Interview: Timothy Geithner

Mr. Secretary, we've done a number of interviews with people involved in credit unions, and they talk about making a living on an 18 percent interest rate cap. Is there any chance the administration is going to back such an initiative to cap interest rates for consumers?

We think we can do a lot to protect what went wrong in credit by having strong centers nationally, [enforced] more clearly, much cleaner disclosure, and making clear somebody has the authority to ban the kind of predatory, fraudulent, manipulative things you saw happen across the country.

And we think that mix of approaches is the best way to give us a system where people still can have access to credit responsibly, use credit responsibly; [where] there's innovation and competition without the kind of terrible failures, the sort of dark side of credit we saw in this crisis.

So you don't see any reason to control the level of interest that can be charged, 30, 40 percent? A lot of people are now getting 30 percent interest rates.

I'm sure you've talked to people on all sides of this debate. And there is some risk, if you take that approach, you're going to end up denying people who would otherwise be able to borrow responsibly. So that's the trade-off. So again, our approach is to try and make sure you've got cleaner rules, more simple rules to protect people, enforce more evenly, and, again, the capacity to ban the most abusive practices we saw across the industry.

The main things that have happened in our country was we had one set of rules that were applied to banks -- not perfectly applied, but they were relatively tough. But as long as you were not a bank, you could do a whole range of things without those protections.

So over time, they stole that business from banks, and you saw a huge amount of just basically abusive practices move outside of the banking system with no basic protections for consumers. And that absence of a sort of clean set of standards applied evenly was the principal source of what happened.

And you don't think the banks then became predatory themselves?

The banks did a lot of bad things that should not have happened also. But the main problem we faced, again, was this uneven playing field. And the rules weren't well designed or enforced fairly enough for banks, too. But the main problem you saw is that you saw most of that business shift away from banks where you didn't have adequate protection in place.

So we need to fix the rules, make them tougher. But you need to enforce them more fairly, more evenly across everybody who's in the business of providing a kind of credit product to a consumer.

That's what this Consumer Financial Protection Agency [CFPA] will do?

Yeah, that's our hope. Right now you have this responsibility for writing rules and enforcing them diffused across multiple agencies, probably seven at the federal level, and across all the states in the country. And most of the people [with that] responsibility had other responsibilities, too, and they just didn't do a good job of doing it.

So to streamline it and to make sure there's one place the American people can hold accountable for better protections is to put that into one agency with a simple, clear, single mission to protect consumers.

Sen. [Richard] Shelby [R-Ala.] says you cannot divorce protecting consumers from the soundness of the banks, and if you divide it up, it's just not going to work, and you're going to create -- he recently said -- a "nanny state."

I respect Sen. Shelby on many issues. We agree on a lot of things, but on this I don't think he's right. There's no inherent conflict between consumer protection and safety and soundness. ... We lived with a system where you had people responsible for safety and soundness doing consumer protection, and they didn't do a good enough job at that.

But the bankers say that there are enough bureaucracies already in place.

And I agree with that completely. Again, right now our problem now is not that we have too few people doing this; they just didn't do it well.

And it's partly because it was responsibility diffused around a whole different set of agencies -- seven at the federal level -- most of whom had other preoccupations, other responsibilities. This is not their primary job. So it was just a complicated mess. And we're trying to do it for a simple, streamlining consolidation of that responsibility in one place.

For consumer lending.

For consumer lending, exactly.

But separating it out from the safety and soundness.

Yeah. You take it away from people whose job is to worry about safety of an institution. Take it away from them. Make that their principal job. Hopefully that will make them better at safety and soundness supervision, which didn't go so well, too, and then have somebody whose job is to worry about the consumer protection accountable for that responsibility.

I have to ask then: You were at the Federal Reserve. You had that authority. You were on the Open Market Committee, as I understand it. Why didn't you do it then?

The Fed got a lot of things right. But I think, [as the Fed said] -- and I completely agree with this -- the Fed did not move early enough to use the authority that Congress gave it to write stronger rules. The Fed's authority did not extend to most of the institutions that were in the business of providing credit. So even with better rules, the system wouldn't have worked well enough. But I think the Fed could have done a better job.

I want to just highlight one thing. The Federal Reserve Bank in New York, when I was president in 2004, applied the largest civil money penalty fine in history in response to a consumer credit set of failures, consumer protection kind of failures in a finance company of one of the largest banks in the country. So we did some tough things.

That was Capital One?

No, this was Citibank. ... And these were tough measures. And it's one reason why you saw what I described earlier happen, which is you saw banks try to evade the protection of bank regulation, like Countrywide, [and] become a thrift where there is a lower standard, so they can engage in a bunch of practices that were not possible to do within the bank.

You saw other businesses shift to finance companies, because protection applied to banks was tougher. Now, it wasn't tough enough. We've got to fix it and make that better. But it was much tougher than was applied across the rest of the country.

