a very different situation. You know, history is, that the first thing that comes is GDP growth. Then comes increases in the number of hours per worker for the workers who are working, then comes increases in jobs, then comes reductions in unemployment. We've seen the GDP growth, we're starting to see the increased hours; the other stages in the process will come. But our problems weren't made in a day or a week or a year, they won't be solved in a day or a week or a year.
KAREN FINERMAN: But we're now a year past what was really the worst of the storm and the jobs are absolutely the number one issue. So, given that there is a lag, though, and those two things have happened, we've got to start to see jobs now -- right now -- for people to start feeling optimistic again to see economic growth. And yet the jobs aren't there. How does this administration form jobs now?
LARRY SUMMERS: Look, jobs are priority number one for the President. Let me say a word about the statistics. Who knows what the next number is going to be. The blizzards that affected much of the country during the last month are likely to distort the statistics. And in past blizzards, those statistics have been distorted by 100 to 200,000 jobs. So it's going to be very important to know, very important to look past whatever the next figures are to gauge the underlying trends. I think those underlying trends are going to show job growth soon. I think that, in large part, because of what is coming onstream. Several thousand new projects are coming onstream: building roads, repairing bridges and the like across the country.
You'll look at the data on business investment. Businesses are starting to pick up their levels of investment. The world economy has become a better market for U.S. exports than appeared to be the case six months ago, and that's going to be an additional source of job creation, and we've got a lot to do. A lot is going to depend on what the Congress does with respect to the jobs legislation and the other measures that are before it, if we're able to invest more in infrastructure, if we're able -- and this is probably the most critical thing -- to do more for small business by eliminating capital gains on small businesses, by providing for expensing for small businesses, for -- by providing much more generous credit availability, working through community banks to small businesses. The President has proposed and is up before the Congress right now, if we're able to take those steps, I think that's going to maximize the rate of job growth going forward.
KAREN FINERMAN: You touched on a lot of different things, but let's talk about economic growth in the world. Some say -- some on our show have said that Europe is collapsing. They are in the middle of a crisis there. Do you think they are in the middle -- the moment of their crisis, that here is the point for them to be able to reform -- it's a two-part question -- that, and have we missed our moment of crisis that allows us to reform?
LARRY SUMMERS: Let's talk about Europe, and then maybe we can come back to the United States. With respect to Europe, I am obviously very concerned about what's happening in Greece and Portugal, in Spain, in Italy, on the European continent. On the other hand, I think there have been increasing signs of recognition both in Greece and in the major countries of Europe that this is a situation that has to be managed; that combination of getting the Greek budget under better control and providing more support is necessary to stabilize this situation.
KAREN FINERMAN: You have roles in that?
LARRY SUMMERS: But I think the moment of recognition, and obviously as Americans we're -- the European Union is a union that has a common monetary responsibility. We're not part of that, but we're obviously very concerned and conveying our concerns to European officials and watching and monitoring the situation very, very carefully. Because clearly, our prospects for rapid growth will be stronger in a more rapidly growing world economy, and Europe is a critical part of that.
KAREN FINERMAN: So are you actively involved at all? I know you said you're monitoring the situation. But are we now a globalized economy where you need to be involved in -- I mean, if you were advising Greece now, what would you say about how to get their house in order, or for the EU, about how to help get Greece's house in order?
LARRY SUMMERS: You know, it's a hypothetical question. If I were not in the U.S. government and I were advising Greece, I would probably come on your show and talk about the advice that I was giving. But any dialogues the U.S. government has on this are private for good reason. And I think the main thing to say, though, is that this is between the Greeks, the European Central Banks, and the European authorities, and our state is less around how they defy the various burdens and challenges associated with the adjustment than it is around making sure that that adjustment takes place. And certainly Secretary Geithner has been encouraged by what he has heard from European authorities.
KAREN FINERMAN: So, with your economist hat on, if you were to forecast, then, you see Greece being able to get out of this current -- crisis that they're in?
