Tim Geithner flew all the way to China on a bond sales trip, and CNBC’s Steve Liesman followed him there to snag a rather long interview on the major question of the day: Namely, what’s the Chinese appetite for Americn debt?
Those kids who laughed at Geithner not withstanding, the Treasury Secretary claims it remains strong and that the Chinese have strong confidence in the resilience and dynamics of our economy (though they’re obviously not that confidence, since they’re constantly jawboning and shifting more and more of their purchases to the short end of the curve).
He also made comments about so-called monetization of the debt (the Fed buying US debt that the rest of the world doesn’t want, which would be inflationary) and overall concerns about inflation. He says it’s not an issue (of course), and that the Fed is buying debt to stabilise markets, not to fill in demand where there is none.
Overall, no howlers in the interview, and as for the trip, we’re guessing Tim probably won us some more time.
The whole transcript is below, and we’ve highlighted some of the more interesting parts.
LIESMAN: Thank you, Mr. Secretary for joining us
GEITHNER: Happy to be here, Steve
LIESMAN: Couple days in China. What– what did you set out to accomplish here on this trip, and what have you accomplished so far
GEITHNER: Just laying the foundation for the kind of economic relationship that two countries like this need. Want to establish the kind of relationship we, the United States, traditionally had with the G7. The other major economies, at an earlier stage. But at important critical stages in the evolution of the global financial system. We’re at that moment now. And so, we need to begin to lay a foundation for that kind of– framework.
Now, we’re taking stock of where we are in terms of global– global crisis, recovery efforts. We’re trying to get a better feel for where the Chinese reform process is. Been a lot of issues we’re working together on to try to make sure that a process of international financial reform gets some traction.
LIESMAN: You mentioned that in Alaska (?). They said do you have a relationship with the Chinese like we have in the G7. Would you just sort of round that out a little bit? What do you mean by that?
GEITHNER: Well, again, you know– China’s an enormously important economy– in the world. We want to have them– want to give them a seat at the table as we reshape the international financial architecture, so they feel invested in the effectiveness of those traditional institutions. And– in some ways we’re just catching up for the huge shift in the balance of economic activity, financial activity around the world. Make sure those institutions reflect that important shift.
LIESMAN: So, let me cut to the chase on what everybody thinks is the big issue here. How much concern are you hearing about the size of the U.S. deficit and the value of the dollar?
GEITHNER: You know what? I’m actually hearing quite a lot of confidence in not just the long term strength, resilience, dynamism of the U.S. economy– as you would expect. I think that confidence is justified. But a lot of confidence in the basic policy framework that we’ve undertaken. Just like China moved very aggressively here– in the early stages of the crisis to try to put in place strong measures to support growth and recovery. They understand why we’ve acted very aggressively in the United States. Not just on the fiscal front. Not just with– alongside what the Fed has done. But to try to get our financial system working again.
They’re very supportive of those steps. And they understand that we have committed once the foundation for recovery’s been established. And we need to move quickly to bring our fiscal deficits down to a sustainable level. Work to unwind these exceptional interventions in the financial system. And I think they’ve got a pretty good feel for what we’re trying to do and are very supportive.
LIESMAN: How critical is it that China keeps or continues to buy and hold U.S. Treasuries?
GEITHNER: You know, the– the really important thing is that we do what is necessary in the United States to make sure that American investors, investors around the world– continue to have confidence in the basic policy framework of the United States. That we’re doing what is necessary, again, not just to address the immediate crisis, but as we do that, we’re laying a foundation for a more productive economy– recovery that’s more balanced, more sustainable. So that we can bring these fiscal deficits down over time.
And, you know, you’re seeing the early– very early administration, in the middle of an extraordinarily challenging recession. That the President work with Congress to lay a foundation for health care reform. It’s gonna bring down growth in health care costs. He started to make some important investments, improving quality of education, infrastructure, energy efficiency. Other things that are really important to our productive capacity in the future. Those things are essential– not just for the strength of the U.S. economy. But to put us in a position where we can be– begin the pre– address our long term fiscal issues.
