Economy 'will bottom out this year:' W.H.

by Mark Silva

The nation's economy should be starting its recovery by the end of this year, President Barack Obama's chief economic adviser said today.

""I have every expectation, as do private forecasters, that we will bottom out this year," Christina Romer, who chairs the White House Council of Economic Advisers, said on CNN's State of the Union. "And, [we'll] actually be growing again by the end of the year."

Romer, appearing on the Sunday news talk show with host John King, chief national correspondent for CNN, said that a bank rescue plan which the Treasury Department is working on will be only "one piece of what we're doing'' to right the economy.

"his is just one more of those pieces, and I don't think Wall Street is expecting the silver bullet ,'' she said. "There'll be more to come."

Further action to stabilize the mortgage market may be necessary as well, she said, suggesting that the mortgage giants Fannie Mae and Freddie Mac could be broken into smaller entities to make them more manageable.

"I think that's certainly going to be an issue going forward," Romer said "If you are going to be too big to fail, we've got to have an eye on you and make sure that you're taking prudent practices,"

See the interview above and see a full transcript, courtesy of CNN's State of the Union with John King below:

KING: I'm John King, and this is our "State of the Union" report for this Sunday, March 22nd.

President Obama responds to the AIG scandal saying the buck stops with him, and an outside review sees more red ink in the administration's plan to pay for its ambitious agenda. We will discuss the outrage and check the math with one of the president's top economic advisers, Christina Romer.

A Republican who not long thought so highly of the new economic team he agreed to join the Cabinet, now compares the Obama administration's approach to Venezuela. The Senate Budget Committee's top Republican, Judd Gregg, explains his changing tune.

And three and a half years after Hurricane Katrina, a new normal settles in New Orleans. We'll visit one neighborhood that is trailing far behind the city's recovery. That's all ahead in this hour of "State of the Union."

Live pictures of the White House there on a beautiful Sunday here in the nation's capital. And the wait is almost over. The Obama administration this week will share its plan to ease the credit crunch and put more money in your hands. The goal is to rid struggling banks of the toxic loans that keep them from lending. One question is how Wall Street, which posted its first two-week gain in nearly a year, will take the news. And the announcement follows a week of outrage over millions in bonuses handed out by insurance giant AIG, even though it is taking billions in taxpayer bailout funds.

Let's talk it through with the president's chief economist, chair of the White House Council of Economic Advisers, Dr. Christina Romer. Welcome to "State of the Union."

ROMER: Great to be here.

KING: Let's start with the toxic asset plan. Here it is on the front page of the Washington Post. "Treasury Presses Ahead with Plan for Toxic Assets." The announcement tomorrow. A couple of sentences in this account troubled me, and I'll start with this one here. "But the government will put far more money into the deals and take on more risk than the investors, which could include hedge funds and foreign investors."

So taxpayers, who are already bailing out financial institutions, already outraged over bonuses at AIG, are going to take on more risks here?

ROMER: I think you need to keep your eye on why we're doing this at all, which is we do know that banks have these so-called toxic assets on their balance sheets. We think they're highly uncertain. They are making banks unwilling to lend, they're making private investors unwilling to come into banks. We need to get those off the banks' balance sheets. That's a market that really hasn't been functioning, really hasn't existed. That's exactly when the government needs to step in.

And what is really innovative about this is partnering with private investors, partnering with the FDIC and the Federal Reserve to get all the resources we can to get those things off banks' balance sheets.

KING: One other thing in this front page account in the Post, key details of the toxic asset purchasing program are not yet finalized. Treasury officials express concern the markets would expect too much.

You remember when your colleague, Secretary Geithner, gave the broad outlines of this plan. It was so vague, the markets tanked. Are you sure you will meet the test this time?

