ABC’S “THIS WEEK WITH GEORGE STEPHANOPOULOS”

STEPHANOPOULOS: Major milestone this week here in Iraq with the American troops pulling out of the cities. And I wonder if you can put the broader American mission in context. Are we in the process of securing victory or cutting our losses to come home?

BIDEN: Securing victory. Look, the president and I laid out a plan in the campaign which was twofold. One, withdraw our troops from Iraq in a rational timetable consistent with what the Iraqis want. And the same time, leave behind a stable and secure country.

And one of the reasons I’m here, George, is to push the last end of that, which is the need for political settlement on some important issues between Arabs and Kurds and among the confessional groups. And I think we’re well on our way.

STEPHANOPOULOS: You know, your predecessor doesn’t seem convinced.

(LAUGHTER)

STEPHANOPOULOS: John Hannah, Vice President Cheney’s national security adviser, wrote this week that under Obama, Bush’s commitment to winning in Iraq has all been vanished. The vice president warned against a premature withdrawal.

He said: “I would not want to see the U.S. waste all of the tremendous sacrifice that has gotten us to this point.”

BIDEN: You know, it’s kind of ironic. It’s their timetable we are implementing. Cheney and Bush agreed with the Iraqis before we were elected that we’d have combat troops out of the cities by June 30th.

STEPHANOPOULOS: So he’s wrong to be worried?

BIDEN: Well, I mean, it’s — I mean, for this he can’t have it both ways. He negotiated that timetable. We have met the commitment the timetable the last administration negotiated with Iraqis. And we’re totally confident that is the right thing to do.

So I find it kind of ironic that he’s criticizing his own agreement that he negotiated.

STEPHANOPOULOS: You’re also facing a little bit of criticism from the Iraqis. You know yesterday you stood up there with Prime Minister Maliki and talked about your commitment to solve these political problems, yet his spokesman came out after the meeting and said: “This is purely an Iraqi issue, we don’t want the Americans to get involved.”

What do you say to that?

BIDEN: Well, that’s that not what — that’s not what the prime minister said. The prime minister said that we may need you to get involved.

What we offered the prime minister, as well as the speaker, as well as the two vice presidents, was that to the extent — let me give you an example. The United Nations has started a process to deal with what they called the “disputed internal borders.” And that is the debate between the Kurds and the Arabs as to where the line is.

Kirkuk is probably the biggest flashpoint. And we were asked that we would — would we be helpful to the United Nations in doing this? I was further asked that would I communicate to the Kurdish leadership, who I have a close relationship with, that their passing a constitution through their parliament in Kurdistan was not helpful to the process that was under way.

STEPHANOPOULOS: So what’s going on here? Maliki says one thing and his spokesman says another.

BIDEN: Well, look, I think that it’s very important that Prime Minister Maliki and all of the Iraqi leaders are able to in fact communicate, which is true, to the people of Iraq, that they’re now a sovereign nation.

They take directions from no one. That they are able to handle their own internal affairs. And the fact — my guess is, if the spokesman said that — which surprises me, if the spokesman said that, I’d imagine they’re worried about an upcoming election, making it look like the United States is going to continue to try to direct things here.

We are not. That is not why I’m here.

STEPHANOPOULOS: We’re not going to direct things, but what if the Iraqi people — they’ve been dealing with these political disputes for an awful long time, what if they can’t solve them, the violence flares up again?

BIDEN: Well, that’s going to be a tragic outcome for the Iraqi people. We made a commitment.

STEPHANOPOULOS: But are we going to put our lives on the line again?

BIDEN: No. We made a commitment to withdraw our troops from the cities by the 30th, to withdraw our combat brigades from Iraq by next summer — the end of next summer, and withdraw all troops according to the SOFA, that agreement we negotiated with them, by the end of 2011. That is our intention.

STEPHANOPOULOS: But no matter what, 2011, American troops all gone?

BIDEN: That is the intention. We believe the Iraqis will be fully capable of maintaining their own security. And we believe that with the time frame, with their upcoming election — you know they’re having an election in January, I know you know that, they’ll form a new government early — in late winter as a consequence of that election.

And it is our expectation that that election will come off peacefully and that their democracy is gradually maturing, so.

STEPHANOPOULOS: Let me turn to Iran. We’re three weeks out from their election.

BIDEN: Yes.

STEPHANOPOULOS: Do you have any doubt it was stolen?

BIDEN: Well, look, what I don’t want to do is play into the hands of the supreme leader and Ahmadinejad like they’re blaming the British now. You know, there — that the reason why there was unrest is outside influence.

STEPHANOPOULOS: They’re saying they have confessions from reformers saying that.

BIDEN: Well, you know, they say a lot of things. That’s simply not true. The — I think the dust hasn’t settled yet in terms of?

STEPHANOPOULOS: Still, three weeks ago.

BIDEN: Well, no, now here’s what I think. I mean, I think it’s clear that the consequences of the way the election was conducted and the way that the election was declared — who was declared the winner and how, is going to have a rippling effect.

What that effect will be, I don’t know. I think we have to wait to see how this settles out and — before we can make a judgment.

STEPHANOPOULOS: But there’s no doubt now that they responded violently to the election.

BIDEN: Oh, there is no doubt about that. There is none. The whole world saw it. And it is — we have to acknowledge as a free and sovereign nation that we abhor the violence that took place. We think it was inappropriate, the way in which they treated those protesters.

And so there is no question, we and the rest of the world looked at them and said, my lord, this is not the way to conduct?

STEPHANOPOULOS: But how do you respond to critics who say the United States should have come out forcefully right away, right away and said, this is wrong, stop it, and they say that would have made a difference?

BIDEN: Well, I don’t — I think the president was absolutely pitch-perfect. I think what the president did is exactly the right way. I think the president did not allow us to be used to as the scapegoat, us to be used as?

STEPHANOPOULOS: There were some reports that you were arguing for a more forceful response earlier.

BIDEN: Well, I think the president did it exactly right. I think he was correct.

STEPHANOPOULOS: And going forward, what next? What should the strategy be right now?

