CQ Transcriptswire

SPEAKERS: GEORGE STEPHANOPOULOS, HOST

JAMES BAKER, FORMER SECRETARY OF STATE

LAWRENCE SUMMERS, FORMER TREASURY SECRETARY

REP. BARNEY FRANK, D-MASS.

REP. ROY BLUNT, R-MO., HOUSE MINORITY WHIP

ART CASHIN, DIRECTOR OF FLOOR TRADING, UBS SECURITIES

[*] STEPHANOPOULOS: Good morning, welcome to THIS WEEK.

(BEGIN VIDEOTAPE)

STEPHANOPOULOS (voice-over): Crash.

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: This has been a deeply unsettling period.

STEPHANOPOULOS: U.S. stocks have their worst week ever.

UNIDENTIFIED MALE: Oh, my God, (INAUDIBLE), I’ll call you back.

STEPHANOPOULOS: A global market meltdown.

HENRY PAULSON, TREASURY SECRETARY: Weakness hurts all of us. And we need to work together.

STEPHANOPOULOS: What will it take to stem the slide and stabilize our economy? How will the crisis change our politics and what does it mean for you? Questions this morning for our headliners: market veteran Art Cashin, financial statesmen James Baker and Larry Summers, and key congressmen, Democrat Barney Frank and Republican Roy Blunt .

Then...

UNIDENTIFIED MALE: I’m really mad. And what’s going to surprise you is not the economy.

STEPHANOPOULOS: The campaign takes an even nastier turn. That, and the rest of the week’s politics on our roundtable with George Will, Cokie Roberts, Dan Balz of The Washington Post, and Paul Krugman of The New York Times.

And as always, the “Sunday Funnies.”

SEN. BARACK OBAMA (D-IL), PRESIDENTIAL CANDIDATE: Senator McCain suggests that somehow, you know, I’m green behind the ears...

JOHN STEWART, HOST, “THE DAILY SHOW”: You don’t want to bring up ears.

(LAUGHTER)

(END VIDEOTAPE)

ANNOUNCER: From the heart of the nation’s capital, THIS WEEK with ABC News chief Washington correspondent, George Stephanopoulos, live from the Newseum on Pennsylvania Avenue. STEPHANOPOULOS: All eyes turned from Wall Street to Washington this weekend as world leaders gathered here to confront the carnage in financial markets. So far, those talks have not produced a new plan. They’ll continue in Paris today.

But Treasury Secretary Hank Paulson is now preparing his own plan to have the federal government to become part owner of American banks. This morning we’re going to take a full look at what this means for our economy and our politics. And to get started, let’s go to Wall Street. The stock market is open tomorrow, Columbus Day, and Art Cashin, director of floor trading for UBS, will be there, as he has for the last 45 years.

Good morning, Art.

CASHIN: Good morning, George.

STEPHANOPOULOS: So here’s this Washington Post headline: “World leaders offer unity but no steps to ease crisis.” Does that foreshadow a Black Monday? Or have the markets already factored in some kind of failure?

CASHIN: I don’t think so. I think it would be a major problem if they didn’t come out with some apparent coordinated plan. That has been the problem in this crisis all of the way through. First they addressed things on an ad hoc basis. Then when they tried to coordinate things, they were a little bit behind the time curve.

So by the time Asian markets open tomorrow, I think there has to be a new coordinated plan.

STEPHANOPOULOS: And what has to be in that? What are you looking for?

CASHIN: Well, I think that some of the things I’m hearing about putting capital into some of the big banks and making sure they don’t go, I think in hindsight it’s pretty clear it was a drastic error to let Lehman go under.

It spilled over into the money markets after that. When the money markets froze up, they stopped buying commercial paper, which is lifeline for much of American business. So instantly it went from Wall Street and the banks to Main Street and business. And we could see more of that.

STEPHANOPOULOS: But just to be clear then, you think we have got to see some kind of an announcement, a coordinated announcement by the end of the day today? By the time Asian markets open? And possibly an announcement by Secretary Paulson finalizing his partial privatization of the American banks to forestall a larger sell-off tomorrow?