ROMER: I think it is important to realize this is just one piece of what we're doing. So if you think about what his speech in February is supposed to be, that was the broad outline, and what we've been doing sort of each week since then is rolling out the housing plan, the small-business plan, the consumer and business lending initiative. This is just one more of those pieces, and I don't think Wall Street is expecting the silver bullet. This is one more piece. It's a crucial piece to get those toxic assets off, but it is -- it is just part of it, and there will be more to come.

KING: There are many critics of the administration who are critical just about every day, who don't like the way this is going forward. But I want you to respond to a critic from someone who is like-minded. Paul Krugman in the New York Times, an economist who generally supports the administration's perspective, says this of your plan. "This plan will produce big gains for banks that didn't actually need any help. What an awful mess."

ROMER: I think that's just unfair. And again, keep in mind why we're doing this, it's precisely because banks have these bad things on their books. We need to get them off. We think this is a good way.

Another way to say it, part of the reason we're partnering with private investors is to make sure the government doesn't overpay, right, so it isn't just another handout to banks, right? We are trying to actually help the taxpayer by using the expertise of the market to set the price for these toxic or legacy assets.

KING: Is there a number at which taxpayers are at risk in terms of loan guarantees or programs guarantees, a monetary figure you can put on this?

ROMER: I think, you know, the Treasury, I think we're putting up something in the order of $100 billion, out of the TARP funds, working through, again, the FED, the FDIC.

You know, the crucial thing is it's being designed precisely so that it is going to be safe. We very much have the taxpayers' interest in mind, but we also have the interest of the whole economy on the mind. Right? The crucial thing is getting lending going again. I can't say that enough, and that is why we're doing this.

KING: I want to move on to the cover of Time magazine this week, and this I assume is not why you took this job and why you came to Washington. But the bailout bomb, the outrage over AIG. And the outrage is so big in the country that the Congress decided -- the House spent most of last week on a plan to punitive taxes on those executives who took the big bonuses from AIG. The Senate now will continue that debate, and wants to expand it even further to say maybe there's Fannie Mae or Freddie Mac executives out there who got bonuses. That anybody who makes a sizable amount of money who is getting a bonus from a firm that gets taxpayer money will be taxed punitively. The administration thinks that's a bad idea. Why?

ROMER: I think the main thing the president said is he very much wants to draw a distinction between the firms that have gotten a lot of government money, where the -- basically if it weren't for the government, they wouldn't still exist. He think it's completely appropriate to have different standards for them, and for firms that are basically playing by the rules and not taking a lot of money from the government.

I think the other thing to say is the president -- I mean, he shares the outrage. We all agree that a firm like AIG that is getting huge amounts of government money should not be paying bonuses, right? That's just -- that's just terrible.

What he has been trying to say, though, is let's channel this, and I think that is exactly right, to say let's make sure this never happens again. And that's why he is already talking to Congress about getting resolution authority so that the next time we have an AIG, there is a judge that can say this contract is out of here, right? We, you know, a legal way to break these contracts and go forward.

KING: You say the president shares the outrage and wants to channel it in the right way. I want to go back through the past week, because I think it's important and I think there were some mixed messages to the American people. A week ago on a Sunday show, one of your colleagues, Larry Summers, another of the president's top advisers, was asked about these bonuses and said I don't like them, but contracts are contracts, and we can't abrogate the contracts. The very next day, the president, starting to get a sense of the outrage in the country, said something quite different. Let's listen.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: I've asked Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole.

(END VIDEO CLIP)

KING: The president makes that statement, but we learn that there is actually specific language in the Obama stimulus plan protecting these bonuses. So the reporters are trying to find out where did this language come from. One of the people blamed for this is Chris Dodd. He's the chairman of the Senate Banking Committee. He went on our air last week and said flatly, no, I had nothing to do with it, absolutely nothing to do with it, I don't know where this language came from. The very next day, when confronted with CNN reporting, he came back on our air again and said something very different.

(BEGIN VIDEO CLIP)

SEN. CHRISTOPHER J. DODD, D-CONN.: The alternative was losing, in my view, the entire section on executive excessive compensation. Given the choice -- this is not an uncommon occurrence here -- I agreed to a modification in the legislation, reluctantly.