BIDEN: Well, look, the Iranian government has a choice. They either choose greater isolation, and from the whole world, or they decide to take a rightful place in the — in civilized, big, great nations. They can — that’s the path they have to choose.

STEPHANOPOULOS: Haven’t they already shown evidence in the last week of what their choice is?

BIDEN: Well, they have in terms of the way they conducted their election, but they haven’t in terms of whether — the real key issues to now, are they going to continue the nuclear program? Are they going to be braced by what happened? Is this going to alter their behavior internally or externally?

Look, responses that they saw on the street in any country have consequences. It’s hard to predict what those consequences will be.

STEPHANOPOULOS: But what are the consequences for the U.S. relationship? I mean, the president had said he wants to meet with the Iranians over the nuclear program through the P-5. But how does he engage with the Iranians now without breaking faith with those reformers?

BIDEN: Well, the way you do it is if they choose to meet with the P5, under the conditions the P5 was laid out, it means they begin to change course. And it means that the protesters probably had some impact on the behavior of an administration that they don’t like at all. And it believes and I believe that means there’s consequences to that.

Now, if they in fact decide to shut out the rest of the world, clamp down, further isolation, I think that takes them down a very different path.

STEPHANOPOULOS: How do you respond to those who say that it’s the United States now that should hit the pause button, there should be a cause correction, and we shouldn’t rush to sit down…

BIDEN: Well, we’re not. We’re not rushing to sit down.

As I said to you, we have to wait to see how this sort of settles out. And there’s already an offer laid out there by the permanent five plus one to say we’re prepared to sit down and negotiate with you relative to your nuclear program. And so the ball’s in their court.

STEPHANOPOULOS: When I saw President Ahmadinejad back in April, his response to that was that we need to see more from the United States first.

Is it fair to say now that there will be absolutely no more concessions to the Iranians in advance of those discussions?

BIDEN: It’s fair to say the position the president has laid out will not change.

STEPHANOPOULOS: But there will be engagement — if the Iranians want to…

(CROSSTALK)

BIDEN: If the Iranians seek to engage, we will engage.

STEPHANOPOULOS: And meanwhile, the clock is ticking…

BIDEN: If the Iranians respond to the offer of engagement, we will engage.

STEPHANOPOULOS: But the offer is on the table?

BIDEN: The offer’s on the table.

STEPHANOPOULOS: And meanwhile, Prime Minister Netanyahu has made it pretty clear that he agreed with President Obama to give until the end of the year for this whole process of engagement to work. After that, he’s prepared to make matters into his own hands.

Is that the right approach?

BIDEN: Look, Israel can determine for itself — it’s a sovereign nation — what’s in their interest and what they decide to do relative to Iran and anyone else.

STEPHANOPOULOS: Whether we agree or not?

BIDEN: Whether we agree or not. They’re entitled to do that. Any sovereign nation is entitled to do that. But there is no pressure from any nation that’s going to alter our behavior as to how to proceed.

What we believe is in the national interest of the United States, which we, coincidentally, believe is also in the interest of Israel and the whole world. And so there are separate issues.

If the Netanyahu government decides to take a course of action different than the one being pursued now, that is their sovereign right to do that. That is not our choice.

STEPHANOPOULOS: But just to be clear here, if the Israelis decide Iran is an existential threat, they have to take out the nuclear program, militarily the United States will not stand in the way?

BIDEN: Look, we cannot dictate to another sovereign nation what they can and cannot do when they make a determination, if they make a determination that they’re existentially threatened and their survival is threatened by another country.

STEPHANOPOULOS: You say we can’t dictate, but we can, if we choose to, deny over-flight rights here in Iraq. We can stand in the way of a military strike.

BIDEN: I’m not going to speculate, George, on those issues, other than to say Israel has a right to determine what’s in its interests, and we have a right and we will determine what’s in our interests.

STEPHANOPOULOS: Meanwhile, North Korea…

BIDEN: Yes.

STEPHANOPOULOS: … seven missile launches in the last 24 hours, 11 this week. Anything the United States can do about it?

BIDEN: The question is, is there anything that we should do about it?

Look, this has almost become predictable behavior. Some of it seems like almost attention-seeking behavior.

STEPHANOPOULOS: And you don’t want to give the attention?

BIDEN: And — no, I don’t want to give the attention, because, look, I think our policy has been absolutely correct so far. We have succeeded in uniting the most important and critical countries to North Korea on a common path of further isolating North Korea. They’re going to be faced with a pretty difficult choice, it seems to me.

STEPHANOPOULOS: But not a task that includes very forceful enforcement of the sanctions. The Russians and the Chinese blocked any boarding of the ships, didn’t they?

BIDEN: No, no. Well, what they did was, if you noticed, the ship had to turn around and come back. Why? Because no port would allow them into their port.

There was no place they could go with certitude that they would not be, in fact, at that point, boarded and searched. And so I would argue that it, in fact, worked.

STEPHANOPOULOS: Is our policy now though basically waiting for the Kim Jong-il regime to collapse?

BIDEN: Our policy is to continue to put united pressure from the very countries that North Korea was able to look to before with impunity. They could take almost any action and got no reaction, no negative reaction.

That’s changed. And it is — there is a significant turning of the pressure. And there are going to be some very difficult decisions that that regime’s going to have make.

There’s a real debate going on right now, George, about succession in North Korea.

STEPHANOPOULOS: Reports that he’s tapped his youngest son.

BIDEN: That is the report.

STEPHANOPOULOS: Do you believe it?

BIDEN: Well, if I had to bet, that would be my guess. But I don’t think anyone knows for certain.

STEPHANOPOULOS: The clock is also ticking on Afghanistan. Key members of Congress made it pretty clear during the war supplemental debate that they’re going to give until early next year to see progress in Afghanistan or they’re going to cut off the funding, move to cut off the funding.

Is that the right approach?

BIDEN: Look, I think the right approach is one we have chosen, the Obama/Biden administration.

We did a thorough review of what our objectives and policies were and should be in Afghanistan.

