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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S INTERVIEW WITH NY GOVERNOR DAVID PATERSON TODAY ON "SQUAWK BOX"

WHEN: Friday, February 20th @ 8:35 AM ET

WHERE: CNBC's "Squawk Box"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with NY Governor David Paterson, today on CNBC's "Squawk Box"

CNBC's "Squawk Box" airs M-F, 6-9AM ET

All references must be sourced to CNBC.

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QUINTANILLA: IT'S GREAT TO HAVE YOU BACK.

PATERSON: THANK YOU.

QUINTANILLA: YOUR THOUGHTS ON THIS -- I DON'T WANT TO CALL IT CLASS WARFARE, THOUGH THAT'S WHAT IT MAY END UP BEING IN THE END. THIS DEBATE OVER WEALTH REDISTRIBUTION. HOW MUCH WE'RE ALL WILLING OR ABLE TO PUT IN TO RESCUE AN ECONOMY THAT WAS PUT INTO JEOPARDY BY A FEW PEOPLE WHO ACTED WRONG.

PATERSON: WELL, I THINK WHAT WE'RE SEEING IS THAT IT'S OCCURRING FROM BOTH SIDES OF THE SPECTRUM NOW. THERE ARE PEOPLE WHO ARE UPSET BECAUSE THOSE WHO GOT IN TROUBLE PAYING MORTGAGES ARE GETTING ASSISTANCE, AND FOR A LONG TIME WE'VE BEEN PAYING FOR FINANCIAL FIRMS THAT FRITERRED MONEY AWAY IN RECKLESS SCHEMES. IT'S TOO BIG TO FAIL CONCEPT ALMOST BEING APPLIED IN A WAY THAT'S ALMOST TOO SMALL TO SMALL FAIL. TOO MANY PEOPLE WHO ARE NOW OUT OF THE ECONOMIC GROWTH FACTOR BECAUSE THEY DON'T HAVE ANY MONEY AND THE GOVERNMENT IS, IN A SENSE, TRYING TO HELP THEM. I CAN TOTALLY UNDERSTAND THE OUTRAGE OF PEOPLE WHO PAY THEIR MORTGAGES, THEY PAY THEIR DEBTS, THEY DIDN'T GET INTO THIS PROBLEM, AND YOU LOOK UP AND SEE YOUR NEIGHBOR GETTING HELP. WHAT I WOULD SAY IS THAT, UNFORTUNATELY, ALMOST UNIVERSALLY THE WAY OUT OF THESE ECONOMIC DOWNTURNS DOES REQUIRE SOME AMOUNT OF HELPING PEOPLE WHO MAYBE DON'T DESERVE IT.

QUINATNILLA: THEY'RE GOING TO GET IN UNDER THE WIRE, IN SPITE OF THEMSELVES, AND WE HAVE TO DEAL WITH THAT.

PATERSON: IN SPITE OF THEMSELVES, THEY'LL GET IN UNDER THE WIRE. I THINK ONE OF THE PROBLEM IS THAT THE SAME MENTALITY THAT GOT US INTO THAT PROBLEM IS STILL PREVALENT SO, ONE OF THE PROBLEMS WE'RE HAVING IN NEW YORK -- YES, WE'RE GOING TO GET $24.4 BILLION DOLLARS OVER TWO YEARS YOU THINK IT WAS 100 BILLION DOLLARS -- NOBODY WANTS TO TAKE REDUCED SPENDING. WE HAVE AN ADDICTION TO SPENDING IN NEW YORK'S GOVERNMENT. LET ME TELL YOU ABOUT US. WHEN WALL STREET WAS DOING WELL FROM JANUARY 1st, 1990 TO JUNE 1998 WHEN THE DOW JONES AVERAGE WENT FROM 2,500 TO 10,000, OUR BUDGETS IN THOSE TEN YEARS WERE IN DEFICIT FIVE YEARS AND 20% OF OUR TAXES CAME FROM WALL STREET. WE CLEARLY MISMANAGED, BUT WHAT I WOULD SAY NOW IS WHAT WE'VE GOT TO UNDERSTAND IS NO MATTER WHAT STIMULUS MONEY COMES IN, IF WE CONTINUE TO SPEND WHEN THE STIMULUS MONEY GOES AWAY, WE'LL BE RIGHT BACK IN THE MESS THAT WE'RE IN RIGHT NOW TWO, THREE YEARS FROM NOW.

