WHEN: TODAY, TUESDAY, APRIL 14TH
WHERE: CNBC'S "CLOSING BELL WITH MARIA BARTIROMO"
Following is the unofficial transcript of a FIRST ON CNBC interview with Lawrence Summers, National Economic Council Director, today on CNBC's "Closing Bell with Maria Bartiromo."
All reference must source CNBC's "Closing Bell with Maria Bartiromo."
MARIA BARTIROMO, host: And as promised, some early signs of improvement becoming evident. The Obama administration continues to promote the notion of a steady recovery. Joining me now for more on the effort, Lawrence Summers, is the director of the National Economic Council and one of the president's top advisers on the economy. So great to have you on the program, Larry. Welcome back.
Mr. LAWRENCE SUMMERS: Good to be with you again, Maria.
BARTIROMO: So the president today talked about some glimmers of hope, talking about some positive reports on the economy, even though adding that we are in for some tough news ahead when it comes to unemployment. Can you tell us where the growth has been coming from most recently and where the weak spots that remain in the economy today?
Mr. SUMMERS: Well, I think, Maria, if you look two months ago, you couldn't find anything positive. Every statistic was running negative, you really had no--almost no positive indicators and...(technical difficulties)...an economy in free fall. I think today the picture's more mixed. There are obviously still problems in financial market, there's obviously still weakness in housing. But you have a number of things that are most positive. You have the fact that production is now pretty clearly running below sales, pointing to inventory decumulation, which will be followed by an inventory cycle that can be a source of strength. You have a sense of a more mixed picture in terms of consumer spending, and not the kind of free fall that you saw in part because the stimulus that the president provided in the Recovery and Reinvestment Act is coming into people's paychecks and that's putting a little more energy into the--into the consumer. You have the fiscal policy coming online. You know, government almost never gets a positive surprise in how much things cost, but it's actually turning out that because there's a lot of slack in the construction section, we're going to be able to do a lot of these projects, these infrastructure projects. And you know, 2,000 have been started already just in two months. We're going to be able to do some of those projects cheaper than we'd expected, and that means more employment, more ability to do things. So it's a complex picture. We inherited a very difficult situation. It's going to take a long time to work through. But after a period when it was a very steep down slope, it certainly doesn't have quite that steepness at this point.
BARTIROMO: Yeah. The president said--the president said--pardon me--this morning, I guess, that--or yesterday, that, you know, some of the projects, the infrastructure projects, are coming in under budget, which is--which is obviously very positive. We've spoken in the past a number of times about the banking system and that the broad economy is going to be unable to really get back to where we would like to see it without the banking sector getting on track. Now, Goldman Sachs yesterday said that it wants to pay back the $10 billion in TARP money from the government. Do you have any objection to Goldman paying back that money at this time?
Mr. SUMMERS: Maria, I'm not going to get into the situation of any
particular company. There are...
BARTIROMO: Well, with any bank.
Mr. SUMMERS: ...a variety--a variety of kinds of regulatory approvals. But I will just say this, the assistance the government provided was intended as temporary. It's our objective to have a private sector based system, and that means a system where people don't have government--don't have government capital and work themselves to a place where--for their health and for their contribution, they don't need government capital. That's the kind--it's the kind of thing that we want--we certainly--we certainly want to see.
BARTIROMO: So there's no worry then as far as has and has nots? If five out of 20 banks called and said, `Look, we're going to pay back the TARP money, we want to pay back that money next week,' there's no worry as far as speculation in the market about haves and have nots and who's stronger than others and a run on any banks?
Mr. SUMMERS: You know, Maria, when I was Treasury secretary some years ago, I didn't appreciate it when White House officials commented on the specific decisions that the Treasury was going to make. And I vowed to respect that when I became an adviser in the White House, and I'm going to do that. So I'll stay out of trying to judge what particular decisions the Treasury's going to make. But as the president said today, the stress test will be completed in a few weeks and that will provide a basis for assuring that institutions are well capitalized. And of course, it will require rather different steps for different institutions to become well capitalized. And one of the things that the stress test will enable is a strategy, very different than the strategy that was pursued last fall, of tailoring the policies to the needs of particular institutions.