LIESMAN: Compared with your predecessors, I hear less haranguing about the level of the Yuwang (PH). And their– or the (UNINTEL). Is there a different tact you’re taking? Are you de-emphasising the value of the currency right now and our relationship with China?
GEITHNER: Well, I think what I want to emphasise is that even as we address the near term crisis, that we’re looking very carefully at making sure that our policies are gonna support a more balanced, sustainable, global recovery going forward. We do not want to lay the seeds in recovery today for the next financial crisis– and that requires that as we raise private savings, public (UNINTEL) in the United States, that countries around the world, including China– strengthen domestic demand. Shift the composition of growth more towards the domestic demand.
So, what we’re focusing on, as the Chinese are, in making sure that there’s a– again, not just here. There’s a policy– policies in place to shift the composition of growth. Now, in China, as you know, they laid down a very ambitious program of– of reforms, financial reform. Let market prices work more effectively. Strengthen (UNINTEL) social safety net. Reduced some of the incentive for precautionary savings. And they have committed publicly to move over time to a more market determined, flexible (UNINTEL) system. Which will them have more flexibility (UNINTEL) policy to address future growth and inflation challenges in– in China. So, that’s what our emphasis will be. That’s in China’s interest. The interest of the world economy.
LIESMAN: But I– I just want to question that a little bit. Do you just think it doesn’t do any good to go out there and tell the Chinese to let their– currency appreciate? Do you think that was a mistake that was made by predecessors?
GEITHNER: See, like– what we’re focused on is– fixing the things we have to fix in the United States. Working with countries around the world to address this crisis and make sure that in China as in the United States that we’re laying a better foundation for future growth, future stability globally. And this crisis was in part caused– by a set of broader global forces, was partly caused by regulatory failure. And we want to fix those things, as we address the near term crisis.
LIESMAN: Let me just do one more on the currency here, which is– in the campaign, the– which sort of led to this issue that you had with– labelling China a manipulator. The President seemed, on the campaign, to talk about China as a currency manipulator. Given the chance, though, in your report to Congress, you said– decided China was not a currency manipulator. Has the President changed his mind on this issue?
GEITHNER: Look– you know, we’re going through an exceptionally challenging period globally. And things have changed in China, as well, over that period of time. Not just globally. And you see China now acting in a very constructive role internationally. This very aggressive program to strengthen the (UNINTEL) demand. And they have committed publicly to continue to move over time towards a more flexible exchange rate system. ‘Cause I think they recognise that that is essential to their broader strategy of rebalancing sources of growth.
You know, they want to build an economy that has stronger domestic demands. So that they are less vulnerable to future fluctuations in global demand. That’s a rational thing for China to want to do, and I think it’s in the interest of the world economy as a whole.
LIESMAN: You’re calling on China and– and you– you have said several times on this trip here that– China is a critical part of reforming the global financial system. Do– do you think China’s ready for that role? Or is– is– are we asking China to do more than (UNINTEL PHRASE) willing or ready to do through the taking of global economic leadership role?
GEITHNER: Well– let me say it slightly differently. Reform of the international financial system of the IMF and other institutions is very important to us. We think China should be part of that. We think the institutions will be stronger, more effective, if China feels invested in their effectiveness. So, we want China to be part of that basic framework of cooperation. That’s why they now have a seat at the table alongside us in the financial stability forum and (UNINTEL) board, which is the most important place for cooperation on putting in place stronger rules of the game of financial systems.
But I think we have an interest and they have interest, too, in trying to make sure that they’re part of this reform effort in the IMF, and the other institutions– as well. And I think they are ready for that. China is a developing country. We’re not asking them to take on obligations– they’re not ready for. But they have a stake in this system working. And we need to have the institutions give them that seat at the table.
LIESMAN: Do you have commitments from them to– contribute to some of those new IMF facilities that are designed to help with other worthy markets (?).