QUINTANILLA: YOU'RE IN A POSITION WHERE VOTERS HEAR THAT THE STATE IS GETTING $25 BILLION, AND HAVE YOU TO TELL THEM YES, BUT WE STILL HAVE TO CUT?

PATERSON: ABSOLUTELY. WHEN YOU REALLY FACTOR OUT ALL OF THAT MONEY, IT PROBABLY ACCOUNTS FOR 30% OF OUR DEBT, AND THERE'S STILL ANOTHER 70% TO GO. THIS IS THE WORST CUT IN HISTORY. OF COURSE. THIS IS THE WORST DEFICIT IN HISTORY. IT'S THREE TIMES LARGER THAN IT EVER WAS BL, AND NOBODY WANTS TOFACE IT.

QUINTANILLA: YOU'VE SEEN THE COMMERCIAL OF THE GENTLEMAN IN THE WHEELCHAIR ADDRESSING YOU, I THINK, BY NAME SAYING HOW CAN YOU CUT HEALTH CARE? HOW AM I GOING TO GET AROUND, WORK? HOW AM I GOING TO GET MY HEALTH CARE BILLS PAID? TAKING MONEY FROM THE FEDERAL GOVERNMENT AND CUTTING SERVICES IS NOT A GOOD RECIPE FOR RE-ELECTION, IS IT?

PATERSON: WELL, NO. I DON'T EVEN THINK CUTTING THE DEFICIT IS MAKING PEOPLE OWN UP TO THE RESPONSIBILITY. I DON'T THINK ABOUT RE-ELECTION. I THINK ABOUT WHAT WE HAVE TO DO NOW THAT'S RIGHT. BASICALLY MY OPINION IS THAT A GOOD ETHICAL DECISION AT THE TIME -- AT THE TIME WILL BE A GOOD POLITICAL DECISION NEXT YEAR.

QUICK: GOVERNOR, GOVERNOR SCHWARZENEGGER OF CALIFORNIA IS ON THE FRONT OF THE "WALL STREET JOURNAL" TODAY LOOKING PRETTY GRIM. THE STATE OF CALIFORNIA HAS TAKEN SOME VERY DIFFICULT STEPS. THEY HAVE A $42 BILLION DEFICIT GAP THEY HAD TO CLOSE. SOME PEOPLE SAY NEW YORK AFTER CALIFORNIA IS THE NEXT ONE UP. WHAT'S GOING TO HAPPEN?

PATERSON: NEW YORK, MICHIGAN, MASSACHUSETTS. A LOT OF STATES. THERE ARE 43 STATES THAT ARE OVER $200 BILLION RIGHT NOW. MY FEELING IS THAT IN 2009 WE MAY HAVE PROBLEMS SIMILAR TO 2008. OUR BUDGET DEFICIT IS ABOUT $14 BILLION. WE HAVE TO GO BACK INTO THE 2008-2009 BUDGET AND CUT $3 BILLION AFTER WE PASSED IT LAST YEAR. OUR BUDGET DEFICIT MAY REALLY BE $17 BILLION. THAT'S UNIMAGINABLE, BUT IT'S GOING TO MEAN A LOT OF PAIN, AND WE'RE GOING TO TRY TO DISTRIBUTE IT IN AS MANY PLACES AS POSSIBLE, AND TO BE FAIR -- BUT THERE WILL HAVE TO BE A SACRIFICE. THE PROBLEM IS WHEN PEOPLE HEAR ABOUT $700 BILLION AND $800 BILLION BAILOUTS AND $700 BILLION -- I MEAN, BAILOUTS, YOU KNOW, $15 BILLION DOESN'T SOUND LIKE A LOT OF MONEY. $15 BILLION IS 15,000 MILLION. IT'S A LOT OF MONEY. IT'S 25% OF THE AVAILABLE RESOURCES THAT WE CAN CUT FROM. THAT'S, LIKE, I WOULD BE ASKING YOU AFTER TAXES AND HEALTH CARE AND FOOD AND ENERGY COSTS TO CUT YOUR OWN FAMILY BUDGET BY 25%.

THAT WOULD BE A HARD THING FOR A CONSUMER TO DO. ABSOLUTELY.

QUINTANILLA: WE HAVE A "MARKETWATCH"ER, WELL KNOWN GUY WHO IS ON THE SHOW QUITE A BIT. EVERY YEAR HE PUTS OUT A LIST OF POTENTIAL SURPRISES FOR THE YEAR TO COME. ONE OF THEM THIS YEAR IS THAT NEW YORK STATE WILL AT LEAST THREATEN BANKRUPTCY AND TRY TO GO TO THE FEDS FOR HELP. PERCENTAGE LIKELIHOOD?