BARTIROMO: What kind of information are we going to learn about through the results of those stress tests? A lot of people wonder if we're going to get the transparency that really people want. In other words, are you going to be telling us the capital requirements at the banks, how much capital these banks have...
Mr. SUMMERS: Well, again, the--anything that goes to the precise details of the stress test is really a matter for the financial regulatory authorities, so you're not going to get as much detail as you're probably asking for from me. But Maria, I would say, and I think everybody understands very clearly how important transparency is as a value, that that's what rebuilds trust, and that you can't have confidence without trust and you can't have trust without clarity. And therefore, transparency is something that's going to be very, very important.
BARTIROMO: How much money is left in the TARP?
Mr. SUMMERS: Well, I think that the Treasury secretary has indicated that it's a figure well in excess of $100 billion.
BARTIROMO: And what is the incentives for the banks to sell their bad assets if they have to take a writedown on it? Is the government going to be there to provide a capital cushion, if, in fact, they have to take writedowns and they don't want to sell those bad assets?
Mr. SUMMERS: Well, government's indicated a commitment to do what's necessary to fill capital holes so that institutions are well capitalized. And of course, by removing assets from their balance sheet where there's enormous uncertainty about the value of those assets, a bank puts itself in a stronger and more credible condition for raising capital from markets or more generally from being in a position to reassure all its counterparts.
BARTIROMO: So you think they'll be willing to sell these assets at say, 50, 60 cents on the dollar, if they--even if they believe they're worth 90 cents on the dollar?
Mr. SUMMERS: Well, I think the situation of a variety of different banks is going to differ, and certainly there are going to be banks that are going to decide not to sell their assets, and that's as it should be. But I think the availability of this kind of leverage so that it's possible for there to be a realistic market in which people can sell assets, by the way, sell both bank loans and also sell other kinds of securities which underpin the shadow banking system that accounts for nearly half the credit creation in the country, I think making those markets and having government step in at a time when there's a shortage of liquidity in those markets, will be something that's very constructive.
BARTIROMO: So there won't be a situation where, you know, a bank says, `Look, we don't want to sell the assets at these prices, so we're going to wait and hold on to them.' The government's not going to say, `Look, you need to get these off the books.'
Mr. SUMMERS: You know, the particular situation of each bank is going to be a matter between it and its regulators, and that's not something I would try, that I would be trying to prejudge. What I think is very clear is that we've got to get the markets functioning again if we want to have our market system work. And by providing this kind of liquidity in a very careful way with haircuts that make sure, margin levels that make sure that the federal government's not taking inappropriate risk, we can get the markets started. And as we get the markets started, that will help everybody have a more transparent view of what's going on. That'll make it easier to originate loans because it'll be possible, there'll be a place in which they can be sold. And so it will be constructive with respect to credit flow in the country.
BARTIROMO: And it leads me--it leads me to sort of a more thoughtful, broader idea here, and it feels like there's a bit of a competition going. On the one hand, the government is saying to the banks, `Look, you need to lend more,' lend, lend, lend, get the credit moving again,' since credit has been stripped in this economy, literally, five quarters. On the other hand, the government is saying, `We're performing stress tests and you need to get your capital levels at an appropriate level.' So why would a bank lend when they know that they've got to get their credit level--they've got to get their capital levels up?
Mr. SUMMERS: Well, I think the focus of the stress test is going to be on levels of capital rather than capital ratios. And so the focus is going to be on making sure that institutions raise capital or take other kinds of steps to assure that they have capital that enables them to support their existing loans and puts them in a position--puts them in a position to expand. And that's really where focus--really where the focus is going to be Nobody's looking to use the stress test as a vehicle for forcing institutions to deleverage and reduce their lending activity. Rather, the action's going to be on the capital side, and that's where you're supporting a stronger economy and more lending that enables more growth.
BARTIROMO: Of course. I mean, I understand, obviously, the goal. But the point is is given the fact that they are up against these tests, now is, it's obviously a period where they're going to want to get capital ratios to a level where they're not necessarily going to be lending as much as perhaps you would like them to.
Mr. SUMMERS: Well, you know, there's a risk--there's a risk of that, I suppose. But I think as--least, I understand the dialogues people have been having with the banks, I think there's a pretty strong feeling in the banking industry right now that while there are a lot of problems with inherited assets, that at this point, because spreads have widened, there are rather substantial opportunities to lend.
