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March 25th, 2009
09:22 AM ET

Timothy Geithner speaks to the Council on Foreign Relations

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Treasury Secretary Tim Geithner

Remarks before the Council on Foreign Relations

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.

No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.

I want to describe the actions that this Administration is taking to bring the crisis to an end and to help ensure that nothing of this magnitude can happen again.

The imbalances that caused the crisis built up over time. The absence of a serious recession over more than two decades bred complacency. Relatively accommodative monetary policy and high foreign demand for U.S financial assets pushed down rates and encouraged borrowing. Financial innovation produced products whose complexity escaped the understanding of both our regulators and our most sophisticated institutions. Finally, incentives implicit in financial industry compensation encouraged inordinate risk-taking and short-time horizons.

The result was a financial system that was fragile and unstable. Once trouble emerged in the subprime mortgage market, the results cascaded across the entire system. Overall house prices fell. Critical funding markets for households, banks and businesses froze. Major banks and other financial institutions turned defensive. The financial system became burdened by a backlog of mortgage and mortgage-backed securities that they could not price, much less sell.

All of these problems spilled over into the real economy, here and around the world.

Working closely with the Congress, President Obama has moved quickly and with forceful action to help get people back to work and the economy growing again. And we are moving to repair the financial system so that it works for, rather than against, recovery.

Last month, I unveiled a framework of initiatives to work alongside our economic recovery plan and address the four problems at the heart of the financial crisis–falling home prices, frozen credit markets, weakened bank capital positions and bank balance sheets weighed down by mortgage-related assets.

We have made substantial progress.

We have launched a home affordability program to stabilize the housing market by keeping mortgage rates low and ensuring that as many as 9 million responsible homeowners can refinance into affordable mortgages or modify at-risk loans.

As a result of these actions and those by the Fed, 15- and 30-year mortgage rates have fallen to near record lows.

We have helped jumpstart critical markets for securitizations that are providing new credit for households and businesses and have unveiled a new small business lending program.

And we have put in place a new capital program, as a form of insurance against deeper recession, to make sure banks are able to provide the credit necessary for recovery.

On Monday, we added to our arsenal of tools by announcing a Public-Private Investment Program to buy some of the mortgage-related assets that are clogging the financial system and thereby re-start the private market for these assets. Under the investment program, the government will provide financing to investors on a competitive basis for them to purchase assets. The purchases will be structured so that investors share the risk of loss while taxpayers share the eventual profits.

We will make sure that private investors, rather than the government, determine the prices to be paid for the assets. Since these investors will have an incentive to bargain hard to assure their investments are profitable, the taxpayer will be protected from overpaying.

We believe that the combination public and private funds will be enough to generate an immediate $500 billion in purchasing power, and, over time, up to $1 trillion.

The combination of our capital assistance and the asset purchase program will help banks clean up their balance sheets so that they can go back to doing what they must do in order to sustain recovery–and that is, lend.

However, many Americans are understandably skeptical about the need to provide this help because they view many of the financial institutions that will receive the assistance as causes of – not partners in – solving our current troubles.

So we must accompany our investment program with steps to help ensure that this country is never again confronted with the untenable choice between meltdown and massive taxpayer bailouts.

We came into the current crisis without the authority and tools we needed to contain the damage to the economy from the financial crisis. We are moving to ensure that we are equipped with both in the future, and in the process, that we modernize our 20th century regulatory system meet 21st century financial challenges.

One of the key lessons of the current crisis is that destabilizing dangers can come from financial institutions besides banks, but our current regulatory system provides few ways to deal with these risks.

Yesterday, I testified before Congress about the need for legislation that would give the government the authority to help a non-bank firm whose troubles could pose such a threat, but also the authority to become its conservator or receiver with the power to protect the financial system against instability.

I discussed with Congress the classic case of such a firm, AIG. AIG insures companies that employ one in every three Americans. But atop its insurance companies is an almost entirely unregulated business unit that took extraordinary risks to generate extraordinary profits. And when this unit's derivative contract losses pushed AIG to the brink of failure last fall, the entire financial system was endangered.

That is why, with extreme reluctance, Treasury, the Federal Reserve Board and the Federal Reserve Bank of New York authorized an $85 billion revolving credit facility for the company in September and has since committed additional support to prevent the collapse of the company. The legislation that I believe we need would help us deal with a similar case in the future.

Tomorrow, I will lay out the Administration's broad framework for dealing with the kind of systemic risk that AIG posed. Because we have learned from the current crisis that destabilizing dangers can come from financial institutions besides banks, our plan will give the government the tools to limit the risk-taking at firms that could set off cascading damage. The framework will significantly raise the prudential requirements, once we get through the crisis, that our largest and most interconnected financial firms must meet in order to ensure they do not pose risks to the system.

In the coming weeks, we will take additional steps, among them, proposing new and stronger rules to protect American consumers and investors against financial fraud and abuse. These will help us deal in the future with threats like the practices in subprime lending that kicked off the current crisis. And because we have learned that risk respects no borders, our plan will not focus solely on financial regulations in the United States, but–with the help of other interested nations and strengthened international bodies–on stronger standards globally, as well.

One week from today, I will join President Obama in London for the G20 leaders meeting to build support for a global system to ensure recovery and make financial reforms.

We will do what is necessary to stabilize the financial system, and with the help of Congress, develop the tools that we need to make our economy more resilient and our system more just.

The world needs to see America come together with a commitment that is commensurate with the deep gravity of the problem. The American people need confidence that the resources they are providing will be used wisely and in ways that will benefit them.

To get through this, we need the private sector to take risk. In order to do so, they need confidence about the rules of the game. But the financial and business community also needs to recognize and demonstrate that they need to make changes and sacrifices alongside those the American people are making.

We are a strong and resilient country. This is about will not ability.

Thank you.

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