Let me just ask you a response to something that [Chairman of the Senate Banking Committee] Sen. [Chris] Dodd [D-Conn.] said. We were talking with Sen. Dodd about deregulation and the repeal of deregulation. ... He said he voted for it, but it was a mistake.

Which deregulation?

Glass-Steagall, for instance. ... Do you feel now that the deregulation that you were one of the advocates of during your career --

Actually, that's not what I spent my past life in the Treasury doing. I was responsible for the international side of Treasury. I can't take credit for that particular thing.

But you know what I'm saying.

I actually don't think the end of Glass-Steagall had really anything material to do with this financial crisis. I'll give you a simple illustration.

But let's say deregulation as it applies to, let's say, credit cards.

Well, I think I would say it differently. ... What happened is you had a set of protections that were in place for banks designed over several decades. As I said, they weren't perfect.

But what happened is a large industry of finance built up outside of banks, outside of those protections. And the main failures in the consumers' side that were so devastating to families across the country, as well as the same basic failures that caused the crisis, [that] brought the whole system to the edge of the collapse, came from the fact that we allowed an entire industry of finance to develop outside those protections, outside those constraints.

So investment banks, thrifts, AIG [American International Group], [a range of] auto-type finance companies grew up outside that with a lot of leverage, very vulnerable to runs and panics, with none of the protections we put in place to protect the country from financial crises we put in place after the '30s, for example.

And what happened in basic risk taking is very similar to what happened on the consumers' side, is people were allowed to evade the tougher protections and go to shop for where the protections were weakest. And that's what left the country and the financial system so fragile.

And now you can say that that is absolutely a failure of regulation, but ... it wasn't the consequence of deregulation as much as a consequence of the failure of regulation to catch up with and prevent that huge migration of risk where the standards were lower or nonexistent.

But in the credit card area or the debit card area, there's been very little regulation.

Right.

Very little enforcement.

Well, I think fortunately now that Congress just passed a law [Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009] which will put in place a tougher set of rules -- and a key part of [what the reforms] are trying [to do] is to make sure they're going to be enforced more evenly, so there's one standard nationally, not 50 standards or not 57 standards, depending on who your regulators, who your supervisors [are]. We don't want people to be able to shop for the weakest form of protection.

So those laws, I think, were necessary. And we're moving a whole set of other reforms [to] the Congress today, which will be necessary to fix those basic mistakes. And it would have been good for the country if they had been done earlier.

The banking industry says you want them to lend more. You want them to make more credit available out there. But at the same time, you're putting more restrictions on them.

Yeah.

Which way is it? Can you have it both ways?

You can. I think the reforms we're proposing, the president proposed, I don't think present a material risk [where you're] going to have a system where people cannot borrow responsibly in the future.

Think of it this way: Look what happened in this crisis. You saw people basically lend too much, borrow too much, borrow irresponsibly without the knowledge of the risks. And that was terribly damaging not just to the people who were the victims of predatory practices and not just to the banks that took too much risk; those burdens were imposed on the people who were careful and responsible.

They're the ones suffering now, because what happens in crises is the market overcorrects the other side. To correct for all the excesses in the way up, people end up pulling back much too sharply, and you'll starve. It's like oxygen. It's like starving viable businesses, responsible families of the capacity to borrow carefully in the future.

So it's good for the system as a whole, good for the industry -- not just good for the economy and the consumers -- to have a set of protections that enforce more evenly over time and prevent that kind of excess borrowing in the future.

... Some consumer advocates we've talked to say there has to be less borrowing; there has to be less money made available to people who can't pay it back; that that's a good thing. The banks, in turn, sort of agree, saying: "We don't have the money. Times are tough."

I basically share that view. I think, as a country, we did borrow too much. We had a long period where many families and certainly the government was living way beyond its means. And we're going to be a stronger country in the future. Growth will be more stable. It will be more fair, the economy less fragile, if we have less excess, less borrowing, less excess leverage in the future.

So what do you say to the consumers out there who are complaining now? Surveys show half of the consumers have had interest rate changes, have balances, cards canceled, credit lines change.

I'd say it's unfair to them, and it's typically terrifically unfair to the responsible borrower, too. It's unfair to the person who was taken advantage of, was not exposed to the risk and complexity, the fees, the kind of tricks you referred to earlier in these products. But it's also unfair to the person who borrowed less, ... because they're going to get caught up into this general pullback, as well.

What's happening now.

And it's happening now.

They're going to have to live with it?

Well, I think, again, that's why you want to have a set of reforms in place, to prevent the excesses in the boom years from happening in the future, and from people being extended credit on terms they could not afford.

So we're going to go forward into a society where consumption is no longer the American way, the way that it was before.

I think America is a very resource-rich, resilient country, and I'm sure Americans will be spending in the future. But they'll probably be borrowing, spending less on the strength of what they borrow, borrowing less to finance consumption.

And savings is going to have to rise -- you're already seeing it now. Private savings in America now is positive after being negative for a long period of time. And that's a healthy, necessary shift. It doesn't mean that as we grow in the future it will be more about investment and export, less on consumption fueled by borrowing.

