‘It’s Going To Be Bumpy’

President Barack Obama has said that Tim Geithner, whose job coincided with a credit crisis, faces more challenges than any Treasury secretary since Alexander Hamilton, the first to hold the post. Geithner chatted with NEWSWEEK editor Jon Meacham in Washington about the deficit and the financial crisis. Excerpts:

Has the economy bottomed out?
Things have clearly stabilized. You're seeing some improvements in credit markets. It took a long time for these problems to build up; it's going to take time for us to work through them. It's going to be bumpy. Even as growth starts to turn positive, which will happen, unemployment is going to keep increasing for a while. (Story continued below...)

You have two children. The deficit over the next 10 years is expected to hit $11 trillion. How do you feel about saddling them with that debt?
Our immediate imperative is to get growth back on track. It requires us to do things that are expensive and in the short term will raise deficits. If we were to not do those things, then future deficits would be higher and growth would be lower.

How big a political problem do you think the deficit will be going forward?
If you listen carefully, the whole feel of politics—the fiscal policy is different today. There's much more realism than we've seen in a long time. There's a broader appreciation that unless you bring the growth of health-care costs down, we're not going to be able to address these long-term fiscal deficits.

On the question of compensation, what's your salary, sir?
My salary is generous, appropriate for a public servant. It's under $200,000.

Would there be a reasonable proposal that executives receiving tarp money should be capped at what the secretary of the treasury makes?
No, I don't think our government should set caps on compensation. We need to make sure we put in place some broad constraints on the incentives that compensation systems create. You had a crisis magnified by the fact that people were paid to take a huge amount of short-term risk at the expense of their firm and the system as a whole.

Would you anticipate more populist politics coming?
You see a completely understandable and, in many ways, justifiable level of anger and frustration. Financial crises are indiscriminate in the damage they cause. In some ways, you could say the people who are most responsible suffer the most damage because of the choices made by the less responsible, and that produces a huge sense of unfairness.

What is this crisis most like in your view? You're a student of these things. Is this 1907 plus? Is it 1933 minus?
It has most attributes of any crisis. You go from excessive confidence about the future to a period where pessimism generates a contraction of activity. This one is more damaging than anything we've been through, really, in two generations. It's also true this is happening globally.

Do you think the consumer credit-card debt is the next bubble?
I wouldn't think of it that way. Americans are going to be reducing how much they borrow, improving their balance sheets, saving more. It might make recovery slower, but that's a healthy process of adjustment for us to go through.

The regulations on derivatives you announced last week—if they had been in place, would we still be in this mess today?
They would have helped, but they would not have been decisive. Again, like in any financial crisis, this was a crisis where people borrowed too much, and they took on too much risk—in simple ways, not in fancy ways.

How do you manage incentives to make sure you aren't driving folks right back—to a different part of the cliff but looking over the same abyss?
Presidents for a long time were submitting to their shareholders for their approval. That kind of disclosure can help a lot.