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updated 3/29/2009 11:58:25 AM ET 2009-03-29T15:58:25

MR. DAVID GREGORY:  Our issues this Sunday:  Crisis management at the White House.

(Videotape)

PRES. BARACK OBAMA:  It took many years and many failures to lead us here, and it will take many months and many different solutions to lead us out.

(End videotape)

MR. GREGORY:  At the height of a global recession, the administration unveils a detailed plan to shore up the country's financial system and get the banks lending again.

(Videotape)

SEC'Y TIMOTHY GEITHNER:  To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.

(End videotape)

MR. GREGORY:  With us this morning, in his first live Sunday morning interview, the man at the helm of the administration's efforts to combat the recession and save the banking system, the secretary of the Treasury, Timothy Geithner.

Then, a leading Republican voice in the Senate, the GOP's presidential candidate in 2008 and their ranking member of the Senate Armed Services Committee, Senator John McCain of Arizona.  What does President Obama's former opponent think of the bank rescue plan and the president's new strategy in Afghanistan?  We'll ask him in an exclusive interview.  Geithner and McCain, only on MEET THE PRESS.

But first, here live is Treasury Secretary Timothy Geithner.

Welcome to MEET THE PRESS.

SEC'Y GEITHNER:  Thank you, David.  Good to be here.

MR. GREGORY:  Thank you.  I want to start with some basic terms here.  Can you explain as simply as you can why increasing bank lending is so important to the economy?

SEC'Y GEITHNER:  Absolutely, David.  Economies require banks because they require credit.  Credit is like the blood, it's like the oxygen of any economy.  And for us to get the economy growing again, we need to make sure there's going to be credit available to businesses and families across the country so that businesses can meet payroll, so that they can expand, so that families can put their kids through college, can borrow to finance purchase of a car or a new house.  That's, that's why financial systems matter, and there is now way to get this economy back on track unless we have a financial system that's working with the recovery rather than against recovery.

MR. GREGORY:  My mother out in California, I presume, is watching this morning. She's like a lot of Americans, worried about her job and wondering why not just bank lending, but something called nonbank lending, securitization--what is that, and why does that matter to her?

SEC'Y GEITHNER:  We, we came through a period where people borrowed too much and we let our financial system take on much too much risk.  And the consequences of those choices, made over years, were--was a huge boom.  And that boom--the air is now coming out of that, and that's causing enormous damage.  And financial crises are, are brutally indiscriminate in the pain they--and suffering they cause.  The burden falls not just on people who took too much risk, but on people who were careful and responsible in their business.  That's why it's so unfair.  That's why Americans are so frustrated and angry And that's why it's so important that your government act very aggressively to help contain the damage.

MR. GREGORY:  But I want to go back to what--I want to understand the terms here. What is securitization, and why does that matter?

SEC'Y GEITHNER:  In our system we have banks--community banks, large banks, small banks--that provide credit to businesses and families.  But in our markets we also have these securitization markets where--which, which match investors directly with borrowers through the capital markets.  We need both those to work.  Both are not doing enough now.  They're not working, doing the kind of job they need to do to get credit going again.  And so to fix this mess we're in, the mess we inherited, need to make sure banks are strong enough...

MR. GREGORY:  Right.

SEC'Y GEITHNER:  ...but we also need to make sure these credit markets are working again.

MR. GREGORY:  And let me--on that point, on the nonbank lending, the securitization market is where actually most of the lending goes on right now. Is that right?

SEC'Y GEITHNER:  Well, well, typically in, in our financial system, somewhat less than half of lending for businesses and consumers comes from those markets.  So we need to get those markets going again just as we need to fix our banking system.  And the programs we put in place are already having some effect in helping unfreeze those markets.  So just as an example, last week the Fed announced--the Fed put in place a program with the Treasury, very powerful program that led to about $9 billion in new issuance of automobile loans and credit card loans.  That was more than you saw in the past four months combined.

MR. GREGORY:  Mm-hmm.

SEC'Y GEITHNER:  That will help bring down interest rates and, again, make it easier for people to get access to the credit they need to get through this.

MR. GREGORY:  All right, we've defined our terms a little bit, now let's talk about the big news this week, your plan to help save the banks.  The bank stabilization plan.  We've come up with an example here and we'll role-play a little bit, because I think this is the easiest way to explain this.  So here's how a transaction would work.  Bank USA, we're calling it, has a loan, a toxic asset, and it's valued on their books for $100 million.  And it's for sale, right?  So there's going to be an auction here and investors like me could come in, and I'm going to come in and I've got--my highest bid is for $70 million, OK?  That's the price for the $100 million loan that I'm actually going to pay.  Now, here's how the transaction actually works, right?  I'm the investor, I put in $5 million.  You, the Treasury Department--you're really the taxpayer--put in $5 million, and then the government in the form of the FDIC is going to provide 60 million at very good terms, going to guarantee that loan.  So the government's on a hook for a lot of this.  That's called leverage, right?  How does it work and what's the upside?

SEC'Y GEITHNER:  David, let me just step back for one second.  Part of what's, what's causing this problem in our financial system is banks made a bunch of bad loans, many of them backed by real estate; residential, commercial real estate.  Those loans are now sitting on the books of the financial system and they're taking up room, preventing banks from extending new credit on the scale they need.  And we have two choices in this context.  We can leave it as it is, hope banks will earn their way out of this process over time, and I am certain that will create the risk of a deeper, longer recession.  Again, the classic lesson in financial crises, if governments wait to act, they wait too late and that means more damage to the economy, higher deficit in the future, greater cost to the taxpayer.  We're not prepared to take that approach.

Another approach many people advocate is that the government itself come in...

MR. GREGORY:  Right.