CASHIN: Yes, because -- and it has to be coordinated. A good example was in Ireland, the Bank of Ireland was worried about people having a run on the bank. So they announced that they would insure all deposits. Well, the unintended consequence was money from all other Europe started flooding into Ireland because your money was safe in Ireland.

So that’s why it has got to be coordinated. If you press on one side, you can destabilize things in another area.

STEPHANOPOULOS: And what would be the most -- single most important signal to you that we’re pulling out of this?

CASHIN: Well, the clear signal would be for things to calm down. You’ve got to remember that the stock market is merely the side show in this circus. It is the financial system that’s there, to use a different metaphor, we’re just the thermometer, it’s the patient -- it’s the banking system that has got to get put back together. And it has got to get put back together fast.

STEPHANOPOULOS: Real quickly, it took 30 years for market to recover from the Great Depression, about 15 years from the crash of the late ‘60s. How long is this going to take?

CASHIN: Well, I think it’s going to come in two stages. First we need to put in at least a temporary bottom. And thankfully, we’re in the month of October, which is historically known for bottoms. But I think we have done so much damage to both the economy and to the financial system that this may drag on for a couple of years with sub normal growth.

STEPHANOPOULOS: OK. Art Cashin, thanks very much for your insight this morning.

CASHIN: OK.

STEPHANOPOULOS: And for more on this, we now turn to two men with deep experience at the center of economic policy and the financial markets. Former treasury secretaries Larry Summers, who served under President Clinton, and James A. Baker, Treasury Secretary under Ronald Reagan, and of course, secretary of state with the first President Bush.

Gentleman, welcome to you both.

SUMMERS: Glad to be here.

BAKER: Thank you.

STEPHANOPOULOS: Secretary Summers, let me begin with you. You heard Art Cashin there say we need to see a coordinated action plan out of the industrialized world today before Asian markets open. Do you agree with that?

And then more broadly, this has been an extraordinary few weeks, and we have seen the government try just about everything, the Fed pumped billions into the system, a $700 billion rescue plan guaranteeing deposits, a global rate cut, and nothing seems to have worked. Why not?

SUMMERS: George, we’ve got a problem of trust. People trusting their money in financial institutions. Financial institutions trusting each other. The whole economy trusting the government policy framework. And any time you have a problem of trust, you got to deal with it in a very aggressive way.

And the sooner you respond to it and the more strongly you respond to it, the sooner trust is rebuilt. We have had many measures but what we haven’t had yet is a comprehensive approach laid out that’s responsive to all of the aspects of this problem.

The core problem today of assurance that your money in a financial institution is safe. The problem that banks are short of capital and need capital from some source, and if it has to be the government, that’s better than their not having capital.

The assurance that the flow of credit that people, that municipalities, that students, small businesses depend on is going to be maintained. We need those things, but we also need to recognize that the financial system can’t be healthier than the overall economy.

And if the overall economy doesn’t look like it’s being supported, then we’ve got a lot of trouble fixing the financial system. That’s why we need to be looking at the problem for homeowners, looking at the problem of job creation.

What we need is a strong, comprehensive, multi-part approach laid out. But more important than any rhetoric is the actions that are taken in the next several months.

STEPHANOPOULOS: Let me bring Secretary Baker in.

SUMMERS: And we have had a problem of being behind the curve.

STEPHANOPOULOS: Bring him in on this. And I wonder if you agree with that, first of all. But also, you now see this plan by Secretary Paulson to inject money directly into the banks, to have the government become part owner. Do you agree with that? Because that seems to fly in the face of the philosophy set by your former boss, Ronald Reagan.

BAKER: Well, I agree with that, given the circumstances today, George. Because this problem is serious. We’re a resourceful people and a resourceful country. And we’ll work out of this. But this is bigger than the private sector can fix by itself.

Government is going to have to do what’s necessary to restore financial stability to our markets and to our economy. And frankly, I think they have made some -- taken some pretty good steps already. We’ve had one coordinated interest rate reduction with other central banks around the world. We then increased significantly our insurance for bank deposits from $100,000 to $250,000.