LARRY SUMMERS: I think that there is significant scope to take constructive measures that will improve this situation. But obviously it's a difficult situation in Europe, and a lot is going to depend on the policy choices that are undertaken there.
KAREN FINERMAN: Do you want to say what policy choices you would --
LARRY SUMMERS: I think I've said as much as I'm going to say, Karen.
KAREN FINERMAN: All right. Well, back to the issue of being in a crisis. You yourself have said in a crisis is the best time to enact reform. That's when you have the most leverage, that's when you can bring the parties to the table. Yet I'm wondering, have we in the United States missed our window of opportunity to effect financial reform because the crisis has now passed?
LARRY SUMMERS: I don't think so, I think for most Americans with 10 percent unemployment, it feels like there is a crisis.
KAREN FINERMAN: But I mean the financial institutions crisis.
LARRY SUMMERS: I don't think that our political authority from the Congress or their constituents have forgotten what happened as a consequence of what happened in the financial system. So there's still a very strong will for reform. Some sense, as people have learned more of what happened, as the process has started to repair itself, that will has been enhanced. And it's something that we're very focused on.
You know, we have a complicated system of government. The House of Representatives passed legislation that contained landmark provisions with respect to assuring that every systemic institution was regulated; with respect to assuring that the proper resolution authorities, because we have a system that's not safe for failure. It's hardly going to be fail-safe, to make sure the derivatives were regulated in a much more serious way than they have been in the past; to make sure that there's an independent consumer authority that can protect consumers from abuse; to address the whole issue of too big to fail, and a wide range of activities that are addressed by -- that can indirectly be supported by the safety net, a concern that former chairman Paul Volcker has stressed in the public debate. These are all measures that are expressed in the House bill. They are all measures that are now under active consideration in the Senate Banking Committee. I think there is a difficult challenge here of overcoming the special interests, and there are strong special interests that like the world as it was.
But the President is very determined here to put in place a financial reform where we will avoid what is the story of the last generation. You know, for the generation you and I have known each other, Karen, you had the '87 stock market crash, you had the S&L debacle, you had the Mexican financial crisis, the Asian financial crisis, LTCM, NASDAQ, Tech Bubble, Enron, and now this. It's a crisis almost every three years, and surely we can do better, and I don't think there's anyone who is complacent about the propensity of the financial system to remain safe.
And so as there is no slackening of the effort and I don't think there will be as long as so many people have had their lives wrenched by what's come out of the financial system.
KAREN FINERMAN: Suffice it to say it's not fixed yet. There are still --
LARRY SUMMERS: Certainly, Karen, I think one should be fair. We have a long way to go, and that's why it's important to pass legislation. But if you look at leverage levels, if you look at capital ratios, if you look at the presence or actually the absence of off-balance sheet vehicles, if you look at the amount -- look at phenomena like the liar loans that were so common two years ago --
KAREN FINERMAN: I hear what you're saying --
LARRY SUMMERS: -- on a whole set of dimensions of behavior of financial institutions. If you look at a whole of dimensions because of what's happened and because of the steps that regulators have -- regulators have taken, there have been considerable changes. Now I don't think that those often --
KAREN FINERMAN: I agree with --
LARRY SUMMERS: -- I think there's a long way to go. But let's not suppose we are in a world anything like the world of 2007 today.
KAREN FINERMAN: I don't. I do believe that the financial structure is much healthier. Clearly banks have been able to recapitalize. That's of significant importance. And banks in general, specifically the big banks, are much healthier. However, the issue of too big to fail still persists. I mean, just think about it. The J.P. Morgan, were to be in financial distress, it's hard to say that J.P. Morgan isn't too big to fail at this point.
LARRY SUMMERS: That's why, and how do you go about addressing a concern like too big to fail?
First, you make failure possible by establishing a legal framework in which it could happen. That's what the President's resolution regime --
KAREN FINERMAN: Don't we already have that in bankruptcy law?
