Inequality | Council on Foreign Relations

Development

Democracy in Development: An Update on Mobile Technology in Development

This week on my blog, I featured a two-part series on mobile technology in the developing world. On Tuesday, I wrote about how mobile phones are enabling people in the developing world to access banking services and obtain life insurance. On Thursday, I discussed how mobile technology helps NGOs extend resources and aid to those in need—and how it helps evaluate the impact of these projects. As I write in Tuesday’s post: In the past, one reason why banks did not court the poor as clients is because the cost of processing their small transactions outweighed any advantage to the bank; but mobile technology is significantly decreasing transaction costs. You can read part one here and part two here.

Blog Post by Isobel Coleman July 20, 2012 Development Channel
Development

Emerging Voices: Vishnu Sridharan on Cash Transfers and Financial Inclusion

This article is from Vishnu Sridharan, program associate with the Global Assets Project of the New America Foundation. Sridharan analyzes efforts undertaken so far to link cash transfers for low-income families to financial services, such as bank accounts. This approach promises large development gains, he argues, but early experience is mixed. Perhaps unsurprisingly, one of the most successful ways to fight poverty in a variety of contexts is to give low-income households regular cash payments. Though this may sound simple, as late as 2004, seasoned aid workers described the fear of giving money to beneficiaries as “almost pathological.” Since then, however, a “quiet revolution” has taken place against “giving aid to government bureaucrats and consultants.” Instead, programs are increasingly giving cash “directly to poor people so they can pull themselves out of the poverty trap.” One way that many countries have approached direct cash payments is through a social contract, in which families receive “conditional” cash transfers in exchange for ensuring that their children attend school and regular health check-ups. As a result, these payments not only ensure a basic level of consumption among recipients but help facilitate investment in the human capital of the next generation. Since the advent of Mexico’s first conditional cash transfer program PROGRESA (now known as Oportunidades) in 1997, social policymakers from Nicaragua to Nigeria have adopted similar models for alleviating poverty. In fact, the New America Foundation’s Global Savings and Social Protection Database--which currently focuses on Latin America, Africa, and Asia--has identified over 90 cash transfer programs in 45 countries in the developing world, with over half a billion beneficiaries. Of these programs, as the map above shows, 15 have been started, expanded or redefined in the past 3 years alone, which shows how rapidly the landscape of cash transfer social protection is evolving. As successful as these programs have been, one persistent critique has been that they foster dependency on behalf of beneficiaries because they do not enable them to save money in the medium term. Recent research by the New America Foundation’s Global Assets Project shows that breakthroughs in payment technologies, among other trends, has made addressing this critique all the easier. By linking payments to formal financial services--like bank accounts--beneficiaries can more easily store funds, be prepared for emergencies, and invest in opportunities that could lead to economic security. Cost-saving innovations like mobile telephones and biometric IDs are revolutionizing how government-to-person payments are taking place, with more and more governments, aid agencies, and multi-laterals making the switch from cash payments to electronic. To take two examples: from 2009 to 2011, Colombia invested in advanced payment infrastructure so that it could cut the number of individuals receiving cash payments from 76 percent to nine, and, on the financial institution front, the Fijian government committed to shifting all social welfare payments from vouchers into a bank accounts to promote savings in 2010. What are the results of these trends? Electronic payment systems are clearly more convenient for beneficiaries, as they are able to access their funds at the time of their choosing and without crowds at distribution points. And although initial investments are often necessary to build out payment infrastructure for electronic transfers, governments do benefit from a subsequent decrease in administrative costs and an increase in transparency. But results are mixed in the incorporation of low-income households into the formal financial sector. The central challenge is not necessarily in teaching low-income households to save more money: from the work of Stuart Rutherford, founder of the microfinance organization SafeSave, as well as the pioneering efforts of the Gates Foundation, it’s clear that poor families do want to save, and they often do so in ingenious (and risky) ways. Instead, the challenge is in encouraging families to make full use of financial tools. Countries such as India have seen that simply providing the poor with ‘no-frills’ bank accounts is insufficient--up to 90 percent of them remain dormant and unused. As a result, countries are now experimenting with how to raise awareness of the benefits and safety of bank accounts while at the same time incentivizing their participation. Over the past couple of years, Colombia has conducted an extensive impact study on which approach to promoting savings works best. In 2008, Colombia started making payments for its social protection program Familias en Accion through deposits in savings accounts, and it attempted to promote a culture of savings through a pilot program called Programa de Promocion de la Cultura de Ahorro (PPCA, or Culture of Savings Promotion Pilot). The impact study was incorporated into the design of the pilot, with some participants receiving financial education, others receiving a cash incentive for savings, and some receiving both. The good news was that the provision of accounts did lead some cash transfer recipients to save. What’s more, evidence suggested that the greatest savings occurred among those who received both financial literacy education and a cash incentive to save. On the other hand, early results showed little difference between different treatment groups on whether or not the recipients withdrew their entire monthly payment at once, with an overwhelming 91 percent choosing to do so. The reasons for the withdrawals varied: not knowing that accounts allowed for savings, fear of losing eligibility, distrust of bank fees, and even transportation costs. Regardless of their particular reasons, however, the beneficiaries’ collective experience showed that introducing households into the formal financial system is far from straightforward. Cash transfers have demonstrated a remarkable ability to both protect households from extreme hardship and promote long-term development. As the emphasis on helping beneficiaries graduate from poverty increases and electronic payment methods become more widespread, there is a great potential to enhance the impact of these transfers even further by linking them to savings opportunities (and eventually to other financial services such as insurance and loans). The potential of this linkage, in the eyes of many in the field, presents a “transformational opportunity” to take conditional cash transfer programs to the next level. Early experience, however, suggests that there’s a lot left to be done before we get there.

Blog Post by Guest Blogger for Isobel Coleman July 9, 2012 Development Channel
Budget, Debt, and Deficits

Buffett Wants to Pay Higher Taxes—on Less Than 1% of His Income

In a now-famous August 14, 2011 New York Times op-ed, billionaire Warren Buffett called for tax rates to be raised “immediately on taxable incomes in excess of $1 million, including, of course, dividends and capital gains.” The key word here is “taxable.” In Buffett’s case, his taxable income is a mere 0.9% of his income held within Berkshire Hathaway, of which he owns 22%. His share of its 2010 pre-tax income was $4.2 billion dollars, taxes on which amounted to over $1.2 billion—a 29% rate. This income would be subject to tax again at the personal rate if it was taken out of the company, but since he has generously pledged to give away his fortune he would avoid the tax he wants to increase. As the bottom figure above shows, when all taxes are accounted for the U.S. tax code—however poorly designed—is in actuality considerably more progressive than Buffett’s storyline suggests. Buffett: Stop Coddling the Super-Rich Spence: Mind over Market Geo-Graphics: The Payroll Tax Cut and U.S. GDP Growth Foreign Affairs: The Future of History

Blog Post by Greenberg Center for Geoeconomic Studies February 8, 2012 Geo-Graphics