(END VIDEO CLIP)

KING: Dr. Romer, he says he reluctantly agreed because of pressure from senior Treasury Department officials. So the president on the one hand is expressing outrage at these bonuses, but the chairman of the Banking Committee says the language that protected those bonuses was put in the bill by the Obama administration. Is that Washington double speak, or was the president ill-served by his own economic team?

ROMER: You know, I think the truth is, I don't really know all of the tick-tock of when various things were done. And I'm not sure it's useful. I think the president, again, is very -- very aware of, you know, just how outrageous these things are. He has expressed it. That is his genuine...

KING: But if they're so outrageous, why did the Treasury Department put language in the stimulus plan that protected them?

ROMER: I think there, again, there were legal issues, and I can't really help you about sort of the particulars.

I think the thing I want to keep coming back to is the big picture. The president absolutely says there's just this crucial distinction, firms that are getting a lot of government money -- absolutely, we need a different way to deal with those so that this kind of thing doesn't happen, because it is, frankly, outrageous.

KING: Mr. Liddy, the AIG CEO, was in the hot seat in Congress this week, and they beat him up pretty good, trying to blame him for this. He is a former Allstate executive, who came in to do this. He's being paid I think a dollar a year. Rate him. How is he doing? I know everyone is outraged about these bonuses, but he says, just as the administration says, we inherited this mess. He says they were already on the books. How is he doing? The government owns, essentially owns 80 percent of this company right now. How is he doing?

ROMER: I think the president did I think very much want to make a distinction, that he was not the person that had gotten us into this mess and was not -- you know, was the person that was trying to help us out of it.

Again, I don't think it's useful for me to be rating or second- guessing. I think, you know, the big issue, this is a company that, you know, should never have gotten as big and as systemically important as it was. I mean, that's why, I think, going forward, certainly, one of the things we will be talking about at the G-20 is financial regulatory reform, precisely how do we make sure this doesn't happen again, that we get firms like this that can be so important to the economy that we can't let them go down, and yet they can do these outrageous things.

KING: You mentioned it got so big, and that is the problem.

I was down in New Orleans this past week. One of the things I did was stop by a class at Tulane University. The former speaker of the House, Newt Gingrich, was there, speaking to a class that is taught by our colleague here at CNN, the Democratic consultant James Carville. And he hit the point you just made about things getting too big. I want you to listen to the former speaker of the House, Newt Gingrich.

(BEGIN VIDEO CLIP)

NEWT GINGRICH, FORMER SPEAKER OF THE HOUSE: One of my conclusions over the last 10 years is, if you are too big to fail, you're too big to manage. And I would break up Fannie Mae, I'd break up Freddie Mac. I would break up AIG. I frankly wouldn't defend any of the biggest banks. And I say, if you're too big to be managed, you need to become smaller.

(END VIDEO CLIP)

KING: Is Newt Gingrich right?

ROMER: He is getting at an idea -- certainly, we know we need a financial regulatory structure that puts limits on these companies, or if you are going to be too big to fail, we've got to have an eye on you and make sure that you're taking prudent practices.

KING: Mr. Liddy said he is going to break up AIG. Do we need to break up Fannie and Freddie?

ROMER: I think that is certainly going to be an issue going forward. I think it should be part of the overall financial regulatory reform, to figure out what is the best way.

Again, you know, anytime we have now got taxpayer money on the line, what we have an obligation to do is do it in a way that protects the American taxpayer. What is going to be the way that gets these institutions safe, gets them doing what we need them to do, which is lend like crazy, and just basically functioning again for the economy.

KING: More of our conversation with Dr. Romer in just a minute.