LARRY SUMMERS: No, bankruptcy law, as we saw in the case of Lehman and the enormous losses that took place there, far larger than even the most negative estimates of what Lehman's net worth was and the enormous disruptions that followed that, the conventional bankruptcy law is written with a view to a very different kind of situation than a financial institution that can implode literally in a matter of hours. That's why there's a special set of procedures, a special set of resolution regimes for banks that the FDIC administers that doesn't work according to the traditional provisions of the Bankruptcy Code.
And what has been a gaping anomaly for a long time is that while we have it for simple depository institution banks, we don't have it for bank holding companies, and we don't have it for other large financial institutions that aren't banks that face many of the same challenges.
So the first step on too big to fail is about resolution issue.
The second step on too big to fail is about capital levels and leverage so that people who buy the liabilities of those institutions can do so not in reliance on any idea about what the government's going to do, but in reliance on the level of capital and the level of liquidity that they have.
The third piece goes to the activities of those institutions so that they're not taking excessive risk with respect to any prospect, and that's why the so-called "Volcker rule" that looks at risk-taking activities in proprietary trading or hedge funds, private equity, is an important feature.
KAREN FINERMAN: Let's --
LARRY SUMMERS: But the way you address too big to fail isn't by simply saying you hate too big to fail. It has to be by taking concrete measures that enable failure, that prevent reliance on government action when people take liabilities and by containing risk taking. And that's what is in the bill that the President has before the Congress.
KAREN FINERMAN: Well, looking at the Volcker plan, the things it addresses, proprietary trading for one, and a tax on a business that is funded with something other than deposits. So it seems interesting that that bill seems to -- almost as if it was written to take aim at Goldman Sachs, which of all the U.S. investment banks, probably makes most of their money off their proprietary trading debt and funds their business with -- not with deposits but with debt. Is this the administration taking aim at Goldman Sachs?
LARRY SUMMERS: Come on, Karen. I'm not going to -- and one shouldn't --
KAREN FINERMAN: Or that type of model.
LARRY SUMMERS: -- one shouldn't, in a position like mine, talk about the situation of any individual companies.
But I think it's very important and I think your question somewhat misstated the nature of the Volcker rule. The Volcker rule spoke only to institutions that were banks. It did not speak to institutions -- to other types of financial institutions, pure investment banks, for example, trading companies, and the like. And so any financial institution that is not a bank is free to engage in these various kinds of trading activities.
KAREN FINERMAN: So what is the definition of "proprietary trading" the way you think about it?
LARRY SUMMERS: Proprietary trading is ultimately something that's going to be defined by the regulators. But I don't think it's very hard to see the basic distinctions involved. If a company sets up a separate unit that is going to make guesses and judgments about which way foreign exchange markets are going to go and speculates in foreign exchanges markets --
KAREN FINERMAN: Right.
LARRY SUMMERS: -- that's proprietary trading. It's a good activity. It's a valuable activity. It contributes to market liquidity, has a set of other things. It's just not one that the President believes should take place in a bank.
On the other hand, if you facilitate a customer's hedging, if you underwrite a -- underwrite a security, if you make a market, in all of those examples, the basic purpose is to serve customers or to serve clients, and that's not proprietary trading.
KAREN FINERMAN: But there is --
KAREN FINERMAN: -- to commit capital.
LARRY SUMMERS: I'm sorry.
KAREN FINERMAN: There are going to be certain instances, lots of them, where you need to commit capital in order to facilitate clients.
LARRY SUMMERS: I think I was very clear and mine just now was the 50th or 100th statement from the administration that if you commit capital to making a market, if you commit capital to supporting a customer's need to hedge, you commit capital to underwriting a security, that's not what we would understand as "proprietary trading."
On the other hand, if there's no nexus with a customer, that is what would be thought of as proprietary trading. Now there are no doubt examples where there's ambiguity, there's no doubt examples where you could argue either way. That's going to be the task of rule making. And that's why what we've suggested is -- suggested is a framework that regulators can make rules.