Financial Markets

The Global Finance Regime

This page is part of the Global Governance Monitor. Scope of the Challenge For twenty-five years, globalization produced unprecedented levels of both economic growth and economic risk. Financial markets became more open, which allowed firms and governments to invest more freely. But as global finance grew bigger, it also grew more complex. Faster-flowing capital became more volatile and economic risk harder to track. Domestic regulators struggled to keep up with evolving financial practices, many of which they did not fully understand. To make matters worse, most national governments refused to cede regulatory authority to a global institution, limiting the extent of international oversight over global markets. International cooperation was based on a patchwork of ad hoc arrangements with limited scope and coercive power. This resulted in an explosion of systemic banking crises, with more than 120 [PDF] taking place between 1970 and 2007. By the spring of 2008, policymakers who were disheartened by the severe impact of these crises began expressing anxiety about the lack of effective regulation of the global financial system, which former U.S. treasury secretary Lawrence Summers said had generated "over one major crisis every three years." The subsequent 2008 financial crisis shook the entire system, plunging the world's developed markets into a recession. Since then, stimulus packages and bailouts have staved off a 1930s-like depression, but the ongoing crisis illustrates the need for a more comprehensive global finance regulatory regime. In 2010, the Group of Twenty (G20) and the International Monetary Fund (IMF) agreed on initial steps toward international regulatory reforms and liquidity support but the G20 has yet to live up to expectations. Fundamentally, two underlying weaknesses in the international financial regime remain. First, there are too many institutions and mechanisms—often with overlapping mandates but limited power. Second, despite this machinery of cooperation, building critical agreement often proves impossible. When states perceive a conflict with their immediate national interest, they repeatedly disagree on fundamental issues, hindering the prospects for cooperative regulation to truly reform the international system. Further crises loom large on the horizon. Strengths and Weaknesses Overall assessment: Improving, but with hiccups After the global financial system collapsed in 2008, policymakers around the world scrambled to respond. The Group of Twenty (G20) designated itself the world's premier forum for economic cooperation, but has struggled to implement necessary reforms. The International Monetary Fund (IMF) was also retooled to better reflect shifts in the global economy. Similarly, regulators from twenty-seven countries forged new rules, known as Basel III, in an effort to prevent similar crises in the future. But despite these efforts, mitigating financial risk and coordinating global economic policy remains a challenge. In 1944, world leaders gathered in Bretton Woods, New Hampshire, to craft a global financial regime based on fixed exchange rates. They hoped the regime would provide the financial stability needed to recover from the Great Depression and World War II. But by the 1970s, the postwar setup had become untenable. A key aspect of international economics is that countries cannot simultaneously have market autonomy, free capital movement, and fixed exchange rates. Once countries running a surplus refused to allow their currencies to appreciate, the United States decided it would rather unhinge the dollar from the gold standard than sacrifice its macroeconomic autonomy, ushering in a new era of floating exchange rates. This new regime produced tangible benefits, allowing major economies to combine national policy autonomy with open capital markets. (Emerging economies that valued stability could still peg their currencies to a major currency, though doing so often required large foreign-exchange reserves). Meanwhile, floating exchange rates stimulated the development of capital markets, opening new opportunities for countries—rich and poor alike—to run large deficits. In the 1970s, major international banks financed deficits in less-developed countries by recycling petrodollars. In the 1980s, surpluses in Germany and Japan financed the U.S. trade deficit—which rose to the then-high level of 3 percent of U.S. gross domestic product (GDP). During the last few decades of unprecedented economic growth and globalization, crises periodically interrupted the expansion of global finance, forcing the international community to develop mechanisms that could prevent or mitigate them. The IMF, and more recently the G20, provided a forum for world economic leaders to address these crises. Nevertheless, achieving consensus on effective collective responses has proven an enormous challenge. For its part, the IMF supplied emergency financing to troubled economies with a primary focus on developing countries, acting as a lender of last resort. In addition to financial assistance, the fund often worked to promote structural adjustment policies designed to reduce the state's economic role and expand free markets. However, with the 2008 global economic recession and subsequent eurozone crisis, the IMF assumed a newly active role in developed economies. However, even as the IMF became a central figure in crisis response, countries also resisted shifting too much power—especially regulatory power—to the fund and similar global institutions. Regulation remained national, though occasionally states coordinated their national regulations to avoid a race to the bottom. One such initiative was a new set of regulations proposed by the Basel Committee on Banking Supervision in September 2010. Known as Basel III, these regulations were created to stabilize national financial systems through strict liquidity controls and capital adequacy requirements. However, these regulations have been postponed twice thus far and are unlikely to be implemented before 2019, at the earliest. Aside from its inability to prevent financial crises, the global financial regime has also been slow to adjust to tectonic shifts in the international distribution of economic power, particularly with regard to the rise of China, India, and other emerging-market economies. In the wake of the 2008 crisis, the G20 emerged as the most promising forum for policy coordination between developed and developing states. Its membership included stalwarts of the Bretton Woods system alongside burgeoning economic heavyweights like China and India. While the G20 produced an initially strong response to the crisis, it has struggled to bolster its initial success with strong implementation and further agreements. Policy disagreements emerged between developed and developing countries, as well as among major developing economies, which have distinctive interests and outlooks. In particular, the United States Federal Reserve's policy of quantitative easing and questions regarding China's currency manipulation represent continued threats to international financial cooperation. The continuing eurozone crisis, and in particular the financial and political turmoil in Greece, Spain, Italy, and Cyprus overshadow efforts to solve the debt crisis. Japan's recent devaluation of the yen also led to fears of a currency wars between G20 countries. Instrumentally, there has been a long struggle to strengthen agreed-upon frameworks for financial regulations with a continually fragmenting international architecture of national and regional policies including a financial transaction tax in Europe, Dodd-Frank Act the United States, and Basel III requirements all being implemented to varying degrees. The World Bank and IMF have also attempted to enhance the role of developing nations in policymaking processes. Both institutions have endorsed voice and quota reforms aimed at increasing the voting power and influence of developing economies, though implementation remains limited. Indeed, recent efforts to reform shares in the international financial institutions have progressed slowly. Even if the changes had occurred, the voting share of traditional advanced economies would only decrease by 2.6 percent. With that said, the World Bank, which released an external review [PDF] in October 2009 with proposals for governance reforms, successfully increased voting shares for developing and transition countries across its various groups: The International Bank for Reconstruction and Development (IBRD) increased voting shares by just over 3 percent, while the International Finance Corporation (IFC) and the International Development Association (IDA) raised voting shares for developing states by approximately 6 percent. In sum, although the reform in favor of developing countries enjoys broad international support, proportional representation remains a distant goal. More often than not, however, advanced economies have not agreed on the right response to crises. Some believe that international institutions need more firepower to help tame global markets. Others worry provisions for crisis insurance would reduce incentives for investors and countries to avoid crises themselves. Some emerging economies, for their part, often trust in national self-help, building up large reserves, and in some cases limiting capital flows, rather than relying on global institutions. Coordinating macroeconomic policies and exchange rates: A weak system since 1973 One major shortcoming of the global financial architecture is the lack of a robust mechanism to allow the world's economies to coordinate their macroeconomic policies. This gap has become acute in recent years and encouraged massive structural imbalances leading some to question the future of the U.S. dollar as the primary global reserve currency. While the global financial crisis encouraged provisional efforts to rationalize currency exchanges, these have not been institutionalized. During the Bretton Woods system, the dollar's value was linked to gold and other currencies were pegged to the dollar—providing an international framework for monetary policy. But when Bretton Woods collapsed in 1971, no mechanism of multilateral coordination emerged to replace it. By 1973, the unprecedented buildup of foreign-exchange reserves by emerging-market economies led some countries to declare the emergence of a new Bretton Woods system marked by unilateral pegs to the dollar. The currency gap has become particularly acute in recent years, promoting massive structural imbalances between surplus and deficit countries. As a result, the United States, as an importer, consistently runs up current account deficits of $500 billion to $1 trillion while Asian commodity exporters rack up large surpluses. The current account surplus of China alone rose from $20.5 billion in 2000 to more than $190 billion in 2012. The most recent financial crisis fostered unprecedented levels of macroeconomic cooperation among the world's major economies. In the immediate aftermath of the crisis, many countries passed fiscal stimulus packages to foster economic growth. Subsequently, the Group of Twenty (G20) demonstrated its potential as an international focal point for macroeconomic coordination by embracing the Framework for Strong, Sustainable, and Balanced Growth [PDF] at its September 2009 summit in Pittsburgh. In adopting the framework, G20 members agreed to undertake close macroeconomic coordination, including of their macroeconomic and fiscal policies; harmonize the national stimulus plans and "exit" strategies; and correct longstanding imbalances between surplus and deficit countries, which had contributed to the crisis. To encourage progress on the framework—and permit G20 members to evaluate one another's progress in achieving their espoused goals—the G20 established the Mutual Assessment Process (MAP), in close coordination with the IMF. Thus far, the first three phases of MAP have been successfully completed. Before the June 2010 G20 Summit in Toronto, the IMF aggregated G20 nations economic policies, analyzed barriers to growth, and drafted "alternative policy scenarios" that would lead to further growth. In response, G20 nations launched a second stage of MAP to draft recommendations for international policy coordination, which were agreed upon during phase three in February 2011. The final stage, which began in April 2011, assessed member nations' progress and guided the action plan at the November 2011 Cannes G20 Summit. The resulting Action Plan for Growth and Jobs highlighted international consensus toward the importance of tackling international unemployment. Specifically, the plan includes the creation of a G20 task force on employment with a focus on youth employment. Presently, however, "available data [PDF] for seventeen countries suggest the overall youth employment situation remains critical." Beyond the G20, other international organizations like the Group of Eight (G8), the United Nations, and regional development banks provide venues for economic policy coordination. Still other institutions including the Organization for Economic Cooperation and Development (OECD), and the Bank for International Settlements (BIS) further cooperative action by providing governments with consultative forums, analytical support, and financial guidelines. Through dialogue in the aforementioned organizations, as well as through direct diplomacy, major economic powers have pursued monetary policy coordination. The United States Federal Reserve, Bank of England, European Central Bank, and People's Bank of China implemented a round of coordinated interest rate cuts in late 2008, though analysts doubt whether their success will tame investor jitters. In late 2008, the Federal Reserve also gave European banks unprecedented access to U.S. dollars to hedge against consumer withdrawals. Yet monetary policy is not only a cooperative tool—it also serves competitive purposes. Facing difficult economic conditions at home, states have used monetary policy to pursue national prerogatives. Issues of currency valuation have long caused tension between the United States and China, resulting in entrenched nationalist positions and lost opportunities for further macroeconomic alignment. The controversy has also caused bitterness among emerging economies like China and Brazil. Recently, the Japanese devaluation of the yen and French worries concerning the overvalued euro raised fears of competitive devaluations. In the G20 and elsewhere, these conflicting interests have become an impediment to meaningful action on financial reforms and overshadowed a recent meeting of bank governors finance ministers in Moscow. Discord arises not only from the repercussions of international competition, but also from fundamental disagreement on how to rebalance the system. The United States believes that policy changes in major creditor countries, such as the appreciation of the Chinese yuan, can address the world's imbalances without structural change. Competitors like China, however, advocate broader changes for the international financial architecture, including a shift away from dollar reserves. Monitoring and regulating financial standards and financial activity: Insufficient consensus to prevent further global crises Another major weakness of the global financial system is the lack of a coherent set of rules for monitoring, regulating, and standardizing financial activities, particularly at the cross-border activities of systematically significant actors. The current system entails an uneven patchwork of oversight efforts and entities, sometimes with overlapping mandates and jurisdictions. As a first step toward tackling this problem, the Basel Committee announced and a new set of Basel reforms for the banking sector. Known as Basel III[PDF], they aim to create a more coherent regulatory framework by increasing transparency in the financial markets, preventing diversion of resources, and tracking potentially excessive risks—with the intension of spotting rotten players (or practices) and quarantining them before they infect the entire system. Prior to any regime being installed, participants must agree that they want to limit excessive risk-taking in the first place—a difficult precondition to set. One school of thought holds that regulations give investors false comfort and thus leads them to pay too little attention to the risks of lending to a regulated institution. Others argue that regulation introduces distortions that lead to bad investment decisions. Financial policymakers first realized the need for more transparency and accountability in the mid-1970s. The first international banking crisis of the postwar era prompted the creation of the Basel Committee on Banking Supervision, which was charged with coordinating national banking supervisory policy. In the 1980s, the debt crisis revealed that many large international banks did not have the capital to absorb an outright default on their loans, leading to almost a decade of rescheduling—or revising repayment timeframes—to give the banks time to build up their capital. In an effort to avoid these crises, the Basel Committee adopted common standards for evaluating risk-weighted capital. After the Asian financial crisis, similar attention shifted to improving the quality of bank supervision in emerging economies. In 1997, the Basel Committee released its Core Principles for Effective Banking Supervision [PDF] and the IMF, in conjunction with the World Bank, began to systematically assess supervision in its macroeconomic health checks through the Financial Sector Assessment Program. The Basel Committee announced its newest round of banking regulations, Basel III, in September 2010 as a response to the economic crisis. A month later, at the 2010 Seoul Summit, the G20 endorsed the new rules, emphasizing their function in stabilizing market fluctuations and lowering the financial risk and fallout emanating from the failure of large banks. The rules require banks to hold higher levels of tier-one capital and establish countercyclical buffers to offset potential fluctuation. Unfortunately, banking regulation moves slowly and are subject to repeated delays with Basel III now not going into effect until 2019 [PDF]—allowing known systemic risks to exist unregulated. While important to the global regulatory regime, the sclerotic pace of and delays to implementation make the Basel III regulations an unwieldy tool for much-needed reform. Several similar arrangements emerged in the securities, insurance, corporate governance, accounting, and auditing sectors. Additionally, the Joint Forum of Financial Conglomerates and the Financial Stability Board (FSB) promote overall coordination and cooperation by regularly bringing together overseers of the global financial system. At the November 2011 Cannes Summit, the G20 strengthened the purview of the FSB, giving it legal standing and buttressing its financial institutions. The OECD and the World Bank have also pitched in, leading international discussions on corporate governance standards, insolvency, and bankruptcy. Nonetheless, obvious flaws remain in the global regulatory structure. Regulation remains overwhelmingly national or regional with weak, external verification and assessment mechanisms. No organization has the power to enforce compliance with agreed standards—or to sanction countries that fail to live up to global standards. Even recent systemic regulatory measures like the Basel III banking reforms are subject to national implementation, the extent of which will determine the speed and strength of its entry into force on the international level. For example, Russia is only now, in 2013, approaching achievement of the Basel II regulations. The acceptance of global standards will remain subordinate to the perceived competitive edge of national financial sectors. Additionally, important new financial players have fallen through the cracks. Central banks, finance ministries, and bank regulators, were surprised to discover the extent to which new actors in the shadow financial sector—which consists of unregulated special-investment vehicles and broker-dealers—had taken on the risks associated with subprime mortgages. There are increasing efforts to place these actors under new regulatory mechanisms—including EU restrictions on short selling, credit default swaps, and new taxes on financial transactions, as well as laws mandating greater transparency for hedge fund transactions and controls on executive compensation. Managing financial crises: Progressing, but overarching concerns remain Under the current global financial regime, the world has found itself vulnerable to severe financial crises but unable to manage them successfully. The International Monetary Fund(IMF) is ostensibly the premier fire-fighter in these circumstances and is charged with mitigating economic tensions in the aftermath of financial crisis. Even so, individual states have created their own dizzying array of bilateral and multilateral arrangements to help cushion against financial crises, as the eurozone crisis aptly demonstrates. Excessive volatility in financial flows has become a hallmark of the global economy. In some cases, countries suddenly lose access to market financing and find that they can no longer finance substantial deficits. Likewise, short-term financing for financial institutions can dry up equally fast—be they special-investment vehicles that have to roll over short-term asset-backed commercial paper, U.S. broker-dealers that rely on the repo market to obtain financing from money market funds, or European banks that rely on the wholesale market. At the start of the global economic crisis, the reliance of Iceland's banks on short-term borrowing in foreign currencies sent the country's entire economy into a tailspin once instability in European markets began. Meanwhile, financial contagion affects weak and strong investments alike. Losses in one portion of a portfolio may prompt a leveraged institution to sell other assets, pushing the price of healthy assets down. Once investors begin confusing sound investments with unsound ones, financial institutions can lose confidence in one another and the system upon which their short-term borrowing costs rely. To reduce this uncertainty, the IMF is the principle institution for managing financial crises. The IMF took on some of the functions of lender of last resort when currency crises swept the developing world in the 1990s. It created two emergency credit facilities, the Supplemental Reserve Facility of 1997, and the Contingent Credit Lines of 1999 to facilitate faster financing for governments and markets judged to already have relatively sound policies. When developed nations required assistance during the most recent financial crisis, the IMF was able to draw upon these facilities and past experience. Following the model from the the developing world's currency crises in the 1990s, the IMF created the Short-Term Liquidity Facility of 2008 to more rapidly inject capital into relatively stable financial systems. Again, in 2010, the IMF and the European Central Bank approved a package of $930 billion to provide stability to eurozone countries. In December 2011, the eurozone again sought IMF assistance to craft a new massive bailout fund of $260 billion, but when Britain refused to contribute, the combined IMF-EU bailout fund only set aside $200 billion. With that said, the IMF issues its loans with a variety of conditions, which often impose fiscal austerity on crisis-battered societies. While many in the developing world have long regarded the IMF as a tool for developed nations to control developing nations, the fund's eurozone bailouts have generated resentment in Europe, too. In fact, portions of European publics, in particular, demonize the IMF for its strict demands of austerity. Furthermore, IMF critics still question the discretionary nature of its interventions as the institution lacks clear standards for determining how much financing countries should receive. Some economists even argue that the existence of the IMF prompts governments and investors to pursue reckless policies because they know they can receive IMF loans if their investments fall through. Unlike domestic lenders of last resort, the IMF's lending capacity is limited by donor contributions contingent upon internal voting processes and the feasibility of issuing new Special Drawing Rights (SDRs). As one expert notes, "Neither the IMF nor the Bank for International Settlements nor any other international organization has the authority to create and extinguish reserve money." Past concerns with the IMF prompted a slew of new bilateral, regional, and multilateral institutions—including the Brady Bonds, the Chiang Mai Initiative, and the European Central Bank—all aiming to supply a troubled country with the foreign exchange currency it needs in a crisis. In the European case, a multinational currency—the euro—and its accompanying policy infrastructure enabled the EU to oversee regional crisis management with aid from the IMF. Thus far, the IMF has provided traditional conditional loans to Iceland (its first loan to a developed country since the 1970s), as well as to Hungary, Ukraine, Pakistan, Latvia, Romania, Ireland and Portugal. To quell fears that the post-2008 wave of lending would exhaust the IMF's resources, the G20 and a few emerging market economies agreed to expand the New Arrangements to Borrow, providing the IMF with up to $500 billion in supplementary financing in March 2011. The IMF's members also authorized a Special Drawing Rights allocation, which expanded the IMF's global pool of reserves by giving each member additional reserves in proportion to their contribution to the IMF. However, the IMF's spending on eurozone bailouts and countries' failure to match rhetorical commitments with cash, has caused the IMF to fall short of that target. At the 2012 spring meetings of the World Bank and International Monetary Fund (IMF), the world's finance ministers agreed to increase the IMF's lending power by $430 billion, but doubts remain whether it will be enough to contain the crisis. Supporting Development: Some progress, but still starving for aid and investment A final shortcoming of the current global architecture is the disproportionate effect financial crises have on development assistance to developing countries. Poor countries are vulnerable to negative spillover effects that culminate in rampant poverty, mass unemployment, and food shortages. Over the years, multilateral development agencies and the International Monetary Fund (IMF) have refashioned their policies to support financial sector stability and growth, and to encourage financial activity through incentive programs. However, the demand for aid in developing countries remains tangible. Multilateral efforts to address the needs of the developing world extend back to 1945, when the architects of the Bretton Woods system created the World Bank to support postwar reconstruction. Many capital controls were dismantled, and private capital markets emerged as an alternative source of long-term financing. But countries with rudimentary financial and banking infrastructure or unstable governments still struggled to attract private investment on any but the most onerous terms. Meanwhile, concerns that development failure might spillover into neighboring economies created a demand for multilateral development support. Subsequently, the World Bank increasingly focused on helping the world's poorest economies, and in 1960, it set up its International Development Association, or so-called soft loan window to finance developing countries. Today, the World Bank continues to make loans to middle-income countries with access to private markets. These loans are priced commercially so they provide the World Bank with a profit, part of which is used to subsidize concessional assistance to poorer countries. In addition to being a financial intermediary, the World Bank has become a center of knowledge: it disseminates lessons learned from its experience of maintaining programs in dozens of countries from a variety of programs including its Poverty Reduction Strategy Papers. Regional development banks have also undertaken similar objectives. States, too, offer bilateral official development assistance (ODA) from donor countries and have helped support development goals in poor countries. However, too often bilateral ODA suffers [PDF] from a lack of harmonization and host country-ownership. Despite boosting funding levels in recent years, the increased number of actors involved—from donor states to nongovernmental organizations and philanthropic foundations—has increasingly fragmented the sources of financing for development projects. Additionally, weak capacity and corruption in recipient states often lead to ineffective implementation and squandered resources. These challenges make it difficult to account for success on the ground. In recent years, the developing world gained another source of financing: government-backed firms from Europe, the Middle East and Asia. Such investment, together with renewed private investment in mines and oil fields driven by high commodity prices, pushed investments and loans to Africa from $9 billion in 2000 to $62 billion in 2008. These investors offered governments an opportunity to sidestep the transparency requirements, performance monitoring, and governance rules attached to loans from development banks or Western ministries. The G20 also formally introduced development as a key issue to its agenda in November 2011 (which the Group of Eight had previously included on its agenda). The final communiqué agreed not to tax or restrict food destined for the United Nations World Food Program, established a task force to address youth unemployment, and enumerated steps to increase global agricultural output. However, in 2009, development assistance from industrialized countries dropped for the first time since 1997. In sum, development efforts fall short of fulfilling commitments outlined at the 2005 World Summit. Domestic financial policies in low- and middle-income countries need to become more countercyclical and targeted [PDF] to address systemic vulnerabilities in their national financial markets. As noted above, development banks, the IMF, and new financial institutions will inevitably play a critical role to keep these economies from contracting as the global financial crisis runs its course. Financial Policy Issues Introduction: The United States has been a champion of free markets, the architect of the Bretton Woods system, and home to one of the world's leading financial capitals. Despite evolving from the world's leading lender to the world's largest borrower, the United States has been the major promoter of a liberalized global financial system. Many therefore saw the United States as the major culprit of the 2008 financial crisis (though others blamed the crisis on global sources). Does global finance need sweeping regulation? Yes: Crises arise, in part, due to a lack of regulatory oversight in markets. To prevent their occurrence, the world needs to devise and implement a set of monitoring and enforcement guidelines. After the financial crisis hit in 2008, the Financial Stability Forum—now the Financial Stability Board (FSB)—produced a blueprint [PDF] for global reform. In June 2010, leaders from the Group of Twenty (G20) pledged to pursue a "better regulated" financial system based on four pillars: (1) a strong regulatory framework; (2) effective supervision; (3) addressing the systemic problems involving important ally institutions; and (4) transparent international assessment and peer review. The FSB is monitoring implementation of G20 recommendations for increasing financial stability and assesses [PDF] that efforts are progressing. In September 2010, financial authorities from twenty-seven countries also forged new rules known as Basel III to require larger holdings of low-risk capital reserves, thereby reducing systemic risk. However, individual nations are responsible for implementation, and spotty compliance points to the inadequacy of currency regulations. At the June 2012 Los Cabos G20 Summit, little progress was made to boost compliance with Basel III regulations. In December 2012, it became clear that compliance with the agreed-to Basel III would be further delayed in the United States and Europe amid fears that its implementation might hinder growth. No: Few question the need for reform, but some caution against going too far. Excessive restrictions and government interference might slow economic recovery by suffocating creative market dynamism. If the government's hand reaches too deep, politicians and policymakers may be tempted to use regulations to pursue their own agendas, creating dangerous distortions in resource allocation. In sum, these critics argue that the painful recession should not make us forget the remarkable results of the past twenty-five years. Stifling financial innovation would be even more costly than the financial crisis. Others argue that instead of regulating institutions that are "too-big-to-fail," the system needs to be made safe for failure—allowing markets rather than regulators to discipline financial institutions. Still others worry that reforms may concentrate too much power in the hands of a few regulators, such as the Federal Reserve, without eliminating the risk of regulatory capture. Moreover, adding new mandates to existing institutions could draw energy and attention away from traditional duties. These voices consequently favor limiting the Federal Reserve's regulatory responsibilities. Should regulation come through a new global architecture? Yes: Despite calls from some analysts who argued as early as 1984 that global financial markets could not sustain itself in the long term, proponents have only now begun to rally support for a global financial governance regime. European leaders have been particularly vocal, with former European Central Bank president Jean-Claude Trichet urging increased vigilance and a three-pronged approach based on "macroeconomic discipline, monetary discipline, [and] market discipline." The deep impact of the 2008 financial crisis has persuaded some economists and policymakers to favor a comprehensive financial architecture that looks not only at banks and coordinating macroeconomic policies, but also at the shadow financial market, including enhanced regulation and transparency of investment banks and derivatives. Other analysts have added to the plea by pointing out that the current financial system is too big to be rescued by one national government, and needs a more robust governance body to offer viable rescue packages. No: Critics of a new Bretton Woods approach believe that the ills of global finance can in large part be cured at home. National policies, they argue, will do more to address the key problem of excessive bank leverage than new global rules. "It's worth remembering that after the last global crisis in 1997-98, there was lots of grand talk about a new international financial architecture," Sebastian Mallaby writes, but in the end, "the only important reforms were national ones." Looking at the aftermath of the Asian financial crisis, the Economist argues that huge foreign reserves, flexible exchange rates, and stronger banking systems proved more powerful than international initiatives in spurring economic recovery. Others, such as former U.S. treasury secretary Henry Paulson, believe that new, intrusive international rules will not only be useless, but also damaging, because they will inevitably rely on a one-size-fits-all approach. Moreover, a final group argues that, regardless of whether a theoretical global system would work, it will never see the light of day because countries will simply refuse to turn over real power to international regulators. Should there be more support for global rebalancing? Yes: Many analysts agree that a root cause of the latest financial crisis has been the global imbalances that have been accruing since the 1990s. As current account discrepancies between exporting and importing countries grow larger, the need for rebalancing solutions becomes more imperative. Supporters of global rebalancing efforts feel that larger structural changes need to occur to correct these imbalances. Surplus countries, particularly China and Germany, need to save less and stimulate domestic demand and the United States must save more and increase the role of exports in its economy.The trend of global trade balance corrections since 2008 relied on unsustainable large fiscal stimuli and has already reversed. No: Critics contend that a global correction is already under way and that the market naturally tends toward equilibrium. The 2008 financial crisis has driven global demand lower, contributing to a decline in the U.S. trade deficit, a higher savings rate among U.S. households, and a correction in the U.S. exchange rate. Moreover, if countries were to pursue coordinated policies to tackle global imbalances, the question of who would be tasked with spearheading these efforts remains unanswered. The Group of Twenty (G20) has not adequately addressed concerns, and the recent summit in Los Cabos, Mexico represents a continued failure in these efforts. Some also believe that the informal institution may also be too big to prescribe consensus-based global rebalancing policies. Recent Developments January 2014: Higher IMF growth forecast The IMF revised its 2014 global growth forecast upward in January by 0.1 percent to 3.7 percent. In a shift from recent years, stronger performances by advanced economies, rather than emerging markets, are fueling global growth. The modest growth rates predicted for much of the developing world may slow even further in response to improvements in the U.S. economy as tighter U.S. monetary policy could redirect capital flows toward the U.S. market. January 2014: Doha Round ends The moribund Doha Round trade round was finally brought to a close in Bali, Indonesia. The Bali deal focuses on "trade facilitation", addressing inefficiencies in customs procedures. The agreement, however, fails to settle many other long-standing points of contention among WTO member states, nor is it likely to shift the international trade landscape decisively in favour of multilateral agreements, away from increasing popular bilateral and plurilateral agreements. September 2013: G20 Summit The eighth G20 Summit was held in St. Petersburg, Russia, from September 5-6. Unfortunately, tensions over the international response to the conflict in Syria overshadowed meaningful progress on the economic agenda. The outcome document from the Summit did not outline concrete steps on more critical issues like remaining regulatory challenges, but did include an extended commitment to refrain from protectionist measures and points of agreement on addressing the challenge of tax havens. May 2013: Dow Jones at record high On May 7, the Dow Jones Industrial Average closed above 15,000 points for the first time. Quantitative easing from central banks, low interest rates, and recent positive figures related to unemployment and productivity has each contributed to this record high. It remains unclear whether this trend will continue or whether it characterizes the end of the global financial crisis. It does, however, represent a significant expansion of the index from 13,000 points immediately before the crisis began and a doubling of the index from its lowest point under 7,000 points in early 2009. April 2013: World Bank targets extreme poverty Global finance officials endorsed a World Bank target to end extreme poverty by 2030 at the Spring Meetings of the World Bank and International Monetary Fund. The goal is to have only 3 percent of the world's populations classified as being in "extreme" poverty (with average consumption below $1.25 per day) and creates poverty reduction strategies to serve the bottom 40 percent of the population of each country in the developing world. This goal was created against the backdrop of new statistics that suggest extreme poverty has been reduced to 21 percent in 2010 compared to 43 percent in 1990 and the recent discussions reflected concerns that climate change and environmental protection were essential to achieving its goal of reaching 3 percent by 2030. This effort will likely coincide with the United Nations' effort to create a post-2015 development framework to replace the Millennium Development Goals. March 2013: U.S. sequestration U.S. lawmakers failed to make a deal to prevent significant budget cuts to U.S. government discretionary spending. These cuts to defense programs, research, and education programs took place despite warnings that they would affect both domestic and international markets and slow growth in gross domestic product by half a percentage point. These cuts remain ongoing with their full force not expected to take hold until later in the year. February 2013: Currency wars A devaluation of the Japanese yen triggered fears of a currency war among developed and developing states in early February. Japan's new fiscal and monetary policies apparently targeted a lower exchange rate to reinvigorate a stagnant economy. This development coincided with a rapidly strengthening euro that put a six-month long recovery in jeopardy. The prospect of a currency war between members of the G20 led to fears of increased protectionism that would unravel the international financial architecture built in the aftermath of the financial crisis. These fears overshadowed February's G20 Finance Ministers and Central Bank Governors Meeting. At this meeting, however, the group made clear that they would not devalue their currency in search of improving their respective balances of trade. Options for Strengthening the Regime Introduction he 2007-2009 economic crisis, followed by the sovereign debt traumas in Europe, has triggered a variety of operational and normative challenges in both finance and economics. The United States and other major economies are being pressured to find effective strategies that remedy financial instability, through both measures at home and international cooperation. Strengthening multilateral mechanisms remains the foundation for responding to financial crises, but importance must also be placed on coordination of domestic policies, particularly among the top twenty industrialized nations. These recommendations reflect the views of Stewart M. Patrick, director of the International Institutions and Global Governance program. In the near term, the United States and its partners should pursue the following initiatives to ensure the global recovery is a success: Revitalize Group of Twenty (G20) action on global economic imbalances During the April 14-15, 2011, Group of Twenty (G20) meeting of finance ministers and bank governors in Washington, DC, the group agreed on a two step process to reduce persistently large imbalances between countries with current-account surpluses (notably China) and those with deficits (notably the United States). The plan also charged the International Monetary Fund with identifying factors that drive countries to accumulate massive surpluses or deficits. However, building unanimous consensus on the outcome of these independent assessments is notoriously difficult. The risk is that national politicians will despair of a multilateral solution and will resort to unilateral sanctions, as suggested by a bill in the U.S. Congress that would punish China for alleged currency manipulation. Because unilateral measures could result in retaliation and escalation, the United States and its partners must display leadership by affirmatively supporting the G20 process. Both China and the United States recognize that it is in their own interest to address imbalances, so an international understanding about benchmarks of progress should not be impossible. Unfortunately, G20 leaders made only limited progress on these issues due to heightened tension over the eurozone and their own economic concerns. Bolster IMF in fighting liquidity crises The United States should support France's proposal [PDF] to bolster the IMF's role in helping countries respond to liquidity crises. Stronger IMF responses to liquidity crises would decrease the motivation for vulnerable countries to stockpile excessive reserves as a precaution in case of a sudden capital outflow. An increasing number of emerging economies are practicing precautionary reserve accumulation—which contributes to macroeconomic imbalances and mispricing of financial risks. As the U.S. dollar is the currency of stockpiled reserves, widespread reserve accumulation drives up the value of the dollar, widening the U.S. current-account deficit. A larger IMF, and one that stood ready to lend rapidly and without excessive conditions, would reduce the incentive to unilaterally accumulate cash reserves. In effect, collective insurance would displace individual insurance. Implement IMF governance reform Leaders at the 2010 G20 Seoul summit agreed to increase the voting shares of emerging economies at the International Monetary Fund (IMF) by 6 percent, and give more seats to developing countries on the IMF Executive Board. However, these reforms missed the deadline for actual implementation, which was slated for October 2012. An additional challenge continues to be negotiations within Europe to decide which European nations will give up seats on the executive board to allow for emerging economies. The United States needs to continue to pressure its partners in the G20—especially those European countries hesitant to acquiesce—toward implementing these and future reforms. A timely increase in the voting shares of emerging economies will reinforce the sense of ownership that these countries feel toward the IMF. That, in turn, should encourage them to have faith in the IMF's ability to provide liquidity in a crisis, and should dampen the temptation to unilateral reserve accumulation. Provide assistance to support the European recovery Despite positive developments toward the end of 2012 alongside the eurozone's recently negotiated banking union, Europe's economy remains deeply troubled. Those countries that embarked upon fiscal austerity face low growth rates and grim forecasts. Further, any movement toward fiscal union has been postponed until the summer of 2013 while the European Union has been dealt the blow of a potential British withdrawal amid its fraught budget negotiations. With France's new Hollande government looking inwards (and asking for a loosening of the EU's foundational Stability and Growth Pact) and Germany's leadership no longer a driving force toward consensus due to upcoming elections, there is a tangible leadership vacuum. This was clear during the unfolding banking crisis in Cyprus that has huge ramifications for European investors but that has received a lackluster response from the EU and International Monetary Fund, who failed to craft a financial rescue package that would not affect depositors and launch damaging capital controls on Cypriot banks. While the worst may well have passed, the European economy remains an anchor in the international economy and remains in need of fiscal stimulus and a nudge toward pro-growth strategies. Improve regulatory standards to mitigate financial risks Experts and policymakers have placed much of the blame for the financial crisis on weak regulatory standards and inadequate supervision of sophisticated financial activities. Although progress has been made, particularly through the creation of the Financial Stability Oversight Council in the United States and the European Systemic Risk Board in Europe, the complexity and integrated nature of modern finance continues to pose unprecedented challenges. Responding to the crisis, the Financial Stability Board (FSB), formerly the Financial Stability Forum, has provided [PDF] a set of proposals to "restore confidence in the soundness of markets and institutions." Though the 2011 G20 Cannes Summit endowed the FSB with a "legal personality," its recommendations remain advisory, and have no legally binding enforcement mechanism. Beyond the aforementioned near-term steps, the United States should consider another set of important proposals:These recommendations reflect the views of Stewart M. Patrick, director of the International Institutions and Global Governance program. Implement Basel III regulations The recently released Basel III regulations require banks to hold higher levels of tier-one capital and develop countercyclical buffers to cushion against future financial turbulence. Implementation of the reforms requires national supervision and the willingness of individual financial institutions to adhere to the new standards. The established timeframe for banks to meet requirements, on some measures lasting until 2019, means that there will be plenty of opportunities for global progress on Basel III to slow or falter. The IMF has recently criticized the European Commission's efforts to implement Basel III regulations as "too weak" and "a disappointment." In addition, the approaches to national enforcement may be altered by local political and economic concerns, leading to an inconsistent application between countries over that period. To some extent, differences in implementation may be justified. But it is vital that legitimate differences in implementation of capital and regulatory standards do not open the way for a regulatory race to the bottom. Finance the developing world The economic recession that followed the global financial crisis had a serious effect on developing countries. Export demand collapsed, commodity prices fell, and the flow of both remittances and private capital shrank. The World Bank estimates that in the first year of the crisis alone, 130 to 155 million people fell into extreme poverty. The period 2009-2011 saw a sharp rebound for emerging economies, especially commodity exporters that took advantage of resurgent prices and red-hot demand in China. But the extremes of the recent cycle demonstrate the value of public-sector development banks that can lend in a countercyclical fashion. Thus, in addition to commitments to the IMF, the United States and its industrialized partners should continue its commitment to multilateral financing for development banks and encourage private sector investment flows.

Report by International Institutions and Global Governance Program September 10, 2009 International Institutions and Global Governance Program
Economics

Mexico’s 99 Percent: How the Next President Can Reduce Poverty and Inequality

It is campaign season in Mexico, and aside from security issues, front-runners Enrique Peña Nieto of the PRI and Andrés Manuel López Obrador of the PRD are focusing on poverty and inequality. Both criticize the past two PAN governments for not improving the lot of Mexico’s poor, and for perpetuating if not exacerbating an uneven playing field that benefits the few and not the many. In a recent campaign stop in the Southern state of Veracruz, Peña Nieto came down hard on the PAN, saying “[the PRI] knows what Mexico hasn’t achieved in the past decade. We haven’t forgotten that more people are poor, that we haven’t had the economic growth that creates jobs that the public demands.” But recent data from the World Bank and Mexico’s own household survey call these claims into question. Over the past fifteen years, inequality has fallen consistently, and since 1996 Mexico’s Gini coefficient has dropped by nearly one percent each year (reaching pre-1980s crisis levels – 49.8 – in 2006). Poverty is also down slightly, as five million fewer people live on four dollars a day or less in 2010 than in 2005. A number of factors are behind these trends. First, macroeconomic stability (even with slow growth) has been particularly beneficial for the poor, who, studies show, are hit the hardest by economic crises. Real wages also improved, due to a mix of broader education and increased worker productivity. Finally, social spending targeting the poor rose. Programs such as Oportunidades (started under President Zedillo as Progresa), give monthly stipends to low income households that keep their kids healthy and in school, and now reach nearly six million families. Unfortunately, the world financial crisis of 2008 brought this progress to a standstill. In contrast to the rest of Latin America, Mexico has seen an uptick in extreme poverty in its wake, with more families dropping below the poverty line even as the economy recovered in 2010. The big question going forward is whether – and how – Mexico can get back to spreading the gains of strong growth more evenly among the larger population. To make this happen, the next president should learn from the lessons of the last fifteen plus years – and focus on improving education, expanding targeted social programs, and redistributing wealth more generally (for instance through a more progressive tax system). These policies already have and would continue to make a difference in the lives of the many Mexicans that still struggle to make ends meet.