PATERSON: WELL, UNDER OUR REGULATIONS WE ARE FORBIDEN TO GO TO THE FEDERAL GOVERNMENT FOR HELP AS CALIFORNIA AND MASSACHUSETTS ATTEMPTED TO. I DON'T THINK NEW YORK WILL GO INTO BANKRUPTCY. I THINK THAT THE LEADERS OF OUR STATE RECOGNIZE THAT THE DEFICIT PROBLEM AND ALTHOUGH IT WILL BE PAINFUL, COMBINED WITH SOME RELIEF FROM STIMULUS, NOT INVOLVING REAL AND RECURRING DEBT, WE CAN ACTUALLY PUT A PLAN TOGETHER THAT WILL ERADICATE WHAT IS A $48 BILLION INCUMBERANCE OVER THE NEXT TEN YEARS.

QUINTANILLA: ARE YOU IMPRESSED WITH WHAT SCHWARZENEGGER DID?

PATERSON:YES, I AM.

QUINTANILLA: HE BROUGHT THEM BACK FROM THE BRINK, DIDN'T HE?

PATERSON: WELL, HE IS FACED A PROBLEM WHERE NOBODY WANTED TO REALIZE THAT THE CLOCK HAD RUN OUT. AND THIS IS DIFFERENT THAN OTHER ECONOMIC TIMES THAT WE'VE HAD. THIS REMINDS ME MORE OF WHAT HAPPENED IN 1929 WHEN WE -- OR 1930 WHEN WE PASSED A ACT AND DROVE INTERNATIONAL EXPORT BUSINESS DOWN BECAUSE WE DECIDED WE WERE GOING TO BE PROTECTIONISTS AND DROVE OURSELVES DEEPER INTO DEPRESSION. WE'RE SITTING AROUND WHILE THE CLOCK IS RUNNING OUT, AND PEOPLE IN NEW YORK SHOULD HEED WHAT WENT ON IN CALIFORNIA BECAUSE IT COULD COME TO OUR SHORE VERY SOON.

QUICK: YOU SAID IN THE PAST THAT YOU DID NOT WANT TO RAISE TAXES ON NEW YORKERS BECAUSE WHETHER YOU LIVE IN A STATE AND IF PEOPLE DON'T LIKE THE HIGHER TACKS, THEY JUST MOVE ACROSS STATE LINES. ARE WE IN A MORE DIRE SITUATION WHERE YOU'RE GOING TO HAVE TO RAISE TAXES?

PATERSON: OVER 150,000 PEOPLE LEAVE NEW YORK EVERY YEAR. WHEN YOU TAX THE RICH, THE RICH LEAVE, AND THEN YOU HAVE LESSER JOB CREATION. IT'S A BIG PROBLEM. I WOULD SAY, THOUGH, THAT IF THE DEFICIT GETS MUCH HIGHER, THAT THERE IS NO ISSUE THAT WE SHOULD BE AFRAID OF ADDRESSING. WHAT I WOULD RATHER DO IS ADDRESS THE WHOLE TAX STRUCTURE BECAUSE OUR HIGHEST TAXABLE INCOME IS $40,000. IF PEOPLE MAKE $40,000 THEY GET TAXED THE SAME RATE AS THE PEOPLE THAT MAKE $4 MILLION.

QUICK: MEANING, YOU WANTED TO SEE A MORE PROGRESSIVE TAX RATE? WOULDN'T THAT SCARE HIGHER INCOME PEOPLE?

PATERSON: WELL, YOU SEE, I DON'T WANT IT TO BE SOMETHING THAT IS SO FOREBODING THAT IT DRIVES PEOPLE OUT OF THE STATE. I THINK THAT A LOT OF THE VOICES THAT SAY THE TAX STRUCTURE WE HAVE IS NOT PARTICULARLY FAIR.

QUICK: ALSO THERE'S A STORY IN THE "NEW YORK TIMES" TODAY ABOUT A FORMER AIDE OF YOURS, CHARLES O'BURN, WHO HAD RESIGNED UNDER A TAX SCANDAL BEFORE. THE "NEW YORK TIMES" SAYS IN RECENT DAYS YOU'VE BEEN SOUNDING OUT ABOUT BRINGING HIM BACK. IS THAT TRUE?