SEC'Y GEITHNER:  ...and buy these assets, take on all the risk itself.  The government would set a price for the assets and bear all the losses and all the costs in that context.  Our judgment is that would be much more expensive for the taxpayer, create much greater risk for the taxpayer, and we're not prepared to take that approach.

MR. GREGORY:  And the point in our model, if we can just put that slide up again, where you see investor puts in five million, Treasury puts in five million, the FDIC guarantees it at $60 million in terms of providing the loan.  There's upside there.  In other words, if the value of that loan goes up, the taxpayer wins, the investor wins.

SEC'Y GEITHNER:  Right.  The investors are taking risk.  Their money is at risk and at stake.  They're the ones that set the price for which this transactions will take place.  So using their self-interest to get the price better, better than what the government would do in that context.

MR. GREGORY:  Right.

SEC'Y GEITHNER:  We're using their expertise to help manage these assets.  And the--and as you said, the taxpayer will share in the upside.  This is a relatively conservative structure.  It's not very different from when your family buys a house.  It's a more conservative structure than a bank typically operates.  But the key thing is it allows the government to work with the private investor to help get through this crisis.

MR. GREGORY:  Hm.

SEC'Y GEITHNER:  That we don't want the government taking on all the risk and all the losses.

MR. GREGORY:  Right.

SEC'Y GEITHNER:  We need to work with the private sector to help get this, get this recovery going again.

MR. GREGORY:  All right, but here's the key point.  The investor presumably is on board because, you know, they stand to gain a lot.  The government wants to get all of these toxic assets off the banks' balance sheets.  It's been estimated between $1.5 and $3 trillion of bad stuff out there.  But will the banks participate?  And here's my question based on our example.  Hundred million dollar loan, but the auction price is $70 million.  Well, if you're the bank and you say, "Hey, wait a minute.  This is really worth $90 million or $80 million.  I'm not going to sell that for $70 million and take that loss on my books." Are you going make them sell?

SEC'Y GEITHNER:  Banks already hold reserves against that $100 million.  So the gap is not between 100 and 70, for example, it's a narrower gap.  Now, banks are going to have an incentive because they want to raise, go raise private capital from the markets.  And it's going to be easier for them to do that if they can show their investors a cleaner balance sheet.  And that'll help improve the incentive for banks to participate.

MR. GREGORY:  But you can't make them sell, can you?

SEC'Y GEITHNER:  Well, you can make it compelling and economic for them to sell.  And again, if you think about the markets today, if you had to sell your house tomorrow, in a market where no one can get a mortgage, then the price you would get if you sold in that market would be a tiny fraction of its basic value in a more normal.  And our markets are not working today.  People, in effect, in these securities markets, can't raise financing.  And there is a very good case in that context for the government to provide financing on appropriate terms to help provide a market for these assets.  And by doing that, we're going to make it more likely that interest rates come down and, and the financial system has the capacity to provide the credit, the oxygen.

MR. GREGORY:  Mm-hmm.

SEC'Y GEITHNER:  That economies need to grow.

MR. GREGORY:  Isn't the government on the hook here for a lot of risk?  Isn't there a lot more risk here for the government than there is for that investor?

SEC'Y GEITHNER:  David, the choice we face is whether to have the government take on all the risk in solving this, which we don't want to do.  So if you compare this to the classic alternative, which is again, the government sits back, hopes the market solves this, which would be much more damaging to the economy, or the government takes on all the risk, buys all the assets itself, makes up a price, would risk overpaying, provide a much greater subsidy, this proposal is a much better approach to solving this problem.

MR. GREGORY:  Paul Krugman, Nobel laureate, New York Times columnist, been very critical of this plan.  He and others have said this is effectively a transfer of wealth from the banks' balance sheets to the government's balance sheets. A bailout for the banks, trash for cash.  You've heard all of these terms. And in fact, Krugman writes in a column last Sunday that your approach is very similar to your predecessor's in the Bush administration, Hank Paulson.  This is what he writes.  I want to have you respond to it:  "The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks' books are really worth much, much more than anyone is currently willing to pay for them.  In fact, their true value is so high that if they were properly priced, banks wouldn't be in trouble.  And so the plan is to use taxpayer funds to drive the prices of bad assets up to `fair' levels.  Mr. Paulson proposed having the government buy the assets directly.  Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff.  ...  The Geithner scheme would offer a one-way bet:  if asset values go up, the investors profit, but if they go down," and again, these are all mortgage backed, "the investors can walk away from their debt.  So this isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets." Respond, please.

SEC'Y GEITHNER:  David, the investor's money is at risk.  They can lose all their money.  Now, again, you have to compare these to the alternatives.  In the alternative scheme the government, in our view, would be taking on much more risk.  The taxpayer will be much more exposed to losses.  Life's about choices.  Life's about alternatives.  This is a better way to help get these markets working again.

But let me just step back for one sec.  What we're trying to do is to get the entire financial system, our complicated finances working again so that we get credit where it needs to go in the economy.  And that requires strengthening our banking system.  It requires making sure there is enough capital in the financial system to withstand a deeper recession.  And we're going to make sure that that capital comes with conditions to make sure that banks restructure, that there's accountability for board and management, that the firms emerge stronger, not weaker, and that there are tough conditions to protect the taxpayer.  That is a critical part of what we're going to do.

But our, our system is much more--depends on more than just banks, and so we have to do things to get these markets working again by providing financing directly to those markets that small business, consumers depend on.  And, and, but it's going to require a comprehensive approach.  This particular proposal is not going to solve all our problems, but it is a critical part of the solution and we think it's the best approach to protect the taxpayer and make sure that the market is working with us.

