'Meet the Press' transcript for August 10, 2008

MR. BROKAW:  I think what, I think what puzzles a lot of people, Mr. Secretary, is that how so many smart people can not have seen some of this coming.

SEC'Y PAULSON:  Right.

MR. BROKAW:  Here's a quote from you in April of 2007.  "I don't see subprime mortgage market troubles imposing a serious problem.  I think it's going to be largely contained." That was a year ago at this time.

SEC'Y PAULSON:  Right.

MR. BROKAW:  The former chairman of President Bush's Council of Economic Advisers has been critical.  Said, "This looks like the Fed and Treasury were lurching form crisis to crisis, when much of this was forecastable."

SEC'Y PAULSON:  Well, let me say this.  Hindsight's 20/20.  A year ago, it was August, we were in the middle of capital markets, dealing with the turmoil of the capital markets.  I think from the time I came to Washington, I began to prepare to deal with turmoil in our capital markets.  With regard to Freddie Mac and Fannie Mae beginning in, in--right after I arrived in 2006, I, I got permission from the White House to begin to really engage in trying to get reform.  There were people--there were two camps.  There was one camp that said, "We need reform," and there was another camp that said, "You're not going to get reform," and there was no compromise.  And so I started working in late 2006, started working with the House.  And, Tom, I think I've been very consistent throughout this housing problem in saying to Congress, you know, the--as important as some of the other legislation is, that these two agencies, the need for reform here is an order of magnitude more important than, than any of the other housing issues.  We need stability in that marketplace, and we need a strong--and, and, and a strong regulator.  So I, I believe I'm essentially playing the hand that I've been dealt in terms of Fannie Mae and Freddie Mac.  This problem has been going on for many, many years, and it's my lot in life to deal with it in a way in which is going to, I think, provide stability.  And our capital markets have put us in a position to deal with systemic risk going forward.

MR. BROKAW:  Beyond Freddie Mac and Fannie Mae, President Bush, in an unguarded moment recently--he thought the cameras were off, he was talking at a fundraiser in Texas.  Here's what he had to say about how Wall Street got in trouble.

(Videotape)

PRES. GEORGE W. BUSH:  There's no question about it.  Wall Street got drunk. It got drunk, and now it's got a hangover.  The question is how long will it sober up and not try to do all these fancy financial instruments.

MR. BROKAW:  Listen, I know personally that you're a teetotaler, so you may not approve of that metaphor, of Wall Street gotting--getting drunk, and you're an old Wall Street guy yourself.  But isn't it--not just for Wall Street, but for the entire country, we were on a binge?

SEC'Y PAULSON:  Absolutely.  There's a lot of truth in what the, what the president said.  And in terms of Wall Street, there is too much leverage in the system, and more leverage than was appropriate, and more than, than people recognized because the leverage came in, into the system in the form of highly complex, structured products which were difficult to understand.  So there is excess leverage, excess complexity.  And, Tom, one of the things we've been working on with, with the president's working group on financial markets, and that's a group that I chair where we have all of the regulators--we have the Fed, the OCC, the SEC--we have, of course, one priority, getting through this period with as little damage, as little negative impact as possible on the economy.  But, but the second part is to take steps to reduce the likelihood of, of these sorts of things happening in the future.  And so we have a number of recommendations to deal with hoping that these things working so that these problems won't happen again.  And, for instance, we have a regulatory system that is very outdated.  It was put in place many years ago, and...

MR. BROKAW:  There's going to have to be more modern regulation...

SEC'Y PAULSON:  Yes, absolutely.

MR. BROKAW:  ...of Wall Street across the board.

SEC'Y PAULSON:  Across the board.  More modern regulation and more authorities.

MR. BROKAW:  Tough for a Republican who comes from Wall Street to say that?

SEC'Y PAULSON:  Well, I've got to say, it's not tough for me.  I understand the importance of regulation, and I also understand the importance of moral hazard, market discipline.  Because we need to be in a, in, in a position where organizations are not considered too big to fail.  We need--and in order to be in that position, we need to be--to have authorities that allow us to unwind a financial institution if it fails and it is not a bank with Federal deposit insurance.  And so we're going to need those kinds of authorities, and we're going to, to also need to do a lot of work to get the system in balance.

MR. BROKAW:  Mr. Secretary, this goes well beyond the shores of the United States, obviously.

SEC'Y PAULSON:  Right.

MR. BROKAW:  The Financial Times had a long analytical piece recently, and the bottom line was, in effect, when the United States gets sick, the rest of the world now gets flu.  Here's what they had to say.  "The world economy is in trouble, poised between the rock of recession and hard place of overheating.  It will take a remarkable resumption in global policy co-ordination and a huge dose of luck to avoid one or the other." At a time in the United States when we have a lame duck president, a Congress running for re-election and concentrating on that primarily, and two candidates running for president who don't want to talk about inflicting pain on any of the consumers or the taxpayers in the country, is it hard for you, then, to generate that kind of global coordination that is necessary?