The $700 billion rescue plan is now going to be diverted toward or used for injecting capital into our financial institutions so that they can unfreeze -- the credit markets can unfreeze and they can begin to lend.

And I talked -- and I was very encouraged about the -- by what the G-7 finance ministers said, even though they didn’t come out with a specific plan, they were far more specific in their communique than Larry and I used to see when we attended those G-7 meetings.

So injecting liquidity into the system, coordinating our macro- economic policies with other nations, these are the kids of moves that are going to be required to get this thing under control, and we will get it under control.

STEPHANOPOULOS: Secretary Summers, you’ve talked -- said that the financial system can’t be more healthy than the economy. Let’s focus in on that right now as we look at the underlying economy.

I think everyone now agrees we’re headed towards a recession. How long, how deep, and what specifically can be done to lessen the blow?

SUMMERS: No one knows. My guess is that it’s going to be sometime now before the economy starts to expand, certainly several quarters, and even then it’s going to be longer until we return to normal levels of employment.

What can we do? Government needs to step in and create jobs and prevent layoffs by upping infrastructure spending, by supporting state and local governments. It’s a tragedy that schools are on four-day weeks, that we’re laying people off when there is such important work to be done in so many areas of our health care system, of our education system.

But critically, we’ve got to do something about the housing market. We’ve got to address a core problem, which is that people are being foreclosed, and their houses are being put on the market. And then the houses are sold, that pushes the market down further. And that makes it harder for more and more people to stay in their homes.

SUMMERS: We’ve got to approach this issue of mortgage relief, but we’ve got to do it with a view to protecting the homeowner, rather than with a view to protecting the banks.

That’s why the proposals that were signed into law a few months ago are so important, and that’s why it’s important we don’t just talk about them, but that we start executing them much more rapidly.

If we do that, we’re not going to prevent an economic downturn...

STEPHANOPOULOS: Let stop you right there, because...

SUMMERS: ... but we could help.

STEPHANOPOULOS: ... Senator McCain had a proposal, this week, to refinance mortgages, basically, at full value.

Secretary Baker, do you agree with that proposal?

BAKER: Well, I think it’s a good proposal. It’s certainly a very good political proposal, and I think it could be a good substantive proposal, provided the mechanics of how you get there are delineated a bit more.

But let me say something to what Larry said, just a minute ago. I don’t disagree that this is going to be with us for a little while. But we will come out of it, George.

And I -- I think back to the last real serious market crash we had. I happened to have been Treasury secretary then. That was back in -- 21 years ago, in 1987, this very month, when the indexes, the market indexes, dropped 43 percent in seven days.

Now, we’ve had a drop, today, of about 40 percent. And that’s a huge drop. And the problem is greater today because we have all of these esoteric derivatives, out there, floating around the system, credit default swaps. Nobody knows how many there are. The estimate’s up to $55 trillion or $60 trillion, four times the gross national product, entire gross national product, annually, of the United States.

And we need to do something about that. And we need to figure out a way to have some transparency; we have, maybe, a clearing house or a central exchange place, somewhere, where people will be able to take a look. And that would help restore credit. Right now, nobody knows who owes what, with which, and to whom. And we shouldn’t have let ourselves get into this position, but we did, and now we’ve got to figure out how to regulate our way out of it.

I hate to say that, but it’s what we have to do.

STEPHANOPOULOS: I’m watching you nod your head, Secretary Summers. It seems like that’s something you and Secretary Baker can agree on.

SUMMERS: I think so. As we were leaving office in 2000, we proposed a clearing house for exactly the reasons that Jim describes.

You know, Jim mentioned the 1987 experience, and it’s interesting in two respects.

One of the things that -- one of the many things that Jim did as secretary of the Treasury that was so important was not just propose measures but always propose them in a clear way, as part of a comprehensive program that gave people a sense of confidence.

And I don’t think we’ve quite had that yet, today. I hope we will in the future.

The other thing, though, people have to recognize is that this really is much more serious than the situation we had in 1987 -- 1987 we terribly serious, in terms of the financial markets...

