>> r rose: welcome to our program. tonight, the u.s. secretary of the treasury tim geithner. >> as the american people repair their balance sleets, as they save more as a share of their income, as they reduce their debt outstanding, that will make us stronger in the future. in the short term, it means growth is slower than we'd like but it's fundamentally healthy for us and we are, in my judgment, charlie, a substantial way through the process of healing, of fixing the things that are broken. the financial sector much less leveraged. we've had a traumatic, huge adjustment in house prices, real estate prices across the country. and private savings rates are already increased quite significantly. so those things are really important for future growth and they're encouraging. but they do mean that we're not growing as fast as we'd like and i think washington has more work

to do to provide support for the economy. >> rose: geithner for the hour, next. captioning sponsored by rose communications

from our studios in new york city, this is charlie rose. >> rose: tim geithner is here, he's the united states secretary of the treasury. he's been in office during one of the most tumultuous periods in american history. two of the government's signature economic programs are coming to a close-- the troubled asset relief program, or tarp-- was wound down on sunday. despite overwhelming disapproval among voters, it's been praised for restoring the financial system. the american recovery and reinvestment act also ended in late september yet the economy continues to struggle while productivity has officially been growing for nearly 15 months, unemployment remains at 9.6% and the country lost another 95,000 jobs in september. there have also been big changes in personnel at the white house. the departure of such key figures as larry summers, christina roamer and peter

orszag has resulted in a period of transition for the obama administration. secretary geithner is now poised to become the dean of the president's economic team. i am pleased to have dean geithner here with us this evening. welcome. >> nice to see you, charlie. >> rose: (laughs) tell me where the global economy is. what you expect to happen in the rest of 2010 and for the year of 2011 region by region. >> the world economy suffered a serious blow, devastating blowment it wasn't just here it was really around the world and around the world, the world's now healing. it's growing. the i.m.f. expects the world as a whole to expand at a rate of 4% next year. >> rose: 4.2%, they say. 4.4% this year. >> which is not amazing but much better than we thought would have been possible. but that overall number-- which is pretty impressive-- still hides huge differences across regions. >> rose: imbalances. >> yeah.

and there are parts of the world economy-- china, india, brazil, emerging markets in arab a ya, latin america, eastern europe-- that are growing very rapidly now. those are the most populous countries in the world and they have a long period of rapid growth ahead of help the. europe and japan growth is much weaker still. most people expect those economies to grow between 1% and 1.5% which is a very slow recovery. the united states the picture is next. right now i think most economists thing think we're growing at a rate of about 2%. but if you look ahead and you saw the blue chip forecasters this morning, the private forecasters, average private forecasters say they expect the economy to strengthen to 11, grow about 3. that's not fast enough for us. we want it to be faster and we still have a lot of work to do to heal the damage caused by the crisis and try to get more americans back to work more quickly and make sure that we're growing sustainably in the future. but the american economy, it's

healing. parts of it look very strong and impressive now if you look at high tech, you look at manufacturing, look at agriculture. you look at industrial production. they came out of the crisis much more quickly, really quite strong. even private investment growth that slowed a bit, even private investment growth, investment by businesses and capital invest system expanding at a healthy clip. the reason why it's slower, charlie, than we'd like is fundamentally goes back to the causes of the crisis. you know, we you had a crisis caused by the fact that as an economy we were living way beyond our means. people were borrowing more than they could afford. they were spending more than they earned and you had these huge growth in leverage in the financial sector and when you have a recession, a crisis caused by that, it takes more time to dig out of it. and the things that are causing growth to feel slower now, to seem slower, weaker now, are fundamental to the process of healing. we see weakness in it, people are concerned by weakness in it, but it's really about future

strength because, as the american people repair their balance sheets, as they save more as a share of their income, as they reduce their debt outstanding, that lick l make us stronger in the future. in the short term it means growth is slower than we'd like but it's fundamentally healthy for us and we are, in my judgment, charlie, a substantial way through the process of healing, of fixing the things that were broken. the financial sector much less leveraged. we've had a traumatic, huge adjustment in house prices, real estate prices across the country and private savings rates are already increased quite significantly. so if those things are really important for future growth and they're encouraging, but they do mean that we're not growing as fast as we'd like and i think washington has more work to do to provide some support for the economy. >> rose: you're encouraging banks to declare moratorium on foreclosures? >> i wouldn't say it that way. what you're seeing in housing is a national tragedy. still very, very difficult. again, this was a crisis caused

by... a lot of people were taken advantage of, a lot of people were too optimistic of what they could afford in terms of a house, a lot of people were speculating real estate and a lot of innocent victims got caught up in the consequences of those basic mistakes. you saw the nation's largest banks that ran these servicing businesses not informs anything like what they needed to to run that business effectively in a downturn like that. and you're seeing the consequences of all those mistakes play out still across the american economy. now, you've seen some banks suspend temporarily the foreclosure process so they can make sure they're not causing any adjustment to borrowers and that's very important to happen. >> rose: are you pleased to see that happen? >> i think where there's happening the suspension to make sure they're not causing injustice is important. but i think it's important to recognize, charlie, that a national pour moratorium would be damaging to the kind of people we're trying to protect because the consequence of that would be in neighborhoods most affected by the foreclosure