Blog Post by Shannon K. O'Neil January 19, 2012 Latin America’s Moment
Economic Crises

A Conversation on the Economy with Timothy F. Geithner

(Note: This event was fed in progress.)DANIEL L. DOCTOROFF: (In progress) -- Council on Foreign Relations meeting with Secretary Timothy Geithner. My name's Dan Doctoroff. I'm the president of Bloomberg LP, and I'll be presiding here today.We are truly honored to have the 75th secretary of the United States Department of Treasury and fellow council member with us here today. This meeting is part of our C. Peter McColough Series on International Economics.One housekeeping matter -- actually, a couple: Please completely turn off -- and it says here in capitals, "TURN OFF" -- not just put on vibrate, your cell phones, BlackBerrys and all wireless devices, to avoid interference with the sound system. You're not going to miss -- want to miss a second of this.I would like to remind members that this meeting is on the record and CFR members around the nation and the world are participating via a password-protected teleconference. This meeting is being webcast by CFR and The Washington Post.Having served as secretary of the Treasury since January of 2009, and previously as president and CEO of the New York Fed from 2003 to 2009, Secretary Geithner has led the response to the global economic crisis, the design of the ongoing recovery, and has guided the formulation of new rules and regulations to limit the risk of future crises.Secretary Geithner will provide opening remarks, after which he and I will have a conversation here on stage for approximately 20 minutes. I will then turn to members for Q&A for the remainder of the hour.Now, Secretary Geithner last spoke to the membership on March 25th, 2009. Let's look at the situation then and now. The Fed and Treasury were on the hook for 2.8 trillion (dollars) through TARP, Fed programs, the purchase of mortgage-backed securities, backstopping money market funds and commitments to Fannie and Freddie as well as the FDIC. At that time, it was thought that expected losses could be as much as $700 billion. Today, it is expected that the government will come out with a $24 billion profit. The combined market capitalization of GM and Ford on March 25th, 2009, was $8.4 billion. As of the close yesterday, it was $107.3 billion. On March 25th, 2009, the S&P 500 was at 813. Today, it is at 1,335; a 64 percent increase.Having skillfully navigated the financial system and the economy through the crisis, you would think Secretary Geithner could relax just a bit. But as we all know, unemployment remains stubbornly high, deficits have ballooned, and the political climate in Washington is as poisonous as we have seen in many years, making extremely difficult a long-term deficit reduction agreement that may be necessary to avoid the loss of the U.S.'s AAA rating. The housing market still seems to be bumping along the bottom. Long-term growth in the U.S. may be slowing, due in part to gas prices on the rise. And global crises threaten the stability of the global economy.Not an easy job.We are delighted to have Secretary Geithner here today to comment on these topics and many others.Mr. Secretary. (Applause.)TREASURY SECRETARY TIMOTHY GEITHNER: Thank you, Dan. That was gracious -- (laughter) -- and generous, very generous. I had the privilege to watch you from a distance when I was here in New York, and I admire so much what you did for the city and that you played in the arena.And great to be back at the council. I had dinner with some people last night, and they said: So you're speaking to the council. And I said: Well, you don't go to speak to the council. You got to get advice -- (laughter) -- from the council, so I'm here to escape Washington temporarily and learn a little about the real world. And -- (laughter) -- we'll have a chance to have a little debate about the problems facing the country and how to solve them.I'm just going to begin with a few minutes of remarks about the three main challenges we have coming out of this crisis, and they are about growth, about financial repair and reform and of course about the deep fiscal challenges facing the country. And I'm just going to run through these briefly just at the beginning of the conversation.Let me just start with growth, with economic growth. I'm going to borrow someone else's characterization. We started the year with a little less momentum and we've got some new headwinds, most prominently of course in oil. And growth in the first quarter, if you just look at the consensus of private forecasters now, and the Bloomberg consensus now is likely to be under 2 (percent), many people think, much slower than we ended the year. But if you -- if you look through weather in January and February and you look through the weakness in construction, the underlying trends in the economy show much more resilience.And the economy is definitely healing. And even with the many challenges we still face, I think then if you look at the consensus of private forecasters who look at the U.S economy looking out, they believe that the U.S. economy is likely to grow between 3 (percent) and 4 percent over the next two years, and that seems like a reasonable expectation.Unemployment, of course, as Dan said, is still very high. Housing and construction are still very weak, and it's going to take years still to repair the damage caused to the housing market. And the economy as a whole still feels very hard to the average American, unfairly hard for millions of Americans caught up in the aftershocks of this crisis. But still, I believe we can be confident that the economy is healing and gradually getting stronger, and there's much to be encouraged about in the shape of this early period of expansion and recovery.Let me just go through this quickly. Productivity growth of course, as you know, has been very strong. The private savings rate in the United States, negative going into the crisis, is now significantly positive, between 5 (percent) and 6 percent. We're borrowing as a share of our economy now about half of what we were before the crisis, meaning our current account imbalance, our current account deficit is half of what it was as a share of GDP. Business spending on capital equipment has been very strong and still looks quite strong. Manufacturing, high tech, agriculture all show broad-based strength, which is testament to the diversity of the U.S. economy. Export performance has been quite good, and the financial system, which I'll come to in a sec, is dramatically stronger. The tax incentives we put in place at the end of year provided a very powerful near-term catalyst for business spending on capital equipment, and of course it gave working families a substantial increase in after-tax income, which is helping offset the effects of higher gas prices.We're about to get America back into the business of trade agreements with these three new agreements, and that will help us start to negotiate a much more ambitious set of trade-expanding measures in Asia and Latin America, but of course what matters most now is not just that we reinforce this process of repair and recovery but that we focus on strengthening the long-term fundamentals that affect potential growth in the future. And of course as you all know, that's all about education, about innovation, about public investments in things like infrastructure and incentives for private investment. And of course our challenge is to make this economy once again the best place in the world to start a business, to try to grow a business, and that is completely within our capacity to do. And I think we have a very good chance of emerging from this crisis with underlying potential growth rates in the United States as strong as they were before the crisis.Briefly on the financial system, how are we doing, how far have we come and what's still ahead? Our basic responsibility, our core objective is to make the United States again the strongest financial system in the world, the best at channeling the savings of investors around the world to finance the ideas of growing companies with the strongest protections for investors and a much better set of shock absorbers, cushions against future shocks and crises. And I believe we are well on the way to that objective, far ahead of countries that were caught up in this mess and are coming out of it, too. And we're ahead of them because we were much more aggressive strong and early in recapitalizing the financial system with private capital, restructuring the system to clean out the weakest parts of the system very forcefully and then legislating reforms to modernize the basic checks and balances all financial systems require.So we brought more than $300 billion in private capital into our largest banks in a relatively short period of time. Compare that to what's happening in Europe.The shadow banking system in the United States, so important to the vulnerability in the crisis, is a shadow of its former self. We were the first mover, first to lay out the broad new rules of the road to modernize oversight so that we could shape the global outcome on financial reform.And as Dan said, the overall economic costs, the overall direct financial costs of our financial programs is likely to be trivially small, perhaps positive. That means if you do the Fed -- all the Fed (clutter ?) programs, all the losses in the GSEs we still -- we still are working through; all the investments we made in the banking system, automobile industry, in the insurance sector -- all in are likely to be tiny in -- measured against the overall size of the U.S. economy and a tiny fraction of what a much more modest crisis, the S&L crisis cost, which, as you know, was roughly 3 percent of GDP for the American taxpayer.Of course, the main (challenges ?) to a lot of us in the finance -- (inaudible) -- the middle of this still are in the housing finance system, where we're just at the beginning of trying to figure out how to fix that mess, in trying to make sure we create a better balance of efficiency and resiliency, better shock absorbers, less complex to administer, less risk of contagion and without just pushing risk outside the regulated institutions and to other markets; and of course, finally, to make sure that as we do this we do so with as much of a level playing field across countries as possible.Now, third is about the fiscal imperative, about the budget imperative, the debt imperative. We obviously have unsustainable fiscal deficits. To quote Richard Haass, we have wars of choice and wars of necessity. This is a war of necessity. There is no alternative. Democrats have to understand that our capacity as a country to finance things Democrats believe in like education, like a minimal guarantee of protection in health care (and ?) the safety net, require demonstrating we can live within our means; and Republicans have to understand, of course, that deficits matter, that they are unsustainable and they hurt growth left unaddressed. Tax cuts don't pay for themselves.I think that basic reality, if you listen closely beneath the political rhetoric, that basic reality is seeping in now. And of course, the challenge in fiscal reform is not just an accounting challenge, it's not simply a math challenge, it's not -- it's not just deciding on the level of cuts. The fundamental policy challenge is doing so in a way that leaves you with good incentives for future growth, capacity to support future growth and doing so in a way that is judged fair by the bulk of the citizens of the country.And this is going to be a formidable challenge for us, much bigger challenge than anything we've faced as a government in the last several decades on the -- on the budget side. But it is a manageable challenge for the United States. It's not as hard as what we've just achieved in averting the risk of a second Great Depression.The president laid out two weeks ago a broad strategy for restoring fiscal sustainability. And I just want to list the most important critical elements of a credible strategy, and then we can have a conversation about how to achieve this.First, you have to commit to bring the budget deficit down to a level that will put our overall debt burden on a declining path as a share of the economy. This requires achieving what people call primary surplus, primary balance, meaning what you take in has to exceed what you spend, less interest. You have to do this in a time frame that is -- that is present. You have to do it, in our -- in our thinking, by 2015. That's the first thing. You have to commit to a target for sustainability on the overall debt level that starts to put the debt burden on a declining path.You have to have a comprehensive and balanced approach with spending savings across the core functions of the government, from defense through entitlements. And you have to include tax reform. Comprehensive is important, because it allows the burden to be shared and spread across the core functions of government and makes the savings and the effects and the costs to the economy more manageable than if they were concentrated.Third key point -- these cuts and reforms have to be phased in over time to avoid damaging the expansion. The biggest mistakes countries make in financial crises, apart from waiting too long to act in the face of the gathering storm, is they put on the brakes too early. They shift too prematurely to abrupt contraction-rate strategies that put at risk the incipient expansion. So you have to be -- you have to lock these reforms in, but you have to phase them in to reduce that risk to the economy as a whole.You need to protect -- and this is fourth -- you need to protect investments in things critical for future growth -- again, like education or like innovation, incentives for investment. So the reason why you want to live within your means is so you preserve room for doing things that matter to the overall basic quality of growth and opportunity creating for the country.And finally, you need a -- an enforcement mechanism. You need discipline that works that will force Congress to make choices to live within constraints that is viewed as broadly credible to the market, that will force Congress to deliver reforms in the event they find a hard time agreeing on them.And if we are able to legislate a broad framework with these key elements, that locks in reforms over a multi-year period, constrains the ability of future Congresses and executive branch officials to live -- constrains their ability to live with larger deficits, then we do not need to resolve immediately all the basic choices that still divide so much of the country, that still divide Republics (sic; Republicans) and Democrats, like on how to do tax reform or what balance of reform is necessary to make our health care costs more sustainable for the economy as a whole. We can buy some time to resolve those longer-term questions if we lock in a multi-year framework of constraints that imposes a credible, binding fiscal rule on the U.S. government. So our objective is to try to take advantage of this present moment and build a bipartisan consensus. And it has to be bipartisan. You can't do anything with just one party, these days, of course. And I think we have a chance to do that now, because if you listen carefully, again, beneath the political rhetoric of the moment, there is broad agreement among both Republicans and Democrats now on the scale of the deficit reduction you need to commit to and achieve. And there's substantial agreement on some of the components of that, and that gives the chance now to lock something productive in place today.And this is going to be, of course, the key test of our political system. It will be essential to restoring confidence in a country -- confidence that was very damaged by the crisis. And it's very important of course to act now before a crisis forces action.You know, this crisis just caused enormous damage, not just to the economy, not just to the basic economic security of all Americans -- it's the fabric of confidence we all rely on, confidence in the ability of government to act -- it caused a huge amount of confidence to our credibility globally, confidence in our financial system. And, you know, much of the world is getting better at these things. They're not standing still. So this is a moment where we need to -- where we need to move in. We have to find a way to demonstrate that we have a political system that will work, that can solve problems, that can bring people together and deliver reforms that are commensurate with the size of our challenges, to demonstrate that we can do things together even where many things still divide us.And I'll just end with confidence. I think -- again, I think we can do that. It's completely within our capacity to do that. You know, I sit in this office occupied by -- in Hamilton's office occupied by 73 other men. It will be women at some point, but so far it's only been men. And if you -- the politics feel terrible now. They feel very hard. And anybody who looks at Washington from a distance thinks -- well, they -- I don't know what they think. (Laughter.) But you could -- you could -- you could forgive them for wondering. (Laughter.)But if you think back of what it's been like, just to go back to the beginning, there have been times when politics have been much, much worse. And I would take our challenges today over anybody -- any of the challenges facing the other economies, as a whole, and I think we're completely up to those challenges. And I'd be happy to have a conversation with you about what's hard and, of course, as I said, take some advice. Thank you. (Applause.)DOCTOROFF: So Mr. Secretary, just following up on one thing that you've said specifically -- triggering mechanisms -- could you be a little bit more specific about the types of triggering mechanisms? There's short-term triggering mechanisms. There's long-term triggering mechanisms. Republicans, at least some of them, have suggested a triggering mechanism of, you know, debt to GDP, et cetera. What do you think more specifically?GEITHNER: I'd like to start by saying, you know, you can't put all the burden on a trigger. Again, you need something that people will look at and say, is that a constraint? This is enough -- are there enough reforms in place that you'd be confident, again, we're going to get ahead of this problem? So you don't want to put all the burden on the trigger itself, but for the -- for a trigger to be designed sensibly and -- you need to anchor it in this basic primary balance concept. You need to have a target that will produce a deficit that is below 3 percent of GDP and will stay there. And if you do that, then you can show the world that our debt burden as a share of the economy will first stabilize at an acceptable level and then start to decline, fade over time.And so the anchor of the framework has to be, you know, what economists call modest primary surplus by 2015. I say '15 just because you can't -- if you put it off too far, it's -- (chuckles) -- it's not credible, and if you make it too quick, again, it's too much risk that you force too much -- too much weakness in the economy too soon. So that should be the anchor for the rule, and for a -- and a force mechanism to work, it has to be scary to people. It has to be scary enough -- politicians will not want it to go into effect. And it has to be balanced. It has to cover both spending, what we call (classic ?) spending and spending in the tax code, as Marty Feldstein would say it, so that politicians have an incentive to act ahead of the trigger. That would be the art. But again, it can't be all in the trigger. It has to be -- it has to be policies in place to get you some distance to that target. Otherwise people will look at us and say, how do we know that they're actually going to deliver?DOCTOROFF: You also stress the importance of phasing in whatever is done to reduce the deficit, something that arguably has not been done in Britain by Prime Minister Cameron and Chancellor of the Exchequer George Osborne. Do you think they've made a fundamental mistake?GEITHNER: I don't. I think -- I think they're in a fundamentally different situation. They do not have the luxury we have. Our challenges look large, of course, but they're fundamentally different, much more manageable than in -- those in the U.K. and other parts of Europe as a whole. And that's because our -- the structural piece of our balance, the piece that's not the product of recession and the product of the emergency measures you put in place in the recovery act -- that piece of our deficit is much smaller than theirs. And I think realistically -- you know, we don't stand in their shoes, but they, I think, had no alternative but to adopt a much more aggressive path.Now of course if you look at our projected deficit path too, it's not -- it's not dramatically softer than theirs. It's very similar. I saw George Osborne the other day, and he was looking at what the president announced and said, gee, that's a -- that's a pretty aggressive path. But it's easier for us to do because our economy has much better underlying growth potential, is much more diversified, and a much larger piece of our deficit is just the temporary cyclical effects of recession.DOCTOROFF: You recently said that there is, quote, "no risk" that the United States will lose its AAA credit rating. S&P's action to put the U.S.'s AAA rating on credit watch or negative watch implies a one-third chance of a downgrade in the next two years. Of course they cited fears that there won't be a long-term deficit reduction plan. What gives you the confidence that we'll actually be able to reach an acceptable budget agreement?GEITHNER: Again, I think if you look -- and I know it's hard to do, because Washington is such a hard place to understand, but if -- again, if you look through the rhetoric, it is incredibly important that the leadership of both parties now, embracing the basic fiscal imperative and embracing the same basic magnitude of adjustment over the same basic time frame that is essential to get us on a sustainable path -- and I think that the odds of an outcome that helps start that process are much better today than they've been, I think, any time in the last decade.Now a lot separates these two parties, and the country's still fundamentally divided on how you think about the right balance, how to do tax reform, again, how to do entitlement reform. But you have to -- when you start with that recognition that there's no alternative but to put these things in downward path, you've made the most important choice. And then you can have a debate about the best strategy, best composition within that, and that's a good debate to have -- good debate, necessary debate to have.The other thing that's important to recognize about us as a country -- again, you know, we're a much younger country than the other major economies. We have much better underlying growth rates, in part because our -- more openness to immigration. We have a -- we started with a much lower overall debt burden as a share of our economy. The size and expense of our commitments in the safety net are a much smaller share of the economy as a whole.And so we're in a much better position to manage through this. And the reforms that are going to be necessary for us to put in place, they're going to be difficult, but there's things that we can absorb and adjust without risking substantial damage to our growth potential, long-term growth prospects. Again, if you do it in the right way, it's a balanced way. It's a much more manageable problem for us than would be true for many of the other major economies.DOCTOROFF: Still, you are facing a situation in Congress where a huge percentage of the Republicans have entered into no new tax pledges. How do you overcome that?GEITHNER: Well, I think that's an excellent question, and that, I think, is probably the most difficult political problem for them to have to solve. But they're going to have to solve that problem, because, again, if you just watch this debate carefully now, what's happened over the last few weeks or so? One is, you had this -- you know, you had this very divisive, difficult fight over how to fund the government, which tested people's tolerance and sort of illustrated what the consequences are for going way too deep in education, for example. And you saw people go up to the edge of the cliff and pull back because they said, I can't support that basic cut; that sort of helpful recognition you can't balance the budget through cuts on 12 percent, what's 12 percent of the budget. That's very important.Second thing that's happened is that you see in the plan that some Republicans embraced what happens if you force all the burden for fiscal sustainability on cuts in Medicare and Medicaid, and mandatory programs for the disabled and the poor. So if you put all the burden of this on that part of the budget, you have to cut -- you know, just to be unfair; well, I think this is fair -- you'd just have to cut savagely deeply into those basic programs. And you will find people will -- across (here ?) will not embrace that. They cannot defend it. They won't be able to do that and they will move away from that quickly. That's sort of helpful.The other thing -- the other thing that's very important to hear -- to say is that, you know, the president laid out this $4 trillion deficit reduction plan over a 12-year period -- again, same broad magnitude of cuts that the Republicans embraced, much more balanced package, and you found Democrats largely embraced that imperative. And again, this is a -- this is a problem within our capacity to solve, and we have a moment where we can take advantage of this recognition, greater recognition of the magnitude of the problem, and try to lock in something useful.DOCTOROFF: Let me switch topics. In introducing you a few moments ago, I mentioned some pretty remarkable statistics about progress since you were last here. Despite these achievements, the president is often perceived by the business community as being anti-business. And even in Bloomberg's last global investor poll, taken in January, only 44 percent of U.S. investors rate your performance as favorable versus --GEITHNER: Forty-four (percent)? (Laughter.)DOCTOROFF: -- versus 52 percent unfavorable.GEITHNER: Forty-four (percent) is unbelievable. (Laughter.)DOCTOROFF: So my question is, where's the -- (laughter) -- these are investors. This isn't the public. (Laughter.) So my question is, where's the love? Really, where's the disconnect, do you think? What is it that's not being communicated, if anything?GEITHNER: You know, I don't -- you know, these are complicated problems, but I mean, you know, think -- just as you did -- you -- well, and you, when you were introducing this -- the subject, unemployment is basically 9 percent, as you measure it. It's much higher in many parts of the country. You just saw more damage to people's basic wealth and economic security than we'd seen since the Great Depression. It is very hard for our people to understand why that was necessary, why it can't be better quickly.DOCTOROFF: How about the business community, though, specifically?GEITHNER: Oh, I don't -- I wouldn't -- I don't think too much about that. I mean, the business community is -- well, I'll give you an anecdote. (Laughter.) You know, I spend a lot of time with people who run businesses in the United States now. So we've talked to the average non-U.S. business, and they look at us; they say, I don't know what those guys are complaining about. I would much rather be an American company established in the United States today, operating under your set of constraints, rules of games, not -- I would say, across most industries, that's what people say to us.Again, if you look at the basic balance sheet of American companies; you look at the basic improvement in productivity, in profitability; you look at the broad improvements they're demonstrating across the board just in the last couple of years, they're in a much stronger position than they would be without the actions we took. And I think they basically understand that. I think most of what you hear in the rhetoric is the understandable desire businesses always have to lower their tax burden and make sure they get more influence over the basic regulatory framework in which they operate.There's nothing new in that. That's an old traditional game, and some people play that very well, some people less well; but they all play it aggressively. And I view most of the rhetorical stuff that you hear through that prism.DOCTOROFF: By the way, to reinforce your point, in the Bloomberg global investors' poll, your approval rating outside the United States was much higher than in the United States. (Laughter.)So the jobless rate has dropped nearly a full point in less than a year; yet there are now, as you pointed out, lower forecasts for growth this year. A year and a half from now -- sort of an insignificant date, a year and a half from now -- where do you think we'll be on jobs and growth?GEITHNER: You know, I'm not an economist. I don't forecast. But, you know, again, if you look at the consensus forecast for the U.S. economy, it's 3 (percent) to 4 percent growth over the next 18 months or so. And if you -- you're growing at that pace, then the private sector in the United States is likely adding jobs a little north of 200,000 a month. And again, that'll feel -- anybody who doesn't have a job, still knows somebody who doesn't have a job, not working as much as they do -- that's not going to feel strong enough. But it's probably what you can expect for an economy coming out of a crisis caused by these basic imbalances.Again, the basic tragedy of this financial crisis and the constraint on recovery is that you -- people have to bring down their debt burden after a period of living beyond their means, just as the government's going to have to do. And you're not going to have -- it's going to take a while again, it's going to take several more years, to repair the damage in housing markets and construction. You do not have the normal avenues governments have to induce or help foster much stronger growth in that. And that is the reality we're left with.But that is the -- that is the tragic constraint imposed by the crisis. It's not fundamentally about the policy choices people can make in Washington. Washington can make it worse, but the hard thing for people to understand is that it'd be hard to make it dramatically better than that. Very important: you know, again, first do no harm. And I think one reason why you want to make sure we take advantage of this fiscal moment is you do not want to take any risk that you cause damage to this process of repair and confidence building that's happening across the economy today.That's absolutely true in this debate about the debt limit, which is a ridiculous debate to have. I mean, the idea -- the idea that the United States would take the risk people would start to believe we won't pay our bills is a ridiculous proposition -- irresponsible, completely unacceptable basic risk for us to take. But it's also true that on a fiscal debate you don't want to put this off indefinitely and if -- because if you do that, there's a risk that you will magnify the unease people still feel about whether Washington's going to be able to get ahead of these basic problems.DOCTOROFF: Same answer with respect to housing, where clearly, as we both acknowledge, it's just sort of bumping along the bottom but we've got huge unresolved issues with the GSEs?GEITHNER: Right. Yeah, I think, again, in housing we have -- you know, we still have the -- I don't know how to say it elegantly. We have to clean up the mess of the basic servicer problems you see across the country still. But then you have to put in place a housing finance system that'll allow private capital to carry the dominant role of financing a mortgage for people; have the government recede from the role it's playing today. And that requires, you know, not just winding down Fannie and Freddie and in a sense pricing them out of that business gradually; but it requires putting in place a set of incentives, disclosure requirements, capital requirements, reform to the (security issuing ?) business so that people will bring capital back into that market. And we're -- as we all know, we're at the very early stage of putting in place that architecture; not least, you know, having it get some traction. And that's going to take a long time.DOCTOROFF: Just one more question, and then we'll turn to the members. The G-20 this month described a global recovery that is, quote, "broadening and becoming more self-sustaining." At the same time, energy and food prices are climbing, particularly in the emerging markets; unrest continues in the Mideast -- Middle East; Japan is obviously hobbled seriously; and the European debt crisis remains completely unresolved. Which of these in your view poses the greatest threat to the global economy in the next year? (Laughter.)GEITHNER: Well, I think that's a good list. (Laughter.) I think that -- I think -- I guess I'd answer it that way. It's just -- this way -- it depends a lot on how people manage these challenges. I mean, the -- what's happening in oil is obviously potentially very significant. And at current levels, on its own, it won't put the recovery at risk.The question really is -- I think, in one way, is, how do emerging markets manage the rising inflation problem that they face? Because they're growing so rapidly. It is a manageable problem, lots of experience trying to do that well. But that's important. Europe, as you said, has got a lot of challenges, but it's completely within their capacity to manage. They just have to choose to solve those on terms that are going to be reassuring to the world, they can do that.Again, I would say that I'd prefer our challenges over those facing any other country. And for us, the big challenge is to try to build a political consensus around a reasonable, balanced fiscal sustainability strategy that makes sure we don't get behind this basic problem. I think that's the most important thing. And if we -- if we do that, then we'll be in a much better position as an -- as an economy to manage all of the pressures, tensions, other things out there still.DOCTOROFF: So at this point I'd like to invite members to join our conversation with your questions. When called upon, please stand. Wait for the microphone and state your name and affiliation. And importantly, please limit yourself to one question and try and keep it concise so we can allow as many members to get involved in the conversation.Yes.QUESTIONER: Hello, Secretary Geithner. Ginny Kamsky.GEITHNER: Hi, Ginny.QUESTIONER: Ginny Kamsky. Secretary Geithner, you have a strong history, knowledge and understanding of China. You talked about -- GEITHNER: I wouldn't say understanding, but -- (laughter).QUESTIONER: You talked about the financial crisis and how you believe the United States responded well and, in a way, better than other nations, and I believe you were referring to Europe. I'd be interested in your reaction to how China responded to the financial crisis, and whether or not you think we can learn from the Chinese response, and overall your reaction to how China is performing today in the engagement of Treasury with China. Thank you.GEITHNER: Well, China is -- you know, China is still at the early stage of this transition to a more market economy, a more mature economy, and they've got a long way to go. It's important to look -- you know, if you even -- even with the amazing accomplishments of growth, broad-based growth, over the last three decades or so, they still have an economy that's still overwhelmingly dominated by the state, and they're just beginning to dismantle and move away from that. And that's a difficult challenge, as you know, for governments to manage.I think that, in the crisis, they did all the necessary right things. You know, they did a well-designed but very substantial fiscal force, which they had to do at that point, and that helped compensate for the shortfall in export demand. But what -- right now what they're trying to do is to put in place a growth strategy that's less export-dependent, reflects the reality that they're too big, too large a share of the world economy to run an export-driven growth strategy. And they're starting to dismantle gradually the basic elements of that strategy. An undervalued exchange rate they're letting rise gradually against the dollar at least. And they're starting to open up the capital account to allow more convertibility, more capital flows, and they're beginning to unravel those basic elements of the export-driven growth strategy that's served them relatively well but is completely unsustainable now. I think the challenge right