BIDEN: We set in motion a policy which is now only beginning to unfold. All the troops we agreed to increase are not even all in place at this point. And we also believe, as General Jones accurately said, that, ultimately, the success or failure in Iraq will not rest not on a military outcome, but on a both economic and political outcome internally, getting better governance in place and economic development in that country.

STEPHANOPOULOS: But do Americans have a right to expect that if we don’t see continued progress in the next six to nine months, six to 12 months, then we should think about cutting back and pulling out?

BIDEN: Look, I think the Americans have a right to expect success. And I think the success is measured by how we defined it.

STEPHANOPOULOS: At any cost?

BIDEN: No. Success. And if they conclude that, whatever the policy that’s being undertaken by any administration as not succeeding, they have a right to say, look, cease and desist. But I don’t think that’s where we’re going, George.

STEPHANOPOULOS: There were some reports this week that the president has already made the judgment sending General Jones over to Afghanistan with a clear message — no more troops. This is it, this is all you can get.

And Bob Woodward wrote about it. He talked about the general meeting with various military figures in Afghanistan, and this is what he said — this is what he reports that General Jones said: “If there were new requests for force now, the president would quite likely have a Whiskey Tango Foxtrot moment. Everyone in the room caught phonetic reference to WTF — which in the military now sort of means, what the (blank).”

Are you concerned that this is sending some kind of a chilling message?

BIDEN: No, not at all. Look, here’s…

STEPHANOPOULOS: You don’t want to hear the advice?

BIDEN: Look, no, no. We got the advice.

We spent five months with the entire national security team, the chairman of the Joint Chiefs of Staff, the secretary of state, the secretary of defense, the national security adviser down in that tank, down in that Situation Room, laboriously banging out the plans. The military came in with explicit requests. The president gave them what they asked for. It hasn’t even been implemented yet.

STEPHANOPOULOS: You were on the other side, it was reported, that you didn’t want an expansion of troops.

BIDEN: No, no. I did want an expansion of troops. There was a slight difference about how to layer them, how to proceed.

The president — we all ended up in — you know, this was an open discussion. And the thing I like about the president, he seeks everyone’s opinion.

Well, we reached a consensus opinion, and the consensus opinion of the national security team, of which I’m a part, was to do exactly what’s under way.

The point is — I suspect the point that Jim Jones is making is, hey, it hasn’t even been implemented yet. Troops are still on the way. Slow up, guys.

STEPHANOPOULOS: But to be clear, you’re saying if the military believes there should be more troops, they shouldn’t be afraid to give that advice. They should give that advice?

BIDEN: They should not be afraid to give whatever advice from the field or from the Pentagon to the president and the secretary of defense that they think they need.

STEPHANOPOULOS: While we’ve been here, some pretty grim job numbers back at home — 9.5 percent unemployment in June, the worst numbers in 26 years.

How do you explain that? Because when the president and you all were selling the stimulus package, you predicted at the beginning that, to get this package in place, unemployment will peak at about 8 percent. So, either you misread the economy, or the stimulus package is too slow and to small.

BIDEN: The truth is, we and everyone else misread the economy. The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.

Everyone thought at that stage — everyone — the bulk of…

STEPHANOPOULOS: CBO would say a little bit higher.

BIDEN: A little bit, but they’re all in the same range. No one was talking about that we would be moving towards — we’re worried about 10.5 percent, it will be 9.5 percent at this point.

STEPHANOPOULOS: But we’re looking at 10 now, aren’t we?

BIDEN: No. Well, look, we’re much too high. We’re at 9 — what, 9.5 right now?

STEPHANOPOULOS: 9.5.

BIDEN: And so the truth is, there was a misreading of just how bad an economy we inherited. Now, that doesn’t — I’m not — it’s now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we’re in? And we believe it is the right package given the circumstances we’re in.

We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money.

STEPHANOPOULOS: No, but a lot of people were saying that you needed to do something bigger and bolder then, including the economist Paul Krugman. He’s saying — right now he’s saying the same thing again — don’t wait. You need a second stimulus, you need it now.

BIDEN: Look, what we have to do now is we have to properly, adequately, transparently and effectively spend out the $787 billion.

STEPHANOPOULOS: That’s your job. You’re in charge of that now.

BIDEN: That is my job, and I think we’re doing it well. If you noticed, George, I mean, there were other predictions. This was going to be wasteful and all these terrible projects were going to be out there, and we’re wasting money. Well, that dog hasn’t barked yet.

STEPHANOPOULOS: Well, Senator Coburn has identified some.

BIDEN: Yes — no, he hasn’t, but he did, he identified one hundred ? forty-eight of which we had already killed. And so — and the rest I dispute. So the bottom line though is, I think anybody would say this has been pretty well managed so far.

The question is, how do you now — do we — what we have to do, George, is we have to, as this rolls out, put more pace on the ball. The second hundred days you’re going to see a lot more jobs created.

And the reason you are is now all of these contracts for the over several thousand highway projects that have approved.

STEPHANOPOULOS: But you’re also seeing states across the country cutting back on their programs. Many of the people on unemployment?

BIDEN: Sure.

STEPHANOPOULOS: ? today are going to run out of unemployment in September. That means for a lot of those people, if there is not a second stimulus, they’re going to be out in the cold.

BIDEN: Well, look, we have increased the amount of money unemployed — those on unemployment rolls have gotten, 12 million are getting more money because of the stimulus package.

We’ve increased the number of people eligible by 2 million people. We’ve given a tax cut to 95 percent of the people who get a pay stub. They have somewhere — $60 bucks a month out there that’s going into the economy.

There is a lot going on, George. And I think it’s premature to make the judgment?

STEPHANOPOULOS: So no second stimulus?

BIDEN: No, I didn’t say that. I think it’s premature to make that judgment. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid — the new electric grid.

And so this is just starting, the pace of the ball is now going to increase.

STEPHANOPOULOS: So you’re in charge of the stimulus. You’re the president’s envoy here in Iraq. You’re supposed to settle this dispute between the director of national intelligence and the CIA over who is going to appoint the station chiefs. By the way, have you solved that one yet?

BIDEN: I think we’ve solved that one.

