Treasury Secretary Timothy Geithner
Treasury Secretary Timothy Geithner

WHEN: Today, Wednesday, July 7th at 7PM ET

WHERE: CNBC's “The Kudlow Report

Following is the unofficial transcript of a CNBC interview with Treasury Secretary Timothy Geithner today, Wednesday, July 7th on CNBC’s “The Kudlow Report.”

All references must be sourced to CNBC.


LARRY KUDLOW, host: We welcome to THE KUDLOW REPORT Treasury Secretary Tim Geithner. Thank you very much.

Secretary TIM GEITHNER: Good to be here, Larry.

KUDLOW: Let me begin with this. Is there bad blood now between the administration and business, and was the president's free trade speech today designed to calm business with a pro-growth message? I mean, stocks are up 275 points, the speech may have had something to do with it. Were you trying to speak to your business critics?

Sec. GEITHNER: We have a pro-growth agenda. Part of the agenda is growing exports. They're central to our future. What the president today is to say, that is important to the United States, we're going to be committed to making sure we're that we're expanding opportunities for American business everywhere. Now, this president understands deeply that governments don't create jobs, businesses create jobs. And our job as government is try to make sure we're creating the conditions that allow businesses to prosper so they can hire people back, get this economy going again.

KUDLOW: All right, I hear you. I hear you, I get what you're saying to me. But as you know, you've had tremendous criticism from the leaders of the Business Roundtable, the Business Council, you see this criticism with the small business surveys. They're worried about stimulus spending, taxing, cap and trade, fin reg, health care, the costs of doing business. Some have characterized it as a bad environment for investment in jobs.

Sec. GEITHNER: Business...

KUDLOW: So how do you react to that? And so, you know, changing the rules of the game.

Sec. GEITHNER: Look...

KUDLOW: This is overregulation. How do you react?

Sec. GEITHNER: I think businesses are doing now what businesses always do, which is they want their taxes lower and they'd like to operate with less regulation, as they always do. Our job, though, is to make sure, again, we're creating the conditions that make this economy work better for the country as a whole. Now, just remember, when the president stepped into this job, business of America was out of business. People could not borrow.

KUDLOW: All right. All right.

Sec. GEITHNER: They were cutting deeply into the bone of the productive capacity of this country. They were completely out of commission. It was almost lights out. And what the president did is to take on the tough things early to bring stability to an economy that was falling off the cliff. And businesses across this country are in a much, much stronger position today because of the actions he was willing to take. Now, people don't like change, they don't like these reforms, but he took on things that are absolutely critical to our capacity to grow in education, in health care costs and in the financial system. And by taking those tough choices early, we're in a much stronger position now to make sure we can prosper going forward.

KUDLOW: Why is it, then--I mean, you've got--first of all, let's talk about spending, stimulus spending. It's like public enemy number one. I mean, you see it in all the opinion polls, public enemy number one. Now, you recommended more spending at the G-20, and you're recommending more spending here at home on unemployment compensation and so forth.

Sec. GEITHNER: That's not quite--can I just...

KUDLOW: Yes, please.


KUDLOW: Please.

Sec. GEITHNER: Our basic job now, as I know agree with this, our basic responsibility right now is to make sure this economy is growing again.


Sec. GEITHNER: We have a recovery led by private demand, private investment, private recovery. That is the most important thing we can do right now. Now, as part of that, we want to make sure that governments around the world are working with us to make sure we're strengthening growth. In the United States, what the president does propose a series of very targeted measures to support business investment, credit for small businesses, help stay--keep teachers in the classrooms. Those are very sensible--those are good policy for the country. But of course, we recognize that if we're going to have growth in the future we also need to be--make people confident that we're going to have the will as a country here in Washington to act to bring those deficits down over time as growth strengthens, recovers. But our job now is about growth. Now, all the government can do is to make sure we're providing a bridge to the recovery in private demands.

KUDLOW: Well...

Sec. GEITHNER: As I said earlier, it's businesses that create jobs, governments don't create jobs.

KUDLOW: But--all right, Secretary, I--that--it's a great--it's a great point. But what you hear, for example, let me raise this. Unemployment insurance is back on the table, whatever, $30 billion. It would make it up to two years. Some people say that's a deterrent to working, but I'm not going to debate that. Why not couple that with something that would help business investment, again, large and small? For example, Japan and Britain have lowered their corporate tax rates. We now have the highest in the world, we're not competitive. Why not couple the unemployment bill with a lower corporate tax reform? Why not couple it with full cash expensing for business investment, which some people like Fred Smith of FedEx say is the absolute best bang for the buck? In other words, can you lower tax burdens for business even while you're trying to prop up the safety net for those who are truly needy?