prices, where you see lots of houses on the block empty, unoccupied, it means those communities will be living long we are houses unoccupied, with more pressure on their house prices, the people still in their houses, that would be very damaging. so, again, we want to make sure we're holding these services accountable, that they're not causing any injustice to... people who can afford to stay in their home. but we also want to make sure we're not going to make the problem worse. >> rose: last time i talked to you i asked about fannie mae and freddie mac and you said that's next. when does "next" mean? >> we're going to meet this deadline. we're obligated under the wall street reform bill to propose what the new system should look like early the year and we're going to meet that responsibility and we're going to fundamentally change the system. >> rose: give us an indication of what it will look like. >> we'll make it substantially better. we don't want to be in a situation again everywhere you have entities like that where you have the opportunity for private shareholders to take

advantage of the public commitment of support and earn huge sums of money, pay that money to their chief executives, it little of that benefit went to the homeowner. take on huge amount of risk that could imperil the system and those are fundamentally avoidable mistake. they are and i think we can make sure we replace them with a system that does a better job of making sure... >> rose: but is there a plan or just simply waiting to present, are you waiting to hear from barney frank and chris dodd or... >> obviously we're going to consult very closely with chairman frank and chairman dodd and with the republican counterparts because this is going to require bipartisan consensus. and we've been doing that, we've been conducting a series of outreach efforts across the country to make sure we're listening to a broader range of views and alternative models and we're going to take that consultation process and reflect that in a set of proposals for the congress to consider. >> rose: tell us about unemployment and why it's at 9.6% and why those numbers don't go down and how long would they

be at the level they are? >> unemployment at 10% is still overwhelmingly a reflection of how serious the crisis was. how deep the damage was caused by this financial panic like we hadn't seen since the great depression. it's going to take time for that to come down. the most important reason why it's so high is because the economy is not growing rapidly enough to provide new opportunities and it's also true that the crisis was so scarring to confidence. it was, you know, without precedent. very few people running a business today in the united states had ever seen anything like that. >> rose: so they're not prepared to reinvest and build new factories and hire new people because they're waiting for what? >> well, they are still, again, scarred by the crisis. they're still a little tentative and cautious and uncertain about how fast growth is going to be. how much demand for their products is going to be. so although they're invest ago lot, private investment by

american companies grew at an annual rate of more than 20% in the first half of the year. looks like in the third quarter it grew close to 10%, maybe a little less. but they're still spending at a level that is encouraging. because they're looking past the crisis now to the future. and private sector job growth came much earlier in this recovery than in the last two recoveries but not strong enough yet to bring the unemployment rate. and you're still seeing businesses waiting to see how strong is growth going to be. and that's the fundamental factor holding back investment hiring. >> rose: what can you as the secretary of the treasury do to reassure them and create the confidence? >> excellent question. and the president in september proposed three very important things that will help, we believe, create greater incentives for stronger investment and a stronger recovery coming out of this. and more job creation. first thing, he gave more detail yesterday on this. he proposed a substantial

multiyear program of investment in public infrastructure in roads... >> rose: but why didn't they do that from the beginning? >> well, we did. >> rose: but in a significant way. that created better and quicker jobs? >> substantial part of the recovery act, over a two-year period was just those kind of investments in infrastructure. you're seeing across the country now i think 14,000 projects at the state and local level that are basic improvements in the transportation infrastructure of the country. so that we do a better job of reducing costs to businesses getting their gos to market. and there's an overwhelming strong case. because again, the strong crisis... most of the damage caused by the crisis fell on construction workers, manufacturing jobs. and infrastructure is a good way to produce new jobs opportunities in those sectors and still be doing things that help us grow more rapidly in the future. but the president also proposed two very smart, very sensible incentives for private investment. one is to make permanent a very

generous, much more generous tax credit for firms that conduct research and development in the united states. you know, investments in the ideas of the future, the technology of the future. and he proposed to make that permanent at a more generous level. so more more of the investment that's going to come to meet this growing demand around the world comes in the united states. and he also... one more thing, charlie. he also proposed to provide a... for a one-year period 100% expensing of new capital investments. so a new business makes an investment to buy equipment tomorrow... >> rose: they'll back this. >> exactly. and those things are a start. and the benefit of these things are they're good for investment, good for long-term growth. and in the past they've had a lot of republican support. so we think as we move to extend these tax cuts for the middle-class, if at that same time we can do things that are good for investment, that would be a powerful mix of additional support, very sensible design support for the economy. >> rose: the stimulus program.