STEPHANOPOULOS: You have?

BIDEN: Well, let me put it this way. I think we’re well on the way to that being solved.

STEPHANOPOULOS: Who won?

BIDEN: They both won.

STEPHANOPOULOS: So they’re going to share the responsibility to appoint to station chiefs?

BIDEN: Not done yet. Let me comment on that next week to you.

STEPHANOPOULOS: OK. Well, let me get to the broader point then. You’ve fixed — you say you’ve fixed a problem that will?

BIDEN: Well they fixed the problem.

STEPHANOPOULOS: ? to find out that they fixed the problem — look to find out the details on all of that. But you’ve got all of these discrete projects now. And when you came in you talked a lot about how you didn’t want to get bogged down in individual projects because you wanted to be, you know, the president’s primary adviser.

Are you’re worried you’re going to far in the other direction?

BIDEN: No. Because all of these projects have end dates on them. You know, they all have sell-by dates, because — and that’s I think that — I hope I’ve brought some real expertise to this job, available to the president.

The things he has asked me to do. I hope I’m relatively good at. And — but all of them have specific objectives.

STEPHANOPOULOS: Finally, Sarah Palin.

BIDEN: Yes.

STEPHANOPOULOS: You were the last person to run against her.

(LAUGHTER)

STEPHANOPOULOS: Were you surprised by her decision to step down?

BIDEN: Well, look, you and I know — and I shouldn’t say that because that implicates you in my answer, so. But those who have been deeply involved in politics know at the end of the day it is really and truly a personal deal.

And personal family decisions have real impact on people’s decisions. I love reading these history books and biographies of people, the reason they made the choice to run or not run was because the state of the economy.

It maybe had a lot to do with what the state of their life was, and the state of their family, et cetera. So I’m not going to second guess her.

STEPHANOPOULOS: She cast herself as the victim of political blood sport in that press conference. Is that how you see it?

BIDEN: No. I respect her decision. I don’t — I don’t know what prompted her decision to not only not run again and also to step down as a consequence of the decision not to run in 2010. And I take her at her word that had a personal ingredient in it. And you have to respect that.

STEPHANOPOULOS: Mr. Vice President, thank you very much.

BIDEN: Thank you.

GEORGE STEPHANOPOULOS, HOST: Madam Secretary, thanks very much for doing this.

HILLARY CLINTON, SECRETARY OF STATE: I’m glad to see you, George.

STEPHANOPOULOS: You know, we were just talking about Cairo, did you ever imagine you’d be here as secretary of state?

CLINTON: Never. (LAUGHTER)

CLINTON: Never crossed my mind. And what an extraordinary honor to be here, especially for this speech today.

STEPHANOPOULOS: The president has a very high-powered team, Vice President Biden, General Jones, Secretary Gates. You’ve got envoys for Iran, Afghanistan, North Korea. How do you fit in?

(LAUGHTER) CLINTON: Well, I&

STEPHANOPOULOS: What is your role, exactly?

CLINTON: Well, my role is as the chief diplomat for the United States of America. And, you know, when I agreed to do this job, I made it very clear to the president that I would be able to run the State Department and USAID, and that we would have to forge a team that I think we’ve done very well. And that I wanted special envoys, because we were inheriting so many hotspot problems that I knew you could never have one person possibly address all of that.

STEPHANOPOULOS: It also gives you the ability to get out of the crisis management and carve out areas where you’re really going to take initiative. What are those?

CLINTON: Well, I’m having to do both. I mean, I spend a lot of my time on the problems that you would imagine, Afghanistan and Pakistan, the Middle East, Iran. But I’m also working to create a strategic set of priorities that will guide our efforts.

So for example, there are specific regional and country-based endeavors that we are teeing up. We are going to work really hard on our relationships with, for example, Indonesia and Turkey and India.

We have a strategic and economic dialogue that will start the last week in July with China that Secretary Geithner and I are going to co-lead. I mean, we& (CROSSTALK) STEPHANOPOULOS: Plenty of work to go around.

CLINTON: There is plenty of work to go around. But then there are transnational problems. I mean, the president asked me to lead the effort on food security. The president also wants us to focus on Haiti. And ironically the United Nations&

STEPHANOPOULOS: The — you know, President Clinton&

CLINTON: & secretary-general asked Bill to be the special envoy. So we’re really going to have a united effort by our government and by the international community. Those are just some of the, you know, very specific and more general challenges that we are taking on and managing.

STEPHANOPOULOS: You’re also developing a reputation for blunt talk as secretary. You talked about Pakistan abdicating its responsibilities, about the idea that we get into negotiation with North Korea is implausible. And especially on this issue of settlements with Israel, you were very strong last week, so was the president. And I don’t know if you’ve seen the headlines in Israel, headlines talking about the American threat. Publicly the prime minister is saying that this is just unreasonable, these demands from the United States. And privately he was reported to have said, and this is a quote: “What the hell do they want from me?”

CLINTON: Well, George, I think it’s very clear, as you heard in the speech from the president here in Cairo, that he wants to focus from the very beginning of his term in office on doing everything he can to try to bring the Israelis and the Palestinians together. We were very close in 2000. And it’s heartbreaking to see where we are today. And we can’t just stand by and expect time to work its magic. So that means, as the president said in his speech, and as he has said on several other occasions prior to it, that we have to do our very best to reassure Israel, to demonstrate our commitment to Israel’s security, that the bonds we have are unshakeable and durable. But we do have a view about Israel’s security. We see historical, demographic, political, technological trends that are very troubling as to Israel’s future. At the same time, there is a legitimate aspiration of the Palestinian people that needs to be addressed.

STEPHANOPOULOS: So is there any room for compromise on the settlements issue?

CLINTON: Well, I don’t think we want to pre-judge the effort. I think that if you look back, certainly from my perspective, every Israeli leader that I have personally known and others who I have looked at through an historical lens, has come to the same conclusion. Who would have predicted the Ariel Sharon or Ehud Olmert would have reached the conclusion they reached about what was in Israel’s best interest. Who would have predicted that even Prime Minister Netanyahu, in his earlier term, during the 1990s, would have made some of the decisions he made.