Sec. GEITHNER: We're going to have to take a look at comprehensive tax reform for the corporate sector. I agree with that. I think it's going to be important for us going forward. That's one of the things that this fiscal commission is going to look at. Now, it's important to recognize, Larry, that the effective tax rate that US businesses pay now is about the average of what companies face around the world. Our priority right now, and this is what the president is doing, is to make sure that we're extending tax cuts that go to benefit more than 95 percent of businesses in America.

KUDLOW: But what about the capital--what about the capital...

Sec. GEITHNER: And as...

KUDLOW: ...and the investment tax hike?

Sec. GEITHNER: And--but we're for that. And as part of that, we want to make sure that businesses are getting continued incentives to invest. So there's a bill right before the Senate, it's called the small business package, but it includes some very important, targeted incentives: zero capital gains rate on investment in small business, extension of expensing, this bonus depreciation thing. So those are things we think are very good policy, very good--they're sensible things.

KUDLOW: But aren't...

Sec. GEITHNER: Those are things you support.

KUDLOW: I--yes, I do. But again, why not universalize them? They're very narrowly targeted.

Sec. GEITHNER: No, but...

KUDLOW: They don't help the majority of companies, both large and small. We're running at a competitive disadvantage. I mean, for example, in Asia, as you know, they really tax capital less than we do. And here's what I hear all the time from my interviews, people on the street. We're going to see the Bush tax cuts expire, at least for the top end, next year. Tax hikes on capital gains dividends stay.

Sec. GEITHNER: Just for the top end.

KUDLOW: Personal income...

Sec. GEITHNER: Just for the top end.

KUDLOW: Yeah, but this is a big chunk.

Sec. GEITHNER: Right.

KUDLOW: I mean, those are those most likely to invest and save and take risks. Why penalize them? Why not reward them? Why not say there's a moratorium on tax hikes in an uncertain economy?

Sec. GEITHNER: Well, let me tell you what the president's going to fight for and propose. We're going to make sure that we extend and leave in place tax cuts that will go to benefit more than 95 percent--not just of individuals in this country, but of businesses across the country. We think that's good policy, good for the country, sensible policy. We're going to make sure that we keep at 20 percent the existing rates on dividends and capital gains. We think that's good policy, too. But...

KUDLOW: For the--for the--but not for the top end.

Sec. GEITHNER: For dividends. Just for the high end. No, for the high end. We're proposing to make sure that...

KUDLOW: For the high end?

Sec. GEITHNER: ...that 20--and 20/20 on dividends and capital gains. Now, that's the president's proposal. Now, you're right, we're also proposing to allow the tax cuts that President Bush put in place that go to the top 2 to 3 percent of the most affluent, most fortunate Americans in this country, we're proposing to let those expire. But when they expire, Larry, they're going to go back to the rates that prevailed in the second half of the '90s. And as you know, that was a period where we had the best record of growth in private investment, in productivity, broad-based gains of income. That was a record that was the envy of the world in terms of...


Sec. GEITHNER: ...innovation and...

KUDLOW: Touche. I agree, absolutely. I mean, I supported most of Clinton's policies, to tell you the truth. Maybe not the tax--certainly the lower capital gains tax, his free trade policies, his welfare reform. But I want to ask, you know, going after the top 2 or 3 percent, look, Arthur Brooks, the head of AEI's got a book out now. He says there's a war going on between the culture of entrepreneurship on the one side and statism and redistributionism, as he calls it, on the other. When people hear you say we're going to penalize the top earners, those who really make the most income and have the most successful investments, it sounds like social policy, not economic growth. It sounds like ideology, not economic growth policy.

Sec. GEITHNER: We're going to be on the side of the entrepreneur, because there is no plausible strategy for this country to grow that doesn't recognize that that growth has to come from private businesses investing and innovating in this country. That has to be the centerpiece of any successful strategy for this country. But as you know, we inherited a kind of a big mess...


