WHEN: TODAY, FRIDAY, OCTOBER 16TH AT 4PM ET
WHERE: CNBC'S "CLOSING BELL WITH MARIA BARTIROMO"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Treasury Secretary Timothy Geithner. Excerpts of the interview will run throughout CNBC's Business Day programming. The extended interview will air on CNBC's "Closing Bell with Maria Bartiromo" today at 4PM ET.
All references must be sourced to CNBC.
Secretary of the Treasury TIMOTHY GEITHNER: There's much more capital today than there was when we started, and you're seeing in cost of credit, availability of credit, really dramatic improvement in access to credit. But parts of the system are still very damaged, access to credit for small business is still very constrained, and there are parts of the market where, as you've seen in mortgages, where the progress we've seen is really enormously reliant on the government. So we've made a lot of progress, but a lot of repair ahead. And we're going to have to stick with this to make sure that we have enough finances and that's strong enough to support a strong recovery.
BARTIROMO: You make a really good point as far as the government really supporting the system, and a lot of people say, well, what happens when the stimulus is gone? You look at what happened with the cash for clunkers deal. We went from horrible to great to horrible again. The first-time homebuyer credit. So what happens when the stimulus is gone?
Sec. GEITHNER: Well, recovery is going to work for Americans requires a recovery led by the private sector, requires recovery led by private demand that's going to be strong enough to be sustainable. And that means that you're going to have to still make sure there's enough support to reinforce that process of recovery. But when we have growth back in place, we also got to bring down those long-term deficits, make sure we go back to living within our means. And that's like the difficulty--that's the--that's the difficult balance to get right. But I think we're going to get that right. We're not going to make the mistake many countries made in the past of putting the brakes on too early and creating risk that we have a, you know, weaker recovery with even higher levels of unemployment going forward.
BARTIROMO: Now, you said that the capital situation is better than where we were, obviously...
Sec. GEITHNER: I'd say it's dramatically better.
BARTIROMO: Dramatically better. And yet you've called for the banks to raise capital levels, and yet people are saying that's creating a lending issue because banks want to raise capital levels, as the government says to, and yet you want them to lend. How do you raise capital and also lend?
Sec. GEITHNER: Right. I don't--you know, I don't think--that's a good thing to worry about, but that's not the risk we face today. And I think you can separate these two things out. And, again, if you look at what's happened to the cost of credit, how easy it is to borrow, there's been a really very dramatic improvement for the vast bulk of the US economy as a whole. And that's the best measure, really, ultimately, of whether there's enough capital in the system as a whole. Now, demand for credit has fallen dramatically because we've had an acute recession and because this is a recession caused by too much borrowing, in some sense. You would expect demand for credit to fall as we--as we get out of this and people save more, but generally the system today is in a much stronger position to provide the credit--the credit the economy needs.
BARTIROMO: You know, during the conference call this week of Goldman Sachs and JPMorgan, shareholders were criticizing them, that they had so much capital on the balance sheet, and they're saying, `Why won't you raise dividends? Why won't you pay back money to shareholders?' And I heard that they were saying because the government's telling us, or suggesting us not to. So what is the resolution on how much capital these banks need to hold, and also, are you stopping even the non-TARP banks from paying out dividends?
Sec. GEITHNER: The--let's talk about financial reform, because this is critical. To make sure we have a more stable system in the future so we don't ever put taxpayers in the position of--again of having to bail out these large institutions, we're going to have to have more conservative, better designed capital requirements on the financial system in the future. There is no credible argument against that. I'm not actually aware of any financial institution that seriously disputes that basic proposition. That's going to be good for the entire system, a necessary thing for us to do. But we want to get that right. We've got to negotiate a consensus internationally. And we want to make sure it's designed right so the capital requirements don't amplify future crises, don't make them more severe, as fear elevates in the crisis. So we're going to take the time to get that right. Our hope is we have a consensus on reforms at the end of next year, but they won't take it--effect that until some transition period above that.
Right now, as you said, the real risk is that people aren't willing to take enough risk. Because you know what happens after crises that are caused by bubbles is people are a little too cautious, too restrained. So part of the imperative policy now is to still make sure we're providing enough support for that process of repair to.. (unintelligible). We want to make sure that we're reinforcing confidence.
BARTIROMO: But you don't want them--you want them to retain their earnings. You don't want them to pay out dividends right now?
Sec. GEITHNER: Well, on the broader question about capital, generally now, about repayment, again, let me just say the following: It's--private capital is more valuable than public capital. It's better to have more private capital come into the system so that banks can repay the public capital. That's good for the taxpayer, healthy for the system. And I'd say the financial markets now are open for capital, as they've been since early April, May, June, and it's, I think, you know, we'd like to see capital in the system where it's necessary, and private capital's more valuable for the system than public capital.