But millions of Americans are going to have to [get] used to the fact that now their credit is going to be denied. There aren't going to be credit cards available the way they were before.

I wouldn't say it quite that way. We wanted a system at where you're able to borrow at a level consistent with income and your capacity to pay. The credit provides an incredibly helpful, necessary function. A huge number of innovations in credit -- you know, a 30-year fixed-rate mortgage is a terrifically useful ... [you] borrow for college, even to borrow to finance some spike in [health care costs].

Those are fundamentally useful forms of credit, and we wanted a system where that's possible. People can borrow in a way consistent with their capacity to pay.

The Consumer Financial Protection Agency that you're trying to see created, you've had to run up against the opposition not just of the banking lobby ... but your own regulators ... here in the government.

Yeah. Well, you know, we're trying to change a system that didn't work, and there's a lot of vested interest in that system. Most people think those interests were mostly in the financial community. They would like to retain the freedom to do a bunch of things that they found temporarily very lucrative. We're going to prevent that.

But you have a lot of people with a vested interest in what you call "regulatory turf," and they're I think understandably trying to protect that turf. And they'd like to --

You got irritated with them.

Well, I'd like them to put the interest of the country ahead of the interests of their particular agency, because you can't look at the system and say it served the American people adequately. It basically failed. And I don't think there's a credible argument you can make that we can fix this system by leaving it largely intact.

OK. Let me read you something. ... When we interviewed the head of a large credit union in North Carolina about the free market and the fair market, he said: "The thought is in the financial marketplace that a free market has meant that we move from 'buyer beware' to 'buyer be damned.' That's not a free market. That's not a fair market. What we need is a fair market in this country." I wonder if you could comment on that.

Of course [I'd] be in favor of a fair market. In banking, in finance, in credit, you have to have regulation. And there's a long history of broad support of Republicans and conservatives and liberals for the case for regulation in finance.

You just have to look at the history of financial crises in this country in the end of the last century, beginning of the end of the 19th century, beginning of the 20th century to know that finance requires a basic framework of constraints, some clear rules of the game. Without those things, all sorts of dark things happen.

Many people have pointed out -- well, the banking industry itself, it seems, in advertisements now is saying: "We've heard you. Here's more transparent credit cards, transparency in mortgages."

It's a bit of a late conversion. It would have been nice to happen earlier. What you want these banks to do is to be competing, not to take advantage of a consumer. You want them to be competing and providing more simple, less risky basic products that are more appropriate.

What happened across the industry was you found people paying their salesmen to talk a family into taking a loan that was more lucrative for the bank or for the finance company, but clearly inappropriate, too expensive for the consumer, ridiculously expensive to the consumer. And that's just the kind of practice that we need to be able to end and ban in the future. It's a sort of a simple, fair proposition.

And you're not afraid that the Consumer Financial Protection Agency is getting watered down in Congress, ... people are being carved out of it?

Yeah, ... it will change a little bit as it moves through the process, but I think what's happened so far is basically a quite strong framework, dramatic improvement. ... And we're going to make sure that as it moves through the process, it stays as strong as that. ...

... I just want to make sure that we have it clear. You're saying you can have it both ways.

No, you can't have both ways, but you can get a better balance between innovation and competition, and a system with more stability and more protection for consumers. We got that balance wrong. Nobody could argue with that balance, right? And you can do better protection for consumers without sacrificing the ability to choose a product that best suits your needs. ...

People are angry out there, right?

Yeah, justifiably angry. I mean, the system failed them.

... Your calendars came out. They showed that you talked to Goldman Sachs 25 times in the first seven months --

Well, I can help you with this. I'm the secretary of the Treasury.

Right.

My job is to advise the president on how to shape an economic policy for the country that's going to get us back to where we're growing and fix the things that are broken. And we are engaged in a just and necessary fight to basically change the things that were broken in our system and to reform and put in place a stronger set of protections.

And we're working very hard on that, and it's a difficult fight, because you're seeing a lot of resistance to that not just from, as you saw, the financial industry, but from regulators, too. But it's the right thing to do. And we're going to keep working at that until we get something that's going to be strong enough.

You know, we can't tell the American people that we're going to forget the damage caused by this and leave this system basically as it was. We're not going to do that.

No. But the question is, have you met with leaders of consumer advocacy groups?

Absolutely. And ... we listen very carefully. We have [people] working at Treasury helping craft these things, people with some of the best records in consumer advocacy protection in the country. I'll give an example.

You talked to my colleague [Assistant Secretary for Financial Institutions] Michael Barr, who spent his life in this area, and we tried to talk to everybody who matters in these kinds of things, because we want to have something that's going to work, not just bring better protections, but in a way that's going to actually work.

But just so I have it clear, you're seeing a future where people are able to borrow less, basically?

We want them to be able to borrow responsibly, be less vulnerable to predation. And I think that's something we can achieve. I mean, this is not a complicated thing to do. It just takes will and care, and you need to be well prepared to resist and go up against the people who want to leave it as it is.