Sec. GEITHNER: ...on the fiscal side. And part of growth in this country, part of making sure interest rates are low over time so people have their--are able to invest, is to make sure that people understand that we're going to start to dig our way out of that fiscal hole over time. So we think the responsible thing to do--and we don't do this with pleasure--is to make sure we are beginning to take the steps that allow us to dig out of that fiscal hole. And part of that, we think it's responsible to allow those tax cuts that benefited just those 2 to 3 percent of Americans to expire. But again, it only--they only go back to the level, Larry, that prevailed in a period where we had terrific outcomes for the American entrepreneur.

KUDLOW: Well, I think one issue is that when people look at this oversized spending and deficits and borrowing, they don't believe you're going to stop there on tax rates. Now, how do you respond to that? I mean, it's sort of like, to tell you the truth, the country is getting a fiscal product from Washington that it is scared to death about. I mean, that shows up in all the opinion surveys. You know this as well as I do. So if you're running 10 percent of GDP deficits, if the debt-to-GDP ratio is on its way from 60 to 80 to maybe 100 percent according to the Congressional Budget Office, then folks think this is the first of many future tax hikes to come, and it causes them to freeze. And they worry about the regulatory impact of these huge bills. What do you--how do you react to that? This is the heart of the business worry. I think it's the heart of the mainstream worry.

Sec. GEITHNER: I think if you listen to people across the country today, businesses and average working Americans, you hear people worried about two things: growth and jobs, and our long-term fiscal problems. And I think we should find--we should--I would be optimistic about the broad recognition you're seeing in the country today that our deficits are too high and they're going to have to come down. Remember, there was a long period of time where a lot of people in this country believed that deficits didn't matter and we could borrow our way forever.

KUDLOW: Yeah. Loose talk.

Sec. GEITHNER: And that...

KUDLOW: Very loose talk.

Sec. GEITHNER: And that was not a responsible strategy for the country.

KUDLOW: Right.

Sec. GEITHNER: And I would say it's a good thing people recognize now that these are going to have to come down over time. And I think that recognition is the beginning. Now, it's going to require some difficult choices. Our challenge is going to be the way to make sure we dig out of that fiscal hole in a way that is good for growth, good for incentives for investment, but still regarded as fair to the average American that doesn't want to have to bear a larger burden of paying for things governments have to do. That's going to be the challenge.

KUDLOW: All right, I hear you.

Sec. GEITHNER: But can I--I want to go back to what you said.

KUDLOW: Of course you--of course you may.

Sec. GEITHNER: The president, again, he took on, right when he took office, a set of very challenging reforms in education, in health care and in the financial system. Those things are important to every business operating in this country. Education because you want to make sure you have a well-educated work force able to produce the things we need as a country, provide the ideas we need to grow. Health care because rising costs are killing American business. And the--and a financial system that was not good for American business. Now, reg reforms...

KUDLOW: ...get to fin reg in a minute.

Sec. GEITHNER: Yeah.

KUDLOW: But you know businesses is worried that the Obamacare health plan is going to layer on more costs and more taxes. It's not a popular plan, Secretary.

Sec. GEITHNER: But you have--you have to look at what the independent analysts say about health care costs, and they say this plan will make a substantial contribution to slowing the rate of overall growth of health care costs, and that is very encouraging. Now, it's a beginning. It won't solve all problems. And a very difficult thing to do, particularly at a time when people have so little faith in government getting things right, but it goes in the right direction and I think it's enormously important to the business of America, not just to our long-term...

KUDLOW: All right. Now I just got a couple of real fast ones, then I want to close on bank regulation, financial reg. First of all, what is your economic outlook right now?

Sec. GEITHNER: I think this economy is healing. We're repairing the damage caused by the crisis. We're growing, and we've been growing now for 12 months now. We've had six months of sustained growth in private sector jobs. Coming out of the last recession, it took us almost two years before we had a sustained set of month-to-month increase in private sector jobs, so that's very encouraging. I think the most likely thing is you're going to see an economy that is growing at a moderate pace, hopefully strengthening over time. And this growth now you're seeing is being led by business investment, by exports, by manufacturing. That's very encouraging, too. And again, if you look across American industry today, you see the great strength of America. You see our companies competing in the technologies that the world needs. And we are exceptionally good as a country at making things that are very important to growth around the world, and that will serve us well.

KUDLOW: Will the unions allow these free trade agreements to go through? The president talked about South Korea, Colombia and Panama today. These are very important, lots of jobs could be created, beneficial to consumers. The unions have been an obstacle in the Democratic Party and, frankly, in the Republican Party. Can any of this stuff get through in this session?