BAKER: Yes, yes...

(CROSSTALK)

SUMMERS: ... but you didn’t have the breakdown in all the trading between the banks. You didn’t have the largest banks in the country unwilling to lend to each other.

And that’s why we’re going to need much more substantial measures today than the ones we needed in 1987.

STEPHANOPOULOS: And, Secretary Baker, we’re just about of time.

BAKER: Let me suggest...

(CROSSTALK)

BAKER: George, let me suggest one of -- another one of those measures, if I might. And maybe Larry would agree with this.

I think we ought to have some requirement that, when originators of loans put a loan on the books, if they’re going to transfer that loan, throw it out into the financial system, they will have to retain some percentage of liability on that loan.

That would go a long way toward making sure that a lot of these crappy loans aren’t put into this system. (CROSSTALK)

BAKER: ... regulatory step...

STEPHANOPOULOS: You’re nodding your head. Is that right, Secretary Summers?

SUMMERS: That’s something we should certainly look at. But I would just say one caution. The reason we have this crisis is that, for a long time, there was too much greed and not enough fear.

The reason we’re staying in this crisis is because there’s too much fear, right now. And we’ve got to make all kinds of changes in the regulatory system. But we’ve also got to make sure that the flow of funds starts going again for the benefit of homeowners across this country.

STEPHANOPOULOS: Finally, Secretary Baker, I know you’ve both been working...

BAKER: The first thing we have to do is create...

(CROSSTALK)

BAKER: The first thing we have to do, George, is create financial stability. That’s what Larry’s saying, and I totally agree with that. And then we need to look at these broader, mid to long- term reform proposals.

STEPHANOPOULOS: Before we go, Secretary Baker, I know you’ve been working with Presidents Clinton and Bush on the recovery effort from Hurricane Ike.

How has this financial crisis hurt that effort?

BAKER: Well, George, we have a serious problem down here.

BAKER: Well, George, we have a serious problem down here, you know, in the space of three weeks we had two very serious and very destructive hurricanes, Hurricane Gustav and Hurricane Ike. They came through here and the damage and destruction is still very significant and substantial.

The hurricane we’ve been talking about here this morning in our economy and in our financial markets sort of took all of the oxygen out of the media coverage of the hurricanes down here.

Presidents Bush 41 and Clinton have banded together and decided to do something about that. I’m -- they’ve asked me to help them and I’m doing that. Our appeal is really a very simple one, George.

We ask that people go to www.bushclintonfund.org and contribute whatever you can. There are many Americans down here who are still suffering significantly. There are whole families missing on the Gulf Coast between Texas and Louisiana, including significant parts of both states.

We need some help. We hope people will go to that Web site. I know you’re going to post it for our viewers and we hope they will be as generous as they can. The contributions are tax deductible and not one penny will be used for administrative expenses.

STEPHANOPOULOS: We do not want to forget them. Secretary Baker, thank you very much. Secretary Summers, thanks to you as well.

And with that, let’s now turn to the Congress. Passage of the $700 billion rescue package didn’t calm the markets last week. Here to discuss what might come next on Capitol Hill, the chairman of the House Financial Services Committee, Barney Frank , and the number two Republican in the House, Roy Blunt .

Gentleman, welcome to you. And it seems like so far we have unanimity this morning on the need to have the government become partial owner of American banks. Congressman Blunt, do you agree with that as well?

BLUNT: Well, I agree with that as one of the tools that the secretary could use. We created a package for him that gave him lots of options. And I talked to him Thursday. I think he’s going to use all of those options, including some kind of guarantee so that the people that own these assets actually can reach a floor and insure them buying these assets at the right level, and some direct involvement. But there is lots of oversight here. There is lots of transparency. Whatever the secretary does, the American people are going to get a chance to look at it. And taxpayers deserve the ultimate protection here for whatever money is invested.

So I’m going to look real closely, frankly, at any proposals that weren’t on the table before and be sure they meet the standards that the administration set out there when they talked about their need to come in and do all of these things.