Now, just, just one more thing.  We're not going to get through this unless we get a--willing to take risk again.  You know, the financials took too much risk.  The great danger for us now is they're going to take too little risk, they're not going to take a chance on a viable business or a family that wants to put their kids through college.  So we need to get them working with us in this context.  And of course, for them to take risk they're going to need to have more confidence about what the rules of the game are going forward, that there's clarity about conditions and they don't face the risk of great uncertainty about those conditions going forward.

MR. GREGORY:  And to that point, are you this morning providing a guarantee to those investors that the rules of the games will not change?  If they make money in these transactions, that Congress won't try to go get their gains and change the rules?

SEC'Y GEITHNER:  We have to do that or they won't come.  And it's a simple proposition.  Again, for these, all these programs to work, all these programs to work...

MR. GREGORY:  So the rules of this, of this program won't change?

SEC'Y GEITHNER:  No, they cannot change.

MR. GREGORY:  Will the banks need more money?

SEC'Y GEITHNER:  We have a substantial amount of resources that Congress has authorized.  We're moving forward to use those resources as quickly as we can to get them where they need in the economy.  Just to give you an example, the president's housing program, which was the first major initiative we launched after I laid out that broad framework for financial recovery, has had a big effect working with the Fed and bringing interest rates down to historic lows, making--allowing millions of Americans who were not able to refinance to refinance.  Just to give you a simple example, typical American lives in a house that's worth roughly $180,000.  Refinance in this environment could save up to $2,000 a year.  That's a substantial amount of resource that they can use to spend on things that will help get this economy going again.  Where we are acting, you're seeing progress and impact.

MR. GREGORY:  I want to turn to the issue of anger on Wall Street and those AIG bonuses.  The president said a couple of weeks ago this:

(Videotape, March 18, 2009)

PRES. OBAMA:  I don't want to quell anger.  I think people are right to be angry.  I'm angry.

(End videotape)

MR. GREGORY:  You shared--you said in a letter, you shared the president's outrage, and yet the reality is that these bonuses first came to light back in October of 2008.  You were still at the New York Fed.  They were also the subject of hundreds of e-mails between Treasury and the Fed and AIG during the transition and when you came into office.  In fact, the Treasury Department even negotiated with Senator Dodd with regard to executive compensation when the Treasury Department said, "No, no, don't have this deal with retroactive bonuses.  We can't abrogate those contracts." So if you were so outraged about all of this, why didn't you deal with this back when these first came up?

SEC'Y GEITHNER:  David, how could people not be angry with this?  With the challenges we're facing now as a country in part because of risks our financial sector took on, how could people not be angry?  But our obligation and our deep obligation responsibility is, again, to try to fix this problem so that the trauma in the financial system is not causing more damage to the lives and fortunes of Americans and businesses across the country.  That's the most important thing we do.  Everything we do has to be judged by the test of whether we're getting the economy going again and recover...

MR. GREGORY:  Well, and that's all fair.  But if you were so outraged, why didn't you say that then?  Instead, you said, "I was outraged and we should try to get this money back." The government knew about these bonuses several months ago.

SEC'Y GEITHNER:  Look, we had no good choices in that context, David.  These were contracts written before the government got involved, before Ed Liddy became CEO of AIG.

MR. GREGORY:  Mm-hmm.

SEC'Y GEITHNER:  We're a nation of laws.  We cannot get the economy going again if there's an expectation the government's going to come in and break contracts.  Just not a tenable thing to do.  But what we did is--and we had no good choices, David--was when, when I was informed about the details of those provisions, we moved very quickly to ask that they--those that could be renegotiated get renegotiated, the government get those--or reduce those payments going forward.  And we're going to use the authority we have to go recoup those payments where we have a good legal basis for doing that.  And you've already--we're seeing a lot of those payments returned.  But the important thing is going forward that we establish clear conditions, clear rules of the game, prevent this kind of compensation practice in the future from coming back and putting our system at risk.  And we want to make sure that where the government is putting up assistance for these, for these banks, that that assistance is going to get lending going again...

MR. GREGORY:  Right.

SEC'Y GEITHNER:  ...not to enrich the people that helped get us in this mess.

MR. GREGORY:  But, but my question is, is this:  If you thought this was so outrageous at the time, why didn't you put this on the agenda then?  And if you felt that you didn't have any good choices, that you really couldn't dissolve those contracts, then when it came to light, why didn't you and the president stand up and say, "This populist anger is understandable, but you have to understand it has to be put in context and it has to stop"?

SEC'Y GEITHNER:  Well, that--but that's what the president did say.  And again, we're trying to make sure that people understand...

MR. GREGORY:  The president said, "We shouldn't govern in anger," and then he said, "Yes, I'm angry, too.  I don't want to quell the anger." You said this was outrageous.

SEC'Y GEITHNER:  But...

MR. GREGORY:  Did anybody stand up and say, "Let's put this in context.  We didn't have good choices.  This is not worth getting so upset about"?

SEC'Y GEITHNER:  But, but, as you've seen the president say over the course of the week, the most important thing is we recognize that of course we don't want to reward failure and we don't want the government assistance going to reward failure, but we need to make sure we get this economy on--back on track.  That's going to require the financial system getting fixed and repaired.  Of course we're going to put strong conditions on the compensation...(unintelligible).  Remember, the first--the second week in office, the president put out very, very broad, ambitious standards on compensation practice.  That was before the Congress acted.  He was a--took early initiative in this area because we knew this was going to be a significant problem.

MR. GREGORY:  Let me turn to the issue of staffing at the Treasury Department. The president nominated you back on November 24th.  He understood the priority of having a Treasury secretary in place to deal with this recession.  And yet here we are at this date in March, and if you go to your own Web site on treasury.gov, the only confirmed Treasury official is you, the secretary of the Treasury.  The Economist writes this in its issue this week:  "Filling senior department jobs is always a torturous business in America, but Mr. Obama has made it harder by insisting on a level of scrutiny far beyond anything previously attempted.  Getting the Treasury team in place ought to have been his first priority." I know there were some new nominations just this weekend.  Has it been a priority?

