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NBC/CNBC EXCLUSIVE TRANSCRIPT: CNBC'S JOHN HARWOOD SPEAKS WITH TREASURY SECRETARY TIMOTHY GEITHNER TONIGHT

WHERE: "CNBC Special Report: Markets in Turmoil" at 8PM ET

WHEN: Tonight, Sunday, August 7th

Following is the unofficial transcript of a NBC/CNBC exclusive interview with Treasury Secretary Timothy Geithner airing tonight on a "CNBC Special Report: Markets in Turmoil" at 8PM ET. The interview will also air on "NBC Nightly News" at 6:30PM ET and available online at CNBC.com.

All references must be sourced to a NBC/CNBC exclusive.

JOHN HARWOOD: Mr. Secretary, thanks for being with us.

TIM GEITHNER: Good to see you, John.

JOHN HARWOOD: S&P downgraded Friday night over the weekend. Michelle Bachmann, the Republican presidential candidate, among others, said it happened on your watch. You should resign. Today you did the opposite and announced that you're staying. Why?

TIM GEITHNER: I believe in this president, John. I believe in what he's trying to do for the country. I love my work. And I think if a president asks you to serve, you have to do it. And we have men and women dying to protect the country in Afghanistan. We have unemployment above nine percent. Still trying to heal the scars of this crisis. We have a lot of work to do.

JOHN HARWOOD: Do you feel that you or the administration's policies are in any way responsible for this downgrade?

TIM GEITHNER: Oh, absolutely not. You've seen the president work incredibly hard and make really amazing progress trying to heal the damage caused by this terrible crisis. And you saw him work his heart out to try and bring both parties together to reach agreement on a long-term fiscal deal. Made some progress, didn't solve it all, but a very good down payment. Very strong bipartisan support for-- for that down payment. And we got a lot of work ahead of us, so--

JOHN HARWOOD: Alan Greenspan, former chair of the Federal Reserve today said that markets would react negatively to this. Said that it's been a blow to the psyche of the United States. We know that psychology's important in mark-- in markets. What is your message to investors about U.S. treasuries and about the economic path abroad?

TIM GEITHNER: Well-- let's just start with this particular judgment by S&P. I mean I think S&P has shown really terrible judgment and they've handled themselves very poorly. And they've shown a stunning lack of knowledge about basic U.S. fiscal budget math. And I think they drew exactly the wrong conclusion from this budget agreement.

They, like many people, looked at this terrible debate we've had over the past few months, should the U.S. default or not, really a remarkable thing for a country like the United States. And that was very damaging. And I think it left people to wonder whether this political system was going to be up to the challenges facing the country. It caused a lot of damage and that's going to take a long time to heal that damage.

And, you know, John, Congress ultimately owns the credit rating of the United States. They have the power of the purse on the Constitution. And they're going to have a chance now to-- to earn back confidence of investors around the world. And of course they're going to have to do that. But if you look at this country and you look at this economy, our-- our country is much stronger than Washington. We have a very resilient economy. We're a very strong country. And I have enormous confidence in the basic regenerative capacity of the American economy and the American people.

We're growing. We're still healing. We're not growing as fast as we'd like-- but we have absolutely every capacity to meet our obligations. There is no risk the-- the United States of America would ever not be in a position to meet its obligations. But we have a lot of work to do and, you know, when these leaders return from vacation, they're going to have to get back to work in trying to put together kind of long-term fiscal reforms to demonstrate we can live within our means and take some additional actions to help-- help strengthen this economy.

JOHN HARWOOD: In your opinion, are U.S. treasuries as safe this week as they were last week?

TIM GEITHNER: Oh, absolutely. And the judgment by S&P-- changed nothing. It added nothing to what people know about this country. Again, there's no risk the U.S. would never meet its obligations. We've got some challenges ahead of us, but we'll be able to work with those challenges. We'll get through this.

JOHN HARWOOD: So what about market psychology? How do you calm investors who are worried?

TIM GEITHNER: Well, I think if you look at the world over the last three months or so, what's happened is growth has slowed everywhere. You've seen Europe deal with-- dealing with or struggling to deal with some very difficult challenges in Europe as well. And you had this very damaging debate over default in the United States. A completely avoidable basic debate. And so it makes you wonder.

But I think you're going to see Europe step up and do what's necessary to help support the countries in Europe under the most pressure. And, you know, I-- again, I'm very confident in this country and the capacity of this country and even this political system, damaged as it looks, to come together and try to make more progress and meet the long-term challenges.

JOHN HARWOOD: You said a moment ago that Congress owns the credit rating. John Kerry, Democratic Senator, said today, "This is the Tea Party downgrade." Is that right?