BARTIROMO: Are you encouraging more banks to pay back the TARP money, as The New York Times report said today?
Sec. GEITHNER: Well, again, we're going to try to get this balance right. We want to make sure that we get this money back in a time frame that makes sense, but we also want to make sure the system is strong enough, it can provide credit the recovery--businesses need for recovery. That's the--that's a difficult balance, but as I said--let me say it again--private capital is more valuable than public capital.
BARTIROMO: Let me ask you more about financial reform. Aside from the capital levels, how will the industry look, what kind of changes should we expect once this financial reform materializes?
Sec. GEITHNER: Two key things. One is much stronger protections for consumers and investors enforced more evenly across the system. That's really, really important thing. It's central to basic sense of fairness and confidence in the system. And the second is a more stable system, less vulnerable to crisis, less fragile, where the government has the ability to contain the damage without putting taxpayers at risk, without, you know, rewarding failure, saving people from their mistakes.
BARTIROMO: People are nervous about 2010. They're anxious about new tax policy. Are you going to allow the Bush tax cuts to expire if we remain in a flat situation, in terms of the economy, and unemployment remains high?
Sec. GEITHNER: Basic imperative now: overwhelming responsibility of people in government today is to make sure we have an economy that's growing, unemployment coming down, factories back to work. That is the critical imperative. That's why we cut taxes as part of recovery for 95 percent of working Americans and for businesses across the country, and it does not make sense to raise taxes in a recession. So getting growth on track, led by the private sector, is going to--is still our most important priority.
BARTIROMO: But people are worried. They're saying, `Look, I'm worried about higher taxes in 2010. I'm worried about higher health care expenses. I'm worried about cap and trade. I'm not going to be adding heads to my payroll.'
Sec. GEITHNER: Well, I think you're right that you're still in a situation where businesses, they express a lot of uncertainty still about the future. It's mostly uncertainty about the strength of demand. Because I think everybody understands that, as we save more as a country and as we get out of the mess created by this crisis, the risk is we're going to have a period of slower growth. So I think the big source of uncertainty still is how strong is demand going to be in--demand's getting stronger, which is good. We want to reinforce that process. Now, uncertainty is bad for business. And that's one reason why it would be good for the country to see health care brought to a successful conclusion quickly, so people understand what the rules are going to be and they can be more confident that health care costs are not going to grow as more--as rapidly in the future as they have in the past. And that would be a very good thing for businesses across this country.
BARTIROMO: What specific incentives can you put forward, can you push to get small and midcap businesses to create new jobs?
Sec. GEITHNER: Well, the president has proposed--Congress has enacted in stim--a recovery act already--a very powerful set of incentives on the tax side generally for businesses, but also targeted incentives to help facilitate this transition to more energy efficient, less carbon intensive forms of energy use. Those are very powerful, important; but more important than that in some sense, for the long term, is the support this president's provided, Congress has authorized for research and development for basic innovation. And I think everybody understands that to have a more productive economy in the future, we're going to have to have our education system deliver better outcomes. And that's why, again, the president's put so much initial attention and care into resources and reform in those critical areas.
BARTIROMO: And small business says we still don't have the right access to credit. Why?
Sec. GEITHNER: Yeah, small businesses still face a lot of constraints in access to credit. They're more dependent on banks. They're more dependent on credit cards, home equity loans, other types of things that got washed away by this crisis. They're more vulnerable to that, and that's why it's very important that we, using the authority Congress gave us, keep doing things to get banks to--capital to banks that need it, small banks that serve small businesses, to make sure that the SBA, Small Business Administration, is able to do what it needs to do, and to make sure that we're reinforcing this process of repair in the broader capital markets. Those are important to small business lending, too. We want to keep making sure those programs have as much impact as possible in the small business credit.
BARTIROMO: Do you want to extend the TARP program beyond 12/31?
Sec. GEITHNER: Well, that's the judgment we haven't made yet. We're looking carefully at that; but let me just make it clear, it's going to be very important to small businesses, to housing, to businesses across the country, but small businesses in particular, that we have the ability to continue to put in place programs that help make sure they get credit.
BARTIROMO: How worried are you about the deficits? Most people have learned a hard lesson over the last year or two: We can't borrow our way forever. It comes back to haunt you.
Sec. GEITHNER: It's a nit--it's a necessary lesson. And I think you're right, people understand it. Look at what's already happened to behavior. People are saving more. We're borrowing much, much less from the rest of the world, dramatically less than we were before. And that's a necessary, healthy adjustment. And I think Americans understand that we have to go back to living within our means in the country. The government's going to need to do that just like people are. And so 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 that we will do that. Because if they're not confident in that, then recovery'll be weaker, interest rates'll be higher, investment will be constrained, and you'll have a weaker economy with higher unemployment. So it's a really important thing people are confident that we're going to have the will as a country to do that.