SEC'Y GEITHNER:  Absolutely, David.  And, and we've had some terrifically talented, dedicated public servants working at the Treasury from day one.  And look at what we've done in this period of time.  I mean, you have seen this government do more in eight weeks most governments do in years.  We're moving much more aggressively, much more pre-emptively.  Look at the scale of programs we enacted and look at the impact they're having.  You have not seen this scale of action before in this country or many countries.  And even this week we laid out a set of broad, comprehensive reforms to help make sure that our financial system never goes through this kind of crisis again.  We're moving very quickly.  We've got some very strong, talented people.

MR. GREGORY:  Right.

SEC'Y GEITHNER:  We announced some new appointees this week.

MR. GREGORY:  But in terms of confirmed people in the Treasury Department, what's gone wrong?  Is it the vetting standards?  Is it that you don't want to work with people from Wall Street?

SEC'Y GEITHNER:  Confirmation process always takes time.  It always takes time.  People, people forget when you look back at transitions how long it takes to get people in office.  But we've got no choice but to act.  And again, we've been doing a huge amount of important, productive, consequential programs in a short period of time because we've got terrific people there working with me for the president to help get this economy back on track.

MR. GREGORY:  Do you want people with expertise on Wall Street to come work for you?

SEC'Y GEITHNER:  We need people who have experience in policy, in markets, in banking, in supervision, and we're going to get terrifically talented people to come work for the country.  Because again, I think Americans know we're at a moment of crisis and opportunity, and, and if you...

MR. GREGORY:  So Wall Street people don't have a taint in your book?

SEC'Y GEITHNER:  No.  We're, we're going to make sure we take people--we get people with experience, as I said, in markets and in banking.

MR. GREGORY:  Mm-hmm.

SEC'Y GEITHNER:  Not just in policy.  Because that's what's going, that's what it's going to take.  You know, we're trying to protect the interest of the taxpayer.  That requires people that have knowledge and expertise.

MR. GREGORY:  A couple of more moments here.  I want you to take a moment to explain the government regulation that you are proposing, which is very aggressive going forward.  How would this work?

SEC'Y GEITHNER:  Core thing is to make sure that the institutions at the center of our financial system are subject to much more conservative, much tougher requirements on capital and leverage that are applied more evenly and more effectively, frankly.  We need to make sure that hedge funds and derivatives come within a framework of oversight so we protect the system from the risks they may present.  And we need to make sure the government has the authority it needs to come in more quickly, to help contain the damage, restructure the system, so we can have a stronger system going forward.

MR. GREGORY:  But is the government really capable of moving in on companies that may need it?  Does the government have the level of expertise to unwind something like AIG's financial products division?  You're having your own problems even staffing up the Treasury Department.  Isn't that a lot to, to ask the American people to support?

SEC'Y GEITHNER:  But, but there's no choice.  I mean, how--what would you, what would you prefer, that we live with the kind of choices we saw in Lehman, AIG?  Catastrophic damage, or the government putting huge amounts of taxpayer dollars at risk to help and contain that damage?  We need a better model. What we're proposing to do is use a model that exists for small banks that was designed by the Congress in the wake of the S&L crisis, build on that model and give the government a capacity to act more quickly, more effectively to contain the damage at least risk to the taxpayer and the economy as a whole.

MR. GREGORY:  Time magazine this week has its cover, and it's very interesting.  I want to put it up on the screen for our viewers to see.  "The End of Excess: Why the crisis is good for America." And there's a big red "reset" button. And everybody talks about reset.  Obviously this is not a good crisis for America right now.  But take a longer view.  In the long run, is this crisis necessary for this economy?

SEC'Y GEITHNER:  I think the adjustment to a period of excess is necessary. You never, you never want to have a crisis to remind people of the importance of living within your means, not borrowing too much or why regulation of the...(unintelligible)...is important.  You never want to have a crisis that's damaging to make that point.  But we're going to emerge stronger than this. When we get through this people are going to care less about what they make, more about what they do, what they achieve with what they make, and that will help make this country stronger.

MR. GREGORY:  Will the economy be fundamentally different?  Will people own fewer homes?  I mean, home ownership, will that go down?  Will consumption change? Will our lives change in a meaningful way?

SEC'Y GEITHNER:  I think people will be living within their means more, which is helpful.  We want to have, you know, a stronger, more sustainable recovery. Not a recovery based on a artificial boom that's not going to be sustained. We need to end this, this, this pattern of having booms and busts at the kind of frequency we've seen.  That has to change.  And that'll make the, that'll make this a better place to live and a more productive economy going forward.

MR. GREGORY:  Before you go, it's been a fairly bumpy ride for you so far.  You've had Republicans calling for you to resign.  Some on Wall Street have questioned your effectiveness.  Do you think at this stage you've been able to shore up your credibility as not only a steward for economic policy, but as a spokesman for the president's policies?

SEC'Y GEITHNER:  David, when I came into this job I knew two things.  One is I knew we were starting with a set of enormously complicated challenges and a deep sense of anger and frustration about the burden Americans were bearing because of a long period of excessive risk taking.  And I knew we were going to face really tough choices.  We were going to have to do things that are going to be deeply unpopular, hard to understand.  We're not going to get it perfect everywhere.  But this is a great privilege for me, a great honor to help this president do what it takes to help get this economy back on track. This job, it comes with a lot of heat by definition and there's nothing surprising in that.  But we have a great moment of opportunity for this country and it is, again, a great privilege for me to be part of an effort to try to make sure we put in place a stronger economy, stronger financial system for the future.

MR. GREGORY:  Secretary Geithner, good luck with your very important work.