But let's not let the fact that there may possibly -- although I'm not sure there actually are very many -- cases that are difficult to judge blind us to what is the more fundamental truth, which is that if government provides a particularly generous and particularly broad safety net to banks, there should be some limits on what types of activity can be circumscribed, can take place with those safety nets. That's the basic idea here, and it seems to me that's one that should command widespread assent.
KAREN FINERMAN: Let me shift gears here a bit. You have said that a country needs to have a middle class that's optimistic to be able to move forward. And yet that's not, I think, the feeling of the middle class right now.
What can this administration do to help change that notion?
LARRY SUMMERS: We think about it every -- we think about it every day, creating jobs, implementing that recovery act as vigorously as possible, assuring that basic protections like unemployment insurance, like the COBRA program, that lets people keep their health insurance even if they're laid off, continues to operate.
Second, people talk about health insurance as a moral issue, and it is a moral issue. 30 million people without care, people being sent out of hospitals with terminal illnesses and the like. But it's also a crucial economic issue. Families rightly worry that one member of the family is sick, and that if somebody loses the job, the whole family may have to go without health insurance because you can't buy health insurance with a pre-existing condition. And that's something that we're doing what's necessary to fix.
So security with respect to healthcare I think is the second thing.
Third -- third thing is support for college education. That's what many, many families our age worry about. If you look at the President's program, it's got the largest increases in financial aid for higher education that's taken place any time in the last 40 years as part of it. And that's part of increasing the middle class's strength.
And last, getting a sense that we again are a country with a strategy in global economic competition. Whether it is support for innovation, making the R&D credit permanent, providing the largest increase in a world where biotechs are going to be important to our economic future, in the NIH budget, National Institute of Health, in years; whether it's rebuilding our infrastructure at a time when the quality of our ports, the quality of highways, railroads, is an important factor discouraging our success in international trade; whether it is an education reform that is centered on the idea of setting standards and setting high standards in creating a race to the top rather than a race to the bottom.
I think the worst part of it, maybe the most important part of the President's program is giving a sense that after years where we were drifting, as a nation in international competition, where preoccupation was with military competition, that we are again establishing a national economic strategy.
KAREN FINERMAN: Let me ask you, as you focus on jobs, you had the House passing a $155 billion bill in December, and then you had the $15 billion bill. Clearly there are political obstacles to getting this done. Is the polarization between the parties so bad now that it prevents viable economic reform from happening?
LARRY SUMMERS: I hope not. I hope there are issues that we can work on together. There are going to be some issues where there's disagreements probably going to be intractable. Let me give you an example of an issue where I hope we can work together. We've got record unemployment in construction. We've got extraordinarily high, by historical standards, even though they've come down, prices for heating oil and for other fuels, and we've got across this country tens of millions of homes where investments in energy efficiency will pay off in the payback period of three years or five years or seven years. And any business would make any investment that had a pay-back period of three or five years. But those business investments aren't happening.
So we're seeking to partner with the major suppliers of the equipment that's used in that, the major purveyors of those kind of services, insulation and so forth, with strong tax incentives to both -- to do three things: to put people back to work, to create an important economic benefit for homeowners, and to make the country more energy independent and less of a contributor to climate change.
Now that's not some new public sector program; that's something that works through the private sector that we envision doing with businesses that involves in part credits that are provided. That seems to me, and we've gotten some positive indications, to be the kind of thing we ought to be able to work on in a bipartisan way.
KAREN FINERMAN: Let me just switch gears again. Tim Geithner. You have an interesting history with Tim Geithner. You are clearly working together now. But is the relationship one where you're still the mentor and he's the protege' or -- what is the relationship?
LARRY SUMMERS: Tim and I have been good friends and close colleagues for many -- for many, many years. Many, many years. Many years ago he worked in the Treasury Department when I was Secretary, but it's a very different world now. He's probably the most experienced crisis fighter in the world after his --
KAREN FINERMAN: More than you? Even after all these chances you've had.