now is, you know, they're going into a -- what they would call an election, and it's slowing the -- it's slowing the -- it's sort of slowing the pace of reform a bit, because it -- elections tend to induce a little caution. But I think they did really quite well in the crisis, and I think that they look like -- to me, today, they look like they're handling the near-term tensions, pressures relatively well. And of course, we have a huge stake in this economic relationship, and are doing as much as we can to help deepen and strengthen it and reduce some of the basic underlying sources of tensions we still face on the economic side, and not just because of the exchange rate but because of a range of other things they do to disadvantage U.S. producers.Yes, sir.QUESTIONER: Good morning. Marshall Sonenshine, chairman of Sonenshine Partners. Mr. Secretary, pleasure to be with you today.In his introductory remarks, Dan Doctoroff gave a nice overview, which I think many of us -- I certainly -- agree with, and cited some metrics as to the successes of the management of the financial crisis.And there is, of course, alongside that a narrative that says we did what we could and what we had to do, and in fairness we did no harm and we did what we absolutely had to do, but then alongside that we have left in place an accident-prone financial system for no -- for no other reason than it is still highly concentrated in terms of numbers of institutions being low and financial assets that they control being very, very high; and in lieu of addressing that, we have put a burden of regulatory oversight on this government that it has never before had.GEITHNER: On this system.QUESTIONER: On this system that it has never before had. And there are some great democracies that have handled those burdens well. Canada would be a -- I think a good example -- perhaps Israel.Are we equipped in this crazy land that we call Washington and that you refer to obliquely as a tough place -- are we equipped to actually execute on the second step of that plan, whether it be through the Financial Oversight Committee or the other structures, or are we still unfortunately despite all of our best efforts in triage -- which I think all of us give you enormous credit for -- are we still beholden to an accident-prone system?GEITHNER: Excellent question. I think it's exactly the right question. Of course, you won't know the answer to that question -- (laughter) -- you won't -- you just won't know honestly for a long time till we face something substantial in terms of the next large shock.But I'm much more optimistic. Let me just take issue with a couple of things you began with. It is true that our financial system, if you look at banks, is more concentrated than it was before the crisis, but there is no plausible path out of the crisis that did not result in at least temporarily some greater concentration.We have a much less concentrated financial system, again, than any other major economy -- dramatically less concentrated. Banks as a whole are only half of the credit -- (inaudible). So even that measure too, our banks -- even our largest ones together -- are a much smaller share of our economy than is true for any other country. Just -- again, just to do the numbers, our banking system in total now, even encompassing what we used to call investment banks, is about one times GDP, one times the total annual output of our economy. It's five times GDP in the U.K., eight times in Switzerland, three or four times in Germany. So that's one thing.Second is, we forced -- you referred to triage, which is a nice, elegant term for it -- but we forced dramatic restructuring in our system. We either allowed the market to crush -- or I won't use that term -- the weakest -- the weakest parts of the system, so that what was left was able to meet a market test for viability, attract enough capital to sustain itself. And that's hugely important.And as I said earlier, we were way ahead of everybody else in designing a basic set of restraints that average people could have a chance of enforcing to make sure we bring a little bit more resilience to the system in the future.The most important thing to do and the greatest failure that led to this crisis was the inability to apply sufficient constraints on leverage, on liquidity risk for those core institutions. You know, we did it not well enough for banks, but not for entities that were functioning as banks, the (institutions ?) alongside banks that were as large in total as the entire banking system.And one of the most important things that this reform thing does is allow us to impose requirements that force better, thicker shock absorbers into the core parts of the financial system. And if you get that -- you won't get it perfect. If you get that better, you have a much better chance of allowing an economy in the future to withstand pretty dramatic shocks that result in the risk of failure of large institutions. And I think we have a very good chance of doing that.DOCTOROFF: Sir, right there.QUESTIONER: Thank you. Dick Huber, Antarctic Shipping.You touched upon it when you addressed the question of China, but we've had a steady and quite substantial devaluation of the dollar over the last couple of years. And in a way, we're taxing holders of our debt in a way to solve our problem. Now, has that been largely due to benign neglect, or is that part of Treasury's strategy?GEITHNER: Well, I'll give a slightly deeper answer to your question, but I just want to make it clear to everybody that our policy has been and will always be, as long at least I'm in this job, that a strong dollar is in our interest as a country, and we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners.Now, I want to -- if you step back a little bit and you think about the world as it's evolved over the last few years in particular, it's worth noting that at the darkest moments in this crisis, really every time, even after you come out of the depth of the fall of '08, first quarter of 2009, when there's been concern about the basic fabric of finances really globally, people have wanted to be in Treasurys and in dollars. And when risk has receded a bit, confidence has started to come back, growth looks a little more resilient, people start taking risks again. You've seen that start to unwind, come back.And that's a very encouraging thing because it still shows that -- and you see the markets today still -- that people have retained a fundamental confidence in the ability of this country to manage our challenges, and to do so, on average, better than many other countries will do. And I say that not because -- really, to emphasize that you have to earn that and you have to make sure you earn that all the time. And of course, it depends a lot on the Fed's capacity to keep inflation low over time, which of course they will do. It depends a lot on our ability to put in place a set of fiscal reforms that will deliver sustainability over time. It depends a lot on acting aggressively to fix what was damaged in our financial system; make sure that you have a basic framework of integrity, disclosure that all systems require as a whole.Those are things you have to -- again, you have to work at very hard, you have to earn over time. And of course, we're going to -- we're going to keep doing that.DOCTOROFF: Yes, on the aisle.QUESTIONER: Secretary Geithner, thank you so much for coming to talk with us today. Chris Faulkner-MacDonagh, with Ziff Brothers Investments.So I had a question on the -- on the debt ceiling; in particular, what you see as your plan B. I know you released a letter -- had a chance to read it -- on what -- the steps you could take. It was very comprehensive. Thank you. But let's say the debt ceiling isn't increased towards the end of this year. And we will -- you know, and with the interest payments receiving priority, isn't it possible you could just continue to pay interest on the debt and let expenditures on everything else suffer? And if not, then what do -- what do you see as your plan B?GEITHNER: Let me -- let me do the basic constraints and flexibility we have, just so people understand that. On current estimates, we hit the debt limit on about May 16th. We have a set of tools Congress gives the secretary of the Treasury to allow -- that gives Congress more time. We can buy Congress a little bit of time. If we use all those tools, we can give Congress until roughly the end of June, before they go on their July 4th recess, to act. And of course, they will act.You know, we're the only country in the world, I think, that imposed -- where Congress has imposed on itself this particular burden of torture on their members. (Laughter.) And they recognize they have to act, and of course the leadership recognizes it, both Republican and Democrats. And they'll do what's necessary. I'm completely confident they'll do what's necessary.What I want to make sure they don't do is to take us too far into June, to take us too close to the edge again, because you don't want to -- at a moment like this, you don't want to leave people with any concern that they -- that they'll take too much time. And so our basic message to them is: Let's get this done and get it moving.Of course, the harder thing is the thing we spend most of our time talking about, which is how you -- how you legislate a framework that can lock in meaningful fiscal reforms that get these deficits down to a sustainable level. And you know, that's going to be a challenge to do. I think that's something we can do. But the Congress will -- they'll pass the debt limit.DOCTOROFF: Yes, right there. Go ahead.QUESTIONER: Jim Zirin, Mr. Secretary.I wondered whether you weren't disturbed by the dearth of criminal prosecutions that have come out of the mess. (Laughter.)GEITHNER: That's a -- that's a good question. It's not a -- it's not a -- it's not something that, as you know, in our system I get to solve. (Laughter.)And I will say that -- the obvious, which is that, you know, you had this colossal loss of basic trust and confidence in the integrity of the system, and we have to rebuild that. And rebuilding it is not going to come just from what we do on leverage requirements for large, complex financial institutions.It's going to come from making sure that you have a credible enforcement capacity that people believe will be a little bit more proactive, hold people accountable. And you need -- you need to demonstrate that that will be there in the future, because you need the deterrent power that brings to affect behavior. And I agree that we have some ways to go to rebuild -- to rebuild that confidence. And again, it's not -- it's not just about derivatives oversight or about disclosure in securitization products. It's going to be about making sure you have people in these jobs in enforcement authorities that have the -- understand these things -- these are complicated, complicated things -- understand them well enough, are talented enough, not just brave enough, to make sure you hold people accountable.DOCTOROFF: Do you think that's ever really possible, to have the regulators stay equal to or ahead of the regulated, given all the incentives that exist among the regulated?GEITHNER: I think that's the -- that's the existential question about oversight. But putting the enforcement piece of it aside, which is what your -- the question was, if you -- if you think about the rest of the system, to simplify a little bit, you have -- you have two schools of thought. You have people who believe that you can design a better radar system. It will look over the horizon. It can identify pockets of risk and leverage. And then all you do, you just deploy your army and go preempt that -- those pockets of leverage and risk.And you have another school, and I'm -- as you can tell, I'm in the -- I'm in the latter school -- which says that, you know, we're human. The people who occupy these jobs are human. They will not have perfect foresight and wisdom. It is not economically or financially tenable to know exactly what the future brings and what of the shape of the tail looks like, and what the vulnerability (there is to ?) -- to shocks is.So what you can do and what you have to do and is absolutely necessary, if not always sufficient, is you need to build deeper, thicker shock absorbers into the basic system so that you are better positioned to withstand and deal with the fundamental uncertainty that exists about the nature and scale of shocks ahead, because you cannot predict, you will not be able to predict and anticipate, you will not be able to preempt. You could try to do it, but you need a safeguard and thicker cushions. And by cushions, shock absorbers, I mean capital, liquidity, funding in institutions and in the basic markets where firms come together, so that when firms make mistakes and court failure, which they inevitably will do, those things don't threaten to bring down the rest of the system.DOCTOROFF: Yes, sir.QUESTIONER: Gordon Bell, Legacy Growth Partners and Bed-Stuy Restoration, Bed-Stuy Restoration started by Bobby Kennedy some 40 years ago. So this question comes from both sides. And let's turn to some of the more positive aspects of what you are able to do going forward in terms of growth.How can the treasury secretary and how can we, Congress and the nation, focus on investing in ourselves? So Bed-Stuy has education. It's got housing. It's got green initiatives. How can we make sure in this budget we support the places that get leverage and put in private hands strong businesses that -- (inaudible) -- people in jobs? Thanks.GEITHNER: Excellent question. And that's, again, why you have to bring a comprehensive approach to putting us on a path to -- within our -- where we're living within our means, because if we don't do that, we will not have the room and the capacity to target investments and things that only governments can do; you know, like education and things that have high, broad economic and social returns. It just requires choices. And it's another reason why you can't restore balance by focusing just on a piece of the budget, particularly a piece of the budget where you have most of the power to improve future growth and opportunity.So again, just to say it again, just to make it simple, if you do it on education, you'll be, you know, eating the future, as Paul Krugman wrote. It's the reason why you have to do something that's comprehensive, that has the right balance. You have to go -- you have to look at defense, you have to look at tax reform, and absolutely you have to get more savings out of -- out of -- out of health care as a whole. Without that, you have no -- you have no choice.You know, governing is about recognizing that you -- we have limited resources, making choices within those constraints. That's what governing's about, and that's why this debate about how to do it is so important.It's good to get beyond the point about whether we have to do it. That's good. But the more difficult challenge is figuring out how to do it in a way that is not going to leave the economy weaker in the future or leave Americans with less (basic ?) confidence the system is fair, with a fair burden shared by everybody. DOCTOROFF: Did we miss a huge opportunity with the stimulus package in early 2009?GEITHNER: Opportunity to do what?DOCTOROFF: To make those kinds of investments. GEITHNER: I don't -- you know, I think that -- again, it's hard to look back and know what might have been possible given the constraints at the time. But in fact, what the stimulus package did quite well is, you know, apart from the mix of tax incentives and (support ?) for states and local governments and some targeted infrastructure things, that it did put significant material additional amounts of resources in things like NIH, in basic science, in -- a modest amount of money to provide incentives for education reforms that Arne Duncan is (leading ?) across the country. So the recovery act, you know, had that -- had a complicated and pretty diverse mix of what people called, you know, classic near-term catalysts for investment or income support for individuals and families, but it also had a modest amount of targeted things in things that we know are essential to how economies grow over time. DOCTOROFF: Right. Yes, sir?QUESTIONER: (Off mic.)DOCTOROFF: Can you identify yourself, please?QUESTIONER: Yes. I'm sorry about that. Matthew Levey, Kroll Associates.Secretary Geithner, you just hit on the health care part of the equation. What gives you confidence, given the bruising nature of the fight on our first go-round in health care reform, that -- as you say, looking past the rhetoric in Washington -- that there's a fundamental consensus about what needs to be done with Medicare, Medicaid and other health care programs?GEITHNER: There's no -- there's no consensus. And -- I agree with you completely, there's no consensus on how you generate the savings you're going to need. But I think it's worth stepping back for a second and just reminding ourselves of what is the basic health care cost problem we face as a country. It's not just, of course, the cost of the commitments we made in Medicare and Medicaid, it's the rate of growth in overall health care costs across the economy as a whole. And if you're going to solve that broader economic problem, you have to figure out a way to change the incentives for people -- for how people use health care and how the providers of health care provide health care, so that you're slowing the rate of growth and costs economy-wide. You can't just try to shift them from, let's say, Medicare beneficiaries -- to Medicare beneficiaries in a way that'll have enough basic traction and power. And you're absolutely right. I'd say if you listen, you know, health care -- there's the sort of recognition that the commitments we made even with the Affordable Care Act savings ultimately don't go far enough. But no consensus yet on how to go further. And, you know, again, I think you have to do anything and everything that offers the prospect of some improvement in the incentives and try those, figure out what works and then do more of those things over time. And that's going to take a long time to get better. But -- and, you know, again, the important thing to recognize about this thing -- just to end with a little bit of optimism again -- is that, you know, these deficits are large, they're unsustainable, they're going to have to come down over time, but if you do it in a balanced, comprehensive way, you do not need to dismantle the basic safety net that millions of Americans, not just seniors, rely on. You don't need to dismantle it. You don't need to cut that deeply into it. You need to reduce the rate of growth in those costs, you need to reform how those benefits are structured in many ways, but you don't need to dismantle it, as long as you're prepared and willing to do a balanced approach that -- that touches all the basic things government is doing, including, for example, the amount of spending we do (through ?) the tax code. DOCTOROFF: One more question. Sir? QUESTIONER: Farooq Kathwari, Ethan Allen. This is about jobs, and middle-class jobs. While the economy's certainly healing, but there is a tremendous issue about increasing jobs here. The president has talked about increasing exports.I was wondering, where would these jobs come from, when the fact of doing business in the United States is extremely high, especially compared to the emerging markets?GEITHNER: I think that -- again, that's the deep question still hanging over all of us, which is are you going to see a level of job creation in the economy as a whole that'll bring down the employment rate -- unemployment rate fast enough to meet a set of basic expectations of the citizens of the country. I think -- I think that's the essential question.But again, let me try to take the slightly more optimistic side of this debate. I think we've had close to 2 million jobs in the private sector created since growth resumed. That's a much stronger pace, much earlier than happened during the last two recoveries. And they were milder recessions, so important context in that context. If you just think more broadly -- and again, if you look at -- you look -- you know, you look at the basic shape of this recovery, it's important to recognize again that, you know, we're 5 percent of the world's population. We're about one-fifth of global GDP. The most populous parts of the world are going to grow much more rapidly than the major economies for the next several decades. And we are really as a country uniquely positioned to benefit from that basic growth, because we are still uniquely good and productive at things that are going to be very important to help those economies (grow going ?) forward, and that's why, even at this early stage of recovery, you're seeing a broad-based improvement in manufacturing, in agriculture, in high tech reflected in export growth here. And of course, that's translated into jobs. Now, construction is not going to be a source of strength for some time in the United States, and for people that made their living in that basic business, it's going to be very hard and very -- and very tough for them. But again, if you look outside those inevitable pockets of weakness that we still have, you're seeing pretty broad-based signs of basic improvement, which demonstrate a lot of -- a lot of basic innovation, dynamics and make the U.S. companies as a whole look pretty good, relative to their international peers. Of course, for -- to sustain that, we've got to make sure that we do a better job of educating our people, we make the incentives better for growth; you know, we're going -- we're going to take a run at corporate tax reform to improve investment incentives in a responsible way. And again, you've got to make sure as you do this fiscal reform, you do so in a way that doesn't leave starved or underfunded things that only governments can do to make those basic growth fundamentals stronger going forward. But I'd take the qualified, optimistic view just based on the initial experience with recovery.DOCTOROFF: One final question from me. A lot of the people in this room work very hard, but few jobs are as demanding as yours. You haggle with Congress on a Tuesday, you fly to China on Wednesday, you're back here to deal with complaints from the business community on Thursday, a Cabinet meeting on Friday. Can you continue to do this job at the pace you've been doing it -- (laughter) -- seriously, after the 2012 elections, assuming President Obama's re-elected?GEITHNER: You know, Dan, I've never really done anything else. It's -- I'm sure I'm (employable ?) in other -- (inaudible) -- (laughter). You know, I -- DOCTOROFF: Fifty-eight percent of American investors (think that ?).GEITHNER: Yeah. (Laughs.)DOCTOROFF: I'm kidding. (Laughter.)GEITHNER: And I think they have a point. (Laughter.)Could I end with a -- with a compliment?DOCTOROFF: Absolutely.GEITHNER: This is just a Pete Peterson tribute. I was in -- I was in London, I don't know, some time ago in my youth on a trip, and I got a phone call from someone who claimed to be Pete Peterson. And he said, you know, I heard about you, and I wanted to know whether you'd come talk to the Board of the New York Fed about running the New York Fed. And I regret that call every day -- (laughter) -- but no less than I think Pete Peterson does. (Laughter.) No, I am incredibly grateful to him not -- again not just for what he's done for this institution and so many others, and for being such a stubborn advocate of confronting basic fiscal reality, but for what he -- for the privilege he gave me in coming and working for my country in this capacity. I'm grateful for him.DOCTOROFF: Great.GEITHNER: Nice to see you, Dan.DOCTOROFF: Thank you. (Applause.)####®FC¯END®FL¯ .STX (C) COPYRIGHT 2011, FEDERAL NEWS SERVICE, INC., 1000 VERMONT AVE.NW; 5TH FLOOR; WASHINGTON, DC - 20005, USA. ALL RIGHTS RESERVED. ANY REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION IS EXPRESSLY PROHIBITED. UNAUTHORIZED REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION CONSTITUTES A MISAPPROPRIATION UNDER APPLICABLE UNFAIR COMPETITION LAW, AND FEDERAL NEWS SERVICE, INC. RESERVES THE RIGHT TO PURSUE ALL REMEDIES AVAILABLE TO IT IN RESPECT TO SUCH MISAPPROPRIATION. FEDERAL NEWS SERVICE, INC. IS A PRIVATE FIRM AND IS NOT AFFILIATED WITH THE FEDERAL GOVERNMENT. NO COPYRIGHT IS CLAIMED AS TO ANY PART OF THE ORIGINAL WORK PREPARED BY A UNITED STATES GOVERNMENT OFFICER OR EMPLOYEE AS PART OF THAT PERSON'S OFFICIAL DUTIES. FOR INFORMATION ON SUBSCRIBING TO FNS, PLEASE CALL 202-347-1400 OR E-MAIL [email protected]. THIS IS A RUSH TRANSCRIPT. (Note: This event was fed in progress.)DANIEL L. DOCTOROFF: (In progress) -- Council on Foreign Relations meeting with Secretary Timothy Geithner. My name's Dan Doctoroff. I'm the president of Bloomberg LP, and I'll be presiding here today.We are truly honored to have the 75th secretary of the United States Department of Treasury and fellow council member with us here today. This meeting is part of our C. Peter McColough Series on International Economics.One housekeeping matter -- actually, a couple: Please completely turn off -- and it says here in capitals, "TURN OFF" -- not just put on vibrate, your cell phones, BlackBerrys and all wireless devices, to avoid interference with the sound system. You're not going to miss -- want to miss a second of this.I would like to remind members that this meeting is on the record and CFR members around the nation and the world are participating via a password-protected teleconference. This meeting is being webcast by CFR and The Washington Post.Having served as secretary of the Treasury since January of 2009, and previously as president and CEO of the New York Fed from 2003 to 2009, Secretary Geithner has led the response to the global economic crisis, the design of the ongoing recovery, and has guided the formulation of new rules and regulations to limit the risk of future crises.Secretary Geithner will provide opening remarks, after which he and I will have a conversation here on stage for approximately 20 minutes. I will then turn to members for Q&A for the remainder of the hour.Now, Secretary Geithner last spoke to the membership on March 25th, 2009. Let's look at the situation then and now. The Fed and Treasury were on the hook for 2.8 trillion (dollars) through TARP, Fed programs, the purchase of mortgage-backed securities, backstopping money market funds and commitments to Fannie and Freddie as well as the FDIC. At that time, it was thought that expected losses could be as much as $700 billion. Today, it is expected that the government will come out with a $24 billion profit. The combined market capitalization of GM and Ford on March 25th, 2009, was $8.4 billion. As of the close yesterday, it was $107.3 billion. On March 25th, 2009, the S&P 500 was at 813. Today, it is at 1,335; a 64 percent increase.Having skillfully navigated the financial system and the economy through the crisis, you would think Secretary Geithner could relax just a bit. But as we all know, unemployment remains stubbornly high, deficits have ballooned, and the political climate in Washington is as poisonous as we have seen in many years, making extremely difficult a long-term deficit reduction agreement that may be necessary to avoid the loss of the U.S.'s AAA rating. The housing market still seems to be bumping along the bottom. Long-term growth in the U.S. may be slowing, due in part to gas prices on the rise. And global crises threaten the stability of the global economy.Not an easy job.We are delighted to have Secretary Geithner here today to comment on these topics and many others.Mr. Secretary. (Applause.)TREASURY SECRETARY TIMOTHY GEITHNER: Thank you, Dan. That was gracious -- (laughter) -- and generous, very generous. I had the privilege to watch you from a distance when I was here in New York, and I admire so much what you did for the city and that you played in the arena.And great to be back at the council. I had dinner with some people last night, and they said: So you're speaking to the council. And I said: Well, you don't go to speak to the council. You got to get advice -- (laughter) -- from the council, so I'm here to escape Washington temporarily and learn a little about the real world. And -- (laughter) -- we'll have a chance to have a little debate about the problems facing the country and how to solve them.I'm just going to begin with a few minutes of remarks about the three main challenges we have coming out of this crisis, and they are about growth, about financial repair and reform and of course about the deep fiscal challenges facing the country. And I'm just going to run through these briefly just at the beginning of the conversation.Let me just start with growth, with economic growth. I'm going to borrow someone else's characterization. We started the year with a little less momentum and we've got some new headwinds, most prominently of course in oil. And growth in the first quarter, if you just look at the consensus of private forecasters now, and the Bloomberg consensus now is likely to be under 2 (percent), many people think, much slower than we ended the year. But if you -- if you look through weather in January and February and you look through the weakness in construction, the underlying trends in the economy show much more resilience.And the economy is definitely healing. And even with the many challenges we still face, I think then if you look at the consensus of private forecasters who look at the U.S economy looking out, they believe that the U.S. economy is likely to grow between 3 (percent) and 4 percent over the next two years, and that seems like a reasonable expectation.Unemployment, of course, as Dan said, is still very high. Housing and construction are still very weak, and it's going to take years still to repair the damage caused to the housing market. And the economy as a whole still feels very hard to the average American, unfairly hard for millions of Americans caught up in the aftershocks of this crisis. But still, I believe we can be confident that the economy is healing and gradually getting stronger, and there's much to be encouraged about in the shape of this early period of expansion and recovery.Let me just go through this quickly. Productivity growth of course, as you know, has been very strong. The private savings rate in the United States, negative going into the crisis, is now significantly positive, between 5 (percent) and 6 percent. We're borrowing as a share of our economy now about half of what we were before the crisis, meaning our current account imbalance, our current account deficit is half of what it was as a share of GDP. Business spending on capital equipment has been very strong and still looks quite strong. Manufacturing, high tech, agriculture all show broad-based strength, which is testament to the diversity of the U.S. economy. Export performance has been quite good, and the financial system, which I'll come to in a sec, is dramatically stronger. The tax incentives we put in place at the end of year provided a very powerful near-term catalyst for business spending on capital equipment, and of course it gave working families a substantial increase in after-tax income, which is helping offset the effects of higher gas prices.We're about to get America back into the business of trade agreements with these three new agreements, and that will help us start to negotiate a much more ambitious set of trade-expanding measures in Asia and Latin America, but of course what matters most now is not just that we reinforce this process of repair and recovery but that we focus on strengthening the long-term fundamentals that affect potential growth in the future. And of course as you all know, that's all about education, about innovation, about public investments in things like infrastructure and incentives for private investment. And of course our challenge is to make this economy once again the best place in the world to start a business, to try to grow a business, and that is completely within our capacity to do. And I think we have a very good chance of emerging from this crisis with underlying potential growth rates in the United States as strong as they were before the crisis.Briefly on the financial system, how are we doing, how far have we come and what's still ahead? Our basic responsibility, our core objective is to make the United States again the strongest financial system in the world, the best at channeling the savings of investors around the world to finance the ideas of growing companies with the strongest protections for investors and a much better set of shock absorbers, cushions against future shocks and crises. And I believe we are well on the way to that objective, far ahead of countries that were caught up in this mess and are coming out of it, too. And we're ahead of them because we were much more aggressive strong and early in recapitalizing the financial system with private capital, restructuring the system to clean out the weakest parts of the system very forcefully and then legislating reforms to modernize the basic checks and balances all financial systems require.So we brought more than $300 billion in private capital into our largest banks in a relatively short period of time. Compare that to what's happening in Europe.The shadow banking system in the United States, so important to the vulnerability in the crisis, is a shadow of its former self. We were the first mover, first to lay out the broad new rules of the road to modernize oversight so that we could shape the global outcome on financial reform.And as Dan said, the overall economic costs, the overall direct financial costs of our financial programs is likely to be trivially small, perhaps positive. That means if you do the Fed -- all the Fed (clutter ?) programs, all the losses in the GSEs we still -- we still are working through; all the investments we made in the banking system, automobile industry, in the insurance sector -- all in are likely to be tiny in -- measured against the overall size of the U.S. economy and a tiny fraction of what a much more modest crisis, the S&L crisis cost, which, as you know, was roughly 3 percent of GDP for the American taxpayer.Of course, the main (challenges ?) to a lot of us in the finance -- (inaudible) -- the middle of this still are in the housing finance system, where we're just at the beginning of trying to figure out how to fix that mess, in trying to make sure we create a better balance of efficiency and resiliency, better shock absorbers, less complex to administer, less risk of contagion and without just pushing risk outside the regulated institutions and to other markets; and of course, finally, to make sure that as we do this we do so with as much of a level playing field across countries as possible.Now, third is about the fiscal imperative, about the budget imperative, the debt imperative. We obviously have unsustainable fiscal deficits. To quote Richard Haass, we have wars of choice and wars of necessity. This is a war of necessity. There is no alternative. Democrats have to understand that our capacity as a country to finance things Democrats believe in like education, like a minimal guarantee of protection in health care (and ?) the safety net, require demonstrating we can live within our means; and Republicans have to understand, of course, that deficits matter, that they are unsustainable and they hurt growth left unaddressed. Tax cuts don't pay for themselves.I think that basic reality, if you listen closely beneath the political rhetoric, that basic reality is seeping in now. And of course, the challenge in fiscal reform is not just an accounting challenge, it's not simply a math challenge, it's not -- it's not just deciding on the level of cuts. The fundamental policy challenge is doing so in a way that leaves you with good incentives for future growth, capacity to support future growth and doing so in a way that is judged fair by the bulk of the citizens of the country.And this is going to be a formidable challenge for us, much bigger challenge than anything we've faced as a government in the last several decades on the -- on the budget side. But it is a manageable challenge for the United States. It's not as hard as what we've just achieved in averting the risk of a second Great Depression.The president laid out two weeks ago a broad strategy for restoring fiscal sustainability. And I just want to list the most important critical elements of a credible strategy, and then we can have a conversation about how to achieve this.First, you have to commit to bring the budget deficit down to a level that will put our overall debt burden on a declining path as a share of the economy. This requires achieving what people call primary surplus, primary