Watch this broadcast on Video: Part 1, Green Room (not transcribed)

SYNOPSIS:

GRAPHICS: THIS WEEK WITH GEORGE STEPHANOPOULOS

SENATOR LINDSEY GRAHAM (REPUBLICAN): I would not take off the idea of nationalizing the banks.

AL HUNT (BLOOMBERG.COM): Some nationalization of a few banks may be very likely.

SENATOR CHRIS DODD (CHAIR): I don't welcome that at all. But I can see how it's possible it may happen.

ART CASHIN (UBS SECURITIES): You're a shareholder in XYZ Bank and you own the common stock. The concept is, if it gets nationalized, you'll have zero.

ROBERT GIBBS (WHITE HOUSE PRESS SECRETARY): The president believes that a privately held banking system regulated by the government is what this country should have.

GEORGE STEPHANOPOULOS (ABC NEWS): That statement from Press Secretary Robert Gibbs did not stop the market from reaching it's lowest level in more than seven years this week. Nationalization was the big economic debate. Let's debate it here with George Will, as always, Dr Nouriel Rubini, from NYU, they call you Dr Doom because you saw this coming many years ago. Thanks for joining us this morning. Paul Krugman of "The New York Times." And Suzy Welsh of "Business Week." Welcome to all of you. And George, it is kind of striking how over the last several weeks you've seen something that was radioactive even six months ago, the idea nationalizing major banks in this country moving towards something of a consensus.

GEORGE WILL (ABC NEWS): This week, a Democratic administration reproved Alan Greenspan for reckless talk about nationalization. That's how through the looking glass we now are. Nationalization usually means to people socialism. Socialism usually means public ownership of the commanding heights of the economy or instruments of manufacture or distribution and exchange. We've learned now that you can have thorough political and government control of the economy without that. So at this point, with credit now treated essentially as a public utility, the difference between what we have and what nationalization would be is marginal. One number. The market capitalization of Bank of America is $19 billion. Since October, they've received $45 billion in public funds, what's the difference?

GEORGE STEPHANOPOULOS (ABC NEWS): So, Dr Rubini, it's now a small step. You've been talking about this for an awful long time. And you say it's going to be necessary because we have to stop a $1.8 trillion problem in the banks. But I wonder if you could take a step back and simply explain to everybody, George says it's a small step. What would this mean? What would nationalization mean right now?

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): First of all, you know, no one is in favor of a long-term ownership of the banking system by the government. That would be a bad idea. Those like myself who support it, think about the government taking over the bank, cleaning them up, separating the good and the bad assets and then selling them back in short order to the private sector. That's what was done, for example, in Sweden. Instead in Japan they kept zombie banks alive for a decade and the recession became a near depression for a decade. So everybody is in favor of a temporary control of these banks. Essentially it means that there are some banks that are so insolvent, their assets are well below their liabilities. We've already put an unusual amount of money as a government into these banks. This has not anymore even been part of an examination, when Alan Greenspan, when Lindsey Graham and others are saying we want the temporary nationalization. We're thinking about cleaning up the problem and then bringing back the banks to the private sector.

GEORGE STEPHANOPOULOS (ABC NEWS): Yet, Suzy, you still have major bankers like Ken Lewis of Bank of America putting out a memo on Friday saying I'm confident we're not going to need any further assistance in the future. Is he whistling in the dark?

SUZY WELCH ("BUSINESS WEEK"): That is the keyword, which is confidence. And what happens with the nationalization to confidence is the big question. And if we're going to make any sense of this, we have to have a context around the nationalization. Nationalization somehow makes people more anxious. And if we're going to have nationalization, then we have to say, well, this is the purpose of it. This is how long it's going to last.

GEORGE STEPHANOPOULOS (ABC NEWS): So maybe do it but call it something else?

SUZY WELCH ("BUSINESS WEEK"): Well, what is a leader's job but to put context around it? I don't know if you'd put another name around it but you would want to put it in the context of a larger economic program.

PAUL KRUGMAN ("NEW YORK TIMES"): People have actually proposed calling it pre-privatization. No one wants to - Gibbs statement was masterful. It sounded like a reassurance, he was actually saying what everybody believes. Nobody wants the government running the banking system for any length of time. But the question is how, and you know...

GEORGE STEPHANOPOULOS (ABC NEWS): And when he was pressed, he wouldn't rule that out?