BARTIROMO: If the stress tests determine that the banks need more capital, where will that money come from?
Mr. SUMMERS: Well, certainly the first place that we would hope it would come from is private sector capital raising, that institutions that have seen a strengthening in the markets should be prepared to go to markets if they need more capital. There are also a variety of kinds of measures, exchanges of various kinds, that can support increased capital raising. But Secretary Geithner's also made it clear that the government's prepared to underwrite these issues and to backstop these issues and to invest government convertible preferred securities if that's what institutions need to turn to. But the first the choice and the first hope would certainly be on the private sector side.
BARTIROMO: So would you be inclined to recommend that perhaps they reduce the size of TALF or you know, change the plans in terms of the...
Mr. SUMMERS: Oh, I think there's a very strong and robust set of plans in place that address the different dimensions of this problem, both on the bank capital side and on the non-bank side.
BARTIROMO: I think--let me switch gears. I don't want to focus only on the banks. In the budget that the president has put forth, he discussed in 2011 we would see growth in the economy of 4 percent. Are you expecting that?
Mr. SUMMERS: You know, Maria, I think that there's substantial likelihood that any forecast one makes at these points can vary to either side. The president made the forecast several months ago in the context of the budget. It was pretty much a consensus forecast at the time that it was made at the appropriate time in the budget cycle. We will revisit the forecast, as governments always do, a couple times--a couple times a year, and at that point, we'll be in a position to discuss a new forecast.
BARTIROMO: So if we were to see the economy not grow at 4 percent in 2011, would you be prepared to suggest that perhaps he should pull back his plans to raise taxes on the highest earners?
Mr. SUMMERS: Let's just be clear here because what you said is not quite, with respect, correct, Maria. Under current law, the tax cuts that were legislated in 2001 and 2003 for high income earners expired.
Mr. SUMMERS: And so the president isn't taking any action to raise taxes. Current law calls for them to expire. And the president does believe and he is surely right in this conviction, that given the magnitude of the debt problems that the country faces, that those are tax cuts for a very small fraction of the population that we as a country can no longer afford. And so we certainly are prepared to let them expire. We will do what's necessary as we see where the economic--see the flow of economic statistics and see what the economy requires. But if you look at the long-run fiscal burden imposed by those tax cuts, it's as great or greater than the entitlement problems that generate so much discussion with the evidence suggests very little stimulative benefits.
Mr. SUMMERS: So yes, we are prepared to let those tax cuts expire, and that would be our policy intention.
BARTIROMO: Even if we were not to see the growth expectations...
Mr. SUMMERS: No, I'm not going to--you know, I don't want to get in...
BARTIROMO: ...that are. That was my--that's my point.
Mr. SUMMERS: ...I don't want--I don't want to get into speculating on every possible--every possible hypothetical. The president's budget lays out his plan, which is to allow those tax increases--those tax cuts which would, according to current law, expire, to in fact expire as the law passed under the Bush administration provides for them to do. We're going to obviously be monitoring and watching this economy very carefully and take whatever steps are necessary. But right now, there is a massive program that has been put in place on the fiscal side, on the credit provision side, on the recapitalization side, on the housing side. And our focus is implementing that program as strongly and as effectively as we possibly can for maximum benefit to this economy.
BARTIROMO: When would you expect to see growth in the economy again?
Mr. SUMMERS: Well, you know, many forecasters are looking for growth in the latter part of this year. And as I mentioned earlier, the inventory cycle points in that direction. But on one can make forecasts with complete, with complete confidence. And even if there is an inventory cycle, while that would be a welcome development, what's really important is making sure that we have a sound foundation for long-term growth. And that's why some of the issues the president spoke about in his speech today regarding financial regulation, health care, energy, infrastructure investment, are so profoundly important, so that we can enjoy an economic expansion that, frankly, unlike its predecessors, is much less based on bubbles in financial markets.
BARTIROMO: Larry, great to have to you on the program.
Mr. SUMMERS: Good to be with you, Maria.
BARTIROMO: We so appreciate it. Larry Summers here at the Nasdaq. I'll send it back to you.
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