I think they’re going to meet those standards. I think that this is a quickly changing environment, but the safeguards need to be there for the taxpayers as well.

STEPHANOPOULOS: Congressman Frank, how important is it to get this done today?

FRANK: To get what done today?

STEPHANOPOULOS: A united global front (ph), but also the announcement of a partial privatization of American banks.

FRANK: Oh, I’m sorry. Yes, I think that’s very important. And I -- look, Roy Blunt was a very constructive leader in this and we worked in a very bipartisan way to put that bill through. You know we have some differences between the parties and they will play out maybe in the future.

But right now there is a lot of cooperation. And I agree with what Roy said. We took a proposal from the secretary, and frankly, it was the Congress that explicitly added the right to buy the equity. Frankly, the Treasury was not too crazy about that.

We did it both because we thought it would be economically useful, as it now is, to try and get healthy banks healthier, but also for taxpayer protection. Because if you’re only buying bad assets, the likelihood that the taxpayer will recover the outlay is smaller.

Here we are buying equity. We’ve authorized the treasury secretary to do that. And he not only gets the preferred stock -- non-voting stock, by the way, we don’t want the federal government voting in any of these things.

Beyond that, though, they get warrants. That is, they get a piece of paper that says, if this bank becomes more profitable in the future, in part because of what we did, then that goes to the taxpayer. So I think that is a very important piece of it.

FRANK: There is one other piece, though, that we don’t lose sight of. And Larry Summers correctly noted the foreclosure issue. We also explicitly gave him not just authority, but a direction to use some of these funds to buy up the mortgages.

And then having bought up the mortgages, or enough of the mortgage securities to be in control, to try and reduce foreclosures. Foreclosures are not a good idea generally for anybody. And if you’ve got homeowners who can pay a large part of what they owe, but not all of it, the federal government is mandated here to try and buy up those mortgages and then reduce what they pay.

Not at face value, we’re not going to buy up the mortgages at face value, because the people who lent the money shouldn’t get out of this hole. But if they are willing to take a lesser amount from the Treasury, we can then avoid the foreclosures.

STEPHANOPOULOS: Congressman Blunt, Senator McCain did suggest this week buying up the mortgages at face value. Do you agree with that or with what Congressman Frank is saying right now?

BLUNT: Well, I think what Senator McCain talked about this week was essentially in several pieces of law already looking at mortgages that the government could simply take over, clearly buying mortgages, if you buy mortgages, for no more than their value.

BLUNT: Somebody needs to take the loss here, and it needs to be the person that had the bad judgment of making that loan, of buying those poorly put-together mortgage-backed securities.

There’s going to be loss here, and it shouldn’t be loss borne by the taxpayer. Barney’s absolutely right...

STEPHANOPOULOS: So then you don’t agree with Senator McCain’s...

BLUNT: Barney’s absolutely right, that foreclosures don’t help the neighborhood. They don’t help the property. They usually don’t do anything to help the specific piece of property that’s involved. And we just need to look at this carefully.

There’s merit in the McCain plan. That’s why it’s already in -- some of it’s already in the FHA reauthorization bill. Some of that flexibility is here.

But you have to be sure, again, that taxpayers are protected. And I think, when see the specifics of the McCain plan, you’ll see those kind of protections.

STEPHANOPOULOS: So you think he will? You don’t believe that there should be full value given back to the lenders; they should take some kind of a penalty?

BLUNT: Oh, absolutely, the lenders should take a penalty, and they should take a significant penalty, just like Secretary Baker said earlier.

These lenders that loan money to people that they thought could not pay it back, even though the federal government was encouraging some of that, overdid that. And once they got those loans out of their building, they thought they had no ongoing responsibility.

That’s part of this problem. Part of this problem is clearly not regulating these government-sponsored entities, Fannie and Freddie, for years.

I was surprised when I looked back at this, George, and saw how many times, starting in 2001 through September of this year, President Bush called on the Congress to regulate these entities more clearly, more directly, and cited this problem eight years ago, and cited it repeatedly.

And, frankly, the Congress fell down on its job, and we’re looking at the results of that right now.

