This Week featured Tim Geithner this week, and George Stephanopoulas wasted no time is confronting him with Krugman's "despair" comment on his economic plan. Geithner sidestepped the question but did hint that they'd make sure banks would restructure "when they need to restructure":
STEPHANOPOULOS: [...] You laid out what to do about these legacy toxic assets in the banking system this week. And a lot of people are wondering, will it actually work? The stock market definitely seemed to like it, so did a lot of experts. As you know, the Nobel Prize-winning economist Paul Krugman was not a fan. And I want to show what he wrote this week in The New York Times.
He said when he read this plan, it gave him a sense of despair. And he went on to say: "Financial executives literally bet their banks on the belief that there was no housing bubble and the related belief that unprecedented levels of household debt were no problem. They lost that bet and no amount of financial hocus-pocus, for that is what the Geithner plan amounts to, will change that fact."
Financial hocus-pocus.
GEITHNER: George, this is a piece of a series of initiatives we've put in place to help get the financial system doing what it needs to do, which is to provide the credit necessary for recovery. You know, economies depend on financial systems. They're what is -- provide the oxygen, the blood that economies need to grow.
STEPHANOPOULOS: But he says it's just not going to work, that these banks are insolvent, and that even if you put more capital in them, eventually you're going to have to take them over.
GEITHNER: But I just wanted to -- let's step back for a sec. So this is piece of a broad framework of initiatives we're undertaking to help restore the strength of the financial system. Part of our plan -- a core part of our plan involves making sure banks have enough capital to provide the lending we're going to need to get recovery back on track.
Now banks are going to need -- some banks are going to need some large amounts of assistance, and we're going to make sure that that assistance comes with conditions, designed to make sure they restructure, provide accountability on boards of management, that these institutions emerge cleaner, stronger going forward.
STEPHANOPOULOS: But one of the things you're hearing from the banks is in part because they don't want all of these new restrictions, they may not sell these legacy assets.
GEITHNER: That is a risk. And it's very important that people recognize that. To get out of this, we need banks to take a chance on businesses, to take risk again. We had a long period where banks were taking too much risk. The challenge for us is that they take too little now.
And for us to get through this, we need investors and banks to be willing to take a change again on providing credit to that business that has got a great idea and needs to grow, expand.
STEPHANOPOULOS: Well, one of the other criticisms is that the investors, especially in the plans to buy up these toxic assets, are not taking all that much of a risk. They're going to put up $6 and they're going to get 93 percent from the government. We will share on the upside, yes, but they're protected against huge losses.
GEITHNER: George, let's just step back for a sec. The problem we're facing on our financial system is that we -- banks made a bunch of loans, backed real estate that are now facing losses. And those loans are clogging up the financial system.
They're taking up room that could otherwise be used to provide new credits to a business or a family. Now we have two choices, we can let -- leave that as it is, hope that banks earn their way out of this over time. That would be a mistake. That would leave us with a strong -- with a deeper, longer recession.
We're not prepared to adopt that basic strategy.
STEPHANOPOULOS: But there is a third choice...
GEITHNER: There is another choice -- let me say, there's another choice that a lot of people suggest is the government itself comes in, buys these assets, sets the pricing of an asset, takes on all of the risk in that strategy.
And that would leave the taxpayer taking on much more risk, much greater risk of loss over time. We don't think that's an appropriate approach.
The approach we're adopting, though, is to have private investors come in and put their capital risk alongside the government. That helps make sure we're using their incentive to set the price for these assets, rather than having the government set the price and risk overpaying.
This is a conservative structure. It's, sort of, basically like what happens when you buy a house, put money down, borrow it to buy a house. It's a more conservative structure than banks typically run with. And we think it's a much better way, again, to make sure the taxpayer's not taking on risk the taxpayer should not take.
STEPHANOPOULOS: So you're saying your proposal is the middle course. I guess there's a fourth option that Senator McCain lays out, other Republicans have laid it out. He says, just go in and shut them down.
GEITHNER: Right.
STEPHANOPOULOS: These banks ought to be shut down. He says they should be taken over, their management and shareholders suffer the consequences, and their assets resold to private-sector entities.
What's wrong with that idea?
GEITHNER: Well, George, the approach we're adopting, again, is to make sure that there's capital in the financial system where we need capital. And that capital will come with conditions.
As the senator said, make sure these institutions emerge stronger, not weaker. We don't want to be sustaining the weak at the expense of the strong. But our system...
STEPHANOPOULOS: But is that plan B, if your plan fails, is that plan B, go in, take them over, shut them down eventually, unwind their assets?
GEITHNER: The way I would describe it, George, is that we need to move to make sure the banking system is able to provide the credit recovery needs.
When they do that, again, with strong conditions to protect the taxpayer, make sure they restructure where they need to restructure.
But, you know, our system doesn't just depend on banks. In a typical -- in a typical market, more than 40 percent of lending comes from outside of banks, so in the securities markets, through the secondary markets that are so critical to student loans, small- business lending, consumer lending.
And so we have a very aggressive program in place to help provide credit directly, going around banks, get those markets working again.