balance, meaning what you take in has to exceed what you spend, less interest. You have to do this in a time frame that is -- that is present. You have to do it, in our -- in our thinking, by 2015. That's the first thing. You have to commit to a target for sustainability on the overall debt level that starts to put the debt burden on a declining path.You have to have a comprehensive and balanced approach with spending savings across the core functions of the government, from defense through entitlements. And you have to include tax reform. Comprehensive is important, because it allows the burden to be shared and spread across the core functions of government and makes the savings and the effects and the costs to the economy more manageable than if they were concentrated.Third key point -- these cuts and reforms have to be phased in over time to avoid damaging the expansion. The biggest mistakes countries make in financial crises, apart from waiting too long to act in the face of the gathering storm, is they put on the brakes too early. They shift too prematurely to abrupt contraction-rate strategies that put at risk the incipient expansion. So you have to be -- you have to lock these reforms in, but you have to phase them in to reduce that risk to the economy as a whole.You need to protect -- and this is fourth -- you need to protect investments in things critical for future growth -- again, like education or like innovation, incentives for investment. So the reason why you want to live within your means is so you preserve room for doing things that matter to the overall basic quality of growth and opportunity creating for the country.And finally, you need a -- an enforcement mechanism. You need discipline that works that will force Congress to make choices to live within constraints that is viewed as broadly credible to the market, that will force Congress to deliver reforms in the event they find a hard time agreeing on them.And if we are able to legislate a broad framework with these key elements, that locks in reforms over a multi-year period, constrains the ability of future Congresses and executive branch officials to live -- constrains their ability to live with larger deficits, then we do not need to resolve immediately all the basic choices that still divide so much of the country, that still divide Republics (sic; Republicans) and Democrats, like on how to do tax reform or what balance of reform is necessary to make our health care costs more sustainable for the economy as a whole. We can buy some time to resolve those longer-term questions if we lock in a multi-year framework of constraints that imposes a credible, binding fiscal rule on the U.S. government. So our objective is to try to take advantage of this present moment and build a bipartisan consensus. And it has to be bipartisan. You can't do anything with just one party, these days, of course. And I think we have a chance to do that now, because if you listen carefully, again, beneath the political rhetoric of the moment, there is broad agreement among both Republicans and Democrats now on the scale of the deficit reduction you need to commit to and achieve. And there's substantial agreement on some of the components of that, and that gives the chance now to lock something productive in place today.And this is going to be, of course, the key test of our political system. It will be essential to restoring confidence in a country -- confidence that was very damaged by the crisis. And it's very important of course to act now before a crisis forces action.You know, this crisis just caused enormous damage, not just to the economy, not just to the basic economic security of all Americans -- it's the fabric of confidence we all rely on, confidence in the ability of government to act -- it caused a huge amount of confidence to our credibility globally, confidence in our financial system. And, you know, much of the world is getting better at these things. They're not standing still. So this is a moment where we need to -- where we need to move in. We have to find a way to demonstrate that we have a political system that will work, that can solve problems, that can bring people together and deliver reforms that are commensurate with the size of our challenges, to demonstrate that we can do things together even where many things still divide us.And I'll just end with confidence. I think -- again, I think we can do that. It's completely within our capacity to do that. You know, I sit in this office occupied by -- in Hamilton's office occupied by 73 other men. It will be women at some point, but so far it's only been men. And if you -- the politics feel terrible now. They feel very hard. And anybody who looks at Washington from a distance thinks -- well, they -- I don't know what they think. (Laughter.) But you could -- you could -- you could forgive them for wondering. (Laughter.)But if you think back of what it's been like, just to go back to the beginning, there have been times when politics have been much, much worse. And I would take our challenges today over anybody -- any of the challenges facing the other economies, as a whole, and I think we're completely up to those challenges. And I'd be happy to have a conversation with you about what's hard and, of course, as I said, take some advice. Thank you. (Applause.)DOCTOROFF: So Mr. Secretary, just following up on one thing that you've said specifically -- triggering mechanisms -- could you be a little bit more specific about the types of triggering mechanisms? There's short-term triggering mechanisms. There's long-term triggering mechanisms. Republicans, at least some of them, have suggested a triggering mechanism of, you know, debt to GDP, et cetera. What do you think more specifically?GEITHNER: I'd like to start by saying, you know, you can't put all the burden on a trigger. Again, you need something that people will look at and say, is that a constraint? This is enough -- are there enough reforms in place that you'd be confident, again, we're going to get ahead of this problem? So you don't want to put all the burden on the trigger itself, but for the -- for a trigger to be designed sensibly and -- you need to anchor it in this basic primary balance concept. You need to have a target that will produce a deficit that is below 3 percent of GDP and will stay there. And if you do that, then you can show the world that our debt burden as a share of the economy will first stabilize at an acceptable level and then start to decline, fade over time.And so the anchor of the framework has to be, you know, what economists call modest primary surplus by 2015. I say '15 just because you can't -- if you put it off too far, it's -- (chuckles) -- it's not credible, and if you make it too quick, again, it's too much risk that you force too much -- too much weakness in the economy too soon. So that should be the anchor for the rule, and for a -- and a force mechanism to work, it has to be scary to people. It has to be scary enough -- politicians will not want it to go into effect. And it has to be balanced. It has to cover both spending, what we call (classic ?) spending and spending in the tax code, as Marty Feldstein would say it, so that politicians have an incentive to act ahead of the trigger. That would be the art. But again, it can't be all in the trigger. It has to be -- it has to be policies in place to get you some distance to that target. Otherwise people will look at us and say, how do we know that they're actually going to deliver?DOCTOROFF: You also stress the importance of phasing in whatever is done to reduce the deficit, something that arguably has not been done in Britain by Prime Minister Cameron and Chancellor of the Exchequer George Osborne. Do you think they've made a fundamental mistake?GEITHNER: I don't. I think -- I think they're in a fundamentally different situation. They do not have the luxury we have. Our challenges look large, of course, but they're fundamentally different, much more manageable than in -- those in the U.K. and other parts of Europe as a whole. And that's because our -- the structural piece of our balance, the piece that's not the product of recession and the product of the emergency measures you put in place in the recovery act -- that piece of our deficit is much smaller than theirs. And I think realistically -- you know, we don't stand in their shoes, but they, I think, had no alternative but to adopt a much more aggressive path.Now of course if you look at our projected deficit path too, it's not -- it's not dramatically softer than theirs. It's very similar. I saw George Osborne the other day, and he was looking at what the president announced and said, gee, that's a -- that's a pretty aggressive path. But it's easier for us to do because our economy has much better underlying growth potential, is much more diversified, and a much larger piece of our deficit is just the temporary cyclical effects of recession.DOCTOROFF: You recently said that there is, quote, "no risk" that the United States will lose its AAA credit rating. S&P's action to put the U.S.'s AAA rating on credit watch or negative watch implies a one-third chance of a downgrade in the next two years. Of course they cited fears that there won't be a long-term deficit reduction plan. What gives you the confidence that we'll actually be able to reach an acceptable budget agreement?GEITHNER: Again, I think if you look -- and I know it's hard to do, because Washington is such a hard place to understand, but if -- again, if you look through the rhetoric, it is incredibly important that the leadership of both parties now, embracing the basic fiscal imperative and embracing the same basic magnitude of adjustment over the same basic time frame that is essential to get us on a sustainable path -- and I think that the odds of an outcome that helps start that process are much better today than they've been, I think, any time in the last decade.Now a lot separates these two parties, and the country's still fundamentally divided on how you think about the right balance, how to do tax reform, again, how to do entitlement reform. But you have to -- when you start with that recognition that there's no alternative but to put these things in downward path, you've made the most important choice. And then you can have a debate about the best strategy, best composition within that, and that's a good debate to have -- good debate, necessary debate to have.The other thing that's important to recognize about us as a country -- again, you know, we're a much younger country than the other major economies. We have much better underlying growth rates, in part because our -- more openness to immigration. We have a -- we started with a much lower overall debt burden as a share of our economy. The size and expense of our commitments in the safety net are a much smaller share of the economy as a whole.And so we're in a much better position to manage through this. And the reforms that are going to be necessary for us to put in place, they're going to be difficult, but there's things that we can absorb and adjust without risking substantial damage to our growth potential, long-term growth prospects. Again, if you do it in the right way, it's a balanced way. It's a much more manageable problem for us than would be true for many of the other major economies.DOCTOROFF: Still, you are facing a situation in Congress where a huge percentage of the Republicans have entered into no new tax pledges. How do you overcome that?GEITHNER: Well, I think that's an excellent question, and that, I think, is probably the most difficult political problem for them to have to solve. But they're going to have to solve that problem, because, again, if you just watch this debate carefully now, what's happened over the last few weeks or so? One is, you had this -- you know, you had this very divisive, difficult fight over how to fund the government, which tested people's tolerance and sort of illustrated what the consequences are for going way too deep in education, for example. And you saw people go up to the edge of the cliff and pull back because they said, I can't support that basic cut; that sort of helpful recognition you can't balance the budget through cuts on 12 percent, what's 12 percent of the budget. That's very important.Second thing that's happened is that you see in the plan that some Republicans embraced what happens if you force all the burden for fiscal sustainability on cuts in Medicare and Medicaid, and mandatory programs for the disabled and the poor. So if you put all the burden of this on that part of the budget, you have to cut -- you know, just to be unfair; well, I think this is fair -- you'd just have to cut savagely deeply into those basic programs. And you will find people will -- across (here ?) will not embrace that. They cannot defend it. They won't be able to do that and they will move away from that quickly. That's sort of helpful.The other thing -- the other thing that's very important to hear -- to say is that, you know, the president laid out this $4 trillion deficit reduction plan over a 12-year period -- again, same broad magnitude of cuts that the Republicans embraced, much more balanced package, and you found Democrats largely embraced that imperative. And again, this is a -- this is a problem within our capacity to solve, and we have a moment where we can take advantage of this recognition, greater recognition of the magnitude of the problem, and try to lock in something useful.DOCTOROFF: Let me switch topics. In introducing you a few moments ago, I mentioned some pretty remarkable statistics about progress since you were last here. Despite these achievements, the president is often perceived by the business community as being anti-business. And even in Bloomberg's last global investor poll, taken in January, only 44 percent of U.S. investors rate your performance as favorable versus --GEITHNER: Forty-four (percent)? (Laughter.)DOCTOROFF: -- versus 52 percent unfavorable.GEITHNER: Forty-four (percent) is unbelievable. (Laughter.)DOCTOROFF: So my question is, where's the -- (laughter) -- these are investors. This isn't the public. (Laughter.) So my question is, where's the love? Really, where's the disconnect, do you think? What is it that's not being communicated, if anything?GEITHNER: You know, I don't -- you know, these are complicated problems, but I mean, you know, think -- just as you did -- you -- well, and you, when you were introducing this -- the subject, unemployment is basically 9 percent, as you measure it. It's much higher in many parts of the country. You just saw more damage to people's basic wealth and economic security than we'd seen since the Great Depression. It is very hard for our people to understand why that was necessary, why it can't be better quickly.DOCTOROFF: How about the business community, though, specifically?GEITHNER: Oh, I don't -- I wouldn't -- I don't think too much about that. I mean, the business community is -- well, I'll give you an anecdote. (Laughter.) You know, I spend a lot of time with people who run businesses in the United States now. So we've talked to the average non-U.S. business, and they look at us; they say, I don't know what those guys are complaining about. I would much rather be an American company established in the United States today, operating under your set of constraints, rules of games, not -- I would say, across most industries, that's what people say to us.Again, if you look at the basic balance sheet of American companies; you look at the basic improvement in productivity, in profitability; you look at the broad improvements they're demonstrating across the board just in the last couple of years, they're in a much stronger position than they would be without the actions we took. And I think they basically understand that. I think most of what you hear in the rhetoric is the understandable desire businesses always have to lower their tax burden and make sure they get more influence over the basic regulatory framework in which they operate.There's nothing new in that. That's an old traditional game, and some people play that very well, some people less well; but they all play it aggressively. And I view most of the rhetorical stuff that you hear through that prism.DOCTOROFF: By the way, to reinforce your point, in the Bloomberg global investors' poll, your approval rating outside the United States was much higher than in the United States. (Laughter.)So the jobless rate has dropped nearly a full point in less than a year; yet there are now, as you pointed out, lower forecasts for growth this year. A year and a half from now -- sort of an insignificant date, a year and a half from now -- where do you think we'll be on jobs and growth?GEITHNER: You know, I'm not an economist. I don't forecast. But, you know, again, if you look at the consensus forecast for the U.S. economy, it's 3 (percent) to 4 percent growth over the next 18 months or so. And if you -- you're growing at that pace, then the private sector in the United States is likely adding jobs a little north of 200,000 a month. And again, that'll feel -- anybody who doesn't have a job, still knows somebody who doesn't have a job, not working as much as they do -- that's not going to feel strong enough. But it's probably what you can expect for an economy coming out of a crisis caused by these basic imbalances.Again, the basic tragedy of this financial crisis and the constraint on recovery is that you -- people have to bring down their debt burden after a period of living beyond their means, just as the government's going to have to do. And you're not going to have -- it's going to take a while again, it's going to take several more years, to repair the damage in housing markets and construction. You do not have the normal avenues governments have to induce or help foster much stronger growth in that. And that is the reality we're left with.But that is the -- that is the tragic constraint imposed by the crisis. It's not fundamentally about the policy choices people can make in Washington. Washington can make it worse, but the hard thing for people to understand is that it'd be hard to make it dramatically better than that. Very important: you know, again, first do no harm. And I think one reason why you want to make sure we take advantage of this fiscal moment is you do not want to take any risk that you cause damage to this process of repair and confidence building that's happening across the economy today.That's absolutely true in this debate about the debt limit, which is a ridiculous debate to have. I mean, the idea -- the idea that the United States would take the risk people would start to believe we won't pay our bills is a ridiculous proposition -- irresponsible, completely unacceptable basic risk for us to take. But it's also true that on a fiscal debate you don't want to put this off indefinitely and if -- because if you do that, there's a risk that you will magnify the unease people still feel about whether Washington's going to be able to get ahead of these basic problems.DOCTOROFF: Same answer with respect to housing, where clearly, as we both acknowledge, it's just sort of bumping along the bottom but we've got huge unresolved issues with the GSEs?GEITHNER: Right. Yeah, I think, again, in housing we have -- you know, we still have the -- I don't know how to say it elegantly. We have to clean up the mess of the basic servicer problems you see across the country still. But then you have to put in place a housing finance system that'll allow private capital to carry the dominant role of financing a mortgage for people; have the government recede from the role it's playing today. And that requires, you know, not just winding down Fannie and Freddie and in a sense pricing them out of that business gradually; but it requires putting in place a set of incentives, disclosure requirements, capital requirements, reform to the (security issuing ?) business so that people will bring capital back into that market. And we're -- as we all know, we're at the very early stage of putting in place that architecture; not least, you know, having it get some traction. And that's going to take a long time.DOCTOROFF: Just one more question, and then we'll turn to the members. The G-20 this month described a global recovery that is, quote, "broadening and becoming more self-sustaining." At the same time, energy and food prices are climbing, particularly in the emerging markets; unrest continues in the Mideast -- Middle East; Japan is obviously hobbled seriously; and the European debt crisis remains completely unresolved. Which of these in your view poses the greatest threat to the global economy in the next year? (Laughter.)GEITHNER: Well, I think that's a good list. (Laughter.) I think that -- I think -- I guess I'd answer it that way. It's just -- this way -- it depends a lot on how people manage these challenges. I mean, the -- what's happening in oil is obviously potentially very significant. And at current levels, on its own, it won't put the recovery at risk.The question really is -- I think, in one way, is, how do emerging markets manage the rising inflation problem that they face? Because they're growing so rapidly. It is a manageable problem, lots of experience trying to do that well. But that's important. Europe, as you said, has got a lot of challenges, but it's completely within their capacity to manage. They just have to choose to solve those on terms that are going to be reassuring to the world, they can do that.Again, I would say that I'd prefer our challenges over those facing any other country. And for us, the big challenge is to try to build a political consensus around a reasonable, balanced fiscal sustainability strategy that makes sure we don't get behind this basic problem. I think that's the most important thing. And if we -- if we do that, then we'll be in a much better position as an -- as an economy to manage all of the pressures, tensions, other things out there still.DOCTOROFF: So at this point I'd like to invite members to join our conversation with your questions. When called upon, please stand. Wait for the microphone and state your name and affiliation. And importantly, please limit yourself to one question and try and keep it concise so we can allow as many members to get involved in the conversation.Yes.QUESTIONER: Hello, Secretary Geithner. Ginny Kamsky.GEITHNER: Hi, Ginny.QUESTIONER: Ginny Kamsky. Secretary Geithner, you have a strong history, knowledge and understanding of China. You talked about -- GEITHNER: I wouldn't say understanding, but -- (laughter).QUESTIONER: You talked about the financial crisis and how you believe the United States responded well and, in a way, better than other nations, and I believe you were referring to Europe. I'd be interested in your reaction to how China responded to the financial crisis, and whether or not you think we can learn from the Chinese response, and overall your reaction to how China is performing today in the engagement of Treasury with China. Thank you.GEITHNER: Well, China is -- you know, China is still at the early stage of this transition to a more market economy, a more mature economy, and they've got a long way to go. It's important to look -- you know, if you even -- even with the amazing accomplishments of growth, broad-based growth, over the last three decades or so, they still have an economy that's still overwhelmingly dominated by the state, and they're just beginning to dismantle and move away from that. And that's a difficult challenge, as you know, for governments to manage.I think that, in the crisis, they did all the necessary right things. You know, they did a well-designed but very substantial fiscal force, which they had to do at that point, and that helped compensate for the shortfall in export demand. But what -- right now what they're trying to do is to put in place a growth strategy that's less export-dependent, reflects the reality that they're too big, too large a share of the world economy to run an export-driven growth strategy. And they're starting to dismantle gradually the basic elements of that strategy. An undervalued exchange rate they're letting rise gradually against the dollar at least. And they're starting to open up the capital account to allow more convertibility, more capital flows, and they're beginning to unravel those basic elements of the export-driven growth strategy that's served them relatively well but is completely unsustainable now. I think the challenge right now is, you know, they're going into a -- what they would call an election, and it's slowing the -- it's slowing the -- it's sort of slowing the pace of reform a bit, because it -- elections tend to induce a little caution. But I think they did really quite well in the crisis, and I think that they look like -- to me, today, they look like they're handling the near-term tensions, pressures relatively well. And of course, we have a huge stake in this economic relationship, and are doing as much as we can to help deepen and strengthen it and reduce some of the basic underlying sources of tensions we still face on the economic side, and not just because of the exchange rate but because of a range of other things they do to disadvantage U.S. producers.Yes, sir.QUESTIONER: Good morning. Marshall Sonenshine, chairman of Sonenshine Partners. Mr. Secretary, pleasure to be with you today.In his introductory remarks, Dan Doctoroff gave a nice overview, which I think many of us -- I certainly -- agree with, and cited some metrics as to the successes of the management of the financial crisis.And there is, of course, alongside that a narrative that says we did what we could and what we had to do, and in fairness we did no harm and we did what we absolutely had to do, but then alongside that we have left in place an accident-prone financial system for no -- for no other reason than it is still highly concentrated in terms of numbers of institutions being low and financial assets that they control being very, very high; and in lieu of addressing that, we have put a burden of regulatory oversight on this government that it has never before had.GEITHNER: On this system.QUESTIONER: On this system that it has never before had. And there are some great democracies that have handled those burdens well. Canada would be a -- I think a good example -- perhaps Israel.Are we equipped in this crazy land that we call Washington and that you refer to obliquely as a tough place -- are we equipped to actually execute on the second step of that plan, whether it be through the Financial Oversight Committee or the other structures, or are we still unfortunately despite all of our best efforts in triage -- which I think all of us give you enormous credit for -- are we still beholden to an accident-prone system?GEITHNER: Excellent question. I think it's exactly the right question. Of course, you won't know the answer to that question -- (laughter) -- you won't -- you just won't know honestly for a long time till we face something substantial in terms of the next large shock.But I'm much more optimistic. Let me just take issue with a couple of things you began with. It is true that our financial system, if you look at banks, is more concentrated than it was before the crisis, but there is no plausible path out of the crisis that did not result in at least temporarily some greater concentration.We have a much less concentrated financial system, again, than any other major economy -- dramatically less concentrated. Banks as a whole are only half of the credit -- (inaudible). So even that measure too, our banks -- even our largest ones together -- are a much smaller share of our economy than is true for any other country. Just -- again, just to do the numbers, our banking system in total now, even encompassing what we used to call investment banks, is about one times GDP, one times the total annual output of our economy. It's five times GDP in the U.K., eight times in Switzerland, three or four times in Germany. So that's one thing.Second is, we forced -- you referred to triage, which is a nice, elegant term for it -- but we forced dramatic restructuring in our system. We either allowed the market to crush -- or I won't use that term -- the weakest -- the weakest parts of the system, so that what was left was able to meet a market test for viability, attract enough capital to sustain itself. And that's hugely important.And as I said earlier, we were way ahead of everybody else in designing a basic set of restraints that average people could have a chance of enforcing to make sure we bring a little bit more resilience to the system in the future.The most important thing to do and the greatest failure that led to this crisis was the inability to apply sufficient constraints on leverage, on liquidity risk for those core institutions. You know, we did it not well enough for banks, but not for entities that were functioning as banks, the (institutions ?) alongside banks that were as large in total as the entire banking system.And one of the most important things that this reform thing does is allow us to impose requirements that force better, thicker shock absorbers into the core parts of the financial system. And if you get that -- you won't get it perfect. If you get that better, you have a much better chance of allowing an economy in the future to withstand pretty dramatic shocks that result in the risk of failure of large institutions. And I think we have a very good chance of doing that.DOCTOROFF: Sir, right there.QUESTIONER: Thank you. Dick Huber, Antarctic Shipping.You touched upon it when you addressed the question of China, but we've had a steady and quite substantial devaluation of the dollar over the last couple of years. And in a way, we're taxing holders of our debt in a way to solve our problem. Now, has that been largely due to benign neglect, or is that part of Treasury's strategy?GEITHNER: Well, I'll give a slightly deeper answer to your question, but I just want to make it clear to everybody that our policy has been and will always be, as long at least I'm in this job, that a strong dollar is in our interest as a country, and we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners.Now, I want to -- if you step back a little bit and you think about the world as it's evolved over the last few years in particular, it's worth noting that at the darkest moments in this crisis, really every time, even after you come out of the depth of the fall of '08, first quarter of 2009, when there's been concern about the basic fabric of finances really globally, people have wanted to be in Treasurys and in dollars. And when risk has receded a bit, confidence has started to come back, growth looks a little more resilient, people start taking risks again. You've seen that start to unwind, come back.And that's a very encouraging thing because it still shows that -- and you see the markets today still -- that people have retained a fundamental confidence in the ability of this country to manage our challenges, and to do so, on average, better than many other countries will do. And I say that not because -- really, to emphasize that you have to earn that and you have to make sure you earn that all the time. And of course, it depends a lot on the Fed's capacity to keep inflation low over time, which of course they will do. It depends a lot on our ability to put in place a set of fiscal reforms that will deliver sustainability over time. It depends a lot on acting aggressively to fix what was damaged in our financial system; make sure that you have a basic framework of integrity, disclosure that all systems require as a whole.Those are things you have to -- again, you have to work at very hard, you have to earn over time. And of course, we're going to -- we're going to keep doing that.DOCTOROFF: Yes, on the aisle.QUESTIONER: Secretary Geithner, thank you so much for coming to talk with us today. Chris Faulkner-MacDonagh, with Ziff Brothers Investments.So I had a question on the -- on the debt ceiling; in particular, what you see as your plan B. I know you released a letter -- had a chance to read it -- on what -- the steps you could take. It was very comprehensive. Thank you. But let's say the debt ceiling isn't increased towards the end of this year. And we will -- you know, and with the interest payments receiving priority, isn't it possible you could just continue to pay interest on the debt and let expenditures on everything else suffer? And if not, then what do -- what do you see as your plan B?GEITHNER: Let me -- let me do the basic constraints and flexibility we have, just so people understand that. On current estimates, we hit the debt limit on about May 16th. We have a set of tools Congress gives the secretary of the Treasury to allow -- that gives Congress more time. We can buy Congress a little bit of time. If we use all those tools, we can give Congress until roughly the end of June, before they go on their July 4th recess, to act. And of course, they will act.You know, we're the only country in the world, I think, that imposed -- where Congress has imposed on itself this particular burden of torture on their members. (Laughter.) And they recognize they have to act, and of course the leadership recognizes it, both Republican and Democrats. And they'll do what's necessary. I'm completely confident they'll do what's necessary.What I want to make sure they don't do is to take us too far into June, to take us too close to the edge again, because you don't want to -- at a moment like this, you don't want to leave people with any concern that they -- that they'll take too much time. And so our basic message to them is: Let's get this done and get it moving.Of course, the harder thing is the thing we spend most of our time talking about, which is how you -- how you legislate a framework that can lock in meaningful fiscal reforms that get these deficits down to a sustainable level. And you know, that's going to be a challenge to do. I think that's something we can do. But the Congress will -- they'll pass the debt limit.DOCTOROFF: Yes, right there. Go ahead.QUESTIONER: Jim Zirin, Mr. Secretary.I wondered whether you weren't disturbed by the dearth of criminal prosecutions that have come out of the mess. (Laughter.)GEITHNER: That's a -- that's a good question. It's not a -- it's not a -- it's not something that, as you know, in our system I get to solve. (Laughter.)And I will say that -- the obvious, which is that, you know, you had this colossal loss of basic trust and confidence in the integrity of the system, and we have to rebuild that. And rebuilding it is not going to come just from what we do on leverage requirements for large, complex financial institutions.It's going to come from making sure that you have a credible enforcement capacity that people believe will be a little bit more proactive, hold people accountable. And you need -- you need to demonstrate that that will be there in the future, because you need the deterrent power that brings to affect behavior. And I agree that we have some ways to go to rebuild -- to rebuild that confidence. And again, it's not -- it's not just about derivatives oversight or about disclosure in securitization products. It's going to be about making sure you have people in these jobs in enforcement authorities that have the -- understand these things -- these are complicated, complicated things -- understand them well enough, are talented enough, not just brave enough, to make sure you hold people accountable.DOCTOROFF: Do you think that's ever really possible, to have the regulators stay equal to or ahead of the regulated, given all the incentives that exist among the regulated?GEITHNER: I think that's the -- that's the existential question about oversight. But putting the enforcement piece of it aside, which is what your -- the question was, if you -- if you think about the rest of the system, to simplify a little bit, you have -- you have two schools of thought. You have people who believe that you can design a better radar system. It will look over the horizon. It can identify pockets of risk and leverage. And then all you do, you just deploy your army and go preempt that -- those pockets of leverage and risk.And you have another school, and I'm -- as you can tell, I'm in the -- I'm in the latter school -- which says that, you know, we're human. The people who occupy these jobs are human. They will not have perfect foresight and wisdom. It is not economically or financially tenable to know exactly what the future brings and what of the shape of the tail looks like, and what the vulnerability (there is to ?) -- to shocks is.So what you can do and what you have to do and is absolutely necessary, if not always sufficient, is you need to build deeper, thicker shock absorbers into the basic system so that you