LARRY SUMMERS: -- after his experiences at the New York Fed. And one of the great joys of what is a very challenging job is working with Tim.
KAREN FINERMAN: When you watch him getting absolutely skewered over the AIG bill, what is going through your head when you watch that?
LARRY SUMMERS: The same thing going through my head when I see these things that happen many times in Washington. I wish people, frankly, in the media, could take the trouble to understand the nature of the choices that we're presented, and to recognize that people go into public service with the right kind of motives. Tim Geithner is the only Treasury Secretary this country's ever had who never earned a dollar from the private sector in his time before he became Treasury Secretary. So I -- it gets me angry when I hear some of the things that are said about him.
KAREN FINERMAN: Well, it was interesting to watch, just to see the political process, and I really do believe it's political process at work.
But let me bring you to another question.
This administration has the perception of being anti-business; that it has no CEOs in the cabinet or in senior positions. Why is that perception wrong?
LARRY SUMMERS: You know, I think if you look at the President's schedule, if you look at the speech he gave at the business roundtable, if you look at the half a dozen dinners, lunches, other meetings he's had with groups of business leaders, I would be surprised if there has been any other administration that has spent as much time with business and cooperating with business on issues, whether it is the challenge that businesses have of having lower health insurance premiums, whether it's national challenges that are also huge opportunities for businesses like creating electronic medical records at a time when the average doctor's office has less technology in it than the average 7-Eleven. We're doing a great deal with business.
And I think much more important than the backgrounds which people have -- which they ought to check at the door, frankly, when they come into government -- is the approach that an administration takes. And ours is one of being very much prepared to work with business. But it's also one of recognizing that businesses are citizens, corporations are citizens of the United States, and citizenship comes with privileges. But it also comes with obligations.
KAREN FINERMAN: Let me ask you, in your entire career, what is the worst economic policy decision you've ever made?
LARRY SUMMERS: Oh, you know, I tend to look -- I tend to look -- to look forward, not -- not --
KAREN FINERMAN: But your history --
LARRY SUMMERS: -- I tend to look forward, not to look backwards. From the point of view of our family's personal economy, I'm not sure going into government constituted an terrific economic decision, but it is one that has brought me great satisfaction in working with -- working with a really remarkable president at what I think is a critical time in our country, in our country's history.
KAREN FINERMAN: Does it matter to you what job you have to have your economic voice heard? Let's say Ben Bernanke decides he's going to go up to the White House --
LARRY SUMMERS: I'm just not going to go there. I like what I'm doing. I'm making a -- I feel like I have a chance to make a difference by thinking about the economic questions. And my view is if the President asks me to do something in which I think I can make a contribution, the right approach to it is to say yes, and that's why I'm very pleased to be here working at the National Economic Council.
KAREN FINERMAN: Let's say for whatever reason you had to leave the Obama administration and the President were to say to you --
LARRY SUMMERS: Good try.
KAREN FINERMAN: That wasn't a Bernanke question, wasn't a Fed question.
LARRY SUMMERS: Good try, Karen. I think it's hard enough to try to deal with the actual questions we face without going near hypotheticals.
KAREN FINERMAN: So the last question I'll ask you is --
LARRY SUMMERS: I know, actually, I'm not well trained as a politician. What I should have said in answer to that question is all of the wonderful commentators at CNBC --
KAREN FINERMAN: There you go.
LARRY SUMMERS: -- would really be a place where you would get enormous advise.
KAREN FINERMAN: Right. Right. What is the message that I should bring back to Wall Street? I look at the administration, I'm an investor, I run a hedge fund. That's not a popular thing to be sometimes. What is the message this administration wants to send to Wall Street?
LARRY SUMMERS: Moments of crisis are moments of opportunity and challenge. We should all see the opportunity and we should all recognize the obligations we have to respond to the challenge.
KAREN FINERMAN: All right. Thank you, Larry.
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