let's unpackage that now. $700 billion. how much of that was tax cuts? >> about $300 billion. >> rose: so that left $400 billion. >> right. >> rose: and how much of that has been spent? >> i think we are on track to spend... have spent 70% of that now, up to that point. and we're on that path. so there's about 30% still ahead. most of what's still ahead is infrastructure spending. but we think we need toe do better than that and there's a very strong economic case for adding to that pipeline of remaining infrastructure investments... >> rose: as you know, paul krugman constantly writes a column over and over and over that says the stimulus should have been larger and joe stiglitz and other people believe that to be true. was the stimulus not larger because you didn't believe it was the right policy or it was not politically viable? >> at the time... it's worth going back. by the way, i completely agree with those economists and others who believed back at that time, in the transition, in late 2008,

that our overwhelming imperative was to make sure we are putting a very substantial program of investments, tax cuts alongside for what we did with the financial system in place at that time. without that growth would have been terrible, unemployment would have been much higher. at the end of 2008, before the president took office and even into 2009 because of the momentum was so strong, the economy was shrinking at an annual rate of about 6%. we were losing three quarters of a million jobs a month. and that would have gotten worse not better if the government hadn't acted to put a... very substantial unprecedented scale of support into the economy to break the back... >> rose: but it was rumored at the time or said at the time that christine romer and some other people within the councils were suggesting even a trillion dollar stimulus and recovery program. >> we're going back... at... around the election when members of congress were thinking that they needed to do more-- this is before the election-- they were talkings about a package of

stimulus at that point in the range of about $200 billion. what we ultimately did was about four times that. and we knew that even though this was a two-year program designed as two-year program and even was a multiple of what people were thinking about before the president took office that we may need to come back and do more because we were not certain at that point about how much it was going to take. and one thing we said at the time, charlie, we said this in the financial sector and on the stimulus, and the recovery act is the president said we are gonna do whatever it takes to make sure we're healing damage as quickly as possible and we knew we'd have to revisit that judgment over time. as the president did at the end of last year where he proposed at the end of last year a series of additional investments like, for example, the small business bill that just passed he proposed ten months ago. the additional support for state and local government which is, as we saw in the job numbers last friday is very important because you're still seeing state and local governments have to let a bunch of teachers go because they're still suffering from the damage caused by the recession. so he proposed even at the end

of 2009 a series of additional targeted investments so we're providing reinforcement to the economy. now, one more thing. we needed to get something in place quickly because the crisis was so grave at that point. there was a huge imperative for speed. and we did not have the luxury of sitting around-- and this is the great credit to the president-- of sitting around debating what the optimal thing was going to be. >> rose: that's right. >> and we didn't want to risk having a long protracted progress in the congress-- still divided as we saw. is. >> rose: are you saying you couldn't have asked for a trillion, it would have been too contentious. >> that would be a crisper way of saying what i said. >> rose: so if we need more later we'll come back and get more. >> which is exactly what we've done. >> rose: $50 billion for infrastructure, yes? >> but the president proposed a combination of things just to go back to the end of '09. he proposed a series of measures which in total were more than

$200 billion of additional targeted support for the economy which included aid for state and local governments, extending unemployment insurance benefits, infrastructure spending and the small business bill that finally passed a few weeks ago. >> rose: coming out of the g-20 there was an emphasis on spending, correct? >> you mean the initial g-20? >> rose: the one in canada. wasn't there emphasis there on spending and stimulation rather than austerity and cutting spending? >> well, our judgment, charlie, from the beginning has been the following, which is that we think that the overwhelming imperative still for the united states and the other major economies is about growth. >> rose: right. >> the bigger risk for us is that we underachieve on growth. >> rose: and how do you create growth? >> through making sure you're investing things that make growth stronger and get back to work more quickly. >> rose: so investment or spending to create growth. >> and on the tax side, there's very important things on the tax side, too. and, you know, again, we propose you want to come to the tax cuts but we're proposing to extend for middle-class americans, 98% of working americans, the tax

cuts... the tax levels now in place for them and giving them clarity that we're going to do that is also very important for growth. >> rose: now that takes... by extending those tax cuts you are, what? if you would eliminate those tax cuts it would mean another $700 billion in revenue? >> well, let's step back for one s.e.c. what we proposed and what the broad based agreement to do is to extend the tax cuts that we call the middle-class tax cut that go to 9% of working americans and 8% of small businesses. >> rose: those in america earning less than $250,000. >> right. now we propose to allow to expire the tax cuts president bush put in place for those who make more than $250,000. now, when the congress passed those tax cuts ten years ago, they built in the i can praition of those tax cuts so it would look like something within our capacity to afford and we think we should let those tax cuts expire on schedule and we think there are better things we can do to help brick business

investment back, job creation back than to extend those. that's the only thing that separates us now from the republicans is they have... they want to make those permanent but to make them permanent would require me to go out and borrow $700 billion from our children, from our investors around the world and we think that's not a responsible path for the country >> rose: but you are giving up an opportunity of a huge revenue that could be used to engage the deficit and other things. you're giving that up. is it part of your thinking now that these middle-class tax cuts should be extended beyond a year? i mean, that you are basically buying into almost in perpetuity middle-class tax cuts? >> we were saying... we said we want to leave those in place for a long period of time. >> rose: right. >> because, again, the middle-class of this country are not just, like, brutally damaged by the crisis, they suffered a long period in the previous decade where the average american household saw no gain in income over that period of time. found it harder to save for

college, live with much more basic insecurity about their economic and financial future. so we think it's fair to them and good for the country to give them the confidence. we're not going to put the burden of solving our problems disproportionately on them. >> rose: most people argue that unless this country can deal with several things, with entitlements, social security and medicare, unless it can in a sense fix things on the revenue side, we will never get the deficit correct. >> yeah. and i think, again, it's... i think... no, you said it right. the... we're living with an unsustainable imbalance between our commitments as a country and the resource wes generate. it's unsustainably high. and it's going to have to come down over time and it's going to require a great national debate and a much broader consensus than it is today among democrats and republicans about what the role of government should be and how we can make sure that when we commit to do thins we can afford to do them.