SEC'Y GEITHNER:  Thank you.  Nice to see you.

MR. GREGORY:  Appreciate you being here.

Coming next...

(Videotape)

PRES. OBAMA:  I want the American people to understand that we have a clear and focused goal:  to disrupt, dismantle and defeat al-Qaeda in Pakistan and Afghanistan.

(End videotape)

MR. GREGORY:  ...President Obama lays out his strategy in Afghanistan.  We'll get reaction from his 2008 opponent on the way forward in that country; plus, his take on the economic crisis.  An exclusive interview with Senator John McCain coming up next here on MEET THE PRESS.

(Announcements)

MR. GREGORY:  An exclusive interview with Senator John McCain after this brief station break.

(Announcements)

MR. GREGORY:  Senator McCain, welcome back to MEET THE PRESS.

SEN. JOHN McCAIN (R-AZ):  Thanks, David.

MR. GREGORY:  Very, very nice to have you here.

SEN. McCAIN:  Nice to be back.

MR. GREGORY:  You just heard Secretary Geithner.  What's your level of confidence in him?

SEN. McCAIN:  Well, I have some confidence in him.  I think he's very smart. And I hope that this new plan--which, by the way, I thought was well-described...

MR. GREGORY:  Good.

SEN. McCAIN:  ...earlier--will work.  My preference would have been to go in and, you know, with stress testing these banks and go ahead and sell off the--take the toxic assets and sell them off, and then let the good asset banks continue.  But this proposal, I hope it works.  We all want it to work. But what I'm most worried about is laying a debt on future generations of Americans.  The, the multitrillion-dollar debts, unprecedented debts that we are--we are committing generational theft.  I'm confident that the economy will recover.  The question is after it recovers, what kind of a debt are we going to carry which will cause us to print money, inflation, and go through a worse wringing out than we went in the late 1970s and early '80s?

MR. GREGORY:  And I want to ask you specifically about the debt in just a moment.

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  But more generally, in terms of fixing of the economy, fixing the financial industry, if you look at all of the programs that the government has now put in place, do you think they got the prescription right?

SEN. McCAIN:  Well, I hope they do with this plan.  I think the markets reacted well.  And I'm not an expert, but it seems to me that it gave us a little optimism that there was a plan that people could understand, that was coherent, that might lead us out of this mess that we are in.  So there was a great deal of incoherency for a long time, beginning with Secretary Paulson saying the TARP money would be used to...

MR. GREGORY:  Mm-hmm.

SEN. McCAIN:  ...on the home loan mortgage crisis, and then switch to financial institutions.  And it seemed that every few days there was a target du jour, and that obviously eroded dramatically any confidence that Americans might have.

MR. GREGORY:  Do you think that the banks will need more government money, and would you be willing to support that?

SEN. McCAIN:  I would not unless I certainly saw a way that it would not be used the--as the first TARP money was.  I think that's the general opinion throughout the Congress on both sides of the aisle.  There's got to be more transparency.  You didn't ask him, but the secretary of Treasury I understand will not reveal is how much money is left in TARP 1.  Don't you think the American people should know that?  There--we still don't have the transparency and oversight.

One other thing we need, we do need a select committee in Congress to look at what happened so people can--this train hit them without any knowledge.  They still don't know what happened.  Why did it happen?  So then they would have some more confidence on, in what actions we might take in the future to prevent it from happening again.

MR. GREGORY:  And what is your take on the anger, the populist anger in the country?  Do you think it's justified, or do you think it's been overblown? Has the president showed leadership in standing up to it?

SEN. McCAIN:  I think the president was trying to walk a careful line between reflecting public anger--which is all justified.  It's all justified, ranging from the extreme of Madoff to just outright greed and people who knew better. So I think he was trying to walk a fine line between rechanneling and reflecting anger, at the same time not bashing people that are innocent.  I think that, that what we need to do here is understand, too, that sometimes Congress overreacts.  I share all that anger.  My constituents share that anger.  It's, it's real, it's palpable and it's justified.  But bills of attainder, basically going back and taxing people for what they've already by contract earned or are going to earn, I think is a dangerous course of action as well.

MR. GREGORY:  Let me ask you for your assessment of your former opponent in the presidential race and now president, Obama.  This is what you said on election night.  Let's watch.

(Videotape, November 4, 2008)

SEN. McCAIN:  I urge all Americans who supported me to join me in not just congratulating him, but offering our next president our good will and earnest effort to find ways to come together, to find the necessary compromises to bridge our differences.

(End videotape)

MR. GREGORY:  Have Republicans heeded that call, and do you think President Obama has heeded that call?

SEN. McCAIN:  I think neither side, perhaps, has done it as much as maybe we should.  But you establish an environment.  Really, bipartisanship is sitting down across a table from each other and negotiating, recognizing there's got to be compromise.  And in all due respect to the incoming administration, the speaker said, "We won.  We wrote the bill." There was never any serious negotiations over the stimulus package, over the omnibus spending bill.  Now there doesn't seem to be any on the budget.  Those are all party line votes. There's not the negotiations.  And I--look, I'll take blame on our side for maybe not being more forthcoming, but really the president does beat the drum and sets the pace.  And so far there has not been not an instance where they sat down across the table and said, "OK, what do you want?  What are you demanding here?  What do you think is best?" And including some of those concerns as we come--as we move forward with really large, encompassing packages about the future of this country.

MR. GREGORY:  Instead, the administration has...

SEN. McCAIN:  I--could I say--could I just also say, though...

MR. GREGORY:  Yes.

SEN. McCAIN:  ...on national security policy I think the president has done the right thing on Iraq.  We may get to it.  I think his proposal for Afghanistan, I might modify it a little, is good.  So I, I think in the area of national security policy there has been some working together.

