I spoke with former GOP presidential candidate Mitt Romney at his hotel room the morning of his speech to the Conservative Political Action Conference here in Washington. (He ended up winning the CPAC presidential straw poll.) Instead of the usual political horse race questions, I wanted to probe his views of our current economic environment and whether he thought Reagan-style free-market economics was dead. A couple of interesting notes: Romney sees the need for government money to help the banks, and he isn't a knee-jerk "suspend mark to market accounting" guy. But he also thinks the Obama administration doesn't quite get the fact that America exists in a global economy where it needs to a) compete with other nations, and b) take into account what investors think of our economic policies.
Here are some long excerpts from our chat:
1) Romney on the the state of the economy:
This is a downward spiral where you have two elements encouraging the other down a steep slope. On one side you have the collapse of the stock market and housing market which means Americans have less net worth and as a result they feel poorer and as a result they buy fewer things and as they buy fewer things, business see greater losses and that in turn depresses the stock market even further and this a self-actuating downward spiral. ... It was my belief that we should have put in place a stimulus plan earlier than the one that was put in place. And I don't think the president's plan is as focused and targeted as it needed to be. But nonetheless I think it has some portions that will help. But this certainly is not over yet and hopes of a quick rebound are quickly fading.
2) Romney on the White House economic forecasts: I think it's really hard to project when the bottom will be hit and how steep the upturn will be. I am confident that the economy will recover. It always has. The entrepreneurial spirit of the American people is able to pull us out of downward trends. I do believe that the invisible hand of the free market is far more effective than the heavy hand of government. ... Sorry, the only economic system which has been proven to work in the history of mankind is the free market and capitalism and any efforts to move us toward socialism will not be successful in our society. ... But I think it is unrealistic, however, to plan for spending based upon an upside case for the economy. I think it would be a massive error to choose as our objective a budget deficit four years from now of five hundred to six hundred billion dollars in the good times that the president is predicting, a budget deficit of that scale is unacceptable.
3) Romney on whether foreign investors will keep buying our debt: That is something I don't think the president has spent a lot of time talking to the American people about. The perspective that we can spend massively more than we can take in is premised on the view that foreign investors, largely, will loan us the money to do that. At some point there is the risk that foreign investors will believe that the dollars might not be worth very much in the future. That would cause a run on the dollar potentially, hyperinflation potentially, but certainly an increase in interest rates. And if that occurs, you'd have the peril of very higher interest rates at the same time you have a suffering economy and that would be the sort of stagflation that would be so frightful that it would make current conditions seem mild. The president in his short-term plans and his long-term forecasts has to recognize that laying out to the world a budget of massive deficits as far as the eye can see has the potential of causing a run away from the dollar.
4) Romney on whether free-market economics is obsolete: There is no question that free markets and free enterprise and holding government taxation at its historical level of roughly 20 percent of GDP has worked to grow our economy and help pull hundreds of millions of people, even billions of people, worldwide out of poverty. ... A departure from that course would be perilous. The reason for a current calamity has nothing to do with holding down taxation . ... Our current calamity was caused by misregulation of Fannie Mae and Freddie Mac and well as a whole host of [things], there are so many people to blame in this regard. And I'm not one of those that ascribes malevolent intent to those people. I just don't think they saw the risk . ... That being said, this was a necessary correction in the market, but it is not a repudiation of free enterprise and capitalism.
5) Romney on our economic challanges: We face an entirely different competitive world than we had in the past. Once again Russia is emerging as an economic and military power by virtue of its energy resources, and it intends to use energy as the source of its strength going forward. China is going to be a far more competitive economy than we have faced anywhere before. It will pass us in the scale of its GDP at some point in this coming century. Europe is becoming increasingly competitive as they are finally dealing with the threats from Asia. And so America is going to have to compete, and we can't presume that the rest of the world is going to loan money to us so that we can live a lifestyle above that which we can create for ourselves. History has shown that free enterprise, freedom and small government is the favorite approach to growing an economy and remaining competitive, so an effort to move toward a European model of large government, high taxes and unnecessarily burdensome regulation would put us on a path to to be passed by other nations. I do want to make one point as well: Republicans believe in regulation. You can't have a free market with people stealing intellectual property from one another, with monopolies being formed, we believe in law and regulation that sets rules for markets. ... Do we need new regulations? Absolutely. Should regulators be looking at the market in a different way than they did 25 years ago? Certainly.
6) Romney on the relevancy of the New Deal: The key thing is to make sure we get the private sector growing again. ... The government has to create the conditions under which the free enterprise, free market sector is able to grow. A course of raising taxes, raising spending will be counterproductive in terms of stimulating the free market. A view that somehow we are going to go back to the New Deal and put everyone back to work for the government would put us on a road that would have a calamitous conclusion.
7) Romney on economic stimulus:
First of all, the economy is too big for the government to think it can pull a string and the economy will jump. It is a global economy and what is happening here will be affected by what is happening around the world. ... So the best thing our government can do is encourage the conditions that allow new business to grow and old businesses to expand. And that means reduce burdens on them, provide incentives for them, encourage Americans to invest in them, build the pool of risk capital again, each of these things helps the private economy grow and that's how you create jobs and that's how you get us out of the doldrums we're in.
8) Romney on the banking system: The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system. ... The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse. ... About a year or so ago, I proposed a cooperative where banks could contribute their troubled assets into this cooperative and the cooperative would then work with homeowners or businesses and help work out the loans, work out specific terms which would allow them to be performing at some level, then return those funds to the owners of those assets instead forcing them to be written down at fire sale prices. ... Today we are talking about a bad bank which has a similar characteristic . ... The challenge in helping homeowners with their current mortgage is that you open the door to extraordinary abuse and misuse of these funds and what I have not seen is a good method for helping those who really need help and deserve help relative to those who either took advantage of the system or who were making a calculated investment bet.
9) Romney on mark-to-market accounting: I think you have to mark to market in one way or another, whether you mark to market for purposes of regulatory accounting figures or you do it to understand what your financial posture really is ... If you wrote them off over some number of years like pension funds do when they have bad assets and you give banks a little more breathing room in terms of regulatory capital to keep them going ... But I do believe you need to somewhere recognize if you have a toxic asset and present that to stakeholders. Japan took the other route ... and we have learned from that experience that if you try and hide the extent of the problem, you may not be willing to deal with it.
10) Romney on raising taxes on private equity, venture capital and other investment funds: I think capital gains are capital gains and you don't try to characterize them as something they're not. And I don't think you try and hit those sectors of the economy that are so essential to creating new jobs.