the president has begun that process. health care reform reduces our long-term deficits. >> rose: how are you so sure that health care reform substantially reduces our deficit? >> we are confident only because in the judgment of the independent observers we rely on to do this like the congressional budget office they look at these policies and they say if congress holds to them over time, they will change how much we spend on health care and they will require congress to change how we spend on health care and this will change the incentives for how people use health care and that will bring down those costs. so just to give one example-- and these things are complicated and they're difficult-- but if you encourage people to be more careful on how they use health care, we're very confident people will spend less on it and spend more efficiently. and through reforms like that, again, in the eyes of the

independent experts we rely on for this stuff these reforms will substantially reduce the rate of growth in those long-term costs. that's one contribution to our long-term fiscal challenges but we have other challenges still ahead and we're going to have to work to build consensus among republican and democrats about how to bring those down. but right now the most important thing we can do for the economy and for that long-term fiscal challenge is to make sure that we're growing, we're healing the damage caused by the crisis and that's why it's so important and when congress comes back from the election that they work with us to provide additional support for the economy. >> rose: i want to turn to the tarp program, too. because you wrote a piece in the "washington post" called "five myths about tarp." just explain to us-- and you and i have talked about this before in a number of conversations-- what the tarp program was and how successful it's been and how much of it came out of the bush administration and how much of it came out of the obama administration. >> we came into this crisis--

again, a terribly severe crisis, the shock that caused the crisis was, in the eyes of the historians, much larger... larger than what caused the great depression. so it was a grave moment of peril for the american economy, for the global financial system. and we came into that crisis without the basic arsenal of tools countries need to put out a financial fire to stabilize a run on a financial system. to make sure people, individuals, are comfortable keeping their money in banks. that banks can lend so businesses can borrow. you know, credit is the oxygen economies depend on. without it economies can't function. and we came into the crisis without those basic tools. in recognition of that and the severity of the crisis opinion-- and he did the necessary thing. he went to congress and asked them for authority to fix this problem. >> rose: this was secretary paulson. >> and paulson... >> rose: and bernanke and you then head of the new york fed. >> we did. and with that authority the government then went and did two very important things which is

to put put a substantial amount of capital, financial resources, into the banking system to stabilize the run on the system. and provide a guaranty through the f.d.i.c. so that banks were able to stay open. without that everything would have been dramatically worse. and that was a very difficult thing to do because it was politically terribly controversial it put the government of the united states in the position of helping the same institutions that were perceived to cause the crisis. and it helped slow things down. but when the president was elected, president obama was elected, and he came into office, you still had a system that was frozen and as we discussed a few minutes ago the economy was still falling off the cliff. banks were not lending. companies could not borrow. the value of the american savings had fallen by about 40%. and so what president obama did and he made possible with that authority that president bush had started, that ram he started, is we went and then put

in place a very creative, very effective program to open up those credit markets. and we did it in ways that ultimately are going to cost the taxpayer a very modest fraction of their resources. and the way we made it work, charlie, was we today the nation's largest banks that you need to demonstrate to us and to your investors around the world what your loss may be. and you need to go out and raise enough capital that you can cover those losses. and if you are unwilling to do that, then we are going to step in and put that capital in and that will come with terms you will not like. so we made it very powerful for them to go out and try to raise money from private investors not just to replace the government's investments, which happened very, very quickly, but to make sure they could withstand a much deeper storm. and that was overwhelmingly effective and decisive. and alongside that we committed substantial resources to opening up the broader credit markets.

so... and to making sure we were helping directly the people most affected by the cries crisis. homeowners, small businesses. >> rose: $290 plus billion went out during the bush administration. up to $100 billion about has gone out under the obama administration. >> only $10 to banks, mostly small community banks. the remaining part of the resources we committed went to broad-based programs to help housing, to help the credit markets for small businesses, to help reduce the cost of lending to a... somebody that wants to buy a car, put their kid through college, to reduce the cost of borrowing to a municipal government. and the best... what's the best test of success, charlie? there's two basic tests that matter. someone how quickly did growth turn from negative to positive? it happened in the second quarter of 2009 incredibly quickly. how quickly did... and how far did interest rates and borrowing costs come down? if you look at any chart in that period of time they were in the himalayas and they came down very rapidly because of the success of these programs. and so the best way to measure success is how much did it cost