STEPHANOPOULOS: But his team says now that if you continue to push this, it’s going to bring down his government.

CLINTON: We are setting forth our views. Obviously decisions about how to go forward are up to the Israelis and the Palestinians. But I think it is an appropriate role for the United States, and certainly it is what the president has decided, to make clear some of the obstacles he sees. Now remember, the Israelis made a commitment in the road map in the prior administration –

STEPHANOPOULOS: But they say that includes an understanding for natural growth inside the settlement.

CLINTON: Well, that was an understanding that was entered into so far as we are told, orally. That was never made a part of the official record of the negotiations, as it was passed on to our administration. No one in the Bush administration said to anyone that we can find in our administration –

STEPHANOPOULOS: Not only Elliot Abrams? You wrote about that.

CLINTON: Nobody in a position of authority at the time that the Obama administration came into office said anything about it. And in fact, there is also a record that President Bush contradicted even that oral agreement.

But, the fact is that the road map which was agreed to officially, adopted by the Israeli government said something very clear about settlements.

So, I think that what the president is doing is saying, look, everybody should comply with the obligations you’ve already committed to. And for the Palestinians, let’s not forget. They must end incitement against Israel. They must demonstrate an ability to provide security.

STEPHANOPOULOS: That’s what I wanted to ask you about. Abbas was in Washington, last week, He had an interview in the “Washington Post” where he sure seemed to suggest that he doesn’t have to do anything right now.

CLINTON: Well, I think you’re seeing public positions taken, which is understandable in a process like this. But, we’ve made it very clear to President Abbas, what we expect from him, as well.

STEPHANOPOULOS: How about Iran? You reported in the papers back in March, when you met with the Foreign Minister of the UAE that you were skeptical of the possibility that diplomacy would work to stall or stop Iran’s nuclear ambitions. Are you still that doubtful?

CLINTON: Well, I am someone who’s going to wait and see. I mean, I want to see what the president’s engagement will bring. We have a team of people who we have tasked to work on this. I think there’s an enormous amount of potential for change if the Iranians are willing to pursue that –

STEPHANOPOULOS: Well, what do you think they want deep down? You know, you read some of their public declarations by their supreme leader and others saying that they consider nuclear weapons un-Islamic. Yet, they continue to pursue the nuclear program.

CLINTON: But George, one of the values of engagement is we need to have better information, and maybe about each other. Not just about a one-way street of information. The idea that we could have a diplomatic process with Iran means that for the first time, we would actually be sitting at a table across from Iranians authorized by the supreme leader to talk with us about a whole range of issues. That gives us information and insight that we don’t have. Of course there’s a contradiction because we don’t have any really clear sense as to what it is they are seeking.

Now, one of the things that you heard the president say is, you know, we understand the legitimate right of nations to have access to peaceful, nuclear energy. If that is at the core of what they want, there are ways of accommodating that do not lead to a nuclear weapon. But, we have to test that and we have to be willing to sit and listen and evaluate without giving up what we view as a primary objective of the engagement, which is to do everything we can to prevent Iran from becoming a nuclear weapons state.

STEPHANOPOULOS: Your own envoy Dennis Ross has said one way to strengthen the position the United States going into these negotiations is to make it very clear that if Iran used nuclear weapons against Israel or any U.S. ally, that would be met as an attack on the United States — full response. Now, that was your position during the campaign, as well.

Is it U.S. policy now?

CLINTON: I think it is U.S. policy to the extent that we have alliances and understandings with a number of nations. They may not be formal as it is with NATO, but, I don’t think there is any doubt in anyone’s mind that were Israel to suffer a nuclear attack by Iran, there would be retaliation.

STEPHANOPOULOS: By the United States?

CLINTON: Well, I think there would be retaliation. And I think part of what is clear is we want to avoid a Middle East arms race which leads to nuclear weapons being in the possession of other countries in the Middle East. And we want to make clear that there are consequences and costs. Now, let me just put it this way. If Iran is seeking security, if they believe — and you know, you have to put yourself into the shoes of the other party when you negotiate — if they believe that the United States might attack them the way that we did attack Iraq, for example –

STEPHANOPOULOS: Before they attack, as a first strike.

CLINTON: That’s right, as a first strike. Or, they might have some other enemies that would do that to them. Part of what we have to make clear to the Iranians is that their pursuit of nuclear weapons will actually trigger greater insecurity because right now, many of the nations in the neighborhood, as you know very well –

STEPHANOPOULOS: Because Israel will strike before they can finish.

CLINTON: Well, but not only that. I mean, other countries — other Arab countries are deeply concerned about Iran having nuclear weapons. So, does Iran want to face a battery of nuclear weapons countries — (CROSSTALK)

STEPHANOPOULOS: Can you get those other Arab nations to say that publically? That was part of the president’s theme today. CLINTON: Well, you know, we’ve been there a little over four months. And clearly a lot of what we’re doing is teeing up our framework for decision making. We are aggressively pursuing diplomacy, not as an end in itself, but as a means to try to resolve some of these outstanding and very difficult problems. We are trying to make clear that the United States is of course going to pursue our interests in values. But, frankly, we believe there are ways that we can make them consonant with the issues and values that are important to others, as well.

STEPHANOPOULOS: You know, when I saw President Ahmadinejad last month, he said the U.S. wasn’t really walking the block here and he cited the idea that President Obama never responded to his initial letter of congratulations. Why not?

CLINTON: Well, I think that President Obama has made very clear that he is going to put forth an open hand. But not as part of an electoral ploy or propaganda.

STEPHANOPOULOS: So you have to let the elections play out.

CLINTON: I think just like in every country. There is a process that takes place during an election. That will be over soon. And then we’re going to hope to get a positive process going.

STEPHANOPOULOS: With North Korea it seems like nothing has worked. Engagement doesn’t work, isolation doesn’t work. They keep on pursuing their nuclear ambitions. And the problem with North Korea is that they’ve tried to sell every single weapon they’ve ever made.

CLINTON: Right.

