Treasury Secretary Nominee Lawrence Summers
Treasury Secretary Nominee Lawrence Summers



Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Obama Economic Advisor Larry Summers tonight, Thursday, October 15th on CNBC's "The Kudlow Report" at 7PM ET.

All references must be sourced to CNBC.


JOHN HARWOOD: Larry Summers, thank you so much for joining us. Let me ask you this first question as someone who understands the world of Wall Street compensation. You made a lot of money at a hedge fund yourself. Wall Street firms are on track to pay a record $140 billion in bonuses this year. If that can happen so soon after a near collapse on Wall Street, taxpayer infusion of money, populist backlash, doesn't that mean that the regulatory reform process, especially since you don't have dollar limits on compensation, isn't going to do much about that?

Mr. LARRY SUMMERS: Not at all. It means that we've got to pass the regulatory legislation--reform legislation which hasn't passed yet. We were glad to see the House committee approve the reform on derivatives. There's a long way to go on regulatory reform. We hope and expect to get it done this year.

HARWOOD: But the administration...

Mr. SUMMERS: And I think it will represent the most profound change in the way in which Wall Street has been regulated in two generations. It will eliminate the idea that firms shop for their regulators. It'll have much better regulation of consumers than we have now. It'll make sure that the days of `heads, I win; tails, the government loses' bets are over. So, yes, there are...

HARWOOD: But no dollar limits on compensation?

Mr. SUMMERS: No dollar limits on compensation. We've got a market system, and once firms free themselves from the need to rely on government finance, there doesn't need to be, shouldn't be, limits on compensation. What there should be is requirements on the form and structure of compensation so that regulators are making sure you're not encouraging that excessive risk-taking where the idea is you rely, if you lose, on the taxpayers. That kind of reform's going to be a very important part of the regulatory agenda that has been laid out.

HARWOOD: So does that mean the amount of the compensation isn't the issue? It's simply the link to risk and reward?

Mr. SUMMERS: The structure and form of compensation is much more the issue than the amount. The president's always been clear that America needs to be a place where people who are very successful are able to profit from their success. What they must not be able to do is profit from failure, much less to profit from government support. And that's been the focus of our objectives. As you know, Ken Feinberg@, who was the special master during the post-9/11 period, has accepted an assignment for the Treasury Department arbitrating the compensation issues and the firms that received substantial benefits from the TARP, and his process has already resulted in a variety of changes that have meant that people were not getting what they might otherwise have in the absence of a recognition of the obligations that those firms felt to taxpayers.

HARWOOD: But is there anything more that your administration can do about that $140 billion right now?

Mr. SUMMERS: The--Ken Feinberg is, as you know, reviewing a range of compensation contracts. The...

HARWOOD: For a small number of firms, though.

Mr. SUMMERS: For the--for most of the largest firms in New York. The regulatory reform agenda, if it works by discouraging excess risk taking, by changing the form of compensation, we believe we'll have an important impact on compensation practices.

But look, the real question for our financial system isn't if some people succeed. It's if some people succeed while others are left behind, if we're not seeing the kind of lending we should to small businesses, if people are not carrying through on an aggressive program to mitigate foreclosures. And so the president has been very clear with the heads of financial institutions on the fact that their country, as part of responding to this financial crisis, has done a great deal for them, but they've got important obligations to meet as well, whether it's in the mortgage area, the community lending area, what have you.

HARWOOD: Well, you point to my next question, which is a broader question. Aside from the bonuses, you've got strong profits being made by Goldman Sachs and some other firms. You've got investors happy that the Dow is now over 10,000; and yet, unemployment is close to 10 percent, expected to go significantly over that. Is there anything that financial regulatory reform can do to rebalance that? That is, the fact that so many millions of Americans can be out of work while so many others are doing so well?

Mr. SUMMERS: Well, I think it's more the job of employment policy to make sure that people get back to work, make sure that people are protected when they're not unemployed. That's why the president has so strongly supported an expansion of unemployment insurance--extension of unemployment insurance benefits. That's why he supported a repeat of the payment to seniors as given as part of the recovery act last year. That's why we're making sure that the provisions, for the first time, enable the unemployed to continue their health insurance. There are all these kinds of provisions are being maintained.

HARWOOD: Does the government need to do...

Mr. SUMMERS: That's why we're also working very hard, you know. John, we saw data today for the first time that showed that the first $16 billion of the stimulus created over 30,000 jobs. So this is working, and the majority of the funds haven't yet been paid out. So we're very focused. Whether it's wiring the--wiring hospitals or whether it's weatherizing federal buildings, there's a great deal that's left to do. There are big opportunities in this country in infrastructure.

HARWOOD: Well, speaking of jobs...

Mr. SUMMERS: There's a lot that firms can do to hire more workers, and so we're looking at all those issues.

HARWOOD: Speaking of jobs, is there more that the government should do that has been done in the stimulus package already to accelerate job creation? And is there a job creation tax credit of the kind the president proposed in the campaign that can work without employers gaming the system? I hear you're skeptical about that.

Mr. SUMMERS: Well, when the president has proposals to make, he'll make them; and, as he has said, we are looking at a wide range of options with respect to job creation. The real priority, though, has to be first carrying through as aggressively as we can on the hundreds of billions of dollars that haven't yet been spent and that are going to be spent to over the next year and a half that will have very substantial job creation benefits.

HARWOOD: Do you believe in job creation...

Mr. SUMMERS: That along with--that along with support for small business, where we've seen a major increase in small business lending and where SBA administrator Karen Mills has all kinds of plans for further support of--for small business. These are some of the things that we're going to need to do. We'll continue to monitor the economy. When it's appropriate to take action, I'm sure that the president will.