us to do it and what benefit did we get? and we got huge benefits. >> rose: what was the cost of doing it? >> ultimate cost of tarp itself is going to be well under $50 billion. >> rose: okay. so the tarp program was successful. general motors is back on its feet. chrysler has been sold to fiat. so therefore you have... and other things that you talked about. you had a tarp program of which in the end you're saying is going to cost the united states taxpayer $50 billion. i've seen figures up to $66 but somewhere in there. that's pretty good. it could be less than that. >> it could be substantially less than that. here's a nice way to compare this. the s&l crisis which was a much simpler crisis to resolve cost the american taxpayer at that time $2.5% of the entire g.d.p. of the country. this crisis, our financial... direct financial cost in this crisis, even if you include the g.s.e.s is likely to be in the range of 1%, it could be lower

than that as a share of g.d.p. so a fraction of the cost of a much milder crisis because of the success of what the president did. >> rose: you may argue that the public either has not appreciated or you may argue that you haven't explained it very well, you and the president and the vice president and... i agree with that. >> rose: and others. what did you fail to do? >> let's do just a little history again. >> rose: that perception is very... it's hardened. it's the conventional wisdom. everybody believes it and it's not true. >> rose: and too old that they believe behind it is some philosophy of government intervention. >> exactly, right. >> rose: ... that is a hallmark of this administration. >> i think if you look at what is conventional wisdom today most people think president obama came in himself and gave $700 billion to banks that we'll never see again. >> rose: and they caused the problem. he gave the money that-to-the people that caused the problem and didn't help the people who suffered because of the actions they did in creating the subprime crisis. >> exactly. so let's go back again. so tarp, which is caused so much

ang r and frustration across the country for the reasons you said, the government of the united states... >> rose: and they don't refer to it as tarp, they call it the bank bailout. >> whatever it is. the bank bailout. that was something that president bush initiated-- to his enormous credit-- with the full support of the republican leadership at that time. same republicans now running their parties in congress today. because at that moment there was no choice for the country. and then he went in... >> rose: everybody bought into the idea that the country was at a huge crisis and if something wasn't done... warren buffett and everybody else in the private sector was saying the same thing. >> and i fully supported it and was as you know involved in helping shape it. and he went in and made these investments in banks, lent money to our auto companies. a all those actions that defined the crisis were started at that moment of great national peril in september and october of 2008 now, again, when president oma came in, the government was already $300 billion into that bailout strategy. tenstens of billions of dollarst stake to the automobile industry and what did this president do? what this president did alongside the recovery act and

alongside the actions of the fed is he put in place this program to get that money back as quickly as possible. to make sure that private investment, not the taxpayers resources, was going to carry burden for solving this problem. let's make one comparison. the president of the united states since i've been in office put only $10 billion of addition al into our nation's banks, mostly for small community banks. we gave $300 billion in tax cuts to working families across the country and to businesses. compare those two things. the scale of the resource wes put into lowering mortgage costs for the average homeowner vastly outweigh anything we did for banks in this crisis. the president came in and put exceptionally tough conditions on the financial sector, on the automobile industry and a.i.g. so the taxpayer was protected and we could get out. and the idea that this was part of an agenda by this president of the united states, president obama and his economic team to take over the american economy is... >> rose: it's a kind of

european socialism. >> it's a great myth. it's a great political myth. >> rose: you know who should be blamed? if you guys let yourself be defined that way, it's your responsibility. >> i'll take all the responsibility for the programs we designed an put in place. >> rose: by not explaining to them and not explaining why they were necessary and not explaining... i think the president worked very hard to explain why they were necessary. as we all did. the president's to opponents were very effective in creating an alternative reality and they're still running on that. but it's a complete myth. it's a complete myth. and all you have to do is look at the basic actions we took with the program we inherited and look at the... what we did with that basic authority. and there is... i'll say it differently. if you were a conservative republican, look at what we did to get the government out of the financial sector as quickly as possible. if you are a fiscal conservative, look at what we did to return hundreds of billions of dollars of unused authority to the american people, to the congress to deal

with our future challenges and if you are a progressive democrat, what we've done is saved huge amounts of resources that we can use to make sure we don't see... >> rose: but you are getting it from all sides. there's a perception among the republicans that this administration as they say is a european social democrat and you see one story after another... >> it's just politics. >> rose: that's one... >> it's just politics. >> rose: i understand that but you acknowledged to me that perception has taken root, number one. number two you're getting it from the left who's saying that larry summers and tim geithner they are of... too friendly with wall street and when it came time to put together the kinds of regulations that were necessary so it wouldn't happen again the banks got the better of it. >> i disagree that. you're right. it's a good sign we fear a political moment because it can not be true that you have a president of the united states with a socialist agenda to take over the american economy and still have substantial fraction of the american people believe

mistakenly that this president has been too generous to to business and the financial sector. it's impossible for those two things to represent reality and it's not fair to the president and it is a deeply damaging part of the american political debate today and it's a sad sign about the state of politics in the country that it's so easy for people to get away with a perception which has so little basis in reality. again, what we're trying to do, charlie, is just explain what did we do and what did that do for the country and it's understandable why it's hard because americans have no... no american living today has really had real experience with a crisis like this. could not imagine it would be this bad. >> rose: and nobody in power had experience to deal with this situation before. >> exactly. exactly. and the people who were part of this from the beginning and were brave and courageous at that time ran away as quickly as they could but this president did not do that. >> rose: who are we talking about when we say that? >> i would say a lot of people who were instrumental in getting