are better positioned to withstand and deal with the fundamental uncertainty that exists about the nature and scale of shocks ahead, because you cannot predict, you will not be able to predict and anticipate, you will not be able to preempt. You could try to do it, but you need a safeguard and thicker cushions. And by cushions, shock absorbers, I mean capital, liquidity, funding in institutions and in the basic markets where firms come together, so that when firms make mistakes and court failure, which they inevitably will do, those things don't threaten to bring down the rest of the system.DOCTOROFF: Yes, sir.QUESTIONER: Gordon Bell, Legacy Growth Partners and Bed-Stuy Restoration, Bed-Stuy Restoration started by Bobby Kennedy some 40 years ago. So this question comes from both sides. And let's turn to some of the more positive aspects of what you are able to do going forward in terms of growth.How can the treasury secretary and how can we, Congress and the nation, focus on investing in ourselves? So Bed-Stuy has education. It's got housing. It's got green initiatives. How can we make sure in this budget we support the places that get leverage and put in private hands strong businesses that -- (inaudible) -- people in jobs? Thanks.GEITHNER: Excellent question. And that's, again, why you have to bring a comprehensive approach to putting us on a path to -- within our -- where we're living within our means, because if we don't do that, we will not have the room and the capacity to target investments and things that only governments can do; you know, like education and things that have high, broad economic and social returns. It just requires choices. And it's another reason why you can't restore balance by focusing just on a piece of the budget, particularly a piece of the budget where you have most of the power to improve future growth and opportunity.So again, just to say it again, just to make it simple, if you do it on education, you'll be, you know, eating the future, as Paul Krugman wrote. It's the reason why you have to do something that's comprehensive, that has the right balance. You have to go -- you have to look at defense, you have to look at tax reform, and absolutely you have to get more savings out of -- out of -- out of health care as a whole. Without that, you have no -- you have no choice.You know, governing is about recognizing that you -- we have limited resources, making choices within those constraints. That's what governing's about, and that's why this debate about how to do it is so important.It's good to get beyond the point about whether we have to do it. That's good. But the more difficult challenge is figuring out how to do it in a way that is not going to leave the economy weaker in the future or leave Americans with less (basic ?) confidence the system is fair, with a fair burden shared by everybody. DOCTOROFF: Did we miss a huge opportunity with the stimulus package in early 2009?GEITHNER: Opportunity to do what?DOCTOROFF: To make those kinds of investments. GEITHNER: I don't -- you know, I think that -- again, it's hard to look back and know what might have been possible given the constraints at the time. But in fact, what the stimulus package did quite well is, you know, apart from the mix of tax incentives and (support ?) for states and local governments and some targeted infrastructure things, that it did put significant material additional amounts of resources in things like NIH, in basic science, in -- a modest amount of money to provide incentives for education reforms that Arne Duncan is (leading ?) across the country. So the recovery act, you know, had that -- had a complicated and pretty diverse mix of what people called, you know, classic near-term catalysts for investment or income support for individuals and families, but it also had a modest amount of targeted things in things that we know are essential to how economies grow over time. DOCTOROFF: Right. Yes, sir?QUESTIONER: (Off mic.)DOCTOROFF: Can you identify yourself, please?QUESTIONER: Yes. I'm sorry about that. Matthew Levey, Kroll Associates.Secretary Geithner, you just hit on the health care part of the equation. What gives you confidence, given the bruising nature of the fight on our first go-round in health care reform, that -- as you say, looking past the rhetoric in Washington -- that there's a fundamental consensus about what needs to be done with Medicare, Medicaid and other health care programs?GEITHNER: There's no -- there's no consensus. And -- I agree with you completely, there's no consensus on how you generate the savings you're going to need. But I think it's worth stepping back for a second and just reminding ourselves of what is the basic health care cost problem we face as a country. It's not just, of course, the cost of the commitments we made in Medicare and Medicaid, it's the rate of growth in overall health care costs across the economy as a whole. And if you're going to solve that broader economic problem, you have to figure out a way to change the incentives for people -- for how people use health care and how the providers of health care provide health care, so that you're slowing the rate of growth and costs economy-wide. You can't just try to shift them from, let's say, Medicare beneficiaries -- to Medicare beneficiaries in a way that'll have enough basic traction and power. And you're absolutely right. I'd say if you listen, you know, health care -- there's the sort of recognition that the commitments we made even with the Affordable Care Act savings ultimately don't go far enough. But no consensus yet on how to go further. And, you know, again, I think you have to do anything and everything that offers the prospect of some improvement in the incentives and try those, figure out what works and then do more of those things over time. And that's going to take a long time to get better. But -- and, you know, again, the important thing to recognize about this thing -- just to end with a little bit of optimism again -- is that, you know, these deficits are large, they're unsustainable, they're going to have to come down over time, but if you do it in a balanced, comprehensive way, you do not need to dismantle the basic safety net that millions of Americans, not just seniors, rely on. You don't need to dismantle it. You don't need to cut that deeply into it. You need to reduce the rate of growth in those costs, you need to reform how those benefits are structured in many ways, but you don't need to dismantle it, as long as you're prepared and willing to do a balanced approach that -- that touches all the basic things government is doing, including, for example, the amount of spending we do (through ?) the tax code. DOCTOROFF: One more question. Sir? QUESTIONER: Farooq Kathwari, Ethan Allen. This is about jobs, and middle-class jobs. While the economy's certainly healing, but there is a tremendous issue about increasing jobs here. The president has talked about increasing exports.I was wondering, where would these jobs come from, when the fact of doing business in the United States is extremely high, especially compared to the emerging markets?GEITHNER: I think that -- again, that's the deep question still hanging over all of us, which is are you going to see a level of job creation in the economy as a whole that'll bring down the employment rate -- unemployment rate fast enough to meet a set of basic expectations of the citizens of the country. I think -- I think that's the essential question.But again, let me try to take the slightly more optimistic side of this debate. I think we've had close to 2 million jobs in the private sector created since growth resumed. That's a much stronger pace, much earlier than happened during the last two recoveries. And they were milder recessions, so important context in that context. If you just think more broadly -- and again, if you look at -- you look -- you know, you look at the basic shape of this recovery, it's important to recognize again that, you know, we're 5 percent of the world's population. We're about one-fifth of global GDP. The most populous parts of the world are going to grow much more rapidly than the major economies for the next several decades. And we are really as a country uniquely positioned to benefit from that basic growth, because we are still uniquely good and productive at things that are going to be very important to help those economies (grow going ?) forward, and that's why, even at this early stage of recovery, you're seeing a broad-based improvement in manufacturing, in agriculture, in high tech reflected in export growth here. And of course, that's translated into jobs. Now, construction is not going to be a source of strength for some time in the United States, and for people that made their living in that basic business, it's going to be very hard and very -- and very tough for them. But again, if you look outside those inevitable pockets of weakness that we still have, you're seeing pretty broad-based signs of basic improvement, which demonstrate a lot of -- a lot of basic innovation, dynamics and make the U.S. companies as a whole look pretty good, relative to their international peers. Of course, for -- to sustain that, we've got to make sure that we do a better job of educating our people, we make the incentives better for growth; you know, we're going -- we're going to take a run at corporate tax reform to improve investment incentives in a responsible way. And again, you've got to make sure as you do this fiscal reform, you do so in a way that doesn't leave starved or underfunded things that only governments can do to make those basic growth fundamentals stronger going forward. But I'd take the qualified, optimistic view just based on the initial experience with recovery.DOCTOROFF: One final question from me. A lot of the people in this room work very hard, but few jobs are as demanding as yours. You haggle with Congress on a Tuesday, you fly to China on Wednesday, you're back here to deal with complaints from the business community on Thursday, a Cabinet meeting on Friday. Can you continue to do this job at the pace you've been doing it -- (laughter) -- seriously, after the 2012 elections, assuming President Obama's re-elected?GEITHNER: You know, Dan, I've never really done anything else. It's -- I'm sure I'm (employable ?) in other -- (inaudible) -- (laughter). You know, I -- DOCTOROFF: Fifty-eight percent of American investors (think that ?).GEITHNER: Yeah. (Laughs.)DOCTOROFF: I'm kidding. (Laughter.)GEITHNER: And I think they have a point. (Laughter.)Could I end with a -- with a compliment?DOCTOROFF: Absolutely.GEITHNER: This is just a Pete Peterson tribute. I was in -- I was in London, I don't know, some time ago in my youth on a trip, and I got a phone call from someone who claimed to be Pete Peterson. And he said, you know, I heard about you, and I wanted to know whether you'd come talk to the Board of the New York Fed about running the New York Fed. And I regret that call every day -- (laughter) -- but no less than I think Pete Peterson does. (Laughter.) No, I am incredibly grateful to him not -- again not just for what he's done for this institution and so many others, and for being such a stubborn advocate of confronting basic fiscal reality, but for what he -- for the privilege he gave me in coming and working for my country in this capacity. I'm grateful for him.DOCTOROFF: Great.GEITHNER: Nice to see you, Dan.DOCTOROFF: Thank you. (Applause.)####®FC¯END®FL¯ .STX (C) COPYRIGHT 2011, FEDERAL NEWS SERVICE, INC., 1000 VERMONT AVE.NW; 5TH FLOOR; WASHINGTON, DC - 20005, USA. ALL RIGHTS RESERVED. ANY REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION IS EXPRESSLY PROHIBITED. UNAUTHORIZED REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION CONSTITUTES A MISAPPROPRIATION UNDER APPLICABLE UNFAIR COMPETITION LAW, AND FEDERAL NEWS SERVICE, INC. RESERVES THE RIGHT TO PURSUE ALL REMEDIES AVAILABLE TO IT IN RESPECT TO SUCH MISAPPROPRIATION. FEDERAL NEWS SERVICE, INC. IS A PRIVATE FIRM AND IS NOT AFFILIATED WITH THE FEDERAL GOVERNMENT. NO COPYRIGHT IS CLAIMED AS TO ANY PART OF THE ORIGINAL WORK PREPARED BY A UNITED STATES GOVERNMENT OFFICER OR EMPLOYEE AS PART OF THAT PERSON'S OFFICIAL DUTIES. FOR INFORMATION ON SUBSCRIBING TO FNS, PLEASE CALL 202-347-1400 OR E-MAIL [email protected]. THIS IS A RUSH TRANSCRIPT. (Note: This event was fed in progress.)DANIEL L. DOCTOROFF: (In progress) -- Council on Foreign Relations meeting with Secretary Timothy Geithner. My name's Dan Doctoroff. I'm the president of Bloomberg LP, and I'll be presiding here today.We are truly honored to have the 75th secretary of the United States Department of Treasury and fellow council member with us here today. This meeting is part of our C. Peter McColough Series on International Economics.One housekeeping matter -- actually, a couple: Please completely turn off -- and it says here in capitals, "TURN OFF" -- not just put on vibrate, your cell phones, BlackBerrys and all wireless devices, to avoid interference with the sound system. You're not going to miss -- want to miss a second of this.I would like to remind members that this meeting is on the record and CFR members around the nation and the world are participating via a password-protected teleconference. This meeting is being webcast by CFR and The Washington Post.Having served as secretary of the Treasury since January of 2009, and previously as president and CEO of the New York Fed from 2003 to 2009, Secretary Geithner has led the response to the global economic crisis, the design of the ongoing recovery, and has guided the formulation of new rules and regulations to limit the risk of future crises.Secretary Geithner will provide opening remarks, after which he and I will have a conversation here on stage for approximately 20 minutes. I will then turn to members for Q&A for the remainder of the hour.Now, Secretary Geithner last spoke to the membership on March 25th, 2009. Let's look at the situation then and now. The Fed and Treasury were on the hook for 2.8 trillion (dollars) through TARP, Fed programs, the purchase of mortgage-backed securities, backstopping money market funds and commitments to Fannie and Freddie as well as the FDIC. At that time, it was thought that expected losses could be as much as $700 billion. Today, it is expected that the government will come out with a $24 billion profit. The combined market capitalization of GM and Ford on March 25th, 2009, was $8.4 billion. As of the close yesterday, it was $107.3 billion. On March 25th, 2009, the S&P 500 was at 813. Today, it is at 1,335; a 64 percent increase.Having skillfully navigated the financial system and the economy through the crisis, you would think Secretary Geithner could relax just a bit. But as we all know, unemployment remains stubbornly high, deficits have ballooned, and the political climate in Washington is as poisonous as we have seen in many years, making extremely difficult a long-term deficit reduction agreement that may be necessary to avoid the loss of the U.S.'s AAA rating. The housing market still seems to be bumping along the bottom. Long-term growth in the U.S. may be slowing, due in part to gas prices on the rise. And global crises threaten the stability of the global economy.Not an easy job.We are delighted to have Secretary Geithner here today to comment on these topics and many others.Mr. Secretary. (Applause.)TREASURY SECRETARY TIMOTHY GEITHNER: Thank you, Dan. That was gracious -- (laughter) -- and generous, very generous. I had the privilege to watch you from a distance when I was here in New York, and I admire so much what you did for the city and that you played in the arena.And great to be back at the council. I had dinner with some people last night, and they said: So you're speaking to the council. And I said: Well, you don't go to speak to the council. You got to get advice -- (laughter) -- from the council, so I'm here to escape Washington temporarily and learn a little about the real world. And -- (laughter) -- we'll have a chance to have a little debate about the problems facing the country and how to solve them.I'm just going to begin with a few minutes of remarks about the three main challenges we have coming out of this crisis, and they are about growth, about financial repair and reform and of course about the deep fiscal challenges facing the country. And I'm just going to run through these briefly just at the beginning of the conversation.Let me just start with growth, with economic growth. I'm going to borrow someone else's characterization. We started the year with a little less momentum and we've got some new headwinds, most prominently of course in oil. And growth in the first quarter, if you just look at the consensus of private forecasters now, and the Bloomberg consensus now is likely to be under 2 (percent), many people think, much slower than we ended the year. But if you -- if you look through weather in January and February and you look through the weakness in construction, the underlying trends in the economy show much more resilience.And the economy is definitely healing. And even with the many challenges we still face, I think then if you look at the consensus of private forecasters who look at the U.S economy looking out, they believe that the U.S. economy is likely to grow between 3 (percent) and 4 percent over the next two years, and that seems like a reasonable expectation.Unemployment, of course, as Dan said, is still very high. Housing and construction are still very weak, and it's going to take years still to repair the damage caused to the housing market. And the economy as a whole still feels very hard to the average American, unfairly hard for millions of Americans caught up in the aftershocks of this crisis. But still, I believe we can be confident that the economy is healing and gradually getting stronger, and there's much to be encouraged about in the shape of this early period of expansion and recovery.Let me just go through this quickly. Productivity growth of course, as you know, has been very strong. The private savings rate in the United States, negative going into the crisis, is now significantly positive, between 5 (percent) and 6 percent. We're borrowing as a share of our economy now about half of what we were before the crisis, meaning our current account imbalance, our current account deficit is half of what it was as a share of GDP. Business spending on capital equipment has been very strong and still looks quite strong. Manufacturing, high tech, agriculture all show broad-based strength, which is testament to the diversity of the U.S. economy. Export performance has been quite good, and the financial system, which I'll come to in a sec, is dramatically stronger. The tax incentives we put in place at the end of year provided a very powerful near-term catalyst for business spending on capital equipment, and of course it gave working families a substantial increase in after-tax income, which is helping offset the effects of higher gas prices.We're about to get America back into the business of trade agreements with these three new agreements, and that will help us start to negotiate a much more ambitious set of trade-expanding measures in Asia and Latin America, but of course what matters most now is not just that we reinforce this process of repair and recovery but that we focus on strengthening the long-term fundamentals that affect potential growth in the future. And of course as you all know, that's all about education, about innovation, about public investments in things like infrastructure and incentives for private investment. And of course our challenge is to make this economy once again the best place in the world to start a business, to try to grow a business, and that is completely within our capacity to do. And I think we have a very good chance of emerging from this crisis with underlying potential growth rates in the United States as strong as they were before the crisis.Briefly on the financial system, how are we doing, how far have we come and what's still ahead? Our basic responsibility, our core objective is to make the United States again the strongest financial system in the world, the best at channeling the savings of investors around the world to finance the ideas of growing companies with the strongest protections for investors and a much better set of shock absorbers, cushions against future shocks and crises. And I believe we are well on the way to that objective, far ahead of countries that were caught up in this mess and are coming out of it, too. And we're ahead of them because we were much more aggressive strong and early in recapitalizing the financial system with private capital, restructuring the system to clean out the weakest parts of the system very forcefully and then legislating reforms to modernize the basic checks and balances all financial systems require.So we brought more than $300 billion in private capital into our largest banks in a relatively short period of time. Compare that to what's happening in Europe.The shadow banking system in the United States, so important to the vulnerability in the crisis, is a shadow of its former self. We were the first mover, first to lay out the broad new rules of the road to modernize oversight so that we could shape the global outcome on financial reform.And as Dan said, the overall economic costs, the overall direct financial costs of our financial programs is likely to be trivially small, perhaps positive. That means if you do the Fed -- all the Fed (clutter ?) programs, all the losses in the GSEs we still -- we still are working through; all the investments we made in the banking system, automobile industry, in the insurance sector -- all in are likely to be tiny in -- measured against the overall size of the U.S. economy and a tiny fraction of what a much more modest crisis, the S&L crisis cost, which, as you know, was roughly 3 percent of GDP for the American taxpayer.Of course, the main (challenges ?) to a lot of us in the finance -- (inaudible) -- the middle of this still are in the housing finance system, where we're just at the beginning of trying to figure out how to fix that mess, in trying to make sure we create a better balance of efficiency and resiliency, better shock absorbers, less complex to administer, less risk of contagion and without just pushing risk outside the regulated institutions and to other markets; and of course, finally, to make sure that as we do this we do so with as much of a level playing field across countries as possible.Now, third is about the fiscal imperative, about the budget imperative, the debt imperative. We obviously have unsustainable fiscal deficits. To quote Richard Haass, we have wars of choice and wars of necessity. This is a war of necessity. There is no alternative. Democrats have to understand that our capacity as a country to finance things Democrats believe in like education, like a minimal guarantee of protection in health care (and ?) the safety net, require demonstrating we can live within our means; and Republicans have to understand, of course, that deficits matter, that they are unsustainable and they hurt growth left unaddressed. Tax cuts don't pay for themselves.I think that basic reality, if you listen closely beneath the political rhetoric, that basic reality is seeping in now. And of course, the challenge in fiscal reform is not just an accounting challenge, it's not simply a math challenge, it's not -- it's not just deciding on the level of cuts. The fundamental policy challenge is doing so in a way that leaves you with good incentives for future growth, capacity to support future growth and doing so in a way that is judged fair by the bulk of the citizens of the country.And this is going to be a formidable challenge for us, much bigger challenge than anything we've faced as a government in the last several decades on the -- on the budget side. But it is a manageable challenge for the United States. It's not as hard as what we've just achieved in averting the risk of a second Great Depression.The president laid out two weeks ago a broad strategy for restoring fiscal sustainability. And I just want to list the most important critical elements of a credible strategy, and then we can have a conversation about how to achieve this.First, you have to commit to bring the budget deficit down to a level that will put our overall debt burden on a declining path as a share of the economy. This requires achieving what people call primary surplus, primary balance, meaning what you take in has to exceed what you spend, less interest. You have to do this in a time frame that is -- that is present. You have to do it, in our -- in our thinking, by 2015. That's the first thing. You have to commit to a target for sustainability on the overall debt level that starts to put the debt burden on a declining path.You have to have a comprehensive and balanced approach with spending savings across the core functions of the government, from defense through entitlements. And you have to include tax reform. Comprehensive is important, because it allows the burden to be shared and spread across the core functions of government and makes the savings and the effects and the costs to the economy more manageable than if they were concentrated.Third key point -- these cuts and reforms have to be phased in over time to avoid damaging the expansion. The biggest mistakes countries make in financial crises, apart from waiting too long to act in the face of the gathering storm, is they put on the brakes too early. They shift too prematurely to abrupt contraction-rate strategies that put at risk the incipient expansion. So you have to be -- you have to lock these reforms in, but you have to phase them in to reduce that risk to the economy as a whole.You need to protect -- and this is fourth -- you need to protect investments in things critical for future growth -- again, like education or like innovation, incentives for investment. So the reason why you want to live within your means is so you preserve room for doing things that matter to the overall basic quality of growth and opportunity creating for the country.And finally, you need a -- an enforcement mechanism. You need discipline that works that will force Congress to make choices to live within constraints that is viewed as broadly credible to the market, that will force Congress to deliver reforms in the event they find a hard time agreeing on them.And if we are able to legislate a broad framework with these key elements, that locks in reforms over a multi-year period, constrains the ability of future Congresses and executive branch officials to live -- constrains their ability to live with larger deficits, then we do not need to resolve immediately all the basic choices that still divide so much of the country, that still divide Republics (sic; Republicans) and Democrats, like on how to do tax reform or what balance of reform is necessary to make our health care costs more sustainable for the economy as a whole. We can buy some time to resolve those longer-term questions if we lock in a multi-year framework of constraints that imposes a credible, binding fiscal rule on the U.S. government. So our objective is to try to take advantage of this present moment and build a bipartisan consensus. And it has to be bipartisan. You can't do anything with just one party, these days, of course. And I think we have a chance to do that now, because if you listen carefully, again, beneath the political rhetoric of the moment, there is broad agreement among both Republicans and Democrats now on the scale of the deficit reduction you need to commit to and achieve. And there's substantial agreement on some of the components of that, and that gives the chance now to lock something productive in place today.And this is going to be, of course, the key test of our political system. It will be essential to restoring confidence in a country -- confidence that was very damaged by the crisis. And it's very important of course to act now before a crisis forces action.You know, this crisis just caused enormous damage, not just to the economy, not just to the basic economic security of all Americans -- it's the fabric of confidence we all rely on, confidence in the ability of government to act -- it caused a huge amount of confidence to our credibility globally, confidence in our financial system. And, you know, much of the world is getting better at these things. They're not standing still. So this is a moment where we need to -- where we need to move in. We have to find a way to demonstrate that we have a political system that will work, that can solve problems, that can bring people together and deliver reforms that are commensurate with the size of our challenges, to demonstrate that we can do things together even where many things still divide us.And I'll just end with confidence. I think -- again, I think we can do that. It's completely within our capacity to do that. You know, I sit in this office occupied by -- in Hamilton's office occupied by 73 other men. It will be women at some point, but so far it's only been men. And if you -- the politics feel terrible now. They feel very hard. And anybody who looks at Washington from a distance thinks -- well, they -- I don't know what they think. (Laughter.) But you could -- you could -- you could forgive them for wondering. (Laughter.)But if you think back of what it's been like, just to go back to the beginning, there have been times when politics have been much, much worse. And I would take our challenges today over anybody -- any of the challenges facing the other economies, as a whole, and I think we're completely up to those challenges. And I'd be happy to have a conversation with you about what's hard and, of course, as I said, take some advice. Thank you. (Applause.)DOCTOROFF: So Mr. Secretary, just following up on one thing that you've said specifically -- triggering mechanisms -- could you be a little bit more specific about the types of triggering mechanisms? There's short-term triggering mechanisms. There's long-term triggering mechanisms. Republicans, at least some of them, have suggested a triggering mechanism of, you know, debt to GDP, et cetera. What do you think more specifically?GEITHNER: I'd like to start by saying, you know, you can't put all the burden on a trigger. Again, you need something that people will look at and say, is that a constraint? This is enough -- are there enough reforms in place that you'd be confident, again, we're going to get ahead of this problem? So you don't want to put all the burden on the trigger itself, but for the -- for a trigger to be designed sensibly and -- you need to anchor it in this basic primary balance concept. You need to have a target that will produce a deficit that is below 3 percent of GDP and will stay there. And if you do that, then you can show the world that our debt burden as a share of the economy will first stabilize at an acceptable level and then start to decline, fade over time.And so the anchor of the framework has to be, you know, what economists call modest primary surplus by 2015. I say '15 just because you can't -- if you put it off too far, it's -- (chuckles) -- it's not credible, and if you make it too quick, again, it's too much risk that you force too much -- too much weakness in the economy too soon. So that should be the anchor for the rule, and for a -- and a force mechanism to work, it has to be scary to people. It has to be scary enough -- politicians will not want it to go into effect. And it has to be balanced. It has to cover both spending, what we call (classic ?) spending and spending in the tax code, as Marty Feldstein would say it, so that politicians have an incentive to act ahead of the trigger. That would be the art. But again, it can't be all in the trigger. It has to be -- it has to be policies in place to get you some distance to that target. Otherwise people will look at us and say, how do we know that they're actually going to deliver?DOCTOROFF: You also stress the importance of phasing in whatever is done to reduce the deficit, something that arguably has not been done in Britain by Prime Minister Cameron and Chancellor of the Exchequer George Osborne. Do you think they've made a fundamental mistake?GEITHNER: I don't. I think -- I think they're in a fundamentally different situation. They do not have the luxury we have. Our challenges look large, of course, but they're fundamentally different, much more manageable than in -- those in the U.K. and other parts of Europe as a whole. And that's because our -- the structural piece of our balance, the piece that's not the product of recession and the product of the emergency measures you put in place in the recovery act -- that piece of our deficit is much smaller than theirs. And I think realistically -- you know, we don't stand in their shoes, but they, I think, had no alternative but to adopt a much more aggressive path.Now of course if you look at our projected deficit path too, it's not -- it's not dramatically softer than theirs. It's very similar. I saw George Osborne the other day, and he was looking at what the president announced and said, gee, that's a -- that's a pretty aggressive path. But it's easier for us to do because our economy has much better underlying growth potential, is much more diversified, and a much larger piece of our deficit is just the temporary cyclical effects of recession.DOCTOROFF: You recently said that there is, quote, "no risk" that the United States will lose its AAA credit rating. S&P's action to put the U.S.'s AAA rating on credit watch or negative watch implies a one-third chance of a downgrade in the next two years. Of course they cited fears that there won't be a long-term deficit reduction plan. What gives you the confidence that we'll actually be able to reach an acceptable budget agreement?GEITHNER: Again, I think if you look -- and I know it's hard to do, because Washington is such a hard place to understand, but if -- again, if you look through the rhetoric, it is incredibly important that the leadership of both parties now, embracing the basic fiscal imperative and embracing the same basic magnitude of adjustment over the same basic time frame that is essential to get us on a sustainable path -- and I think that the odds of an outcome that helps start that process are much better today than they've been, I think, any time in the last decade.Now a lot separates these two parties, and the country's still fundamentally divided on how you think about the right balance, how to do tax reform, again, how to do entitlement reform. But you have to -- when you start with that recognition that there's no alternative but to put these things in downward path, you've made the most important choice. And then you can have a debate about the best strategy, best composition within that, and that's a good debate to have -- good debate, necessary debate to have.The other thing that's important to recognize about us as a country -- again, you know, we're a much younger country than the other major economies. We have much better underlying growth rates, in part because our -- more openness to immigration. We have a -- we started with a much lower overall debt burden as a share of our economy. The size and expense of our commitments in the safety net are a much smaller share of the economy as a whole.And so we're in a much better position to manage through this. And the reforms that are going to be necessary for us to put in place, they're going to be difficult, but there's things that we can absorb and adjust without risking substantial damage to our growth potential, long-term growth prospects. Again, if you do it in the right way, it's a balanced way. It's a much more manageable problem for us than would be true for many of the other major economies.DOCTOROFF: Still, you are facing a situation in Congress where a huge percentage of the Republicans have entered into no new tax pledges. How do you overcome that?GEITHNER: Well, I think that's an excellent question, and that, I think, is probably the most difficult political problem for them to have to solve. But they're going to have to solve that problem, because, again, if you just watch this debate carefully now, what's happened over the last few weeks or so? One is, you had this -- you know, you had this very divisive, difficult fight over how to fund the government, which tested people's tolerance and sort of illustrated what the consequences are for going way too deep in education, for example. And you saw people go up to the edge of the cliff and pull back because they said, I can't support that basic cut; that sort of helpful recognition you can't balance the budget through cuts on 12 percent, what's 12 percent of the budget. That's very important.Second thing that's happened is