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March 23, 2009

Interview with Larry Summers

The Situation Room

BLITZER: Stock markets skyrocketed today. The Dow soaring almost 500 points. The spark came when the Obama administration finally revealed its plan with details to clean up the books at the nation's troubled banks and help get credit flowing once again to the American people.

The government wants to team up with private investors to buy those so-called toxic assets potentially worth at least a trillion dollars although some say it's worth a whole lot more than that. Let's bring in the top presidential White House economic advisor Larry Summers, he's director of the National Economic Council. Larry, thanks very much for coming in.

LARRY SUMMERS, DIRECTOR OF THE NATIONAL ECONOMIC COUNCIL: Good to be with you, Wolf.

BLITZER: If this works how long will it take to free up the credit market, get money flowing out there?

SUMMERS: You know, Wolf, it's not a thing that happens on and off like a light switch. It's a thing that happens over time. You've seen some modest improvements in credit markets since President Obama took office and since Secretary Geithner provided a framework for restoring financial stability. Mortgage rates have come down substantially. The number of people who were able to refinance their homes has increased 30 percent in the last month alone, putting a lot of money into people's pockets, new money's been made available.

BLITZER: Are we talking weeks or months?

SUMMERS: Small businesses -- I think you're seeing some impact already but these problems didn't get made in a week or a month or even in a year and it's going to take time for a full normality in financial conditions and in the economy to be restored. But I think that process of repair is on the way and I think it took another important step today with the announcements that Secretary Geithner made.

BLITZER: Who's going to oversee the plan that was announced today? What kind of oversight is there going to be in terms of accountability?

SUMMERS: Well, the ultimate accountability as the president always says rests with him but this is an initiative that is being spearheaded by the Treasury Department with the participation in its different components of the FDIC, led by Sheila Bair and of course the Federal Reserve led by Chairman Ben Bernanke. But it's a Treasury based plan to use capital that's been made available to restart our lending markets at a time when the lack of a satisfactory credit market is hurting automobile sales, it's hurting students' ability to go to college. It's one of the things holding back the housing market and so it's an important approach to once again create a market.

BLITZER: Larry, Ben Stein, the economist, told us that this is a bonanza potentially for the private sector, those firms that are going to be working with the federal government. They really have very little to lose but they have a lot of money potentially to make thanks to the federal government. Is he right?

SUMMERS: I think there are some attractive investment opportunities here and certainly the response from a number of market participants to the Treasury's discussions suggest that they do see attractive opportunities here but it's important to realize that taxpayers are going to be investing alongside the private sector and so if there are any substantial benefits, taxpayers will share in them very directly as investors.

BLITZER: But the taxpayers also will have the downside. Will the private equity firms, the banks who get involved in this, do they have a downside?

SUMMERS: Wolf, no government -- none of the government financing will lose any money unless the private sector loses all of its money. The private sector is exposing itself to the full so-called first loss on this. So the money that the government's lending, the so-called leverage, that doesn't lose any money at all until the private sector has been completely wiped out. Moreover, the government's going to collect a fee for this.

BLITZER: All right.

SUMMERS: You know, it's a little frustrating, frankly, when people argue at the same time first that the private sector is going to make too much money. The private sector makes money the government's going to be making a lot of money as well. And then they somehow argue that the whole thing is wrong because the government's going to be the one that loses money. In fact, there's a careful balance struck here.

BLITZER: All right.

SUMMERS: Through the way these loans are priced that assures that taxpayers are protected, that taxpayers have a chance to share in the upside.

BLITZER: But listen to the Nobel economist, prize winning economist Paul Krugman writing in "The New York Times" today and he has been a supporter of your administration, as you know. "It's as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone."

Now, how do you respond to Krugman?

SUMMERS: Paul is a friend and Paul's a great economic theorist and I wish he'd waited until the plan had been announced and the steps had been described before he had written his column, because if he had waited, he would have learned that this is one component of an approach. It's an approach to do something that I think almost all economists regard as essential, restarting the capital market, because restarting the capital market is necessary if you're going to have loans.

Now, there are other steps that are necessary and they're the ones that Paul actually emphasized in his column -- making sure that the banks are satisfactorily capitalized and he's absolutely right about the importance of that. And that is something that the administration has been very focused on. It's been a central preoccupation for Secretary Geithner and for Chairman Bernanke and that's why this stress test process is under way with respect to the banks and when it's completed, we will indicate our policies that assure that the banking system is satisfactorily capitalized.

BLITZER: All right.

SUMMERS: But what Mr. Krugman did today surprisingly, I thought, was he took an action in one area, strengthening the capital markets, and he said it didn't solve another problem, the issues in the banking system. He's right about that. But it wasn't intended to. And we've made clear that there is an approach in place with respect to his concern about the banking system.

BLITZER: We'll look forward to hearing it.

SUMMERS: So, I wish he had waited until the plan was announced before he wrote his column.

BLITZER: We'll look forward to hearing his response to what you just said. Larry Summers, thanks for coming in.

SUMMERS: Thank you.

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