STEPHANOPOULOS: So, what does that mean? How do we stop them now and what happens if they try to sell nuclear material?

CLINTON: One of the positive developments, George, in the face of what has been very provocative and belligerent behavior by the North Koreans is that it has actually brought the members of — six-party process — Japan, South Korea, China, Russia, the United States, much closer together in how we view –

STEPHANOPOULOS: But that process isn’t going anywhere, is there?

CLINTON: Well, but I think what is going somewhere is additional sanctions in the United Nations. Arms embargo, other measures taken against North Korea with the full support of China and Russia.

STEPHANOPOULOS: Including enforcing past resolutions which gives the U.N. the ability to board North Korean ships?

CLINTON: Well, we are working very hard to create a mechanism where we can interdict North Korean shipments. Obviously some countries — not just the ones I named — but others have some legitimate concerns about setting precedent and alike. But, we are working very hard. I’ve personally talked with all the foreign ministers. Some of them many more times than just a couple. We’ve been in very close communication. Obviously we’re working closely with our team in New York. We think we’re going to come out of this with a very strong resolution with teeth that will have consequences for the North Korean regime.

STEPHANOPOULOS: And what are the consequences if they try to ship nuclear material elsewhere?

CLINTON: We will do everything we can to both interdict it and prevent it and shut off their flow of money. If we do not take significant and effective action against the North Koreans now, we’ll spark an arms race in Northeast Asia. I don’t think anybody wants to see that. And so part of what we’re doing is again, sharing with other countries our calculus of the risks and the dangers that would lie ahead if we don’t take very strong action.

STEPHANOPOULOS: Several senators wrote the president a letter just the other day that North Korea should go back on list of the states who sponsor terrorism. Will you do that?

CLINTON: Well, we’re going to look at it. There’s a process for it. Obviously we would want to see recent evidence of their support for international terrorism.

STEPHANOPOULOS: Do you have any?

CLINTON: Well, we’re just beginning to look at it. I don’t have an answer for you right now.

STEPHANOPOULOS: Because the senators say they never stopped with these actions.

CLINTON: Well, we — you know, we take it very seriously. I mean, obviously they were taken off of the list for a purpose and that purpose is being thwarted by their actions.

STEPHANOPOULOS: One other issue on North Korea. The trial has begun for the American journalists.

CLINTON: Right.

STEPHANOPOULOS: And the families of the journalists have come out very clearly and said, the only way this is going to be solved is if the United States government gets involved directly. Have you been involved directly in any way?

CLINTON: I have been. I have been involved directly in working with our team as they have made approaches and requests for information through the channels we use with North Korea. The Swedish ambassador in Pyongyang is taking care of our interests there. He has visited both young women I think, now three times, if I’m not mistaken. I’ve met with the families. We have made it clear through statements, both public and private that we view this as a humanitarian issue –

STEPHANOPOULOS: We were told that you sent a letter saying that the girls didn’t mean — the women didn’t mean to go into North Korea, and asking for their release.

CLINTON: I have taken every action that we thought would produce the result we’re looking for. We think that the charges against these young women are absolutely without merit or foundation. We hope the trial ends quickly, it’s resolved and they’re sent home.

STEPHANOPOULOS: Have you gotten any hopeful signs back?

CLINTON: We have gotten some responses but we’re not sure exactly who’s going to be making this decision and what the reasons for the eventual decision are. So, we’ve been very careful in what we’ve said because clearly we don’t want this pulled into the political issues that we have with North Korea, or the concerns that are being expressed in the United Nations Security Council. This is separate. It is a humanitarian issue and the girls should be let go.

STEPHANOPOULOS: It’s an interesting point: you don’t know who is going to make this decision. Do you believe these reports that Kim Jong-il has tapped his youngest son as his successor? CLINTON: We obviously are following this very closely. We don’t yet know what the outcome of that decision& (CROSSTALK)

STEPHANOPOULOS: What would that mean?

CLINTON: We don’t know. I mean, we would have to wait and evaluate it, the time of it, who might be essentially, you know, put in place to supervise him, if he were the choice. We have to evaluate all of that.

STEPHANOPOULOS: This week is also the anniversary of — the 20th anniversary of the massacre at Tiananmen Square. And you put out a very strong statement on that anniversary. Yet when you went to China earlier this year, you basically said the Chinese know what we think about human rights.

And I guess what I’m trying to get at is, how do you approach that issue? When do public statements make a difference? When should diplomacy be conducted privately? And who is your real audience with these statements?

CLINTON: You know, George, it’s such a great question. And there is no one easy answer, because I think so much of it depends upon what our objectives are. We have made very clear time and time again our concerns about religious freedom in China, treatment of Tibet, Tibetan culture. So that is — we’re on the record with that. We’ve had these, you know, very strong statements that we’ve made historically, going back years, and so of course we want everyone to know that we still feel very strongly about it. But we also would like to see if there is some way we could actually chip away at Chinese resistance to providing some more, at least cultural and religious autonomy for Tibetans. So we — it’s a constant weighing process. You know, I think a lot of times the public statements can turn out to be counterproductive. They can harden positions. Yet at the same time, the public statements can hearten those who are the dissidents. So trying to keep that in balance so that we don’t ever turn our backs on those who are struggling for the very rights that we believe in so strongly and that we think are universal rights, and yet looking for ways that we can actually get results, not just score debating points or, you know, have somebody say, good for you, you made a strong statement.

So what we’re trying to do, and I think you hear it from what the president and I have been saying over the last four months is to really focus in on where we can make progress.

STEPHANOPOULOS: A year ago, you bowed out of the presidential campaign, very graceful speech. It was a bitter campaign. And I’m just wondering, how did president Obama convince you to come on his team?

(LAUGHTER) CLINTON: Well, you know, George, I never had any — any dream, let alone inkling that I would end up in President Obama’s cabinet. When I left the presidential race after getting some sleep and taking some deep breaths, I immediately went to work for him in the general election. I, you know, traveled the country. I worked hard on my supporters. I made the case, which I believed strongly in making sure that we elected him our president. And I was looking forward to going back to the Senate and, frankly, going back to my life and representing New York, which I love. And I had no idea that he had a different plan in mind. So when&

STEPHANOPOULOS: Since the primaries.

