Q&A: Treasury's O'Neill on Bailouts and Building Confidence (extended)

In the aftermath of the Sept. 11 terrorist attacks, Treasury Secretary Paul H. O'Neill has directed Administration plans to shore up the U.S. economy. On Sept. 18, O'Neill sat down with BusinessWeek Washington Bureau Chief Lee Walczak and Senior Writer Rich Miller to discuss these efforts. Here, in extended form, is the conversation that will appear in the Oct. 1 edition of BusinessWeek:

Q:

Many economists think that a worldwide recession is pretty much inevitable as a result of the Sept. 11 terrorist attacks on the U.S. What's your view?

A:

I don't think so, and I don't agree with the adjectives that are being used. If you run the reel backwards to before Sept. 11, the U.S. was bouncing around in a very low, but still positive, growth range, Europe was a little bit better.... So when you say "worldwide recession," I say "Where's the data?" Before [the attacks], there were more reasons to be encouraged than discouraged about growth. Now, you have to take a long pause and say, what about after Sept. 11? At the [World Trade Center] site, there is maybe $10 billion to $20 billion [worth of damage] in physical impact, maybe more. But in the context of the world economy, it's not a stopper. The same is true of the Pentagon. We can handle the Pentagon and the tip of Manhattan.

Q:

What about the psychological damage of the terror strikes?

A:

A lot of economics is a function of confidence and expectations. People who say that what happened is of no consequence to the economy are made of wood or stone or something. These are not inconsequential events going forward. We know there's going to be some damage from [shutting down the air transportation system]. Lots of businesses with high value-added parts...put a lot of components into air freight. There is no doubt that air-transport problems and slowdown at the borders will have a collateral effect. The question now is, for how long?

Q:

A lot is being asked of government. What's an appropriate response?

A:

Our society needs clearing markets where people can translate millions of decisions each day into visible financial-market activity. Despite the proximity to the hit, it was really important that the [markets] came back on the first day of trading. That's an important part of rebuilding confidence. We need to get back to something like [normal] business relationships. What else can government do? Supplemental appropriations to provide immediate reassurance that the tip of Manhattan and the Pentagon will be rebuilt. At the moment, there is thinking about everything that one can contemplate to create momentum in the economy.

Q:

What are your thoughts on the airline situation?

A:

Some airlines were a mess before any of this happened. Some of the things being considered now in terms of individual airlines have antecedents that have nothing to do with this. [But we have to consider] some sort of cash-flow assistance to some of the troubled airlines. There are groups of people working to sort out what should be done. There are people now saying we should federalize the security part of air travel, and that's something we have to look at.

Q:

You work for an Administration devoted to the free market, but you now find yourselves in a situation demanding more government intervention. Do you see any clash with your philosophy?

A:

Having been here in crisis times in the past, a lesson learned...is to proceed with speed -- but do it deliberately, and not to abandon your principles. If your principles were right precrisis, they're still right. That is not to say that you don't make changes and that is not to say there won't be some compelling cases where the federal government will do something that [it] had not done in the past. In the Second World War, we had rationing, we created a wage-and-price control system. But the leaders never let that be a permanent idea for the U.S. economy. Nobody ever thought, "Aha! We've got this crisis and we're going to rebuild America's image as a government-controlled economy," and we shouldn't do that now.

Federalizing the airline industry? I can't imagine a lasting circumstance that would make it beneficial for the federal government to try to be the transportation supplier of airline services.

Q:

Are you worried at all about the "blank check" mentality on Capitol Hill? Only a week after the attacks, there was talk of over $60 billion in federal aid....

A:

You're not keeping score properly. I'm sure there's [talk of] $500 billion [in aid] out there. And it's going to keep going up, and spiraling.

Q:

Is this a bad thing?

A:

Yes. Well, it's not a bad thing for people to have these aspirations. It's a bad thing to actually act on them. We need to move deliberately. The real need of some airlines is liquidity. We shouldn't provide financial support for all existing airlines so they can now report 20% rates of return on the backs of the American people in spite of how good their [company] management may or may not be.

I'm in favor of the most direct way [of providing it], which is -- give 'em cash. Figure out how much, and then give 'em cash. Why do you want to think about loan guarantees? What is that all about?

Q:

The airline industry's allies in Congress are pushing the idea. Do you worry about this "spend now, ask questions later" mood?

A:

The sense that I have from the members of Congress that I've spoken to is this: They're like all Americans, emotionally caught up in this. They want to do the right thing. And in this town, action has come to mean: Send money. But I haven't found anybody who says, "Forget all the restraints, we're going to throw money out there and we don't care who it goes to."

Q:

Republicans and Democrats are talking about a second economic stimulus package built around tax cuts. Good idea?

A:

We need to look at it. With manufacturing capacity in August at 76.3%, we've obviously got some slack in the economy. There's an opportunity perhaps to absorb some surplus capacity that's out there. But you need to be careful that you don't create conditions for sectoral dislocations, because the unabsorbed capacity is not uniformly distributed. You need to do analysis before you take action. We need to do "Ready, aim, fire," not "Fire, ready, aim," which is the tendency.

Q: The Treasury has tried, without much success, to freeze the money flow to terrorists. What makes you think you can win the battle now?

A: We haven't had the impetus that we have now, nor the close coordination around the world. There's a new determination on our part, and there's a new sense that we're going to shut down the financial [system] for these folks.

Q:

Does that extend to the Middle East, as well?

A:

This is a case of you're either in or you're out.

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