PAUL KRUGMAN ("NEW YORK TIMES"): Right. Now, the thing you want to bear in mind, is, you know, we've nationalized 14 banks already this year. We don't call it that, but there were 14 banks, 2 a week that the FDIC seized because they didn't have enough assets to pay their depositors. The Federal Deposit Insurance Corporation says, okay, we're taking it over. We're cleaning out the stockholders. We're going to do exactly what Nouriel said we should be doing for some major banks. So actually a nationalization, properly understood is as America as apple pie.

GEORGE STEPHANOPOULOS (ABC NEWS):

But help me out on this. Because you say there's a $1.8 trillion dollar problem of toxic assets inside the banks. Yet, as I just ready to Suzy, Ken Welch says, wait a second, we're making profits. We're confident right now. Citigroup says they still have plenty of tier one capital. Someone is not telling the truth here, are they?

PAUL KRUGMAN ("NEW YORK TIMES"): No, no, it's a difference of - you know, there is a possibility that if everything goes fine B of A might be okay. But there's also a possibility that it will go bust. Now, naturally, Ken Lewis is going to say, you know, it looks fine to us. But the point is actually without a government guarantee of some kind, they would not be able to survive through next week. To be without the - the only reason they're able to continue in existence even now is the fact that people think there's a downside in their losses. That their creditors will be paid somehow regardless. So, naturally, of course, it's the interest of the stockholders and the current management to keep playing this thing out because it's heads they win and tails the taxpayer lose. What's at stake is whether in fact we're going to, you know, end that one way debt and say okay, look, the taxpayers get the upside as well as the downside.

SUZY WELCH ("BUSINESS WEEK"): People here - they hear one thing, they hear the other thing. You just asked is somebody not telling the truth. And somebody has to say the reason why we would nationalize, that what it would look like at the other side. The context for why we're doing this is this. And, you know, you may hearing all different opinions. There is a vision for what this is going to look like when it's over.

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): Fiscal conservative, by the way, throwing away trillions of dollars of public money. We've already put seven to nine trillions of dollar in the financial system to get liquidity, and capital support. It's going to be fiscally very expensive. You wipe out the shareholders, if you treat the unsecured creditors, the fiscal cost is going to be lower. And when you sell these banks back...

GEORGE STEPHANOPOULOS (ABC NEWS): So you do it all at once.

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): You do it all at once. There's going to be lower fiscal costs.

GEORGE WILL (ABC NEWS): Okay. And another conservative side of this plan is, this taxpayer gets something like equity in these banks. And the taxpayer ought to get something besides recovery, assuming there's recovery.

GEORGE STEPHANOPOULOS (ABC NEWS): And we're seeing the next step to it this week, when these so-called stress test start.

PAUL KRUGMAN ("NEW YORK TIMES"): That's right. Actually what I'm hoping for...

GEORGE STEPHANOPOULOS (ABC NEWS): Explain what those are.

PAUL KRUGMAN ("NEW YORK TIMES"): Stress tests, you're going to look at it and see how bad could things be if we make moderately pessimistic assumptions, how bad could this be.

GEORGE STEPHANOPOULOS (ABC NEWS): 11% unemployment.

PAUL KRUGMAN ("NEW YORK TIMES"): Something like that. And we actually already sort of know what it's going to be. Right? It's going to say that the major banks - the four big banks could lose $450 billion which means that they actually need more money. What we're hoping that this is going to do is that it's going to be a Claude Raines moment. Geithner's people come in and say I'm shocked, shocked to discover that Citibank and Bank of America really need massive government aid so we're going to have to put them in receivership.

GEORGE STEPHANOPOULOS (ABC NEWS): What we also saw this week was the president's housing plan come out. And it got a little bit of a reaction from the cable news talkers. Rick Santelli on CNBC saying - you know, sparking a populist backlash saying it's just unfair. That also got the attention of Robert Gibbs.

GRAPHICS: THIS WEEK WITH GEORGE STEPHANOPOULOS

ROBERT GIBBS (WHITE HOUSE PRESS SECRETARY): Mr Santelli has argued, I think, quite wrongly, that this plan won't help everyone. This plan will help by the money that's invested in Freddie and Fannie will drive down mortgage rates for millions of Americans.

GEORGE STEPHANOPOULOS (ABC NEWS): That's the argument for the broad benefit, George. But the actual plan, $275a billion plan will probably be focusing on about 9 million homeowners, not under water, but who aren't eligible for refinancing right now.