CLINTON: Well, but I had — I mean, that was certainly never expected. And after the election, I started seeing little, you know, tidbits in the press, I thought it was absurd. I thought, you know, this is the kind of silly stuff that ends up in the press. And then when he called and asked me to come see him, and we had our first conversation, I said, you know, I really don’t think I’m the person to do this, I want to go back to my life. I really feel like I owe it to the people of New York. And I gave him a bunch of other names of people who I thought would be great secretaries of state. But he was quite persistent and very persuasive. And, you know, ultimately it came down to my feeling that, number one, when your president asks you to do something for your country, you really need a good reason not to do it. Number two, if I had won and I had asked him to please help me serve our country, I would have hoped he would say yes. And finally, I looked around our world and I thought, you know, we are in just so many deep holes that everybody had better grab a shovel and start digging out.

STEPHANOPOULOS: Final question. The Economist magazine said this week that the question you raised in that famous “3 a.m.” ad is right back in the center of American politics.

Has the president answered it for you?

CLINTON: Absolutely. And, you know, the president in his public actions and demeanor, and certainly in private with me and with the national security team, has been strong, thoughtful, decisive, I think he is doing a terrific job. And it’s an honor to serve with him.

STEPHANOPOULOS: Madam Secretary, thank you very much.

CLINTON: Thanks. Good to talk to you.

STEPHANOPOULOS: During the last administration, no other world leader next to you was as critical of the American administration as Mr. Chavez. Yet, look at this picture right here.

Is this a picture that you would like to see, you and President Obama? And what do you think the Iranian people would think of you and President Obama meeting, shaking hands, engaging in conversation?

AHMADINEJAD: (Through Translator) Well, we are calling for peace and security for all. We would like international relations to be based on justice and friendship. Wherever a hostile relationship turns into friendship, that would make us happy.

STEPHANOPOULOS: President Obama says that’s exactly what he wants right now. He says he wants a new beginning in a relationship with Iran. He sent a message to the Iranian people on the occasion of the Nowruz holiday where he called Iran a great civilization.

He talked about the Islamic Republic of Iran, where he signaled that he wasn’t interested in regime change, and he talked about his vision for the United States/Iranian relationship.

OBAMA: It’s a future where the old divisions are overcome, where you and all of your neighbors and the wider world can live in greater security and greater peace”.

STEPHANOPOULOS: Do you share that vision?

AHMADINEJAD: You need to appreciate that the American administration, 29 years ago, unilaterally cut its relations with Iran. In the past 29 years, different U.S. administrations have opposed the Iranian people. Now they say that we have given up that enmity. That’s fine.

We have welcomed such comments. But an administration which, up until yesterday, was saying that I’m going to kill you, and today says that I’m not going to kill you, is that sufficient?

STEPHANOPOULOS: So there is change, though. What will Iran do in response? The United States has said that the United States is ready to talk with Iran and the other great powers — Britain, France, Germany, Russia and China.

Are you prepared to sit down at those talks without preconditions?

AHMADINEJAD: Well, previously, first of all, I sent a congratulatory message to Mr. Obama. This was a major decision, although the Iranian people were very much dismayed with the conduct of previous U.S. administrations. And I was criticized here at home, in Iran.

Nevertheless, I did that. I am yet to receive a response.

With the European group and the American group, we will talk. We have announced as much that we are going to negotiate. But…

STEPHANOPOULOS: When will you join those talks?

AHMADINEJAD: … again, based on justice and mutual respect.

Well, after everything is said and done — well, planning needs to be made and timetables need to be set.

We believe in talking, in negotiating, based on sincerity and respect and justice. But the U.S. administration severed its relations with us.

STEPHANOPOULOS: But that was the past administration. And now President Obama said he is prepared to sit down along with the other European powers without any preconditions. And it sounds to me as if you’re suggesting now Iran is the one with the preconditions echoing in fact the policy of the last U.S. administration.

Are there preconditions or not? Why not sit down right now with the U.S. and the European powers to discuss the nuclear program?

AHMADINEJAD: Last year we proposed a package of proposals for talks, everyone knows that in this year many changes, developments have unfolded on the international stage. Many new issues have been added to the agenda, so to speak.

And we are reconsidering our proposed package. We are adding new issues to the realm, if you will, of the talks. And we are going to make that public as soon as possible. We are always ready to talk…

STEPHANOPOULOS: Why not now?

AHMADINEJAD: … with no preconditions.

What should I do?

STEPHANOPOULOS: Tell me your proposal.

AHMADINEJAD: Should I share that with you, sir?

STEPHANOPOULOS: The world, American viewers.

AHMADINEJAD: We are going to do that officially. We think that we should prepare the ground so that all states and peoples can have their say. We are ready to contribute to international security, peace, and global friendship and global disarmament.

STEPHANOPOULOS: you say you want to talk on the basis of respect, the president has expressed his respect for the Islamic Republic of Iran. And he said he is ready to talk.

I just want to know, when will Iran sit down with the United States and the European powers to discuss the nuclear program?

AHMADINEJAD: Well, the nuclear issue of ours is a special issue. We think that the nuclear issue needs to be resolved in the context of the agency and regulations. we are just utilizing our legal rights.

I have no reservations when it comes to talking.

STEPHANOPOULOS: So you’re ready to talk without preconditions?

AHMADINEJAD: No, no. We should just have a clear-cut framework for talks. The agenda should be clear.

But so far we have only heard this from the media, the newspapers, that they’re interested in talking. And obviously they’re going to receive a response from the papers. I was fully expecting Mr. Obama to participate in the Geneva Conference. What issue is more important than racial discrimination?

The United Nations has organized…

STEPHANOPOULOS: Yes, sir, since you bring that up…

AHMADINEJAD: … such a conference. I don’t think or believe that Mr. Obama supports racism. However, the gentleman should have been there and should have condemned outright racism and racial discrimination.