Paying for his plans to overhaul health care and education already was a daunting challenge. Now, a new estimate suggests deficit spending in the Obama administration could dwarf the record red ink of the George W. Bush presidency. Will the president have to scale back his plans or maybe raise more taxes? Coming up.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

REP. JOHN M. SPRATT JR., D-S.C.: Can we get everything done in one year? I doubt it. But we're behind him, and we think the country is behind him to give him the mandate that he earned in the last election.

(END VIDEO CLIP)

KING: The House Budget Committee Chairman John Spratt there.

We continue our discussion now with the chair of the White House Council of Economic Advisers, Dr. Christina Romer. An ally in Congress, John Spratt, saying I doubt it, I doubt it. The question is can you pass all of the president's ambitious agenda this first year.

The reason he says he doubts is because of these new numbers I want to show on the wall. The Congressional Budget Office has a more pessimistic view of the economy than you do at the White House. They say growth next year will be 2.9 percent. The administration says it will be over 3 percent, 3.2 percent. The administration says the unemployment rate will go down to 7.9 percent. The Congressional Budget Office thinks it will actually keep going up to 9.0 percent. And if you look at the federal budget deficit, the administration says about $1.17 trillion with a "t," CBO says $1.38 trillion.

Now, these aren't just numbers. This is your ability to pay for health care, your ability to pay for the president's education agenda, or the tough choices you would have to make, whether to pare something back like health care, which the president promised in his first year, or go looking for other revenues out there, to raise taxes.

What will the tough choices be if CBO is right?

ROMER: I think there are a couple of things to say. One is, there is a question whether CBO is right. So we know that forecasts, both of what the economy is going to do and of what the budget deficit are going to do are highly uncertain. And especially when you get further out in the CBO numbers, we think they really are too pessimistic in thinking about how fast the U.S. economy can grow even in normal times and more pessimistic than most private forecasters or the Federal Reserve. So there is that issue.

On the trimming back, I mean, I think the president is in complete agreement with the CBO on a crucial issue, which is the deficit is way too big and he is committed to getting it down. He -- that commitment to cut the deficit that we inherited in half absolutely stands, and we will work with Congress to make the hard choices to do that.

Let me pick up on health care, though, right? That is a crucial issue, one that the president said we just can't put off. But that's an issue where I think, again, we agree with the Congressional Budget Office. They have been saying for the last probably 10 years that the thing that's going to bankrupt the federal government is the rising cost of health care, and that is why the president has said we can't take that off, right? That is such an important issue. We haven't dealt with it in good times and bad times, and peace time and wartime. When are we going to deal with it? He said now is the time.

KING: Is it so important that if the economy does not rebound as fast as you think and as fast as you hope, that it is so important of doing it now that you would take the politically more risky decisions, like taxing the health insurance benefits I receive from my employer, that others receive from their employer, or going out somewhere else to find revenue, find tax increases to do it now, as opposed to saying let's wait a year or two and let the economy come back, where it might be more affordable?

ROMER: I think the key thing -- again, think of what we are trying to do on health care. A big part of that is cost containment, figuring out why it's rising at so much -- why health care costs are rising at a so much faster rate than GDP is growing, or other costs are going up. And that is just going to be crucial. Those are absolutely...

KING: It's not enough. It's not enough. You still need revenue. In the campaign, the president said that revenue would come from the Bush tax cuts, repealing the Bush tax cuts. Instead, that money now goes to deficit reduction, and the administration wants to limit charitable contributions for wealthy Americans to get the money for health care. So even with cost containment in your budget, if your cost containment numbers are dead on in this budget, you still need revenues. If the economy does not come back at the pace you think do you say, Mr. President, we need to wait a year or two for health care, or do you find more revenue?

ROMER: You either say you need more revenues, or you need more cost containment, right? So there are things -- what he's saying is told every agency, go through your budget, the old line-by-line. But that's a real commitment to say is there spending, is there bad spending that we're doing? Let's get rid of that.

So he is absolutely committed to working with Congress to figuring out how we pay for things. That is, you know, we brought ideas to the table, but we're certainly looking for ideas from Congress as well, and we're committed to working with them.