GEITHNER: Even before we went to London– or laid the foundation for the (UNINTEL) in London, China was already talking about trying to give the IMF some supplemental financial resources to make sure the IMF could act effectively in this crisis. We’re working very closely together. (COUGH) As you know, we committed– to a very substantial U.S. contribution to help give the IMF a much stronger emergency capacity to deal with future crises. And– we found the Chinese to be very supportive of that.
LIESMAN: But you don’t have a specific financial (UNINTEL) from the Chinese?
GEITHNER: Well, you know, China’s– talking with us and with the IMF, trying to figure out the architecture of this new fund, this new arrangement. And we’re working through, as this works for the Congress, we’re working with China and the other major participants at what the optimal desire of that arrangements gonna be.
LIESMAN: Make the bridge from our discussion on China to the discussion of domestic policy. And I think one good way to do that is talk about interest rates and commodity prices. Interest rates have been on the rise. Commodity prices have been surging. Some people say that’s a sign of overall inflation concern. Which– how do you look at those indicators?
GEITHNER: You know, Steve, I’m– I’m very careful– not to talk about– financial market sales and financial markets. That’s– not appropriate for a Secretary of the Treasury to do. But I would just say that I think the main thing you’re seeing around the world now. You’re seeing this reflected in markets is somewhat diminished fear of deflation. A recession that’s losing some of its force. Early signs of stabilisation in economic activity and demand around the world. Broader improvement in financial market confidence. Broader improvement in risk premia (PH) and credit spreads.
I think that’s the main– worst as you see washing across the global financial system today. And I think that’s something we should welcome. You know, it was not very long ago where– markets reflected acute risk, a real risk of deflation. Real risk of financial collapse. And I think that has receded to a significant degree. And I’d say that’s a very welcome thing.
LIESMAN: Do you have any concerns, though, that rates could go too high and then sort of curtail the– whatever rebound we have? Especially when it comes to the mortgage rate, which– now seems to be pushing above five per cent?
GEITHNER: I’m very confident in the Fed’s ability to keep inflation low and stable over time. Reduce the risk of inflation expectations rise significantly over time. And I am very confident in the President’s commitment and the awareness in Congress of the importance of getting our fiscal position back to a sustainable path, as soon as we see the conditions for a durable recovery permanently established.
LIESMAN: Treasury is issuing over time and not so much time trillions of dollars of debt. The Fed is buying $300 billion of treasuries (UNINTEL). Why is this not the dreaded concept of monetizing the debt which so many economists would warn against?
GEITHNER: There’s no risk of that in the United States. Because again, we have a strong industry central bank, who’s obligation under the law is not just to achieve maximum (UNINTEL) growth but to keep inflation low and stable over time. And I know the Chairman is completely committed to that. And– he is– has the ability to make sure that as recovery takes hold, the Fed unwinds, as we will unwind. These exceptional measures we’ve had to take to help address this crisis.
Just remember, you know, we came into the beginning of this year, facing the worst recession, the worst financial crisis in decades. That has required us to do exceptional things. Those were necessary things to get us back to fiscal health, economic and financial health. But when we are confident we’ve made that foundation for that, then we will work very quickly to try to walk those measures back.
LIESMAN: Why are you saying– I mean, you’re saying that buying $300 billion of debt by the Fed is not monetizing?
GEITHNER: Absolutely not. Again– the– no conflict between the Fed’s responsibilities for a financial stability, the measures they’ve taken to help make sure that there’s liquidity for markets. We’re (UNINTEL) this process of adjustment in the financial system and their long term obligation to help– help keep inflation low and stable. And I’m completely confident in their ability to do that.
LIESMAN: Sometimes you still sound like a central banker. Yesterday, GM filed bankruptcy. We heard– heard word of– or there’s been some speculation, Chrysler could emerge today or tomorrow? What– what– what can you tell us about that?
GEITHNER: Only to say that I think– we’re very pleased with the progress achieved on both fronts. In putting in place– very strong restructuring programs. Using– the legal tools we have in the United States. And– that process seems to be going relatively well. Quicker than we expected.