PATERSON: I DIDN'T SOUND ON ANYBODY. A NUMBER OF PEOPLE WHO ADMIRED THE WORK AND HAVE SPOKEN TO ME ABOUT IT, AND THERE WAS AN EDITORIAL IN ONE OF THE NEWSPAPERS ABOUT IT.I FELT THAT HE HAD MADE A MISTAKE ONE WE COULD NEVER CONDONE PEOPLE PAY THE PRICE FOR THEIR MISTAKES AND THEN SHOULD BE GIVEN ANOTHER CHANCE -- IT MIGHT BE A GOOD IDEA TO START RECOGNIZING THAT NONE OF US ARE ALL THAT PERFECT,BUT I HAVE NOT SPOKESEN TO CHARLES. HE IS ACTUALLY IN ISRAEL RIGHT NOW. AT SOME POINT I MIGHT BUT THIS WAS WRITTEN ABOUT AND I WAS ASKED ABOUT IT BUT YOU KNOW TRYING TO MAKE OUR GOVERNMENT WORK AS EFFECTIVELY AS WE CAN, AND THERE ARE GOOD PEOPLE OUT THERE. HE IS CERTAINLY ONE OF THEM.

QUINTANILLA: THERE'S THAT STORY. THERE'S ANOTHER STORY OUT THIS MORNING THAT KEN LEWIS OF BANK OF AMERICA HAS BEEN SUBPOENAED BY THE ATTORNEY GENERAL, ANDREW CUOMO, ABOUT THE PURCHASE OF MERRILL AND WHAT HE DID OR DIDN'T TELL INVESTORS. IS THERE SOMETHING THERE? HOW DEEP IS THAT GOING TO GO?

PATERSON: WELL, I THINK THE ATTORNEY GENERAL WOULD KNOW BETTER THAN ME, BECAUSE HE IS PART OF THE INVESTIGATION, BUT WHAT I REALLY LIKE IS THAT HE IS ADDRESSING THIS PROBLEM HEAD ON AND MAKING SURE THAT THE DECISION MAKERS WHO ARE PERHAPS RECEIVING TAXPAYER DOLLARS AND THEN MISUSING THEM MAYBE NOT LEGALLY, BUT CERTAINLY ETHICALLY THAT HE IS ATTACHING THAT IF THERE WASN'T TRANSPARENCY AND OPENNESS AND HONESTY, THAT IT MIGHT BE A LEGAL PROBLEM, AND I THINK THAT IS A HIGHLY ADMIRABLE ACT TO BE PURSUING AT THIS TIME, BECAUSE I THINK WHAT PEOPLE NEED TO FEEL IS THAT THEIR GOVERNMENT, THEIR LAW ENFORCEMENT, AND EVEN THEIR FINANCIAL ANALYSTS, CONTROLLERS OF STATES AND CITIES ARE WATCHING WHAT'S GOING ON AROUND HERE.

QUINTANILLA: SOME WOULD ARGUE WHEN YOU HAVE THE FEDERAL GOVERNMENT PLEADING WITH YOU OR TELLING YOU IN SOME WAYS TO DO A DEAL AND THEN THEY COME AFTER YOU FOR THE WAY IN WHICH YOU CARRIED IT OUT, THAT MIGHT NOT BE ENTIRELY FAIR.

PATERSON: I WOULD SAY IF THE PERSON WAS OPEN AND NOTORIOUS IN THEIR ACTIONS, THEN IT MIGHT NOT BE FAIR, BUT I WOULD ALSO -- YOU KNOW, THAT -- I DIDN'T WANT TO COMMENT ON THIS SPECIFIC INVESTIGATION BECAUSE THIS GENTLEMAN SHOULD HAVE THE RIGHT TO DEPEND HIMSELF, AND, YOU KNOW, WE'LL SEE. I WAS JUST BASICALLY SAYING THE FACT THAT THE GOVERNMENT IN THIS CASE THE LAW ENFORCEMENT OFFICIAL, THE ATTORNEY GENERAL ANDREW CUOMO WOULD BE AGGRESSIVE ENOUGH TO PURSUE THIS, I THINK, SAYS A LOT FOR WHERE OUR GOVERNMENT IS RIGHT NOW.

QUICK: I KNOW WE'RE ONLY ACTUALLY LESS THAN A MONTH INTO THE NEW ADMINISTRATION. BARACK OBAMA AS THE NEW PRESIDENT.