this through in the fall of 2008, to their credit, including the republican leadership, have been eager to walk away from that because it was politically inconvenient for them to be reminded of that. but the president of the united states decided that the only thing responsible for the country was to take on the huge political cost that would become with solving this problem effectively up front early. he knew it was going to be deeply damaging politically and we told him it would be but he was willing to do it. >> rose: who was the most serious figure you know who said don't do anything. >> i don't want to be unfair to them. but you have to look at... again, you know, our obligation... this is still our obligation, charlie, if you just want to look forward. our obligation still is to act. to do things that are responsive to the major challenge wes face as a country and we have a lot of serious challenges still and when we get past the politics of the current moment, we're going to have to figure out how to get people to come here and do this. >> rose: i still don't understand and i think it's important because this is a perception that's there how it came to this that...

>> i don't think it's surprising, charlie. i was scarred by this. i've been up to my neck in this before the election. >> rose: as president of the new york fed. right. >> and i watched very closely what happened to the debate across the country and i live through, as you know, in my previous experience in government through a lot of other countries how i handled their financial crisis. >> rose: when you were in the treasury department. >> in japan and asia and emerging markets across that period of time and what happens is the following, charlie, which is people... governments confronted by crisis, politicians confronted by crisis it's hard. and to solve the problem you have to do things that you know are going to be politically unpopular. like stabilize ago financial system. like preventing a run on a financial system. like doing things your opponents will say are designed to help banks. because that is so difficult politically for people to do, because it's so hard to figure out how to do the bold thing, most governments, they sit back and they wait and they debate. they convene the experts. they debate all sorts of

options. they hope the thing will get better. they hope it's not as bad as people fear. they hope it will solve itself and they wait and what happens it gets worse. it's more expensive to solve and if you look at the pattern of crisis-- it's true in the united states in the '30s, too-- that's the dominant political crisis. because the politics are so terrible. and what this president did here was to break that basic mold and to make the choice which was the responsible choice to say "i'll take that political heat early because nothing's possible unless we do that." and he's going to be vindicated for that choice by history. >> there's also this. not one person with a substantial business background is part of the decision-making process and every businessman i've talked to... >> i've heard that criticism and you've seen lots of administrations and white houses over time try to figure out how to make sure they got a better mix of experience in the real world as part of the cabinet and

you've seen lots of different models for that. but you need to look mostly at what the president has decided to do. i think any business if america today would not want to trade places with the world we faced two years ago. if you look at what the president has actually done to help start to heal the damage caused by the crisis, he has pursued policies that have been enormously important to the basic fortunes of american business. so, again, look at any measure. look at profitability. look at what's happened to their stock prices. look at what they've been able to do in terms of expanded investment. those things would not have been possible without the action it is president took. and he did it because he understood that ultimately it wouldn't solve the crisis unless we got business back on their feet. now, charlie, this president is... understands completely that future growth in the united states is going to come primarily based on the strength

of the conditions we create for businesses to thrive in this country. businesses to innovate, to expand... >> rose: then characterize his philosophy, since we've been talking about it. what's his economic philosophy? >> well, it's rooted in that basic recognition that the only source of growth is to make sure you create conditions that allow businesses in america to innovate, to create jobs, to expand their investment. >> rose: and what's his faith and confidence in markets? >> overing. but he understands as i think all americans must understand today given what we went through that it is the job of government-- and this is a central function of government. there are basic public works only government cans do. and i'll give you an example of that. making sure the financial sect sector... risk in the financial sector is a basic responsible function of government. making sure we're providing better educational opportunities for our children is a basic responsibility of government. making sure we create better incentives for how people use health care, help reduce the growth in costs is a basic responsibility of government. >> rose: social security is a

basic responsibility of government. speech in. >> teachers. and no market economy. no business can thrive with the level of basic neglect and underinvestment this country had made in those critical functions. again, education, public infrastructure, a well-functioning financial system. these are part of the basic network. the public works that businesses and market economies rely on. when you get them wrong, you've seen the damage it causes and what the president did very early in the state of his administration is not just put in place the conditions for the economy to grow to break the back of the financial panic now make sure we were fixing the fundamental causes of the crisis in the financial sector. >> rose: the financial reform. does that dodd-frank bill represent what you think financial reform ought to be? the secretary of the freshly. >> absolutely. >> rose: anything you thought it should have done that it didn't do? >> we got some things in there we did not seek, that we did not think were essential. but on the core things the president thought were essential that we put out initially we

achieved all those things and it's enormously important we did it. i'll give you the best test of what we've been able to do with that authority which is we got the world to agree to a very tough set of new capital requirements, a new global accord on capital requirements so that the major institutions across the world that operate in these markets around the world now have to run with much less risk, much less leverage. these new requirements will more than triple the amount of capital banks, investment banks, future a.i.g.s have to hold against risk. that's a hugely important accomplishment and we were able to do that because this bill gave us such a strong hand. >> rose: okay. there's also this question, though: whether too big to fail still exists. >> look, the... >> rose: and that we're going to have institutions, financial institutions, which are going to take risk beyond what they should because they know they're too big to fail. >> exactly. and this bill does the two