GEORGE WILL (ABC NEWS): It's going to help a lot of people, for example. Who, as they say, have little equity in their homes, that is, they've been paying mostly interest on their mortgages. What do we call people with little equity in their homes? We really call them renters. That's essentially what these people are. It's not their homes. Now, obviously, there's moral hazard in this. Obviously, you can't, in a continental nation where you have these crises of foreclosures concentrated in about five states and a few counties in those states, you're throwing money at a continent trying to help small spots on the continent.

SUZY WELCH ("BUSINESS WEEK"): But this discussion of moral hazard and that Santelli moment, that - you know, for the sake of argument, let's talk about this maybe being a revolution. Of course, there's not guns in the street. But think about what's going on. There's massive uncertainty, there's panic, there's vilification of certain groups, there's blame mongering, there's upending of institutions. And if that's what it is, and our kids are going to look back at this and our grandchildren and study this period, what's it going to be called? Is it the grand reinvention? Is it - let's make sense of it. So when Santelli has that moment, that populist moment, and then Gibbs comes back out at him that people sitting at home watching that fight...

GEORGE STEPHANOPOULOS (ABC NEWS): But it goes to a very simple question. Is it fair or not?

SUZY WELCH ("BUSINESS WEEK"): No, but everybody has a different definition of fairness.

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): There's going to be about 8.4 million households that don't have jobs, they lost their jobs because of the unemployment rate who have a home. It's not their fault. They were working. They lost their jobs. They have no jobs right now. They're going to lose their homes. Does it make sense to throw them out of their homes? It's a social problem here.

PAUL KRUGMAN ("NEW YORK TIMES"): That a lot of problem is that these homes are not worth what people thought they would be worth. And if they had gone out and said, you know, I believe this house is going to be worth a lot of money even though all the experts were telling them otherwise, that would be one thing. But in fact, they were watching CNBC, where anyone who said there's a housing bubble was called a bubblehead. And, you know, they're - Alan Greenspan and Larry were telling them it's great, go ahead and buy those houses. So there's a lot less moral hazard than there would be...

GEORGE STEPHANOPOULOS (ABC NEWS): And is there a real potential, as Gibbs was talking about this, Doctor Rubini, for a refinancing boom, but I guess a safe refinancing boom this time?

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): There is. But in my view this plan actually of the administration doesn't go far enough. I think that a few months ago Ben Bernanke said we need face value reduction, principal value reduction because so many people are so under water, that soon enough, they're gonna either walk away and they're not gonna be able to refinance or they're gonna be forced out of their homes, you know...

GEORGE STEPHANOPOULOS (ABC NEWS): So just force the banks to write down a lot of the principal?

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): We'll have to do it. You can try to subsidize part of it. But really at some point down the line we'll have to do even more than this plan is counting.

GEORGE WILL (ABC NEWS): Won't this mean in the future, if we can assume you get to the future, that the cost of a mortgage is going to have a higher risk premium built into it because lenders will say, well you never know, the bank - the government might come in and tell us to rewrite down. And isn't it also the case that 55% of renegotiated mortgages are again in default in six months?

SUZY WELCH ("BUSINESS WEEK"): Right. And then there will be more discussion of fairness.

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): They are but because they are stretching the maturity rather than reducing the face value of the mortgage. When people are insolvent, you have to reduce the face value. And you have millions of houses that are buried under a mountain of mortgage debt, credit cards, auto loan, student loans, for some of them, those who lost jobs, those were essentially first home buyers, you don't want to give this tax relief to the second homes, to the vacation homes, to those who were for speculative reasons, but those who had first homes and they lost their jobs and others, you have to give them some debt relief.

GEORGE STEPHANOPOULOS (ABC NEWS): You know, you talked about how you have to make sense of this era. And part of the way you make sense of an era is by figuring out how you got into the mess to begin with. Paul, I was struck by Jamie Dimon this week of JPMorgan said he came out for a 9/11-style commission to look into what went wrong, how we got here. He said, listen, this crisis is at least as critical as what happened in 9/11. We should do it here as well.

PAUL KRUGMAN ("NEW YORK TIMES"): You know, we're having that debate. It's not that there's a shortage of discussions. And we know that there are bitter ideological divisions. There's one segment certainly on the Republican side that is determined to believe that it was the government pushing loans on minority groups that's the cause of the crisis. The numbers don't support that but they're not gonna give up that view. There are people who think that Fannie and Freddie were at the heart of the crisis. I think the numbers say no. But, no, this is...

