The Three Treasury Secretaries: Paulson, Summers and Rubin

As the Obama administration prepares for Jan. 20, there has been much debate about how it should approach the needs of the economy and financial crisis — and the constraints of the budget deficit. Two of the president-elect’s most prominent economic advisers offered more grist for the mill at the Four Seasons in Washington on Monday night.

Former Treasury secretaries Larry Summers and Bob Rubin appeared on stage with current Secretary Henry Paulson, before a crowd of CEOs who paid $5,000 a plate to attend The Wall Street Journal’s inaugural CEO Council.

Summers, said to be a contender for Obama’s top Treasury slot and markedly talking on his own behalf, played much of the hour-long discussion carefully, among other things refusing to be pinned down about how big any stimulus package should be.

But Summers and Rubin offered some insights into their thinking — and potentially that of the administration-in-waiting as well. And Paulson offered a little more texture on what is likely to come out of the final 60 days of the current administration.

In January, Summers recalled, he advocated a "timely, targeted and temporary" stimulus package. But things have deteriorated so much that "I would now go for speedy, substantial and sustained over a several-year interval," he said. "I think we're going to need some impetus for the economy for a long time."

In that light, the deficit is a long-term concern, not an immediate one. And major initiatives like health-care reform, infrastructure improvement and energy initiatives can be tackled in a two-step process: "stimulative" elements now, and other elements -- those that help close the deficit -- later.

And he cautioned against assuming that all federal spending is equal -- or that it's quite as big as it seems. Just as an individual loses money it spends on a vacation, but "if I spend the same amount of money on a house, then I still have a house," similarly some government investment is offset by tangible gains, he said. At the same time, government spending -- on stimulus efforts, say -- are partially recouped in tax revenue. His rough figures: $1 spent by the government generates about $1.50 in GNP, about a third of which finds its way to the taxman.

He seemed to discount concerns that investors, particularly overseas, would shy away from buying Treasuries if the deficit, and the national debt, grew too large. He pointed to low yields on Treasury securities as evidence that demand remains strong.

Still, he acknowledged, that "could, and will, change on a dime," and so "fiscal responsibility" remains a priority over time. (Paulson stressed the downside of meeting that demand for Treasurys: "We're doing it at a cost to other things, because it squeezes other credits out of the market," distorting it.)

Rubin, for his part, stressed that an economic stimulus package is the "single most important" item on the short-term agenda, but also said it must be "married with fiscal responsibility." called for "substantially higher" capital requirements for investments in derivatives and other financial-engineering products. But he also suggested that changes mark-to-market accounting rules are something on which reasonable people could disagree.

Paulson spent much of his time on the stage defending his actions during the financial crisis, maintaining that "if the issue was to stabilize the financial system and prevent a collapse," then on a scale of 10, "we're very close to 10." Still, he said, "now you've got a lot of work to restore the financial system, and restoring the financial system will go a long way to helping the economy."

Paulson expects hundreds, possibly as many as a thousand, closely held banks to apply for funds from the financial-rescue bill passed in October; the Treasury posted a term sheet for the private banks Monday. "A lot of those banks, community banks and others, are making the point they're ready to lend," Paulson said.

He also suggested that it's time to see how existing financial-rescue efforts have panned out before embarking on new ones. He told The Wall Street Journal itself much the same, only more explicitly, earlier in the day, saying he doesn't expect to use the remaining $410 billion available under the bailout bill immediately, likely saving it for the Obama administration to allocate.

And it's clear that, with his tenure winding to an end, Paulson is already thinking about what might have been: He spoke almost wistfully about what he "won't get to do, regrettably." One item is "figuring out what the right long-term structure is for Fannie and Freddie."

"I'm going to miss regulatory reform," he said. Then he added: "I plan to do a bit more on that."

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