LIESMAN: What’s your outlook for the GM bankruptcy?
GEITHNER: It’s gonna take a little more time– than Chrysler will have taken. It’s more complicated process. But– we’re reasonably optimistic there that they’re gonna emerge reasonably quickly.
LIESMAN: Past programs include the stress test and the amount of capital raised. What’s your reaction to the amount of capital raised? Did it– was that exactly what you expected to happen?
GEITHNER: Above expectations. I think that– we’ve seen– the clarity and disclosure the stress test brought. More confidence in the financial markets and the underlying strength of U.S. institutions. That’s made it possible for the (UNINTEL) raise very substantial amounts of equity in a very short period of time. So, I find that very encouraging. Would not have been possible without the disclosure the stress test bought and the basic clarity that bought about the level of financial resources, and the strength they had against future losses.
LIESMAN: Which leads us to the next question, which is– do you foresee as much need for either the legacy loan– program from the FDIC or the– securities program from the Treasury– that you guys have put in place? Or (UNINTEL) put in place?
GEITHNER: Let me just step back for one sec, so you can know. To fix this crisis, to get our financial system back to the point where it’s able to provide enough credit that the recovery’s gonna need. We had to strengthen the banking system, make sure there was capital coming in where it was necessary. We had to help repair these very damaged securitization markets.
Alongside those two programs, (UNINTEL) programs on the capital front and this effort to get the credit markets going again, we put in place this framework for these funds, for legacy assets. I think they still have significant potential value. We’re still gonna work to put ’em in place. You’re right, though– that as confidence has improved a little bit, we may see less interest– both on the selling side and the buying side. It’s hard to tell, though, how much interest you’re gonna see. There’s still some concerns, too, about the rules of the game. It’s making some people reluctant to participate.
But we still think they have– some value. We’re gonna work with the FDIC and the Fed to put those– those funds in place. And– we think they’ll have some insurance value over time. They’ve already been helpful, I believe. The prospect of them coming into place has already been helpful in getting these markets going again, a little bit. You’re seeing initial thawing in those markets. And that’s encouraging.
LIESMAN: We’ve heard people talk about there being almost no need at all for the legacy loan program. Is the FDIC gonna dial that back?
GEITHNER: My expectation is they still want to move forward, too. Again, because I think they agree with us that there’s still potential value in these funds. But as I said, it’s gonna be hard to judge what ultimate demand will be. That’ll depend on a lot of different things. It’ll depend on what market conditions are like. How much confidence is there generally. How much progress we’re seeing in those markets improving.
And, you know, you’re seeing banks, again, raise more equity than I think they would have thought they could have raised. And they’ll– may– may feel, therefore, a little bit less need– going forward. And, you know, they may not need to sell into these funds. Maybe they’ll sell them to the markets as a whole.
LIESMAN: It sounds like you’re dialling back expectations for these programs, and how much participation is actually gonna happen.
GEITHNER: No, I just the think the world’s changed a bit. And so– you know, we’re realistic, too. But I think these have– may still have potential value. And we’d like to have that framework– put in place. We think it’ll help reinforce these early signs of recovery and improvement we’re seeing in markets
LIESMAN: Will banks be allowed to pay back the– TARP or CBB (PH) money they have?
GEITHNER: Those banks that– came out of the stress tests with indications they had substantial amounts of capital. And have been able to issue unguaranteed debt on a meaningful scale, will be able to repay back. And I think I expect (UNINTEL) gonna see substantial repayments from some institutions starting relatively quickly.
LIESMAN: We have heard June/April’s a time when we might here some– some approvals. Is that about when you expect to look at (UNINTEL) information?
GEITHNER: It’s possible. I gotta be careful, because that judgment’s in the hands of the federal banking agencies for those institutions. Not in the hands of the treasury. The way the law is written. But I– as I said, I think you’re gonna see it relatively soon. And I think it’s a healthy thing.