GEORGE STEPHANOPOULOS (ABC NEWS): So who's the culprit? Or is there?

PAUL KRUGMAN ("NEW YORK TIMES"): Oh, there are many, many culprits. I mean, you know, Alan Greenspan, if there's a single biggest villain, but he's only responsible for maybe 1% of it. It's just many things. And we just had this huge excess of optimism, excess of debt, out of control financial system, bonuses on Wall Street, all of these things combined to create a crisis. And I'm not sure that a bipartisan commission is going to help us.

SUZY WELCH ("BUSINESS WEEK"): It's like "Murder on the Orient Express." At the end, every single person stuck a knife into the victim. But, you know, you have to wonder, if everybody wants to have names named, how does that move us forward? We wrote a column recently where we talked about the culpability of boards. And we said, you know, boards were culpable. But they were - too much is expected of them. We were deluged with letters. More than usual.

GEORGE STEPHANOPOULOS (ABC NEWS): Complaints or praise?

SUZY WELCH ("BUSINESS WEEK"): This was a very negative response. I mean there was maybe one person who agreed with us in this case. Most people said, you know, with anger, with anger, you can't believe about how boards were responsible. Where were the boards. And we had argued that boards were responsible, but to expect boards with one day a week to come in and understand the operations of complex financial institutions is too much.

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): We have to go beyond the blame game at this point. I mean we have the worst financial crisis since the Great Depression, the worst economic crisis. It's not just the US, it's Europe, it's Japan, it's emerging markets. For not having a bipartisan approach for these things if we don't with other countries, this could become as bad as the Great Depression. We have to avoid that. That means to sit down, looking ahead...

GEORGE STEPHANOPOULOS (ABC NEWS): Even with everything that's been done there's still the possibility that this will slip into a Great Depression?

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): It could be. Because for example, if we keep alive zombie banks rather than clean them up, that makes things worse. If we're not going to resolve the debt problem and housing, that's going to get it worse. If you don't do the right fiscal plan, things are gonna get worse. If we don't do the right monetary policy, things could get worse. There are many lessons from Japan and the Great Depression, about things that work and things that don't work. We have to do it - you need leadership, you have to restore the market and public confidence in policy. This is crucial.

GEORGE WILL (ABC NEWS): But assessing blame is not sterile, because from it, you learn lessons about what to do in the future. And surely, the reason we won't have a commission is the commission would have to say there are about 300 million villains here and they're the great American people who went on a 25-year shopping spree they could not afford. 1980s, we saved 9 cents of every dollar of disposable income. In 1990s a nickel. The saving rate goes negative in 2005. You can't go on that way.

SUZY WELCH ("BUSINESS WEEK"): You found...

PAUL KRUGMAN ("NEW YORK TIMES"): I would disagree. I think it's 600 million because the Europeans are as bad as we are.

GEORGE STEPHANOPOULOS (ABC NEWS): Meanwhile, the president is taking his next step in addressing what to do about all of this. This week, he has the fiscal responsibility summit. Tomorrow, says we have to get a handle on the deficit. Tuesday night, he speaks to the nation, the equivalent to a State of the Union, on the economy. Thursday, he will roll out his budget. And, George, we're getting details of the budget already. Telling us some things we probably knew. That he's not going to move to raise taxes on the wealthy this year. He's going to wait to let the Bush tax cuts expire. He says he's going to continue to push for health care but doesn't identify a revenue source. Yet, White House officials insist that this will be an honest budget. No smoke and mirrors. Yet, they say that the president will be able to reduce the deficit, cut it in half in the next four years.

GEORGE WILL (ABC NEWS): He says it will be an honest budget and it will be to the extent that he puts on the budget, things like the cost of the wars we're waging. That's quite sensible. It will not be an honest budget in the sense that there hasn't been an honest budget since the unified budget went in, in 1969 and we used the social security surplus to mask in fact, what we're - what our real deficit is. I mean, if we had to write the federal budget the way corporations have to budget, we'd have a trillion dollar deficit this year already.