necessary decisive overwhelmingly important things to help reduce that risk to that problem. again, the first is make sure that these large institutions have to run with much less leverage. we had... the bill also caps their size so we can't have a more concentrated financial system. that's hugely important. now, they will make mistakes in the future. there's no doubt about it, it will happen. but if you make sure their capital requirements are much higher, their leverage is much less, the risk is much less, than when they make mistakes in the future that will cause much less damage. much less likely any future government would have the need to come in and do these kind of things but that's only half of it. the other thing this bill does is to give us the power to dismember them when they screw up. >> rose: right. >> without causing damage to the economy as a whole. so what this bill gives us is the ability to come in if a firm takes risks that would imperil its its future, can't survive without the government, to come in, wipe out equity holders, replace management and the board, dismember restructure the company like what we did in a.i.g. so it can't exist again

to take risk in the future again. and by doing that, we've made it much more likely that any executive, any board of directors of one of these firms, any equity holder would want to court the fate of a firm like a.i.g. got itself in a position where the government would have to step in. because they look at what we did in that context, what the bill authorized us to do and you can see in the future we'd say we are not going to put the taxpayerses' money at risk in these crisis to save you from your mistakes in the future. now, those two things, they won't solve all problems. we're going to have a market oriented financial system where there's a lot of innovation, competition, responsible risk taking and people will make mistakes in the future but these two things will make the mistakes much less damaging. >> rose: if you would read the newspapers over the last three months the impression you have is that all the tim geithner does is try to get the chinese to let their currency appreciate because-- and they are resisting as much as they can saying we're

going to take care of our growth and you don't understand we've got problems of our own and we depend on exports to the united states and other places and those exports are... mean that we can employ our people and we're not listening to pretty much what you say about currency appreciation. where is that today? >> you said it exactly right and this is an important question for us and for china. let me start with what's actually happening where it matters for us. china over the last six weeks or so has started to let their currency appreciate at a pretty significant pace. so it's only been now in the last six weeks or so about 2%, 2%,2.5%. but this is going to be a gradual process. and what matters to us is that they continue to let their currency rise to reflect those market forces in that case. and if you look at the last time china moved in this, charlie, between 2006 and 2008 china let

their currency appreciate against the dollar by about 20%. now, that was a gradual process then, too, but that was a very substantial, very important change for them. now, they stopped that process in the crisis because, frankly, they were worried about the state of the world and they thought a period of stability would be good and that was a responsible thing. what we want to do is to maximize the incentives they have to let that process go as far as it needs to go. >> rose: how do you maximize these incentives. >> china takes a long view of these things and a fraction of the leadership in china understand that it is very much in china's interest to do this and there's two reasons why that's the case. one is that china is a large independent country. and if you tie your corn city to ours then in effect you're letting the federal reserve run your monetary policy. china needs to have the independence to set policy for what makes sense for their country. so it's very much in their interest to, again, move to a more flexible system that allows them to run their policies in a

way that helps contain inflation risks in china. there's another good reason, though, for it to and, think a substantial fraction of the leader snoip china recognizes this. in china over time wants to get better at producing things that are... create more value, generate more income for their people. and you can't do that if you're in effect favoring low value-added assembly operations that aren't going to generate much income for your people. like a lot of people, they want to make sure they're providing an opportunity for it and the best way to happen is to make sure that exchange rate is working with them not against them. right now if they keep the currency low and undervalued it's working against that basic objective of development. so they've got a long view. i'm very confident over time this is going to happen we just want to make sure it's happening at a gradual but still significant... >> rose: but as soon as you say that "i'm confident they'll do it over a gradual way and that they will perhaps also build you have enough consumer demand in their own country so

it's not so dependent on exports" knowing that they have always said economic growth is essential for us so that we do not create social tensions any more than they are within our society. >> rose: but they know... this is what changed... the world's changed for them and the crisis illustrated this for them. of course they care about growth. like we care about growth. there's nothing exceptional... >> rose: how has it changed for them? >> what they've now realized is that if they try to run a strategy that's too reliant on exports or heavy investment in their enterprises that because they're getting so big, that's not going to be a tenable strategy. and the best way to make sure they're growing in the future is to shift the strategy of growth to something that helps support more consumption at home. and they recognize that and although people... i know... the exchange rate people understand because it's something you can measure and look at and they understand why it's important. but the exchange rate for it to work has to be complemented to shift the greater strategy of

growth. and charlie this is a good measure of this. we have a huge economic stake in this relationship. our exports to china because of what they're doing in terms of policies, they're growing about twice the rate of growth of exports around the rest of the world. if you look at the rate of growth or exports to china compared to the rate of our exports to the rest of the world, they're growing very rapidly because china is starting to move to favor domestic demand and consumption. >> rose: right. >> and what we want to do is build on that process. but, of course, we want china to play by the rules of the game everybody else plays by. >> rose: do they do that? >> well, they... we'd like them to do it more. >> rose: (laughs) but do they recognize and do they respect the fact that they need act like a stake holder in the world community? >> china is a complicated place. you can't tell it from the outside, but all the time, just like in the united states, they're having huge debate about what policy course to take. and, again, i think there is a substantial number of people in the leadership in china today that recognize that china's future lies and it is critical