TIM GEITHNER: Well, I wouldn't-- I'm not going to do politics, John. And I think if we've learned anything these last few months it's-- it's time to put the economy ahead of politics. Again, these are challenges facing the country of the United States, not-- not facing one party or the other. We both have some responsibility for coming together to dig our way out of this stuff.

And, again, this was-- you know, it's a big down payment on our fiscal challenges. Very strong bipartisan support for it. Our challenge is to build on that support and try to take the next steps that make some longer term progress. You know, we need to reform our tax system to help the middle class make this a stronger place to invest. Obviously we need to reform entitlement to secure Medicare for the next generation. And we've got to do some additional things to make the economy strong.

JOHN HARWOOD: Help the average American who's been absorbing this information this weekend, doesn't know all the details but is worried about what's going to happen to the interest rates on their mortgages, their car loans, their business loans. What is going to happen to their interest rates?

TIM GEITHNER: You know, it’s hard. I don't like to talk about markets, John. It's hard to know what'll happen in this context. But, again, I think that everyone can be confident, both here and around the world, that treasuries are the most-- these days the-- the most liquid-- the strongest place to put your money at a time like this.

And I think you'll see markets-- reset-- and now we can-- through this crisis. You know, interest rates are very, very low. Those interest rates reflect the confidence of the world. We have to keep working to earn that confidence and that's something we're entitled to.

And of course it's not surprising, given what we've been through in this budget debate, this debate about default, that people want to see the American political system demonstrate that we have a AAA political system, not just a AAA economy.

JOHN HARWOOD: Well, speaking of the political system, the president said it's not a AAA political system. And even though S&P may have messed up the math in the debt level computations, they're describing characteristics of the American political system that many people, including the president, have observed. Why should anybody expect that the political system will function more effectively going forward than it has so far?

TIM GEITHNER: 'Cause it always has in the past and it always will. That's the great strength about this country. Faced with tremendous challenge, our country has shown a unique and extraordinary capacity over time to act really with a tremendous record of judgment in crisis over time. And that's why I'm confident.

Again, if you look beneath the rhetoric-- and it's a very political moment when you-- to the campaign. If you look beneath the rhetoric, this was very strong, very broad based bipartisan agreement for some tough near term savings on the budget, strong down payment and we have an opportunity now to build on that and take the next step.

JOHN HARWOOD: China said over the weekend that the United States has to cure its addiction to debt. What's your reaction? And are you worried that they're going to stop lending us money?

TIM GEITHNER: Nothing-- no, absolutely no-- no concern about that. And-- they've always-- they've been very strong and I'm sure they'll be strong investors in the U.S. going forward, as will investors around the world. I'm very confident in that. But, again, there's no surprise that the U.S. has a long-term and unsustainable fiscal position. We believe that. The president believes that. That's why he's been fighting so hard to bring people together to try to deal with it.

We have some time to deal with it. We can't solve it overnight. Don't need to solve it overnight. It would be damaging, counterproductive to try to solve it overnight, because we have an economy still healing from the crisis. But, again, with bipartisan support on a strong, balanced, comprehensive, long-term reforms to the tax system and entitlements, then we're going to-- emerge from this crisis much stronger and in a very strong position.

JOHN HARWOOD: In light of that, not wanting to solve it overnight, was it a mistake to have any spending cuts in-- the immediate fiscal year?

TIM GEITHNER: No, the near term cuts in the budget, they're difficult cuts. They forced the government to do what you should-- government should do, which is use the taxpayers' money more carefully and more wisely. But-- they have very, very small effect in the economy near term.

Now we're going to make sure that we're extending the tax cuts in place now for average working Americans. We want to look for to-- more things to help improve investment incentives. Strengthen the infrastructure so we can build the country. Expand export growth. There's more things we can do for the economy now that we can afford and, you know, pushing the Congress will step it up and do those things.

JOHN HARWOOD: You mentioned problems in Europe where they have a full blown debt crisis. What are you telling Germany, France and our allies as you consult with them about what's going on here and there? What do they need to do? And is there a need for a coordinated global response?

TIM GEITHNER: Well, you know, I've been very close now to them, John, throughout this period of time, as has been the president, and certainly over the weekend. And-- spending more time in the next couple days talking to them. And I think, you know, what they face is a very difficult challenge.

They need to make sure that there's stronger economic growth. That those governments are getting their fiscal house in order. They strengthen their financial systems. And they're undertaking some very, very tough, very difficult-- politically tough reforms. But they need some help through it.

So what Europe needs to do is to make sure that there's an unequivocal financial backstop. So there is no doubt in anyone's mind that those countries across Europe have the ability and the will to meet their obligations. That's essential to managing crises. --the confidence. As I said earlier, I'm confident you're going to see them stop-- step up and provide more forceful support for the countries under so much pressure.