LIESMAN: We heard today that there was another sort of litmus test put out there. Which is the ability to access equity markets. Is that also part of the– part of– part of the program that lets you get out of the TARP is be– being able to raise capital in the equity markets a little?
GEITHNER: Well, I think that I should leave to the Fed. But again, what we want to do is to make sure that we fix this financial system. That this system has enough capital to get through– the– you know, a reasonable expectation of the pressures they might see ahead. And we’re seeing really a lot of progress already on that front. I’m very encouraged by what we’ve seen. But, you know, we’re at the early stage still. In this– process of recover and repair. And we’re gonna make sure that we’re reinforcing the progress we’ve already seen.
LIESMAN: Substantial amounts of money coming back in. What are you gonna do with the money?
GEITHNER: Well, the way the law is written, when the money comes back, it goes into the general fund, helps reduce the debt. But it does give us the flexibility, for every dollar that comes back– to use those resources to help reinforce these programs. And we’re gonna use that flexibility carefully and appropriately. Where we think there’s a need for additional reinforcement to help improve credit markets. Help address the housing crisis. Help get lending to small business flowing again. We’ll use that– because again, we want this economy to emerge as quickly as possible– to a stronger– foundation for growth.
LIESMAN: Moving back just to the autos real quick. You talked yesterday about these companies emerging eventually being able to stand on their own without government assistance. What’s the timeframe on that?
GEITHNER: That’s very hard to know. But again, we want to be able to get out as quickly as we can. And we want them to emerge on their own, as quickly as possible. But it’s hard to tell at this moment how quickly that’s gonna come. It depends a lot on what happens to global recovery and global demand for automobiles.
LIESMAN: You feel confident taxpayers are gonna get paid back?
GEITHNER: I feel– I think we have a reasonable prospect that the taxpayer’s gonna see a reasonable return on these investments. But, you know, we did this because we thought it was in the interest of the economy overall to help facilitate and restructure. And because of the importance of this industry– to the overall U.S. economy.
LIESMAN: So, that’s also– it sounds like you’re saying that the taxpayer should be prepared over time to really– to pay some money on this. It would cost them money.
GEITHNER: I’m actually not trying to lead you one way or the other. I’m just trying to be realistic and– cautious and conservative. There is risk in everything the government is doing. In this economy, in the financial sector and elsewhere. These are necessary risks. We’re only doing it, because we think the overall return and benefit to recovery is– necessary. But there is risk in everything we’re doing.
LIESMAN: I don’t think it’s a secret to say– or even– a surprise to– to say you got off to sort of a rough start. How does it feel like it’s going now?
GEITHNER: Not rougher than I would have expected. Given the scale of the challenge we faced. And we’re making tough decisions. People are gonna disagree with a lot of the decisions we’re making. And we’ve had to do a lot of things in a very short period of time. But I think we’re– we’re makin’ a fair amount of progress. I really do. I think we’ve done– if you look at the– if you look at not just what’s happened on the auto front– the basic firmer foundation we’re seeing emerge in the financial system. The effect of the programs we put in place in the housing market. What we did globally in the G20, the President did in that (UNINTEL) to lay a broader consensus on strategy for global recovery.
Working with China and other countries. Look at the early progress from (UNINTEL) laying out financial reform. I think we’ve done a lot of important, necessary things, in a very short period of time. And that was the right thing to do. We needed to move quickly. And the President moved very quickly
LIESMAN: Give me your– sense of– where we’re gonna be a year from now?
GEITHNER: Hard to know. Hard to know. But I think that people should be much more confident today, based on the impact of the programs we’ve started to put in place. That we’re gonna have a U.S. economy on a path to recovery at that point. Now, again, you know, I’m a careful person, a cautious person. There’s a lot of risk (COUGH) ahead. This process is gonna take some time. But I think if you just look at the impact already of this set of programs, I think you’re starting to see some real traction, and that’s a very important beginning.