that you see in the plan that some Republicans embraced what happens if you force all the burden for fiscal sustainability on cuts in Medicare and Medicaid, and mandatory programs for the disabled and the poor. So if you put all the burden of this on that part of the budget, you have to cut -- you know, just to be unfair; well, I think this is fair -- you'd just have to cut savagely deeply into those basic programs. And you will find people will -- across (here ?) will not embrace that. They cannot defend it. They won't be able to do that and they will move away from that quickly. That's sort of helpful.The other thing -- the other thing that's very important to hear -- to say is that, you know, the president laid out this $4 trillion deficit reduction plan over a 12-year period -- again, same broad magnitude of cuts that the Republicans embraced, much more balanced package, and you found Democrats largely embraced that imperative. And again, this is a -- this is a problem within our capacity to solve, and we have a moment where we can take advantage of this recognition, greater recognition of the magnitude of the problem, and try to lock in something useful.DOCTOROFF: Let me switch topics. In introducing you a few moments ago, I mentioned some pretty remarkable statistics about progress since you were last here. Despite these achievements, the president is often perceived by the business community as being anti-business. And even in Bloomberg's last global investor poll, taken in January, only 44 percent of U.S. investors rate your performance as favorable versus --GEITHNER: Forty-four (percent)? (Laughter.)DOCTOROFF: -- versus 52 percent unfavorable.GEITHNER: Forty-four (percent) is unbelievable. (Laughter.)DOCTOROFF: So my question is, where's the -- (laughter) -- these are investors. This isn't the public. (Laughter.) So my question is, where's the love? Really, where's the disconnect, do you think? What is it that's not being communicated, if anything?GEITHNER: You know, I don't -- you know, these are complicated problems, but I mean, you know, think -- just as you did -- you -- well, and you, when you were introducing this -- the subject, unemployment is basically 9 percent, as you measure it. It's much higher in many parts of the country. You just saw more damage to people's basic wealth and economic security than we'd seen since the Great Depression. It is very hard for our people to understand why that was necessary, why it can't be better quickly.DOCTOROFF: How about the business community, though, specifically?GEITHNER: Oh, I don't -- I wouldn't -- I don't think too much about that. I mean, the business community is -- well, I'll give you an anecdote. (Laughter.) You know, I spend a lot of time with people who run businesses in the United States now. So we've talked to the average non-U.S. business, and they look at us; they say, I don't know what those guys are complaining about. I would much rather be an American company established in the United States today, operating under your set of constraints, rules of games, not -- I would say, across most industries, that's what people say to us.Again, if you look at the basic balance sheet of American companies; you look at the basic improvement in productivity, in profitability; you look at the broad improvements they're demonstrating across the board just in the last couple of years, they're in a much stronger position than they would be without the actions we took. And I think they basically understand that. I think most of what you hear in the rhetoric is the understandable desire businesses always have to lower their tax burden and make sure they get more influence over the basic regulatory framework in which they operate.There's nothing new in that. That's an old traditional game, and some people play that very well, some people less well; but they all play it aggressively. And I view most of the rhetorical stuff that you hear through that prism.DOCTOROFF: By the way, to reinforce your point, in the Bloomberg global investors' poll, your approval rating outside the United States was much higher than in the United States. (Laughter.)So the jobless rate has dropped nearly a full point in less than a year; yet there are now, as you pointed out, lower forecasts for growth this year. A year and a half from now -- sort of an insignificant date, a year and a half from now -- where do you think we'll be on jobs and growth?GEITHNER: You know, I'm not an economist. I don't forecast. But, you know, again, if you look at the consensus forecast for the U.S. economy, it's 3 (percent) to 4 percent growth over the next 18 months or so. And if you -- you're growing at that pace, then the private sector in the United States is likely adding jobs a little north of 200,000 a month. And again, that'll feel -- anybody who doesn't have a job, still knows somebody who doesn't have a job, not working as much as they do -- that's not going to feel strong enough. But it's probably what you can expect for an economy coming out of a crisis caused by these basic imbalances.Again, the basic tragedy of this financial crisis and the constraint on recovery is that you -- people have to bring down their debt burden after a period of living beyond their means, just as the government's going to have to do. And you're not going to have -- it's going to take a while again, it's going to take several more years, to repair the damage in housing markets and construction. You do not have the normal avenues governments have to induce or help foster much stronger growth in that. And that is the reality we're left with.But that is the -- that is the tragic constraint imposed by the crisis. It's not fundamentally about the policy choices people can make in Washington. Washington can make it worse, but the hard thing for people to understand is that it'd be hard to make it dramatically better than that. Very important: you know, again, first do no harm. And I think one reason why you want to make sure we take advantage of this fiscal moment is you do not want to take any risk that you cause damage to this process of repair and confidence building that's happening across the economy today.That's absolutely true in this debate about the debt limit, which is a ridiculous debate to have. I mean, the idea -- the idea that the United States would take the risk people would start to believe we won't pay our bills is a ridiculous proposition -- irresponsible, completely unacceptable basic risk for us to take. But it's also true that on a fiscal debate you don't want to put this off indefinitely and if -- because if you do that, there's a risk that you will magnify the unease people still feel about whether Washington's going to be able to get ahead of these basic problems.DOCTOROFF: Same answer with respect to housing, where clearly, as we both acknowledge, it's just sort of bumping along the bottom but we've got huge unresolved issues with the GSEs?GEITHNER: Right. Yeah, I think, again, in housing we have -- you know, we still have the -- I don't know how to say it elegantly. We have to clean up the mess of the basic servicer problems you see across the country still. But then you have to put in place a housing finance system that'll allow private capital to carry the dominant role of financing a mortgage for people; have the government recede from the role it's playing today. And that requires, you know, not just winding down Fannie and Freddie and in a sense pricing them out of that business gradually; but it requires putting in place a set of incentives, disclosure requirements, capital requirements, reform to the (security issuing ?) business so that people will bring capital back into that market. And we're -- as we all know, we're at the very early stage of putting in place that architecture; not least, you know, having it get some traction. And that's going to take a long time.DOCTOROFF: Just one more question, and then we'll turn to the members. The G-20 this month described a global recovery that is, quote, "broadening and becoming more self-sustaining." At the same time, energy and food prices are climbing, particularly in the emerging markets; unrest continues in the Mideast -- Middle East; Japan is obviously hobbled seriously; and the European debt crisis remains completely unresolved. Which of these in your view poses the greatest threat to the global economy in the next year? (Laughter.)GEITHNER: Well, I think that's a good list. (Laughter.) I think that -- I think -- I guess I'd answer it that way. It's just -- this way -- it depends a lot on how people manage these challenges. I mean, the -- what's happening in oil is obviously potentially very significant. And at current levels, on its own, it won't put the recovery at risk.The question really is -- I think, in one way, is, how do emerging markets manage the rising inflation problem that they face? Because they're growing so rapidly. It is a manageable problem, lots of experience trying to do that well. But that's important. Europe, as you said, has got a lot of challenges, but it's completely within their capacity to manage. They just have to choose to solve those on terms that are going to be reassuring to the world, they can do that.Again, I would say that I'd prefer our challenges over those facing any other country. And for us, the big challenge is to try to build a political consensus around a reasonable, balanced fiscal sustainability strategy that makes sure we don't get behind this basic problem. I think that's the most important thing. And if we -- if we do that, then we'll be in a much better position as an -- as an economy to manage all of the pressures, tensions, other things out there still.DOCTOROFF: So at this point I'd like to invite members to join our conversation with your questions. When called upon, please stand. Wait for the microphone and state your name and affiliation. And importantly, please limit yourself to one question and try and keep it concise so we can allow as many members to get involved in the conversation.Yes.QUESTIONER: Hello, Secretary Geithner. Ginny Kamsky.GEITHNER: Hi, Ginny.QUESTIONER: Ginny Kamsky. Secretary Geithner, you have a strong history, knowledge and understanding of China. You talked about -- GEITHNER: I wouldn't say understanding, but -- (laughter).QUESTIONER: You talked about the financial crisis and how you believe the United States responded well and, in a way, better than other nations, and I believe you were referring to Europe. I'd be interested in your reaction to how China responded to the financial crisis, and whether or not you think we can learn from the Chinese response, and overall your reaction to how China is performing today in the engagement of Treasury with China. Thank you.GEITHNER: Well, China is -- you know, China is still at the early stage of this transition to a more market economy, a more mature economy, and they've got a long way to go. It's important to look -- you know, if you even -- even with the amazing accomplishments of growth, broad-based growth, over the last three decades or so, they still have an economy that's still overwhelmingly dominated by the state, and they're just beginning to dismantle and move away from that. And that's a difficult challenge, as you know, for governments to manage.I think that, in the crisis, they did all the necessary right things. You know, they did a well-designed but very substantial fiscal force, which they had to do at that point, and that helped compensate for the shortfall in export demand. But what -- right now what they're trying to do is to put in place a growth strategy that's less export-dependent, reflects the reality that they're too big, too large a share of the world economy to run an export-driven growth strategy. And they're starting to dismantle gradually the basic elements of that strategy. An undervalued exchange rate they're letting rise gradually against the dollar at least. And they're starting to open up the capital account to allow more convertibility, more capital flows, and they're beginning to unravel those basic elements of the export-driven growth strategy that's served them relatively well but is completely unsustainable now. I think the challenge right now is, you know, they're going into a -- what they would call an election, and it's slowing the -- it's slowing the -- it's sort of slowing the pace of reform a bit, because it -- elections tend to induce a little caution. But I think they did really quite well in the crisis, and I think that they look like -- to me, today, they look like they're handling the near-term tensions, pressures relatively well. And of course, we have a huge stake in this economic relationship, and are doing as much as we can to help deepen and strengthen it and reduce some of the basic underlying sources of tensions we still face on the economic side, and not just because of the exchange rate but because of a range of other things they do to disadvantage U.S. producers.Yes, sir.QUESTIONER: Good morning. Marshall Sonenshine, chairman of Sonenshine Partners. Mr. Secretary, pleasure to be with you today.In his introductory remarks, Dan Doctoroff gave a nice overview, which I think many of us -- I certainly -- agree with, and cited some metrics as to the successes of the management of the financial crisis.And there is, of course, alongside that a narrative that says we did what we could and what we had to do, and in fairness we did no harm and we did what we absolutely had to do, but then alongside that we have left in place an accident-prone financial system for no -- for no other reason than it is still highly concentrated in terms of numbers of institutions being low and financial assets that they control being very, very high; and in lieu of addressing that, we have put a burden of regulatory oversight on this government that it has never before had.GEITHNER: On this system.QUESTIONER: On this system that it has never before had. And there are some great democracies that have handled those burdens well. Canada would be a -- I think a good example -- perhaps Israel.Are we equipped in this crazy land that we call Washington and that you refer to obliquely as a tough place -- are we equipped to actually execute on the second step of that plan, whether it be through the Financial Oversight Committee or the other structures, or are we still unfortunately despite all of our best efforts in triage -- which I think all of us give you enormous credit for -- are we still beholden to an accident-prone system?GEITHNER: Excellent question. I think it's exactly the right question. Of course, you won't know the answer to that question -- (laughter) -- you won't -- you just won't know honestly for a long time till we face something substantial in terms of the next large shock.But I'm much more optimistic. Let me just take issue with a couple of things you began with. It is true that our financial system, if you look at banks, is more concentrated than it was before the crisis, but there is no plausible path out of the crisis that did not result in at least temporarily some greater concentration.We have a much less concentrated financial system, again, than any other major economy -- dramatically less concentrated. Banks as a whole are only half of the credit -- (inaudible). So even that measure too, our banks -- even our largest ones together -- are a much smaller share of our economy than is true for any other country. Just -- again, just to do the numbers, our banking system in total now, even encompassing what we used to call investment banks, is about one times GDP, one times the total annual output of our economy. It's five times GDP in the U.K., eight times in Switzerland, three or four times in Germany. So that's one thing.Second is, we forced -- you referred to triage, which is a nice, elegant term for it -- but we forced dramatic restructuring in our system. We either allowed the market to crush -- or I won't use that term -- the weakest -- the weakest parts of the system, so that what was left was able to meet a market test for viability, attract enough capital to sustain itself. And that's hugely important.And as I said earlier, we were way ahead of everybody else in designing a basic set of restraints that average people could have a chance of enforcing to make sure we bring a little bit more resilience to the system in the future.The most important thing to do and the greatest failure that led to this crisis was the inability to apply sufficient constraints on leverage, on liquidity risk for those core institutions. You know, we did it not well enough for banks, but not for entities that were functioning as banks, the (institutions ?) alongside banks that were as large in total as the entire banking system.And one of the most important things that this reform thing does is allow us to impose requirements that force better, thicker shock absorbers into the core parts of the financial system. And if you get that -- you won't get it perfect. If you get that better, you have a much better chance of allowing an economy in the future to withstand pretty dramatic shocks that result in the risk of failure of large institutions. And I think we have a very good chance of doing that.DOCTOROFF: Sir, right there.QUESTIONER: Thank you. Dick Huber, Antarctic Shipping.You touched upon it when you addressed the question of China, but we've had a steady and quite substantial devaluation of the dollar over the last couple of years. And in a way, we're taxing holders of our debt in a way to solve our problem. Now, has that been largely due to benign neglect, or is that part of Treasury's strategy?GEITHNER: Well, I'll give a slightly deeper answer to your question, but I just want to make it clear to everybody that our policy has been and will always be, as long at least I'm in this job, that a strong dollar is in our interest as a country, and we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners.Now, I want to -- if you step back a little bit and you think about the world as it's evolved over the last few years in particular, it's worth noting that at the darkest moments in this crisis, really every time, even after you come out of the depth of the fall of '08, first quarter of 2009, when there's been concern about the basic fabric of finances really globally, people have wanted to be in Treasurys and in dollars. And when risk has receded a bit, confidence has started to come back, growth looks a little more resilient, people start taking risks again. You've seen that start to unwind, come back.And that's a very encouraging thing because it still shows that -- and you see the markets today still -- that people have retained a fundamental confidence in the ability of this country to manage our challenges, and to do so, on average, better than many other countries will do. And I say that not because -- really, to emphasize that you have to earn that and you have to make sure you earn that all the time. And of course, it depends a lot on the Fed's capacity to keep inflation low over time, which of course they will do. It depends a lot on our ability to put in place a set of fiscal reforms that will deliver sustainability over time. It depends a lot on acting aggressively to fix what was damaged in our financial system; make sure that you have a basic framework of integrity, disclosure that all systems require as a whole.Those are things you have to -- again, you have to work at very hard, you have to earn over time. And of course, we're going to -- we're going to keep doing that.DOCTOROFF: Yes, on the aisle.QUESTIONER: Secretary Geithner, thank you so much for coming to talk with us today. Chris Faulkner-MacDonagh, with Ziff Brothers Investments.So I had a question on the -- on the debt ceiling; in particular, what you see as your plan B. I know you released a letter -- had a chance to read it -- on what -- the steps you could take. It was very comprehensive. Thank you. But let's say the debt ceiling isn't increased towards the end of this year. And we will -- you know, and with the interest payments receiving priority, isn't it possible you could just continue to pay interest on the debt and let expenditures on everything else suffer? And if not, then what do -- what do you see as your plan B?GEITHNER: Let me -- let me do the basic constraints and flexibility we have, just so people understand that. On current estimates, we hit the debt limit on about May 16th. We have a set of tools Congress gives the secretary of the Treasury to allow -- that gives Congress more time. We can buy Congress a little bit of time. If we use all those tools, we can give Congress until roughly the end of June, before they go on their July 4th recess, to act. And of course, they will act.You know, we're the only country in the world, I think, that imposed -- where Congress has imposed on itself this particular burden of torture on their members. (Laughter.) And they recognize they have to act, and of course the leadership recognizes it, both Republican and Democrats. And they'll do what's necessary. I'm completely confident they'll do what's necessary.What I want to make sure they don't do is to take us too far into June, to take us too close to the edge again, because you don't want to -- at a moment like this, you don't want to leave people with any concern that they -- that they'll take too much time. And so our basic message to them is: Let's get this done and get it moving.Of course, the harder thing is the thing we spend most of our time talking about, which is how you -- how you legislate a framework that can lock in meaningful fiscal reforms that get these deficits down to a sustainable level. And you know, that's going to be a challenge to do. I think that's something we can do. But the Congress will -- they'll pass the debt limit.DOCTOROFF: Yes, right there. Go ahead.QUESTIONER: Jim Zirin, Mr. Secretary.I wondered whether you weren't disturbed by the dearth of criminal prosecutions that have come out of the mess. (Laughter.)GEITHNER: That's a -- that's a good question. It's not a -- it's not a -- it's not something that, as you know, in our system I get to solve. (Laughter.)And I will say that -- the obvious, which is that, you know, you had this colossal loss of basic trust and confidence in the integrity of the system, and we have to rebuild that. And rebuilding it is not going to come just from what we do on leverage requirements for large, complex financial institutions.It's going to come from making sure that you have a credible enforcement capacity that people believe will be a little bit more proactive, hold people accountable. And you need -- you need to demonstrate that that will be there in the future, because you need the deterrent power that brings to affect behavior. And I agree that we have some ways to go to rebuild -- to rebuild that confidence. And again, it's not -- it's not just about derivatives oversight or about disclosure in securitization products. It's going to be about making sure you have people in these jobs in enforcement authorities that have the -- understand these things -- these are complicated, complicated things -- understand them well enough, are talented enough, not just brave enough, to make sure you hold people accountable.DOCTOROFF: Do you think that's ever really possible, to have the regulators stay equal to or ahead of the regulated, given all the incentives that exist among the regulated?GEITHNER: I think that's the -- that's the existential question about oversight. But putting the enforcement piece of it aside, which is what your -- the question was, if you -- if you think about the rest of the system, to simplify a little bit, you have -- you have two schools of thought. You have people who believe that you can design a better radar system. It will look over the horizon. It can identify pockets of risk and leverage. And then all you do, you just deploy your army and go preempt that -- those pockets of leverage and risk.And you have another school, and I'm -- as you can tell, I'm in the -- I'm in the latter school -- which says that, you know, we're human. The people who occupy these jobs are human. They will not have perfect foresight and wisdom. It is not economically or financially tenable to know exactly what the future brings and what of the shape of the tail looks like, and what the vulnerability (there is to ?) -- to shocks is.So what you can do and what you have to do and is absolutely necessary, if not always sufficient, is you need to build deeper, thicker shock absorbers into the basic system so that you are better positioned to withstand and deal with the fundamental uncertainty that exists about the nature and scale of shocks ahead, because you cannot predict, you will not be able to predict and anticipate, you will not be able to preempt. You could try to do it, but you need a safeguard and thicker cushions. And by cushions, shock absorbers, I mean capital, liquidity, funding in institutions and in the basic markets where firms come together, so that when firms make mistakes and court failure, which they inevitably will do, those things don't threaten to bring down the rest of the system.DOCTOROFF: Yes, sir.QUESTIONER: Gordon Bell, Legacy Growth Partners and Bed-Stuy Restoration, Bed-Stuy Restoration started by Bobby Kennedy some 40 years ago. So this question comes from both sides. And let's turn to some of the more positive aspects of what you are able to do going forward in terms of growth.How can the treasury secretary and how can we, Congress and the nation, focus on investing in ourselves? So Bed-Stuy has education. It's got housing. It's got green initiatives. How can we make sure in this budget we support the places that get leverage and put in private hands strong businesses that -- (inaudible) -- people in jobs? Thanks.GEITHNER: Excellent question. And that's, again, why you have to bring a comprehensive approach to putting us on a path to -- within our -- where we're living within our means, because if we don't do that, we will not have the room and the capacity to target investments and things that only governments can do; you know, like education and things that have high, broad economic and social returns. It just requires choices. And it's another reason why you can't restore balance by focusing just on a piece of the budget, particularly a piece of the budget where you have most of the power to improve future growth and opportunity.So again, just to say it again, just to make it simple, if you do it on education, you'll be, you know, eating the future, as Paul Krugman wrote. It's the reason why you have to do something that's comprehensive, that has the right balance. You have to go -- you have to look at defense, you have to look at tax reform, and absolutely you have to get more savings out of -- out of -- out of health care as a whole. Without that, you have no -- you have no choice.You know, governing is about recognizing that you -- we have limited resources, making choices within those constraints. That's what governing's about, and that's why this debate about how to do it is so important.It's good to get beyond the point about whether we have to do it. That's good. But the more difficult challenge is figuring out how to do it in a way that is not going to leave the economy weaker in the future or leave Americans with less (basic ?) confidence the system is fair, with a fair burden shared by everybody. DOCTOROFF: Did we miss a huge opportunity with the stimulus package in early 2009?GEITHNER: Opportunity to do what?DOCTOROFF: To make those kinds of investments. GEITHNER: I don't -- you know, I think that -- again, it's hard to look back and know what might have been possible given the constraints at the time. But in fact, what the stimulus package did quite well is, you know, apart from the mix of tax incentives and (support ?) for states and local governments and some targeted infrastructure things, that it did put significant material additional amounts of resources in things like NIH, in basic science, in -- a modest amount of money to provide incentives for education reforms that Arne Duncan is (leading ?) across the country. So the recovery act, you know, had that -- had a complicated and pretty diverse mix of what people called, you know, classic near-term catalysts for investment or income support for individuals and families, but it also had a modest amount of targeted things in things that we know are essential to how economies grow over time. DOCTOROFF: Right. Yes, sir?QUESTIONER: (Off mic.)DOCTOROFF: Can you identify yourself, please?QUESTIONER: Yes. I'm sorry about that. Matthew Levey, Kroll Associates.Secretary Geithner, you just hit on the health care part of the equation. What gives you confidence, given the bruising nature of the fight on our first go-round in health care reform, that -- as you say, looking past the rhetoric in Washington -- that there's a fundamental consensus about what needs to be done with Medicare, Medicaid and other health care programs?GEITHNER: There's no -- there's no consensus. And -- I agree with you completely, there's no consensus on how you generate the savings you're going to need. But I think it's worth stepping back for a second and just reminding ourselves of what is the basic health care cost problem we face as a country. It's not just, of course, the cost of the commitments we made in Medicare and Medicaid, it's the rate of growth in overall health care costs across the economy as a whole. And if you're going to solve that broader economic problem, you have to figure out a way to change the incentives for people -- for how people use health care and how the providers of health care provide health care, so that you're slowing the rate of growth and costs economy-wide. You can't just try to shift them from, let's say, Medicare beneficiaries -- to Medicare beneficiaries in a way that'll have enough basic traction and power. And you're absolutely right. I'd say if you listen, you know, health care -- there's the sort of recognition that the commitments we made even with the Affordable Care Act savings ultimately don't go far enough. But no consensus yet on how to go further. And, you know, again, I think you have to do anything and everything that offers the prospect of some improvement in the incentives and try those, figure out what works and then do more of those things over time. And that's going to take a long time to get better. But -- and, you know, again, the important thing to recognize about this thing -- just to end with a little bit of optimism again -- is that, you know, these deficits are large, they're unsustainable, they're going to have to come down over time, but if you do it in a balanced, comprehensive way, you do not need to dismantle the basic safety net that millions of Americans, not just seniors, rely on. You don't need to dismantle it. You don't need to cut that deeply into it. You need to reduce the rate of growth in those costs, you need to reform how those benefits are structured in many ways, but you don't need to dismantle it, as long as you're prepared and willing to do a balanced approach that -- that touches all the basic things government is doing, including, for example, the amount of spending we do (through ?) the tax code. DOCTOROFF: One more question. Sir? QUESTIONER: Farooq Kathwari, Ethan Allen. This is about jobs, and middle-class jobs. While the economy's certainly healing, but there is a tremendous issue about increasing jobs here. The president has talked about increasing exports.I was wondering, where would these jobs come from, when the fact of doing business in the United States is extremely high, especially compared to the emerging markets?GEITHNER: I think that -- again, that's the deep question still hanging over all of us, which is are you going to see a level of job creation in the economy as a whole that'll bring down the employment rate -- unemployment rate fast enough to meet a set of basic expectations of the citizens of the country. I think -- I think that's the essential question.But again, let me try to take the slightly more optimistic side of this debate. I think we've had close to 2 million jobs in the private sector created since growth resumed. That's a much stronger pace, much earlier than happened during the last two recoveries. And they were milder recessions, so important context in that context. If you just think more broadly -- and again, if you look at -- you look -- you know, you look at the basic shape of this recovery, it's important to recognize again that, you know, we're 5 percent of the world's population. We're about one-fifth of global GDP. The most populous parts of the world are going to grow much more rapidly than the major economies for the next several decades. And we are really as a country uniquely positioned to benefit from that basic growth, because we are still uniquely good and productive at things that are going to be very important to help those economies (grow going ?) forward, and that's why, even at this early stage of recovery, you're seeing a broad-based improvement in manufacturing, in agriculture, in high tech reflected in export growth here. And of course, that's translated into jobs. Now, construction is not going to be a source of strength for some time in the United States, and for people that made their living in that basic business, it's going to be very hard and very -- and very tough for them. But again, if you look outside those inevitable pockets of weakness that we still have, you're seeing pretty broad-based signs of basic improvement, which demonstrate a lot of -- a lot of basic innovation, dynamics and make the U.S. companies as a whole look pretty good, relative to their international peers. Of course, for -- to sustain that, we've got to make sure that we do a better job of educating our people, we make the incentives better for growth; you know, we're going -- we're going to take a run at corporate tax reform to improve investment incentives in a responsible way. And again, you've got to make sure as you do this fiscal reform, you do so in a way that doesn't leave starved or underfunded things that only governments can do to make those basic growth fundamentals stronger going forward. But I'd take the qualified, optimistic view just based on the initial experience with recovery.DOCTOROFF: One final question from me. A lot of the people in this room work very hard, but few jobs are as demanding as yours. You haggle with Congress on a Tuesday, you fly to China on Wednesday, you're back here to deal with complaints from the business community on Thursday, a Cabinet meeting on Friday. Can you continue to do this job at the pace you've been doing it -- (laughter) -- seriously, after the 2012 elections, assuming President Obama's re-elected?GEITHNER: You know, Dan, I've never really done anything else. It's -- I'm sure I'm (employable ?) in other -- (inaudible) -- (laughter). You know, I -- DOCTOROFF: Fifty-eight percent of American investors (think that ?).GEITHNER: Yeah. (Laughs.)DOCTOROFF: I'm kidding. (Laughter.)GEITHNER: And I think they have a point. (Laughter.)Could I end with a -- with a compliment?DOCTOROFF: Absolutely.GEITHNER: This is just a Pete Peterson tribute. I was in -- I was in London, I don't know, some time ago in my youth on a trip, and I got a phone call from someone who claimed to be Pete Peterson. And he said, you know, I heard about you, and I wanted to know whether you'd come talk to the Board of the New York Fed about running the New York Fed. And I regret that call every day -- (laughter) -- but no less than I think Pete Peterson does. (Laughter.) No, I am incredibly grateful to him not -- again not just for what he's done for this institution and so many others, and for being such a stubborn advocate of confronting basic fiscal reality, but for what he -- for the privilege he gave me in coming and working for my country in this capacity. I'm grateful for him.DOCTOROFF: Great.GEITHNER: Nice to see you, Dan.DOCTOROFF: Thank you. (Applause.)####®FC¯END®FL¯ .STX (C) COPYRIGHT 2011, FEDERAL NEWS SERVICE, INC., 1000 VERMONT AVE.NW; 5TH FLOOR; WASHINGTON, DC - 20005, USA. ALL RIGHTS RESERVED. ANY REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION IS EXPRESSLY PROHIBITED. UNAUTHORIZED REPRODUCTION, REDISTRIBUTION OR RETRANSMISSION CONSTITUTES A MISAPPROPRIATION UNDER APPLICABLE UNFAIR COMPETITION LAW, AND FEDERAL NEWS SERVICE, INC. RESERVES THE RIGHT TO PURSUE ALL REMEDIES AVAILABLE TO IT IN RESPECT TO SUCH MISAPPROPRIATION. FEDERAL NEWS SERVICE, INC. IS A PRIVATE FIRM AND IS NOT AFFILIATED WITH THE FEDERAL GOVERNMENT. NO COPYRIGHT IS CLAIMED AS TO ANY PART OF THE ORIGINAL WORK PREPARED BY A UNITED STATES GOVERNMENT OFFICER OR EMPLOYEE AS PART OF THAT PERSON'S OFFICIAL DUTIES. FOR INFORMATION ON SUBSCRIBING TO FNS, PLEASE CALL 202-347-1400 OR E-MAIL [email protected]. THIS IS A RUSH TRANSCRIPT.