JOHN HARWOOD: Just as the United States ultimately-- has to deliver for NATO, does that mean Germany has to deliver? Is this about Germany stepping up?

TIM GEITHNER: Well, Germany's-- central to this, but it's a European problem. It's going to have to be a European approach-- European-wide consensus on this. The ECB has a central role and they've been playing a very constructive role. But, again, I think you're going to see the-- .

But of course I'm very close to them. We've spent a lot of time talking to them. And I think they have a sense of the magnitude of the problem now and-- and they know the world's watching. Wants to see them-- wants to see them move now.

JOHN HARWOOD: You said-- at one point, in an op-ed I believe-- last year, "Welcome to the recovery."

TIM GEITHNER: John, let me stop you there. That was The New York Times op-ed title. Not our title. It was a snarky title. Very unfair to us, the title. It's not what the op-ed said. What I said then, which is true and what's been happening, is that gradually the private sector of the United States. --Growing.

Investment has been increasing. Exports have been relatively strong. We're stealing with a very weak housing market. Very weak construction. Consumers still are acting as if they still feel like they have too much debt. And so we've got a lot of pressure still that's keeping growth weak.

And we've had some-- a lot of difficulty this year because of high oil prices in Japan, some bad weather, state and local governments-- are expanding. So that's made growth weaker than anybody of us would like. But we've created two-- more than 2.4 million jobs since the economy started create-- creating jobs, in the private sector, which is-- a very strong record of job creation this early in a recovery like this. Obviously we've got a lot of work to do. And, you know, we're going to keep at. The president's going to keep at it. He understands that we’ve got-- long way to go. And it—we’ve just got to keep moving. Keep trying to get Congress to do more.

JOHN HARWOOD: Have those head winds that you've referred to this year in fact made a double dip recession a possibility?

TIM GEITHNER: I don't think that's likely, John, but it depends on the quality of judgments of the governments and central banks now--

JOHN HARWOOD: Can't rule it out?

TIM GEITHNER:--around the world. Again, it just depends on what-- what governments and central banks do. Again, if you look at the world, the world has slowed. Growth has slowed. But-- there is a lot of room for central banks and governments to act in order to help deal with the pressures we're around the world.

And I know there's this perception out there that there's no room for policy. And, well, that is a deeply mistaken perception. In countries around the world, not just the United States, we have plenty of room to move and do things that would help make this economy even stronger in the short-term. And it's our responsibility to do that.

JOHN HARWOOD: Do central banks have a role in-- easing monetary policy as they have done in the past?

TIM GEITHNER: Of course. Of course. They always do in this context.

JOHN HARWOOD: The-- you mentioned some of the things the president wants to do. Extend the payroll tax cut. Fund the infrastructure bank. Pass trade deals. Extend unemployment insurance benefits. Given the depth of the financial crisis, are even steps like that going to make a noticeable difference to the American people given the rate of unemployment and how slowly we think it's going to come down?

TIM GEITHNER: Well, absolutely. I think if you-- if you-- if you saw the Congress come together, not just expand exports to--, but provide the kind of financing we need to help rebuild the country, long-term infrastructure commitment would help get more Americans back to work and put in place stronger incentives for investment in the United States. That would be very powerful. Would make a very big difference. And that's a good place-- a good place to start. You don't need to end there, necessarily, but that's a good place to start.

JOHN HARWOOD: Let me close with this. As a career public servant, you've worked in Treasury at various points, you've worked in the New York Fed, how did you feel when you got the word that-- S&P was downgrading?

TIM GEITHNER: Well, I wasn't surprised that-- when they acted because they--

JOHN HARWOOD: Were you--

JOHN HARWOOD: --angry?

TIM GEITHNER:--told the world they going to do it. I was-- what I was surprised by-- I'll tell you two things I did not anticipate. I did not anticipate that the Congress of the United States would spend three months debating whether we should default or not. Really just an inexcusably irresponsible, unnecessary debate for us to have. And I did not think S&P would make a elemental mistake in basic fiscal math.

Again, it's been a messy process, a messy few months or so. But pretty good result. Pretty good down payment on the long-term fiscal challenges. And it gives us more room to do what we need to do to-- to invest in, you know, making sure this country gets stronger.

JOHN HARWOOD: When you got the word that despite the computational error they were still downgrading, were you angry?

TIM GEITHNER: I don't-- I won't characterize what I felt at that point. I was surprised by it. But-- it-- again, just look at the quality of judgments they've made in the past. You know, our job is to worry about what we can do to make the country stronger. Their judgments cha-- change nothing about the challenges we face and the-- and the strengths we have as a country. And we're going to get through this fine. We've just got to make sure Congress is willing to come together and build on the process that-- we just started with this deal.

JOHN HARWOOD: Mr. Secretary, thanks very much.

TIM GEITHNER: Good to see, John.

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