The Economic Outlook

So if we have the right structural policies in place, the dollar will follow?
I'm not going to comment any more on the dollar.

What's been the biggest positive surprise in transitioning from Goldman Sachs to Washington?
I have been impressed with the quality of people I've worked with in Washington, people like [Commerce Secretary] Carlos Gutierrez, [Energy Secretary] Sam Bodman, [Secretary of State] Condi Rice--the whole range of people. It's quite fashionable for people outside of Washington to dump on senators and congressmen, and I would say that, again, the surprise has been on the upside. When you look at how hard they work, many of them working full weeks, flying home and being with their constituents, they may not be qualified to run companies, but there are many people who run companies who aren't qualified to do what they do. The other positive has been living in Washington. I live in an area where I can get on my bike, ride out to Rock Creek Park, and I'm 10 minutes from Treasury.

And the biggest negative surprise?
I knew when I came, there were big issues—there wouldn't be low-hanging fruit. So I knew that the most interesting and important issues were going to be very difficult, and we'd have to measure progress by whether I was able to advance the ball, to make it easier for those who come after you to solve issues. There was the paradox that the lesson of the last 20 to 30 years was that those countries that opened themselves up to competition, to trade and investment flows, benefited, while the others were left behind. I knew there was greater protectionist sentiment in almost every country, including ours. But to see it on a day-to-day basis, while I'm sitting in this seat, is discouraging. Regarding the longer-term structural deficit we had with entitlements, it's frustrating to talk to people on both sides of the aisle, have them behind closed doors say they recognize this is an important problem but not make more progress to solve it. When I looked at Social Security, and I give the president a lot of credit for trying to solve this issue, I tried to depoliticize it, so it'll be easier to deal with in the future.

Are you surprised by the credit problems we've seen in the financial markets?
When I came down here [in the summer of 2006], one of the first things I said to the president is that the history of the capital markets is that every five, six or seven years we have financial turmoil. I wasn't predicting it, but it had been about eight years since we had turmoil. I said to my cohorts, the next time we have a shock, hopefully it'll be after I'm here, because we'll be dealing with issues I haven't dealt with before in terms of the complexity of products and the degree of integration with global markets. At the time, everyone was focused on hedge funds, and we made the point that it's very difficult to determine what will be the spark that lights the dry forest. So it wasn't a surprise. But it's less important to figure out what it is than to get ready to deal with it.

So what went wrong on Wall Street? How can so many people who are paid so well to manage risk do such a bad job at it?
There were clearly a good number of mistakes that were made, there's plenty of blame to go around. But my job is to do everything we can do to get through this period with as little negative impact on the real economy and the American people as possible—and to help come up with some policy prescriptions that will hopefully make this less likely to take place in the future. So right now, as we work our way through this, I'm not looking to point fingers. I'm encouraging people to recognize losses, raise capital and go forward. When you look at what went on, you need to look at it against the backdrop of a world where there were big imbalances, relatively low inflation, what seemed to be a surplus of liquidity, and lenders and investors were reaching for yield in a whole variety of interests. And there was great complexity in the instruments. Clearly, there were poor underwriting standards. We're looking hard at a whole number of things. We need to look at the whole securitization process, the mortgage-origination process and the rating agencies. But again, my focus is on getting through this period.

One of the ways you've done so is by helping to organize a program whereby lenders will freeze interest rates for certain subprime borrowers. Tell us about the motivation behind that.
In the past, if a homeowner with a mortgage had a problem making the payment, often he'd get together with a lender and strike a deal, because foreclosures are very expensive to the lender and obviously not good for the homeowner and the community. Now investors in mortgages are scattered around the world, and that makes decision-making very complicated. In a market where home prices are stable and going up, that's manageable. We have this wave of resets coming, which really picks up this year, on adjustable-rate mortgages, and the underwriting quality is the poorest, because those were the ones originated late last year. So we went to the industry-mortgage servicers covering 90 percent of the market—together with investors and counselors—and came up with a way to handle this volume that would approximate what would have happened in normal market circumstances, and do so in a way that we avoid a market failure. There's nothing that I believe we can do to prevent the market from working, to prevent home prices from going down, given all the excesses we had. But we can certainly do some things to avoid needless foreclosures that are going to exacerbate the situation and hurt the economy and hurt homeowners.