MR. GREGORY:  And yet the White House says the Republicans have become the party of no.  Is that fair?

SEN. McCAIN:  Well, we did have an alternative to the stimulus package, we had an alternative to--on the omnibus bill.  We will have an alternative budget.  And so the--I, I understand the White House saying that.  But the White House, in order to have legitimacy to that charge, has got to give me one example where on a major issue we've sat across a table negotiating, each putting forth their proposals and reaching a compromise.  As far as I can tell, on any domestic issue that hasn't happened.

MR. GREGORY:  Has the president been true to his word to change the way Washington operates?

SEN. McCAIN:  I think he's trying.  I want to give him credit for trying.  I think this is early in his administration.  I don't think we should make judgments.  There's no doubt this president has as great a challenges as any president ever has in the history of this country, certainly amongst the top three or four.  So let's continue to work to, to try to make him succeed.  I believe the role of loyal opposition is loyal to the country, yet opposition where we disagree on principles and philosophy.  That makes for vigorous debate.  Could that debate be more respectful?  Yes.

MR. GREGORY:  Mm-hmm.  Earlier this month you took to the floor on that spending bill over earmarks, and you were quite upset about it.  This is what you said.

(Videotape, March 2, 2009)

SEN. McCAIN:  I just went through a campaign, Mr. President, where both candidates promised change in Washington; promised change from the wasteful, disgraceful, corrupting practice of earmark, pork-barrel spending.

So what are we doing here?  Not only business as usual, but an outrageous insult to the American people.

(End videotape)

MR. GREGORY:  You made it very clear, in that instance the president had not been true to his word.

SEN. McCAIN:  The president said he'd go line by line over any appropriations bill and get rid of those that are unnecessary.  All he had to do was veto that bill, send it back and say, "No more earmarks.  None of this stuff now while the American people can't keep their jobs, can't--don't have health care, all, all the challenges we're facing." One point seven million dollars for pig odor research, on and on and on.  But the practice--the reason why I sounded as upset and I am as upset, because it's not just wasteful spending, it's not everything I just said, it's also corruption.  A senior staff member of the Appropriations Committee just pled guilty in federal court.  A lobbying outfit was shut down and the FBI investigated it.  I mean, there's former members of Congress in federal prison.  And we need it now, we need the confidence and trust of the American people as never before.  Instead, on this earmarking, pork-barrel spending, it's business as usual.  And someone will come on here and say, "It's only a small amount of money, only a few billion dollars." I just don't buy that and I don't think Americans do, either.

MR. GREGORY:  On the economy, I don't have to remind you, during the campaign you said, as this financial crisis was really unraveling, as the economy was taking a dive, that the fundamentals of the economy were strong.  You were criticized as being out of it, not getting it, not understanding the economy. And yet just a couple of weeks ago this was the president in the Oval Office. Watch.

(Videotape, March 13, 2009)

PRES. OBAMA:  If we are keeping focused on all the fundamentally sound aspects of our economy, then we're going to get through this.  And I'm very confident about that.

(End videotape)

MR. GREGORY:  What did you think when you saw that?

SEN. McCAIN:  I think we're in agreement.  I think what the president is saying now, and it's needed to be said to the American people, that we have the best workers, we're the most innovative, we're the most productive.  We still have the fundamentals of a very strong economy.  And we need some confidence to get, to get through this.  We need--that's part of, of the recovery.  So I'm glad we're in agreement.

MR. GREGORY:  In the, the campaign, you think that criticism was unfair?

SEN. McCAIN:  Life isn't fair.  We all know that.

MR. GREGORY:  Let's move on to the budget and the deficit picture that you referenced just a moment ago.  The Washington Examiner reported this this week:  "Last week in a little-noticed conference call featuring Budget Director Peter Orszag...[Orszag was asked:] Are those deficits sustainable? Relenting, Orszag said such deficits, in the range of 5 percent of the Gross Domestic Product, `would lead to rising debt-to-GDP ratios in a manner that would ultimately not be sustainable.' The simple version of that is:  If the Congressional Budget Office projections are correct, we're headed for hell in a handbasket." How concerned are you that, with the goals the administration has for spending on major programs, they're going to have to raise taxes?

SEN. McCAIN:  Well, that's always the inevitable result of increasing spending and increasing the size of government.  They've earmarked $634 billion for cap and trade; by the way, a betrayal of everything I've ever believed in about cap and trade, which I'm a supporter of.  They, they have earmarked or budgeted for hundreds of billions of dollars in increases in spending in health care to bring down the cost of health care.  So my great worry, my great worry is the trillions.  The $10 trillion we already owe, the $1 trillion or $2 trillion that the Chinese now own.  The Chinese comments about a world currency and their complaints about our fiscal policies concern me.  The--you know, there's only one thing worse than, than the Chinese owning a lot of American debt, and that is Chinese stop buying American debt.

MR. GREGORY:  Is that a real fear in your mind?

SEN. McCAIN:  Oh, I think it's of a concern.  I don't think in the short term.  But we've got to get our fiscal house in order.  We were talking about the party of saying no.  Our proposal on the stimulus package was once this country reaches a 2 percent increase in GDP, inflation adjusted, then we'd be on an automatic spending reduction path.  We've got to get the spending under control.  And the old line about deficits as far as the eye can see is, is now so large that it staggers the imagination.  And it can't continue.  No country can continue to do this.

MR. GREGORY:  During his press conference on Tuesday, the president pushed back a bit.

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  This is what he said.

(Videotape, Tuesday)

PRES. OBAMA:  I suspect that some of those Republican critics have a short memory.  Because as I recall, I'm inheriting a $1.3 trillion deficit, annual deficit from them.  That would be point number one.