to their interest in a country in becoming a full player. accepting the broader rights and responsibilities that the rest of us live with us. >> rose: the world trade organization or whatever it is. >> exactly. but, again, they've had their politics and they're having a... it's a very difficult debate specially with a tenuous balance between the people that believe those things and the people who think china's future lies in the past which is not tenable. >> rose: there's also this, though, when you talk about currency. i also read stories of a concernsy war. >> no risk of that. >> rose: you're not worried about that at all? >> so because china's currency is substantially undervalued by really only any measure and because they're trying to make sure it doesn't rise too quickly. what's happening is a bunch of other emerging market currencies-- brazil is a good example, there's a lot of other ones-- there's capital flowing to them because they're letting their currencies move and that's unfair to them.

because as china holds its currency down, their currencies are moving up and they're having to work very hard to make sure they're not at unfair disadvantage with china. and that's why this issue which people like to frame as uniquely an american preoccupation is really much more important to the rest of the world and is really a global problem as a whole. >> rose: okay. we discovered once again that there is no decoupling from the american economy. >> yeah. there's... we absolutely have discovered that. i don't think there was any... i don't think it was a plausible argument before the crisis but certainly crisis proved that countries are much more closely linked today and people's... every country in the world's economic fortunes are deeply tied to our own here in the united states. >> rose: how do you look at the new economic reality of the fact that china's now the second-largest economy? and that all the growth is in the emerging markets and that's where the future growth is. what does that mean for the long run for the united states and its economic health? >> i think it is overwhelmingly

good for the united states. i think we will benefit uniquely from the reality that we are still exceptionally good as a country in producing efficiently the things those countries need to grow and expand. this is true in agriculture, it's true in high tech across services. a huge fraction of what we do exceptionally well in this country are going to be a major source of their future growth and american companies and i think american investors and workers will participate substantialfully that process of development outside the united states. our challenges overwhelmingly are about things we face here in the united states. about how to make sure we're growing, we're bringing unemployment down, that we're improving... >> rose: are we bringing unemployment down or this is what we have to do? >> these are our challenges. >> rose: unemployment down. >> how do we educate our children better? how do we make sure we're creating better incentives for business to expand and grow? how do we make sure we make progress in restoring some basic gravity responsibility to our

unsustainable fiscal deficits. overwhelmingly how we do in the world, charlie, depends on how effectively we are managing those challenges as well. >> rose: here is the big question as you know. you're talking about investments at a time in which people are saying the biggest problem the united states has is the size of its debt. and there is a political uprising against debt. >> there is. the americans are understandably deeply concerned about both these challenges. they're deeply concerned... >> rose: and yet for our future depends on investment in research and development and investment in science and technology. what's the message of leadership here? >> the only strategy that i think has any plausibility of success is to make sure in the short term we are still working to heal the damage caused by the crisis, to do these things i spoke about at the beginning. stronger incentives for business to invest now today and at the same time make sure we are increasing confidence with americans and investors around the world that we'll find the political will in washington to

bring those deficits down over time. that's why the debates we're having are so important. that's why the president's proposed to freeze discretionary expenditures for a long period of time. that's why you're seeing enormously important reforms supported by secretary gates to reduce our military spending. that's the only plausible strategy we know which is to say you do growth now in the context of restoring some balance and responsibility... >> rose: growth in the short term to restore balance, create employment and get the economy going again. >> and bring those deficits down over the medium term over the next several years to a level that's more sustainable. and the... what the president has proposed now won't solve that problem completely but what the president has propose willed bring our deficits down by more than half as a share of our economy as a whole over the next three to four years, we need to go beyond and that and there's a bipartisan fiscal commission the president created that's supposed to recommend policies on december 1 to begin that process. this is not something we can do on our own and the president

can't solve those problems under the constitution. >> are you convinced the political system we have will allow the kind of action that's necessary to deal with the kinds of challenges we face? >> >> that is the grat questions we face. that's what americans are worried about, that's what people are looking to us to do and our job... our responsibility is to act, still, these are not things that are going to go away if we ignore them. what the president will do is propose what we believe are the best things for the country. we don't have a monopoly of wisdom. we'll look to ideas. we have to work with people on the hill to make sure we get this done but we need those elected representatives in washington to come with us, join with us to make sure we're doing things to help fix the problems we still face as a country and it's not something we can solve by just playing politics all the time. we've got serious challenges that requires... >> rose: speak frankly and with common sense to the american them? >> yeah. and we need washington to act and he can't act alone. we need them come with us. >> rose: thank you for coming.

pleasure to see you. thank you very much. secretary of the treasury tim geithner for the hour. thank you for joining us. see you next time. captioning sponsored by

rose communications captioned by media access group at wgbh access.wgbh.org