LIESMAN: Think about the criticism that’s out there. It’s the government has gotten too involved. The Obama Administration knows no limits, when it comes to intervention in the economy. How do you– how do you respond to that?
GEITHNER: I think it’s completely unjustified. We are the exceptionally reluctant investor, when we’ve had to be an investor. We’ve only done it, because we thought it was absolutely necessary, had no alternative but. We will try to make sure we get out as quickly as we can. We do not believe it’s in the overall interest in the health of the U.S. economy and financial system for the government to have a sustained engagement in– private enterprise of any type. So, where we’ve done it, it’s only because we thought it was absolutely essential to the basic obligation we have to help fix this crisis, get the economy back on a better trajectory. And to fix a very damaged financial system.
LIESMAN: Just tell me what the risks are to your forecast.
GEITHNER: Well, the best way to describe the risks, again, are that– this was a– long period, unsustainable borrowing by countries around the world. Unsustainable increase in leverage in financial systems around the world. Unsustainable increase in debt– in many parts of the world. And that means that it’s gonna be– there’s gonna be a process of adjustment the world’s gonna have to go through, as balance sheets get repaired. As savings increase where they have to increase. And that’s gonna make this recovery slower than recoveries typically are. And it’s gonna make the process probably a little bit more fragile and uncertain. I think that’s the best way to describe it. But that’s why it’s important that the United States, China, other countries, keep reinforcing these early signs of stability we’ve seen.
LIESMAN: I’m sorry, just one more question, (UNINTEL). ‘Cause you reminded me of one more. You talk about the need for the United States to save more. Unclear to me whether or not there are policies in (UNINTEL) now to do that. Is this a matter of government policy of increased savings?
GEITHNER: Part of it is just the necessary change in behaviour by private individuals. You know, we had decades– where private savings rates were in the range of six to eight per cent. That was the normal. We had– a few decades where private (UNINTEL) came down quite significantly. We’ve already now come back. They’re now in the range of four to five per cent. It’s possible to move higher still. But– but part of that is just– just a basic change of behaviour and expectations that I think this crisis will help reinforce.
The President has put in his budget, and he said in the campaign some important proposals to help through, like, for example, automatic IRA enrollment, things like that. That might help reinforce that trend. But the most important thing we’re gonna have to do, again, once we have recovery in place, is to bring our fiscal position back down to a sustainable position. Not just to address our medium term fiscal challenges, but those long term fiscal deficits. They’re so driven by this unsustainable rise in (UNINTEL) health care costs.
LIESMAN: I just want to give you an opportunity to say something that you haven’t had a chance to say or respond to a question I’ve asked.
GEITHNER: Nope, good questions. I think we covered it
LIESMAN: Thank you.
GEITHNER: Good to see you
LIESMAN: We (UNINTEL) appreciate your time.
GEITHNER: If you guys want to emphasise that in– in all my meetings in China– over the last couple of days, I’m very impressed– by the degree of confidence they have in the basic strength and resilience and dynamism of the U.S. economy. And as I said, think I said that I think they have a very clear, sophisticated understanding about why we’ve done what we’ve done. Why that was necessary and important. And– the strategy we now have in place to help bring us back down to the point where we’re on a single path going forward. And I’m very impressed by what they’re doing in China, as well. And I think you see not just in the near term measures they’re taking in China. But their long term vision of how to rebalance economic activity. Some very encouraging signs.
LIESMAN: But how do we process those remarks that come from them? Like when they talk about the deficits. When they talk about it. It sounds like there is some concern.
GEITHNER: Well, again, you know, it– it’s no different from what you hear around the world. I mean, countries around the world, people are facing things they have not seen in decades. And governments have had to do exceptional things. And that has produced, as you would expect– a level of uncertainty and concern about how we (UNINTEL) this back, once we get recovery in place. Completely understandable, and that’s again, why we’re working so hard to try to make sure in the Congress and elsewhere we’re starting to lay the consensus for a return (UNINTEL) sustainability. Good to see you.
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