Now, none of us know exactly what's going to happen six or eight or 10 years from now.  Here's what I do know.  If we don't tackle energy, if we don't improve our education system, if we don't drive down the costs of health care, if we're not making serious investments in science and technology and our infrastructure, then we won't grow 2.6 percent, we won't grow 2.2 percent.  We won't grow.

(End videotape)

MR. GREGORY:  The response?

SEN. McCAIN:  Well, first of all, let me say he was inheriting about half of what he described until we added the spending.  Second of all, no...

MR. GREGORY:  This new round of spending from, from last year.

SEN. McCAIN:  Yeah.  No, no nation can spend this way and get out of it without debasing the currency and us returning to a period that we had in the late '70s and the early '80s where we had inflation, a high unemployment and higher taxes, because it, it--you can't do it.  And so I hope that the president's next objective will be to work on this deficit.

MR. GREGORY:  Do you think that Republicans should provide a detailed budget alternative?

SEN. McCAIN:  Yes.

MR. GREGORY:  With numbers?

SEN. McCAIN:  Yes.

MR. GREGORY:  Will that happen in the Senate?

SEN. McCAIN:  We're working on it, working very hard on it.

MR. GREGORY:  And the, the key elements of it would be what?

SEN. McCAIN:  Well, obviously less spending, obviously more restraints, obviously not having $630 billion for "revenues from cap and trade." By the way, that's cap and tax, that's not cap and trade.  The other spending restraint measures that would--that have to be taken.  We'll, we'll--we're working on it very hard.

MR. GREGORY:  Let me turn to the issue of Afghanistan.  The president has ordered 17,000 additional forces to go to Afghanistan and announced on Friday 4,000 additional, so a total of 21,000.  Those 4,000 additional would specifically help police and Afghan forces.  This is the threat that the president described on Friday.

(Videotape, Friday)

PRES. OBAMA:  The situation is increasingly perilous.  Multiple intelligence estimates have warned that al-Qaeda is actively planning attacks on the United States homeland from its safe haven in Pakistan.  And if the Afghan government falls to the Taliban or allows al-Qaeda to go unchallenged, that country will again be a base for terrorists who want to kill as many of our people as they possibly can.

(End videotape)

MR. GREGORY:  Does this strategy have it right when it comes to preventing that sort of outcome?

SEN. McCAIN:  I believe so.  As you know, and is well-known inside the Beltway in this town, there was a big debate in the White House over--and the administration--over a minimalist approach, send a few more troops, kill some bad guys and then get out as quick as you can.  I think this--the outlines of this proposal are good.  The best way to get out of Afghanistan fast is people to think we're staying.  We have to more than double the size of the Afghan army.  We have to--I, I would have announced that 10,000 additional that have been requested would have been sent.  There's several other changes.

MR. GREGORY:  You think more troops are necessary, as you did in Iraq.

SEN. McCAIN:  I know they are.  I know they are.  And the main thing I would have done in that speech, I'm sorry to say, tell the American people it's going to be long and hard and tough.  And as these additional troops come in and we move into the south, which we do not have control of, the southern part of Afghanistan, there's going to be an increase in casualties.  You've got to prepare the American people for a significant expenditure of American blood and treasure.  I think the president laid out the threat very well.

MR. GREGORY:  How do you define victory in Afghanistan?

SEN. McCAIN:  The same way as in Iraq.  You have a governing place where al-Qaeda and other terrorist organizations cannot base attacks on the United States and other--and our allies.  You have a government that functions ineffectively, but--I mean, with some effect.  You have an economy that's growing.  You have normal trappings of emerging democracies as they move forward the difficult path towards a free and prosperous nation.  And this is complicated by Pakistan.

MR. GREGORY:  Mm-hmm.

SEN. McCAIN:  On the issue of Pakistan, we have to have a policy that's oriented to Pakistan, not Afghanistan.  Pakistan's a nuclear-armed country. It's a huge country.  It's an important country no matter what.  And we can--we need to work with Pakistan as much as possible, cooperate in those border areas in the problems and issues we all know about.  But the fact that we may not get as much help from Pakistan as we want because of their internal dynamics does not mean, necessarily, we don't achieve success in Afghanistan. It does not mean that.  It mean--we can still succeed in Afghanistan and still have some of the difficulties that have in Pakistan.

MR. GREGORY:  It's been suggested that the Taliban, which is now reconstituting itself primarily in Pakistan...

SEN. McCAIN:  Yes.

MR. GREGORY:  ...to launch attacks into Afghanistan, that one of the ways to deal with them is to start negotiating with them...

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  ...with those elements who are not as hard-core as, as other elements.  The vice president suggested this, the president alluded to this and Hamid Karzai is saying that that should be done.

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  Is that the smart thing to do?

SEN. McCAIN:  Well, it's a smart thing to do as long as you--as these people believe that you're not leaving and that you are not abandoning your goals as articulated by the president.  And by the way, we have problems with--in, in Iraq, and still do from Iran, from Syria.  And we didn't invade those countries.  We were, we were able to achieve a strategy of success with those problems remaining.  And there's no direct analogies.  There's always difference in circumstances.  But I believe that we can succeed.  And the issue of Pakistan is vital not only because of Afghanistan, but because Pakistan is a nuclear-armed nation we--with tensions with India, with all of the, the, the problems with democracy and corruption that they have there as well.  I think that Karzai's comments about the president's policy can be helpful.

MR. GREGORY:  I want to move on to a couple of other topics, including one that hits very close to home for you as an Arizona senator, and that's this drug violence on the border with Mexico.  What is your assessment of the threat, and what should the United States be doing about it?