Sec. GEITHNER: I think people want to see these agreements will come on terms that are fair and good for American business and American workers. So if the president can present--I believe he can--agreements that we think do a good job of protecting those interests, then I think we're going to find support for them.

KUDLOW: All right.

Sec. GEITHNER: It's very important we do, because we need to be able to be back in the game...

KUDLOW: No, I agree.

Sec. GEITHNER: ...of trade, expanding opportunities, because we will benefit hugely from them.

KUDLOW: All right, the clock is ticking. We might run over a minute. Financial regulation. All right, you've--this has been one of the hearts of your whole existence. First of all, the criticism is, as you know, that the five or 10 largest banks are still too big to fail, and that this bill therefore fails to remove the moral hazard of excessive risk-taking. Your response to too big to fail?

Sec. GEITHNER: Disagree with that. What this bill does is very important. It gives us the authority to constrain risk-taking, limit leverage, force much more conservative capital requirements, liquidity requirements, on these large institutions, so they are much less vulnerable to mistakes, much more able to withstand the shocks that could come from the future, future recessions, wherever they come from. But what it also does, and this is fundamental, what it also does is make sure that if they mess up in the future, if they make mistakes and they can't survive without the government coming in, then we will be able to put them out of existence safely, without the taxpayer being exposed to...

KUDLOW: The biggest. The biggest, top five, top 10?

Sec. GEITHNER: The biggest institutions, exactly. So this--what happens is if you--like if AIG were to happen in the future, Lehman, AIG, Bear Stearns, the government would have the ability to come in and dismember it--and only this, not to preserve them to live another day, but to dismember them safely, break them up, wind them down without the taxpayer being exposed to loss and without the fire spreading to a bunch of better managed, solvent institutions. That's what this bill does, and it's very important we do it.

KUDLOW: All right. One way or the other, the banks are going to continue to trade derivatives. But the corporations, again, Business Roundtable folks are saying the end users of derivatives who want to hedge, what, currencies or energy or farm products, they're going to have to pay a trillion dollars more because of this bill, and therefore they're being enormously penalized.

Sec. GEITHNER: No...

KUDLOW: Your reaction?

Sec. GEITHNER: No basis for those estimates or those concerns, in my view. What this bill does, it preserves the capacity not just for financial institutions but for American businesses to hedge the risks they face in their business. It allows them to continue to do that in ways that meet their specific needs, but to make sure the system as a whole is safer. That stuff happens in the light of day with transparency and disclosure. That's why these reforms are so important in derivatives, so that we don't face the situation again where all this stuff operates in the shadows, where firms like AIG can take on huge risks without the capital to back them up.

KUDLOW: And of course, everyone is up in arms about nothing being done with Fannie and Freddie. And, you know, it's a couple of hundred billion dollars right now. It's off the budget, it's actually exacerbating the deficit, as you well know, running the Treasury. People are throwing up their hands, how can we exempt Fannie and Freddie? They were a crucial element of the problem.

Sec. GEITHNER: No one is going to feel more strongly about reforming those institutions, fixing what's broken, than I am. I'm the one that has to live with trying to clean up that basic mess we inherited. And we're going to propose a sweeping set of reforms that'll end what was broken in that basic model, remove the moral hazard from it, fix the basic things that caused that risk, and we are going to move quickly to do that once we have this financial reform bill in place and behind us. We've had a very thoughtful team of people looking at alternatives, and we're going to cast the net very broadly across the aisle to get the best ideas so we can fix what's broken. This is very important we do it. We couldn't do everything at once, and we decided to do it--try to fix these other problems first. But we're going to move very quickly to reform Fannie and Freddie.

KUDLOW: Personal question, and my final one. And you've been terrific today and I appreciate your time. You had a slow start, but you have become a crucial player in the Obama team, his economics teams. You've come--everyone says that about you. So my question is, will you continue to serve as Treasury Secretary beyond the midterm elections?

Sec. GEITHNER: As long as the president wants me to serve, it is my privilege and honor to help him fix what's broken and make this country stronger. I'll do it as long as he asks me to.

KUDLOW: He backed you, and you're backing him.

Sec. GEITHNER: Absolutely.

KUDLOW: All right.

Sec. GEITHNER: Absolutely.

KUDLOW: Secretary Tim Geithner, we appreciate it very much.

Sec. GEITHNER: All right. See you.

KUDLOW: Terrific stuff and I thank you.

Sec. GEITHNER: Good to see you, Larry.

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