HARWOOD: Do you believe a job creation tax credit could be structured to work?

Mr. SUMMERS: You know, I'm not going to get into various possible options that might get considered--might be considered at some point, as I'm saying.

HARWOOD: So you really are skeptical.

Mr. SUMMERS: We're looking--no, no. No, no. That's not what I said. That's putting words in my mouth. I'm declining to make a judgment. There's certainly reasons to be--reasons to look at those. And, as you know, the president discussed such an idea in the context of the stimulus last year, although it was not ultimately adopted. We'll look at all the options and make the best possible decisions.

HARWOOD: Let me go back to financial regulation. You talked about financial institutions not being able to choose their regulator, and yet there was only a limited amount of streamlining that you all did in what you proposed to Congress. President Obama told me a few months ago that was because he was being practical and wanted to get it passed, didn't want to stimulate too much opposition. We've also seen in the early action on the Hill more exemptions being made from coverage by the Consumer Finance Protection Agency. Is it not inevitable, in your view, in this process, that this bill is going to be weakened and that the effect of it is going to be watered down as you move through the process?

Mr. SUMMERS: I don't think so. I think if you looked at the legislation that passed through the Financial Services Committee with respect to derivatives, it came through in a very strong form. The president has been very clear on the Consumer Financial Protection Agency about how fundamental that is and how basic decisions about protecting consumers have to be separated from those whose primary mandate is to ensure the profitability of financial institutions. That's a--if it comes to that, that's a fight the president is happy to have because he's on the side of the American people. So we feel--we feel good about that. And, no, I mean, in any legislative process there's discussion, debate, and thinking improves and policies are crafted ever more carefully; but we certainly do not expect to see this bill watered down. And in some areas, as we've come to understand the concerns more and more acutely, I expect that the bill will actually be strengthened.

HARWOOD: Mark Zandi tells me that he believes unemployment will peak at 10.5 percent next June and begin declining after that. Does that sound on target to you? And if it--if he is right, how quickly can it come down after that peak?

Mr. SUMMERS: You know, I don't think it's any secret that unemployment has been increasing. I expect it'll continue to increase for at least a little while, a little while forward, but I think you have to recognize that we're in a very different place than we were nine months ago. No one talks about the economy being in free fall. GDP growth is actually likely to be positive for the next six months. So I think we're turning a corner, and as that corner is turned, I think you'll see recovery gather speed and you'll start to see the unemployment coming down.

HARWOOD: Will it go...

Mr. SUMMERS: But, you know, these patterns were not made--these problems that we have were not made in a day or a month or a year, and they're not going to get fixed overnight. The president...

HARWOOD: Do you think 10.5 percent sounds right for where it will peak?

Mr. SUMMERS: I'm not going to get into specifics. Not wouldn't have been the number I would've chosen, but I'm not going to get into...

HARWOOD: Higher or lower?

Mr. SUMMERS: Look, I'm not going to--I'm not--just not going to go there. I think what we can say is that it looks like there's going to be some further increase from this point. But I think the basic tendency is pretty clearly for the economy to be in repair. It's pretty clear, if you look quarter by quarter, that the rate of job loss has been declining quite substantially; and so I think that trend will continue and as that rate of job loss moves through zero, then you're looking job gains and ultimately reductions in unemployment.

HARWOOD: Fred Bergsten, who I know you know, is out with an article this week in Foreign Affairs saying if the United States is serious about recovery, it needs to embrace the declining dollar. I know you've got a computer chip in your brain that says a strong dollar from your service as Treasury secretary is in the best interest of the country. But, in fact, isn't he describing what the administration is doing, and is he right about that?

Mr. SUMMERS: No and no. Secretary Geithner's often spoke with the administration saying that a strong dollar is in our interest. That's a true statement about America.

HARWOOD: But the dollar's gone down under...(unintelligible).

Mr. SUMMERS: And that America's--that and--and that's our policy. Our policy's always recognized that currencies fluctuate. That's what it means to have a floating exchange rate system. What's really crucial is that we strengthen the fundamentals of the economy and it's capacity to grow. And that's where the president's emphasis has been, whether it's the recovery act or whether it's what we're trying to do on health care, whether it's fundamental...

HARWOOD: But isn't a declining dollar helpful for the rebalancing of the economy...

Mr. SUMMERS: education.

HARWOOD: ...away from a consumer-demand-driven economy?

Mr. SUMMERS: The focus of our--the focus of our policy, John, is on the fundamentals of the economy.

HARWOOD: Let me wrap up with this question. As you may recall, Larry Lindsey, who held your job under President Bush, got in hot water with the administration for saying that the Iraq war would cost $200 billion, which turned out to be quite low. Democrats criticized the administration for muzzling him. What can you tell the American people about what our commitment to Afghanistan will cost over a number of years and is that a relevant factor in the decision that the president's dealing with right now?

Mr. SUMMERS: John, that's an ambitious attempt. I'm sure when the president has made a set of decisions, laid out a policy, his Defense Department, his Budget Office will speak about what its consequences will be. No one will muzzle them. There'll be room for the appropriate discussion and debate in the Congress. But before we--before the president has made a judgment about troop levels, it would be manifestly premature to try to speculate about costs.

HARWOOD: Do you have a role in that discussion? And are costs, in your view, relevant to the decision?

Mr. SUMMERS: You know, I think enough has been said about the--that without my joining a public discussion of what obviously should be an area for private deliberation.

HARWOOD: Larry Summers, thanks so much for being with us.

Mr. SUMMERS: Thank you.

HARWOOD: Appreciate it.

Mr. SUMMERS: See you.

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