BARTIROMO: So these are all the implications of deficits?
Sec. GEITHNER: Yeah, that's why deficits matter. That's why deficits, in the end, can be very damaging to growth. That's why you cannot live with future deficits as large as ours are likely to be. But the necessary path for addressing that problem starts with an economy that is growing, led by private demand.
BARTIROMO: When do you expect growth in jobs?
Sec. GEITHNER: Now, I'm not an economist and don't forecast, but I think if you look at what business economists say now, you're going to see the economy growing at a significant rate second half of this year, the rest of this year. Positive growth in 2010 at a level that will begin to gradually bring down the unemployment rate. What you'll see first is businesses creating jobs on net. That'll gradually strengthen, and then you'll see unemployment start to come down.
BARTIROMO: Sometime in 2010? World Bank president Robert Zoellick recently said that the US should not take for granted the dollar's preeminence and, as you know, China and Russia have both called for a global supercurrency. Would you expect, at some point, the dollar not be the world reserve currency?
Sec. GEITHNER: I wouldn't. But I think it's right--and I say this all the time--that the dollar's role in the system and for special obligations and responsibility and us as a country, and it is very important that--to understand that we need to do everything possible to sustain confidence in our ability to keep the inflation, low and stable it--over time and to make sure we're getting our fiscal house in order. That's a really important thing to confidence, generally. We take that very seriously, nobody more than me.
BARTIROMO: So what have you done specifically to safeguard the dollar's decline?
Sec. GEITHNER: Well, I think, Maria, if you look generally, you know, I don't--I don't talk about developments in the exchange markets, but--I generally don't do that, but I think if you look at what's happened over the last year, you've seen really a lot of confidence in the US finance, a lot of confidence in the US economy. When the crisis was at its peak, when people were most concerned about the risk of collapse and deflation, what happened then? The world wanted to be in Treasuries, in the safest, most liquid markets, and you saw the dollar rise when people were most concerned about the future of the world. And that is a very important thing. It's not something we can count on, so we need to make sure that we understand and we--and we continue to foster, and again, we're going to do that.
BARTIROMO: Let me ask you about sort of a common theme that seems to be happening over and over again. Here we are at Dow 10,000, JPMorgan and Goldman Sachs reporting, you know, great numbers once again, paying record bonuses, apparently, a number of firms once again. And yet 10 percent of the country is unemployed. How does--how does that happen? Some people are saying out there, `Here we go again. Did we get snookered again?' Have we learned anything?
Sec. GEITHNER: We're not going to let this financial system go back to where it was, and we're not going to let the practices re-emerge that caused this crisis. And that's why the president and the Congress are working so hard to put in place financial reforms that'll reduce the risk of excessive leverage risk-taking in the future. That's a very, very important thing for us to do, and it's something the financial system has a huge interest in happening. They are all disadvantaged. The best-run firms were disadvantaged by the worst-run, by the worst practice of the...(unintelligible). So the financial community as a whole has a huge interest in putting place a more stable framework with better protections for the industry as a whole. And we--and I believe ultimately we're going to get this, and we're going to get a strong set of protections in place, that's very important.
But just to where you go--where--go to where you begin, you cannot have unemployment come down without growth. You will not have growth without credit being available. It's the oxygen for economies. And we have made remarkable progress in bringing more stability to the system, bringing the cost of credit down, in raising confidence in asset values. You've seen stabilization of house prices, interest rates lower, and that is a necessary condition for starting to have the kind of growth that's going to bring down unemployment. Cannot happen, is not possible without a more stable financial system. And if people don't understand, they should just remember what it was like in the second half of last year, where you saw a huge amount of trauma in the financial system cause enormous damage to businesses and families, not just in the United States but around the world.
BARTIROMO: Because we're still dealing today with too big to fail, aren't we?
Sec. GEITHNER: Well, at the center of any reform process is to make sure that institutions are not living with the expectation the taxpayer's going to come in and save them from their mistakes. And that's why these reforms are so important. And, you know, the critical objection to reform, apart from what we're trying to do on the consumer side, which is really very important, is to make sure we have a system in which we can let firms fail with less damage, without the taxpayer being on the hook. And we're going to do that.
BARTIROMO: How do we know a consumer protection agency won't just be more bureaucracy?
Sec. GEITHNER: This basic balance between innovation and protection is a really important thing to get right. But--and we just--but we got it wrong. I mean, 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. And there's no path to reform of the system that people can believe in that doesn't require getting better designed protection from consumers. But of course we want to make sure there's innovation and choice. I think we found that balance in the proposals we made to Congress, that improve them in some ways. And we want to make sure they come out of this process stronger. And I'm very confident we're going to get a good outcome there.
BARTIROMO: How worried are you about defaults and upset in the commercial market, commercial real estate in 2010?