SEC'Y PAULSON:  I, I--Tom, I think we've got excellent global coordination. What I explained to so many of my friends from the private sector, although we have a regulatory system that is out of date, and although the architecture we have globally is out of date, we have good people in the seats, and I think in some ways, that transcends the financial architecture because there's great communication, and we've worked very closely with the G-7, with the financial stability forum on the policy prescriptions to, to avoid these problems going forward.  We've worked very, very closely together, and I know the Fed has worked very closely with their counterparts around the world to, to deal with the financial turmoil.  So we're working closely together.  I would say that in the first signs that the economy was slowing down in December, the president asked me to work with--closely with Congress on the stimulus bill. And, again, this was enacted very quickly, and if you look at the numbers for the second quarter, you can see that, although it was a tough second quarter, there was, there was growth.  And when you look at consumption and you look at consumer spending, I think that that, that program is working the way it was, it was intended to work.  So we've, we, we've got a lot we're working on right now.

MR. BROKAW:  I know you had a conversation recently with the Democratic candidate for president, Barack Obama--we presume he'll be the nominee. There's been a lot of speculation that you may stay on, whoever's elected president, as Treasury secretary, because you're midstream in some profound changes.  Would you like to stay on?

SEC'Y PAULSON:  No, Tom, I wouldn't.  I'm, I'm, I, I care a lot about this country.  I'm going to run right up until the end.  I'm very, very focused on doing the right thing for the United States of America.  And whoever the next candidate is, whether it's John McCain or Barack Obama--the next president is--I will do everything I can to make for a smooth transition, to work closely with my successor in Treasury to do everything I can to help out.  But I'm, I'm, I'm focused on getting everything done I can get done between now and January 19th.

MR. BROKAW:  That's a firm denial that you would be interested in extending?

SEC'Y PAULSON:  Yeah.  It couldn't be any firmer.  I, I've--you know, when I came down to Washington, people said to me, "How could you want to do something for just two and a half years?" And I said, "Two and a half years sounds like a long time to me, and I'm going to--I, I'm going to define my job expansively.  I'm going to do everything I can to step up to any problems that, that are going to face the country." But again, I, I look forward to doing other things, you know, next year.

MR. BROKAW:  I want to ask you about what may be additionally necessary to get this economy going again.  The tax rebates that were sent out earlier this year had about as much effect as a BB gun on a bear, it turns out.  Do you think we'll need additional stimulus from the federal government?

SEC'Y PAULSON:  Well, Tom, I'm going to take exception with the BB gun on a bear, because I, I believe what we did with, with, with, with the tax rebates and the business incentives, we got them out very quickly.  And they're still, you know, they're still having an impact.  So I think if you look at the second quarter numbers, that's what people--when we put that plan in place, people were worried about negative growth in the second quarter.

Now, in terms of a second stimulus, which is, which is your question, we sized that program to say, "How could we do something that would be meaningful this year but not so big that it would jeopardize some of our long-term priorities and our fiscal priorities in balancing the budget?" So, again, my view would be let's see how this program works in the third quarter.  And the biggest issue we're dealing with right now is housing.  And so we, we've got housing legislation.  We're working with Freddie and Fannie.  We have this Hope Now Alliance where the industry's come together to avoid preventable foreclosures. And I think that's where our priorities should be.

MR. BROKAW:  Let's talk some about China.  You've made more than 70 trips here, both as a public and as a private citizen.  Chinese government has a huge investment in the United States.  They're holding what, $400 billion worth of, of bonds in Freddie Mac and Fannie Mae alone?  Here's a quote that you offered to BusinessWeek recently.  Your counterpart in this country, the vice premier, Wang Qishan, said, "We've been listening a lot to you and now we find out our teacher has problems." You said that you responded to him, "Learn from us and you can avoid some of our mistakes." There's a prominent American businessman who is here this week, who met with some Chinese officials.  They were very concerned about Fannie Mae and Freddie Mac.  And he said their attitude is they're going to sit on their money.  That doesn't help us, does it?

SEC'Y PAULSON:  Well, I, I, I would say this, Tom.  We have had, I believe, great support from investors around the world.  And part of the reason why I was--when, when I talked with Congress about the need for these backup authorities with regard to Fannie Mae and Freddie Mac was I emphasized this is about our capital markets, and investors all around the world need to know that we understand the importance of these organizations to our capital markets and to, to housing.  But the--you're, you're right that, that, that, that the period of turmoil we're going through in our capital markets today is different from some of the periods we've had in the past in that the, the root cause took place right in the United States of America rather than outside of the United States of America.  So, in some ways, that's humbling.  But I still believe that the long term--and I think most of the people I talk with, whether it's the Chinese or whether it's in the Middle East, I think just about every investor outside of the United States looks at the U.S. and says, you know, relative to any other developed or industrial economy, that the long-term fundamentals--economic fundamentals of the United States compare very favorably.  And, and let's not forget that.  We've, we've got our problems, but when we have a problem, we shine a light on it, we move quickly to clean it up, and I can't think of any other nation that, that doesn't have more problems than we do longer term.

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