Event with Timothy F. Geithner and Daniel L. Doctoroff April 26, 2011

Economic Crises

A Conversation on the Economy with Timothy F. Geithner

Timothy F. Geithner, secretary of the U.S. Department of the Treasury, discusses economic growth, financial repair and reform, and the fiscal policies that challenge the U.S. economic recovery. This meeting was part of the C. Peter McColough series on International Economics.

Event April 26, 2011
United States

C. Peter McColough Series on International Economics with Lael Brainard

The C. Peter McColough Series on International Economics is presented by the Corporate Program and the Maurice R. Greenberg Center for Geoeconomic Studies.

Event with Lael Brainard and Faryar Shirzad January 21, 2011
United States

A Conversation with Lael Brainard

Lael Brainard, undersecretary for international affairs at the U.S. Department of Treasury, outlines the discussion between President Obama and President Hu Jintao, as well as the effect of the financial regulatory reform on the international agenda at the treasury for the upcoming year. This meeting was part of the C. Peter McColough Series on International Economics.

Event January 21, 2011
Economic Crises

Prime Brokers and Derivatives Dealers

Overview Runs by prime-brokerage clients and derivatives counterparties were a central cause of the global financial crisis. These runs precipitated the failures of Bear Stearns and Lehman Brothers by substantially reducing the broker’s liquidity. This Working Paper, the ninth in the Squam Lake series distributed by the Greenberg Center for Geoeconomic Studies, argues for higher regulatory liquidity requirements for dealer banks that use assets of clients and counterparties as a source of liquidity.

Report by Squam Lake Working Group on Financial Regulation April 7, 2010 Greenberg Center for Geoeconomic Studies
United States

Financial Regulation’s Fatal Flaw

Congress’ call for a new federal agency to oversee insurers still relies too heavily on ill-equipped state regulators to stem risks posed by bond insurers, traders, and reinsurers, writes CFR’s Marc Levinson.

Expert Brief by Marc Levinson January 21, 2010
United States

Financial Regulation Pitfalls

CFR’s Marc Levinson says further international coordination on financial regulation may do more harm than good and expresses doubts about federal restrictions on executive pay.

Interview with Marc Levinson and Roya Wolverson October 28, 2009
Economic Crises

C. Peter McColough Series on International Economics: The Global Financial Crisis - Causes and Consequences

The C. Peter McColough Series on International Economics is presented by the Corporate Program and the Maurice R. Greenberg Center for Geoeconomic Studies.

Event with Alan Greenspan and Peter G. Peterson October 15, 2009
Economic Crises

C. Peter McColough Series on International Economics: The Global Financial Crisis: Causes and Consequences

Watch Alan Greenspan, president of Greenspan Associates LLC and former chairman of the Federal Reserve Board, outline the causes of the financial crisis and what the outcomes have been, including large fiscal deficits and new financial reforms.

Event October 15, 2009
Financial Markets

Credit Default Swaps, Clearinghouses, and Exchanges

Overview Credit default swaps (CDS) are contracts that provide protection against the risk of default by borrowers. The buyer of the CDS makes periodic payments to the seller, and in return the buyer will receive a payoff if the borrower defaults, analogous to an insurance contract. While credit default swaps can be a valuable tool for managing risk, they can also contribute to systemic risk. CDS contracts are currently traded over the counter rather than on exchange, raising concerns over counterparty risk. The failure of one important participant in the CDS market can destabilize the financial system by inflicting significant losses on many trading partners simultaneously. A clearinghouse could in theory reduce counterparty risk by standing between the buyer and seller of protection, insulating the counterparties’ exposure to each other’s default. This Working Paper, the fifth in the Squam Lake Working Group series distributed by the Center for Geoeconomic Studies, analyzes the market for credit default swaps and makes specific recommendations about appropriate roles for clearinghouses and about how they should be organized.

Report by Squam Lake Working Group on Financial Regulation July 9, 2009