SEN. McCAIN:  I think it's an existential threat to the government of Mexico. I applaud President Calderon.  He is the first president of Mexico to really take on the drug cartels.  The corruption level is very high there.  The violence will spill over into the United States of America.  It already has to some small degree.  The Merida Initiative of working and helping the Mexican government and law enforcement has been succeeding, but it's a huge problem. It is--my hometown of Phoenix, Arizona, is now the kidnapping capital.  That's got all to do with the drug cartels.  These coyotes, these smugglers of illegal immigrants.  And it, it argues for us to work as closely as we can with the Mexicans, and that job is to secure our borders.

MR. GREGORY:  Does that mean U.S. troops if necessary, National Guard troops?  What?

SEN. McCAIN:  Both the, both the governor of Texas and the governor of Arizona have asked for National Guard troops on the border.  I think we need them.

MR. GREGORY:  And what would they do?

SEN. McCAIN:  I think they would help with enforcement.  We simply don't have enough now of boots on the ground.  I think they would help with the enforcement.  And obviously that would require additional training, but we could give it to them.

MR. GREGORY:  I want to, in our couple minutes left, ask you about, as you look back on your 2008 campaign and think about the Republican Party, the future of the party.  Mike Murphy, who of course worked for you in 2000 as a Republican strategist...

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  ...was on the program on March 1st, and he talked about what has to happen for the party.  Listen to this.

(Videotape, March 1, 2009)

MR. MIKE MURPHY:  At the end of the day, here's the one statistic we all got to remember:  The country's changing.  Ronald Reagan won in 1980 with 51 percent of the vote.  We all worship Ronald Reagan.  But if that election had been held with the current demographics of America today, Ronald Reagan would have gotten 47 percent of the vote.  The math is changing.  Anglo vote's 74 percent now, not 89.  And if we don't modernize conservatism, we're going to have a party of 25 percent of the vote going to Limbaugh rallies, enjoying every, every applause line, ripping the furniture up.  We're going to be in permanent minority status.

(End videotape)

MR. GREGORY:  Given that, assuming you agree, how does conservatism modernize itself?  How does the party get back to power?

SEN. McCAIN:  The party of ideas, party of inclusiveness, outreach to other ethnic aspects of the American electorate; in my part of the country especially, Hispanic voters.  We have to recruit and elect Hispanics to office.  We have to welcome new ideas.  And there are--you know, a lot of people complain about divisions within the Republican Party.  That's good right now.  Let's let a thousand flowers bloom.  Let's have different clashes of ideas, sharing the same principles and goals.  Look, if we were having this show in 1982, Republican Party was dead.  1994, the Democratic Party was dead. Right now--there's, there's a great resilience in American politics, and I have--I'm very optimistic about the future of the Republican Party if we do the right things.

MR. GREGORY:  Speaking about the Hispanic vote, would you like to work on immigration policy with this president?

SEN. McCAIN:  At any time I stand ready, but the president has to lead.  The, the administration has to lead with a proposal.

MR. GREGORY:  Do you think they have that proposal, want to do that?

SEN. McCAIN:  They have not come forward with one yet.  They said that they are going to--I understand the president met with the Hispanic Caucus and he said he would have some forums and, and other things.

MR. GREGORY:  Right.

SEN. McCAIN:  But they have not come forward with a proposal.

MR. GREGORY:  In terms of future leaders of the Republican Party, would you like to see Sarah Palin become president?

SEN. McCAIN:  I'd like to see her compete.  I think we've got some very good candidates:  Jon Huntsman and--the problem when I run down these names, I always leave, leave out a, a name--Bobby Jindal, Tim Pawlenty.  There's, there's so many.  There's a lot of good, fresh talent out there.

MR. GREGORY:  But would you support Palin?

SEN. McCAIN:  Oh, I'd have to see who the candidates are and, and what the situation is at the time.  But have no doubt of my respect, admiration and love for Sarah and her family.

MR. GREGORY:  This is your 54th appearance on MEET THE PRESS.  Now, I know you're a competitive guy.  Bob Dole still holds the record at 63.  And so we've been doing the calculations here.  We think we can make this up, maybe within a year's time.

SEN. McCAIN:  I'd love...

MR. GREGORY:  If you're game for that.

SEN. McCAIN:  I'd love to try.  Thank you, David.

MR. GREGORY:  Senator McCain, thank you very much for being here.

We're going to continue our discussion online and ask Senator McCain some questions that our viewers submitted via e-mail and Twitter, where he's very popular.  Watch our MEET THE PRESS Take Two Web extra.  It's up this afternoon on our Web site.  Plus, look for updates from me throughout the week, all at mtp.msnbc.com.

And we'll be right back.

(Announcements)

MR. GREGORY:  As we leave this morning, we remember Irving R.  Levine, the bow-tied pioneer in network news coverage of economic issues; the first person to ever cover that beat full-time for television.  During his more than 40 years with NBC News he appeared on this program 106 times.  Here's one of his first appearances on MEET THE PRESS in 1971, interviewing a very familiar face.

(Videotape, December 19, 1971)

MR. IRVING R.  LEVINE:  Mr. Rumsfeld, the dollar has just been devalued by about 8 percent.  As director of the Cost of Living Council, which has a responsibility for keeping the cost of living down, what effect do you think the devaluation will have on the cost of living of the average American?

MR. DONALD RUMSFELD:  I think the major effect that we'll see over a period of time from the decisions that have been made recently are jobs in this country.  It seems clear to me that the fact that goods coming into this country will cost more and goods leaving this country will be more competitive with foreign-made products, that we will see, oh, it's estimated any, anywhere from a half a million jobs to close to two-thirds of a million jobs result from the decisions have, that have been made recently.

(End videotape)

MR. GREGORY:  Irving R.  Levine died Friday at the age of 86.  His family is in our thoughts and our prayers.

That is all for today.  We'll be back next Sunday.  If it's Sunday, it's MEET THE PRESS.

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