Sec. GEITHNER: That's one area, but there's many others, too, where you're still seeing--going to a lot of pressure and challenge ahead. And again, it's one reason why it's important that we not make the mistake that countries have made in past crises, which is, you know, put on the brakes too soon, pull back critical support too early. And we want to make sure we're continuing this process of repair until we have a system that's strong enough to make sure that viable businesses across the economy get access to credit.
BARTIROMO: Some people feel that there's real class warfare going on, and when you look at some of the policies coming out of the administration, it feels a little anti-business, whether it's cap and trade or higher taxes, in some cases, or higher health care cost. Is this administration anti-business?
Sec. GEITHNER: Absolutely not. And the president of the United States and the people around him understand deeply that, again, for our economy to be more productive in the future, it requires an atmosphere in which businesses are willing to innovate, to invest and to take risk. There's no path to growth, there's no path to lower unemployment, there's no path to broad-based gains in income that doesn't come from and rely on an atmosphere in which investors are confident, the companies are confident that they can invest. And we are doing enormously important things to make sure that we get the incentives better for innovation, and that the government is doing a better job of things governments have to do. Markets can't solve these problems, and the government has got to do a better job, better education outcomes, stronger infrastructure, better incentives for innovation, and we're committed to doing that.
BARTIROMO: This is an important point, because a lot of people are worried about innovation. What are the incentives that you can tell us about that is actually going to encourage innovation and investment?
Sec. GEITHNER: Well, I think you should be a little more optimistic, because this country is remarkably successful at innovation.
BARTIROMO: The best.
Sec. GEITHNER: US companies are at the frontier of innovation across almost every sector of a modern economy, and it's a great strength for us. And part of it's because our financial system, even though we got a bunch of things wrong, does a very good job of taking savings and allocating them to support some idea in some company that's growing. But again, for that to work in the future, we need to make sure that we're--we have people that have the education and skills they need to meet the needs of companies operating at the frontier of innovation, make sure we have better public infrastructure, better incentives for how we use energy. Those are critical things. And we need to make sure we have health care costs that are growing at a much slower rate, because those are enormous burden on any company trying to compete globally.
BARTIROMO: I realize it's really black and white today vs. a year ago, in terms of the environment, but some people say, why hasn't the stimulus worked more effectively? Why hasn't the money gotten to where it needs to go sooner?
Sec. GEITHNER: Stimulus has been remarkably effective, and the combined effect of stimulus, as it was designed and the efforts we took to stabilize the financial system, bring capital and private capital in, have been remarkably effective in arresting the freefall in economic growth we saw here and around the world and laying the foundation for growth. Now, you're seeing growth now for the first time, really, in almost two years. And that's a very encouraging sign. But it's very early still, and again, our job is to make sure that we're encouraging that process. And recovery act was designed so it's going to provide support over a two-year period of time, and you're just now starting to see--probably in the summer you started for the first time to see money start to flow and projects start to get financed. But a key part of stimulus was tax cuts to businesses and families and support to state and local governments, and those things had very immediate, very powerful effect.
BARTIROMO: Partly they were effective because it went to pay down debt.
Sec. GEITHNER: Well, they--again, it--I think, in many ways, this is about confidence. And what they--what they did was make more people more confident, that we were going to put a floor on this economy, provide some foundation of stability. And if you look at classic measures of confidence, business consumer confidence, equity prices, those started to turn when people start to see this country, this government acting together to do what's necessary to lift us, you know, pull us back from the abyss, lift us out of--out of recession.
BARTIROMO: So do we need a second stimulus?
Sec. GEITHNER: The Congress is carefully looking at a range of important things, like setting unemployment insurance, other types of programs that are critical to recovery, and I think there's going to be a good case for doing that.
BARTIROMO: A good case for a second stimulus?
Sec. GEITHNER: No, for what I just said, which is looking at a set of programs like unemployment insurance, other sets of things that have--that are set to expire. And there's a good case for extending them. And I think a lot of support fundamentally for doing it.
BARTIROMO: Yeah, a lot of people say, `Look, I wish the cash for clunkers program was extended, by the way.' That's one of them. Tim, do you think I've missed anything that you'd like to add? I want to make sure that I hit on all of the important topics here, and I think broad economic growth is what people are obviously looking for. But financial reform, do you think we've touched on that and really gotten the message out in terms of what it will like? Is it fair to say the financial services industry going forward is smaller, less leverage, smaller balance sheets? Is that fair?
Sec. GEITHNER: I think it's fair. I think mostly it's going to be different, in the sense that I think you're going to have less activity with a huge amount of leverage outside banks. I think banks will be less levered, too. In the whole...
BARTIROMO: Secretary Geithner, good to have you on the program.
Sec. GEITHNER: Nice to be here.
BARTIROMO: Thank you so much for joining us.
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