KING: We don't like on this program to use the Washington words that people out in America don't quite understand, but I'm going to put one on the table, it's reconciliation. It means you can use the Senate rules and pass big things as part of the budget, big things like health care, like energy and environment reform, with a majority, not the 60 votes it normally takes to shut off debate on a big issue. And many have said the administration, starting to sense the opposition of Republicans and some conservative Democrats to some of these proposals, will go the reconciliation route on health care reform, on other big-ticket items. You hear the grumbling already, not just from Republicans, many centrist Democrats. The chairman of the Finance Committee, the chairman of the Budget Committee say it's not the way to do it, it's not the way to make friends with Republicans, and it's not the way to deal with these big-ticket items and build public consensus.

Will you take that off the table today, the administration going the reconciliation route?

ROMER: I think the truth is, we're getting ahead of ourselves, and sort of what the ins and outs of the legislative strategy are going to be I think is not certainly my -- to use another piece of jargon, my comparative advantage.

I think the crucial thing is just to come back to these are fundamental issues, and we absolutely -- we want to work with Congress, with the committees that are already, for example, starting to talk about health care, starting to talk about energy. Work with them to make the best legislation possible, and I think, you know, we'll continue to do that.

KING: I will translate that into an option still on the table.

I'm going to get up for my final question because we've talked a lot about Washington. I want to talk about the country. Because, when you travel in the country -- excuse me; we'll get rid of these numbers -- people ask, "When is the bottom?"

And you are the president's chief economist. And one way some people judge the economy is this way, by the unemployment rate. And we can show, here, way back, 1983, we were up at 10.4 percent. You know how this plays out; 4.6 percent, a low, in 1998; now at 8.1 percent. Some say it may go to 9 percent or higher.

That's one way some people judge the economy. Another way, especially now that so many Americans are invested in 401(k)s -- we'll make this one go away -- is this way, through the Dow and through the markets.

And you see, obviously, this is 1997, the great high of more than 14,000, in 2007, and this is about where we are now, down around 7,000, 7,200.

Dr. Romer, you see all the data. It all comes into you. As an economist and academic, and now in the political environment, what is it you're looking for?

What is it, in a report, that you will circle someday and say, "We have hit the bottom?"

ROMER: All right, so I think the key thing for us -- and certainly the president has made from the beginning, right, what he cares about is employment, getting people back to work.

And so we will not be -- be satisfied or sure that we've turned the corner until we start seeing the economy add jobs rather than lose jobs, right?

So that's going to be the gold standard. But, obviously, you're going to get signals before, right? So you'll start seeing -- you know, maybe we're starting to see some glimmers. We've seen the retail sales data come in positive. We've seen some positive business -- you know, building permit data come in.

You know, a lot of the private forecasters are saying, well, maybe we're starting to bottom out, at least on the consumer side, right?

So, you know, we're going to watch all of those numbers. I think the one thing we're trying to do is to keep our heads here, and to say, until we have, sort of, overwhelming evidence that we have, you know, the -- all the crucial sectors are turning up, we're not -- not going to say anything.

KING: Do you have any doubt at all that we will be on a path to growth in this year?

ROMER: I don't. I think the reason that -- I mean, I should say things could change, right? I'm not a fortune teller. I do feel strongly we've taken the right policies, the big bold fiscal stimulus, the financial rescue. As you talked about, there's going to be more announced this week.

What we're doing in housing; all of that for small businesses -- I think all of that is absolutely crucial.

And the reason we took them is we think they are the policies that the economy needs. And then we just saw the very aggressive action that the Federal Reserve has been taking.

So I think we are absolutely taking the right policies. I have every expectation, as do private forecasters, that we will bottom out this year and actually be growing again by the end of the year.

KING: Christina Romer, the chair of the Council of Economic Advisers, thanks for joining us this morning on "State of the Union."