STEPHANOPOULOS: Congressman Frank, Senator McCain has been making that same point, saying you haven’t been doing your job to regulate Fannie Mae and Freddie Mac.

FRANK: Well, they couldn’t be more wrong about me, George. None of us foresaw the extent to which subprime lending was going to reverberate negatively throughout the economy.

But Roy Blunt is right. The president saw (inaudible) in 2001. My good friend Roy -- and as I’ve said, we’ve worked together on a lot of things, but from 2001 to 2006, the Republicans controlled the House. I was in the minority.

Mike Oxley, of Sarbanes-Oxley fame, noted that, in 2005, he did try to get a bill through to regulate Fannie Mae and Freddie Mac. I cooperated with him some. It failed in the Republican Congress.

The Democrats took over the Congress in 2006. On February 1, I became the chairman of the committee, and on March 28, we passed the bill to regulate Fannie Mae and Freddie Mac.

The president had also asked for more authority so that the FHA, the Federal Housing Administration, could be an alternative to bad subprime loans. Again, the Republican Congress didn’t do it. We passed it.

By the way, Phil Gramm -- you know, if Senator McCain wants to find someone who didn’t do something, he ought to talk to Phil Gramm, who’s been one of his coaches, economic collaborators.

Phil Gramm was chairman of the Senate Banking Committee, which was in charge of Fannie Mae and Freddie Mac, for six years, and never did a bill on it.

Again, the facts are very clear. For 12 years, the Republicans were controlling the Congress. They never moved a bill. We were in power, and within five months of the Democrats taking over, we did pass the bill to regulate Fannie Mae and Freddie Mac.

STEPHANOPOULOS: We’re just about of time, here. I just want to get you both, quickly, on one final subject.

Congressman Blunt, it’s been reported that Congressman Frank and the Democratic leaders are working on a stimulus package of about $150 billion, to include extending unemployment benefits, food stamps, infrastructure spending, and talking about coming back after the election to pass it in a lame duck session?

Would you go along with something like that?

BLUNT: Well, first of all, George, on the other topic, the Congress didn’t do what it needed to do. I think the many members of the Congress that were on the wrong side of this just need to admit that they were on the wrong side of this and move on. Senator Shelby, on the Senate side, was right on this. Richard Baker, on our side, was right on this. Artur Davis said, this week, it’s time for Democrats -- he said Democrats -- it’s time for all of us, frankly, to admit that Congress should have been more on the ball, here, during the whole period of time.

President Clinton said the same thing, that Democrats need to admit that Republicans in Congress -- this is a Clinton quote -- “were calling on more regulation, and it didn’t happen.”

STEPHANOPOULOS: How about the stimulus package?

BLUNT: In terms of the stimulus package, I certainly will work on a stimulus package that makes sense.

But let’s not use the stimulus package as an excuse to do what Democrats have wanted to do from day one of this Congress, which is a huge public works plan -- now the reason to have that is the economic stress -- and bailing out states who spent a lot more money than they should have.

They’ve been wanting to do that the whole time. The reason to do it today is this economic problem. That was not the same reason that they had 20 months ago, to do the same thing.

A stimulus package that makes sense is something that I’ll be helpful with.

STEPHANOPOULOS: Congressman Frank, we’re just -- we are out of time. But you’re going to bring this after the election?

FRANK: I am. And again, I want to stress, the Republicans controlled Congress for 12 years, and never moved the bill on Fannie Mae and Freddie Mac. We moved it in five months.

So, yes, a lot of people misunderstood the impact that bad subprime loans would have, but I couldn’t do anything when I was in the minority. I wish I could have stopped them from doing a lot of things.

Secondly, though, yes, we are going to do a stimulus. And I disagree with Roy Blunt that the states are at fault that they spent too much on medical care for lower-income people and children.

I think a stimulus package is to give the middle class and the average citizen the same kind of relief that we try to give to the financial sector.

STEPHANOPOULOS: OK. Gentlemen, thank you both very much.

END

.ETX

Oct 12, 2008 10:56 ET .EOF

Source: CQ Transcriptions

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