PAUL KRUGMAN ("NEW YORK TIMES"): The thing is, what he's not going to do is he's not going to do the Bush practice of sunsets. And the reason those tax cuts expire at the last day of 2010 is because they wanted to keep the ten-year cost of the original Bush tax cut down. That's why the estate tax, you know, is zero next year and then jumps up to 55%. I called that the "throw momma from the train" tax cut. But, no I mean it's - so he's going to fix that. But, yeah, there's a lot of things that won't be - realistic possibilities of expenses that won't be in there. And some assessments are a lot more pessimistic than what the White House would issue.

GEORGE STEPHANOPOULOS (ABC NEWS): And he's pretty optimistic about unraveling the war in Iraq. You know, Suzy, I wonder if you - listening to Governor Schwarzenegger he says that Republicans have to get over this allergy to tax increases of any time. In this budget, the Bush cuts for the wealthy will expire. Is this a fight that the Republican Party should take on?

SUZY WELCH ("BUSINESS WEEK"): If it's given the context the Republican Party, I think, is in the place right now where they want to have some kind of movement forward and the lack - the end of the period where the Republicans and Democrats did not speak to each other. Should they take it on? In my opinion, no. I think we should look for solutions that move us forward as a nation so that we know, Barack Obama has said, this is the beginning of the end. I think what Democrats and Republicans want to know is what is the new beginning then. If this is the beginning of the end, and then there's going to be a new beginning, what is the new America going to look like. That's what I want to hear along with what's in the budget. I want to hear what is the America we are driving towards.

GEORGE STEPHANOPOULOS (ABC NEWS): And the White House is aware of that. I think they are going to thank you to put - have the president spell out a little more clearly what the benefits of this plan are. Because they were getting hit a little bit for raising too much fear over the last couple of weeks. But I wonder, Dr Rubini, if you think this budget addressed the scale of the problem? And is it realistic to talk about cutting the deficit in half over the next four years?

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): We'll have to do it because we're going to add in the new few years about four to five trillion dollars to the public debt. Right now, there is no risk for insolvency of the US government. But four or five years from now, if we have this major deficit, there could be a downgrade. Therefore, it's crucial while we're doing the fiscal stimulus in the short run to think about medium term fiscal. And that means eventually, we'll have to raise some taxes and cut some service.

GEORGE STEPHANOPOULOS (ABC NEWS): So reducing the deficit becomes a stimulus in the future is basically the argument?

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): It does. Because if you don't signal there is fiscal sustainability in the medium term, eventually, long-term interest are going to go up. Because people are going to be worried about the sustainability of our fiscal deficit. That's why it's important today to signal we're gonna do the cutbacks in the future.

GEORGE WILL (ABC NEWS): And one thing you cannot cut back is the interest you're paying on the borrowing you're doing. And we're not the only people borrowing. There's a stimulus plan in Europe. There's a stimulus plan in China. Everyone is going into a finite pool of capital trying to borrow. The costs of borrowing are going to go way up. The interest component of the budget is going to go way up.

PAUL KRUGMAN ("NEW YORK TIMES"): I don't agree with that because there is, you know there is a lot of capital sloshing around there because nobody wants to do business investment. Essentially worldwide, a lot of capital is free because people are afraid to lend that money to anyone in the private sector. So in some sense what we're doing is we're recycling the money that the private sector refuses or is unable to borrow. So I'm not at all clear that there's actually going to be that...

GEORGE WILL (ABC NEWS): But Paul, when confidence returns we want that money to go into private investment.

PAUL KRUGMAN ("NEW YORK TIMES"): Well, that's when you scale back the budget deficit.

DOCTOR NOURIEL ROUBINI (NEW YORK UNIVERSITY): But in other countries actually the interest that is being paid on the public debt is rising. Not just in emerging markets but now even in Europe because there are default fears. We don't want to be in a situation a few years from now in the United States where there is this kind of fear.

GEORGE STEPHANOPOULOS (ABC NEWS): We only have about 30 seconds left. The president had put great hope that when he moved to fiscal issues that he actually could get more Republican cooperation than he got on the stimulus. Is that possible?

GEORGE WILL (ABC NEWS): It is. It is. I think particularly after the unified opposition of the stimulus plan, I think Republicans are eager to find something they can agree on.

GEORGE STEPHANOPOULOS (ABC NEWS): On that note of optimism we're going to have to end this for today. You guys can continue that in the green room. And you can watch it later on ABCNews.com. And for political updates all week long, follow me on twitter and Facebook. Coming up here, "The Sunday Funnies."

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Originally broadcast, 2.22.09