BUT ALREADY IT SEEMS LIKE THIS IS A VERY LONG MONTH. IT SEEMS LIKE PEOPLE HAVE RUN A GAMBIT OF EMOTIONS FROM HOPEFUL TO VERY CONCERNED. WHAT'S YOUR GENERAL TAKE ABOUT THE DIRECTION WE'VE BEEN HEADED OVER THE LAST MONTH?

PATERSON: I THINK THAT I WOULD RATHER BE ROUGHLY RIGHT THAN SPECIFICALLY WRONG. I THINK THAT THE PRESIDENT HAS TRIED A LOT OF THINGS. YOU MIGHT NOT AGREE WITH THEM, BUT IS HE DOING THINGS. HE IS ACTIVE. THIS IS KIND OF LIKE THE FIRST 100 DAYS OF ROOSEVELT. SO THERE WERE FOUR BOOKS RECENTLY ABOUT ROOSEVELT'S FIRST 100 DAYS. THERE MAY BE SOME MORE BOOKS ABOUT THE FIRST OBAMA 100 DAYS. YOU -- YOU'VE GOT TO SAY HE CAME IN AND STARTED MAKING THINGS HAPPEN. WE MIGHT NOT AGREE WITH EVERYTHING THAT HE HAS DONE, BUT HE IS ACTIVE. HE IS TRYING TO FIND SOLUTIONS AFTER WHAT APPEARS TO BE A PERIOD OF STAGNATION WHILE THE WHOLE COUNTRY ECONOMICALLY IS GOING DOWN THE TUBES.

QUINTANILLA: THAT'S TRUE HE IS DOING THINGS EXPENSIVE THINGS SOME SAY AND THE FACT IS THAT IS HE GETTING THINGS DONE MIGHT BE OVERWHELMED BY THE FACT THAT THEY ARE EXPENSIVE AND INEFFICIENT USES OF MONEY

PATERSON: WE RAN UP NEARLY A $10 TRILLION BEFORE HE GOT THERE. THE SAME PEOPLE THAT HELPED CONTRIBUTE TO IT ARE COMPLAINING ABOUT ADDING TO FURTHER DEBT. LET'S REMEMBER ONE THING. WHEN IN EUROPE IN THE 1940s AFTER WORLD WAR II THEIR DEBT DEFICIT WAS 190% OF GDP, BUT AT THAT TIME TO STIMULATE THEIR ECONOMY THAT REGENERATED PROSPERITY ALL THROUGH THE EUROPEAN COUNTRIES. THE UNITED STATES HAD A 120% OF GDP DURING THAT PARTICULAR TIME, AND WITH THE MARSHALL PLAN WE HAD IN EUROPE AND THE REDEVELOPMENT ALL AROUND THE COUNTRY AND THE WAY THAT THE WAR WAS ACTUALLY USED AS AN ECONOMIC DEVELOPMENT TOOL BY ROOSEVELT, THE PROSPERITY IN THE 1950s AND 1960s IN THIS COUNTRY WAS UNPARALLELED. WHAT I'M SAYING, NO, RUNNING UP DEBT IS A BAD THING, BUT RUNNING UP DEBT WHEN YOU'VE GOT TO STIMULATE YOUR ECONOMY IS A TEMPORARY SOLUTION. IF YOU TOOK ANTIBIOTICS EVERY DAY, YOU WOULD KILL YOURSELF. IF YOU TAKE THEM WHEN YOU'RE SICK, YOU GET WELL.

QUINTANILLA: WE WANT TO THANK YOU FOR COMING IN, BECAUSE IT'S BEEN A DIFFICULT WEEK WITH THE CRASH IN BUFFALO AND THE PAST -- AND THEN, OF COURSE, THE MIRACLE ON THE HUDSON. YOU'VE HAD YOUR HANDS FULL WITH THINGS THAT ARE NOT ECONOMIC.

PATERSON: I WAS SUPPOSED TO BE HERE LAST FRIDAY MORNING, AND WE HAD TO GO TO IT IS TERRIBLE SITE OF THAT CRASH IN BUFFALO. ACTUALLY THE TOWN OF CLARENCE. I HAVE HAD TO GIVE MY CONDOLENCES TO PEOPLE BECAUSE OF LOSS TO THEIR LOVED ONES. I'VE NEVER BEEN IN A ROOM FULL OF 100 PEOPLE WITH THAT. THAT'S 100 PEOPLE. A DAY I'LL NEVER FORGET.

QUINATNILLA: THANK YOU FOR COMING IN WHAT IS A DIFFICULT TIME.

PATERSON: IT WILL GET BETTER.





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