This is a good possibility for talks and cooperation. We should all cooperate with one another to help…

STEPHANOPOULOS: What he doesn’t…

AHMADINEJAD: … racism to go away from the international…

STEPHANOPOULOS: What he doesn’t agree…

(CROSSTALK)

STEPHANOPOULOS: If I may — excuse me, sir, if I may express his position, is the idea that Israel is a racist state.

OBAMA: ” I found many of the statements that President Ahmadinejad made, particularly those directed at Israel, to be appalling.

STEPHANOPOULOS: And, frankly, many in the West look at your speech in Geneva. And they wonder whether you really do want a better relationship with the West when you deny that there was a Holocaust when it’s an established historical fact, they believe that you’re not showing respect for the West and the beliefs of the West.

AHMADINEJAD: When I was talking against the Zionist regime in the racism conference, the first proviso for successful talks would be to give the other party the freedom to speak. Mr. Obama has the right to have his own opinion, obviously.

He is ready to express his points of view. But the Geneva conference had been organized to combat racism, to oppose racism. My point of view is that the Zionist regime is the manifestation of racism.

STEPHANOPOULOS: Yet when you speak at that conference, Western diplomats walk out. Even the U.N. secretary-general condemns your remarks.

AHMADINEJAD: That’s fine! That’s fine! They are free to have their own points of view. Why do they want to deny me my ideas

STEPHANOPOULOS: Why do you insist on questioning the Holocaust even when it’s established as a historical fact and even when politicians here in Iran worry that kind of talk isolates Iran?

AHMADINEJAD: I’m going to talk about that as well. Don’t be hasty. I have posed two questions over Holocaust.

My first question was, if the Holocaust happened, where did it take place? In Europe. Why should they make amends in Palestine? The Palestinian people had no role to play in the Holocaust. They had no role, for that matter, in the Second World War.

Racism happened in Europe, the amends are made in Palestine?

My second question about the Holocaust, if this is indeed a historical event, why do they want to turn it into a holy thing? And nobody should be allowed to ask any questions about that? Nobody study it, research it, permit it to research it. Why?

STEPHANOPOULOS: It’s the most studied historical event in history.

AHMADINEJAD: If this is a historically documented event, why do Western states show so much sensitivity towards a historical event? They do not want the lid to be taken off. I am asking them to permit studies.

STEPHANOPOULOS: Let’s talking about something that’s happening right now. President Obama has appointed Senator George Mitchell to help negotiate a peace between Israel and Palestine. Do you support that effort?

AHMADINEJAD: Well, we are asking for the legal rights of the Palestinian people. What we are saying is that the Palestinian people like other peoples have the right to determine their own fate. Muslims, Christians and Jews alike. We should — they should allow them to engage in elections, free elections and a free referendum to determine for themselves their own fate.

We must not repeat the mistakes of the past.

STEPHANOPOULOS: Do you believe President Obama’s new effort is repeating the mistakes of the past?

AHMADINEJAD: Well? I am yet to have a clear idea about Mr. Obama’s Palestinian policy. However, the gentleman’s support of the massacre of Gazans in support for the criminals who were responsible for that atrocity was a major mistake on the part of the gentleman. I think that if Mr. Obama wants to help with the Palestinian issue, he has to move in accordance with justice, fair play and also, again, I am calling for the right for the Palestinians to determine their own fate. STEPHANOPOULOS: If the Palestinian people negotiate an agreement with Israel and the Palestinian people vote and support that agreement, a two state solution, will Iran support it?

AHMADINEJAD: Nobody should interfere, allow the Palestinian people to decide for themselves. Whatever they decide.

STEPHANOPOULOS: That’s all I’m asking.

AHMADINEJAD: It is the right of all human beings.

STEPHANOPOULOS: If they choose a two state solution with Israel, that’s fine.

AHMADINEJAD: Well, what we are saying is that you and us should not determine the course of things beforehand. Allow the Palestinian people to make their own decisions.

STEPHANOPOULOS: But if they choose a two state solution, if they choose to recognize Israel’s existence, Iran will as well?

AHMADINEJAD; Let me approach this from another perspective. If the Palestinians decide that the Zionist regime needs to leave all Palestinian lands, would the American administration accept their decision? Will they accept this Palestinian point of view?

STEPHANOPOULOS: I’ll ask them. But I’m asking you if Palestinians accept the existence of Israel, would Iran support that?

AHMADINEJAD: Can I ask you questions as well?

STEPHANOPOULOS: I’m not part of the American government. I’ll put that question to the American government.

AHMADINEJAD: I’m asking that people vote.

STEPHANOPOULOS: But I have a question for you as president of Iran.

AHMADINEJAD: That’s fine!

STEPHANOPOULOS: If the Palestinians sign an agreement with Israel, will Iran support it?

AHMADINEJAD: Whatever decision they take is fine with us. We are not going to determine anything. Whatever decision they take, we will support that. We think that this is the right of the Palestinian people, however we fully expect other states to do so as well.

The U.S. administration, European governments. The right to determine their fate by the Palestinians should be respected by all of them.

STEPHANOPOULOS: Let me ask one final question. You are up for election on June 12. If you are successful in this reelection, what is your hope for the Iranian-U.S. relationship over the next four years?

AHMADINEJAD: Well, Iran and U.S. relations are dependent on the decision taken by the U.S. administration. Mr. Obama sends us messages of friendship but in the communique issued by the five plus one, enmity can be seen. So this is a dual route, if you will.

I have sent a message to Mr. Obama myself. We welcome change. We are praying to the All Mighty for that. And we will help to bring change about.

STEPHANOPOULOS: Mr. President, thank you very much for your time.

AHMADINEJAD: Thank you. Good luck. And please convey my regards to the American people.

[*] STEPHANOPOULOS: Good morning and welcome to “This Week.”

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: We put in place a comprehensive strategy designed to attack this crisis on all fronts.

(END VIDEO CLIP)

STEPHANOPOULOS: Our headliner this morning, the man behind Obama’s plan.

(BEGIN VIDEO CLIP)

GEITHNER: We made some significant progress.

We have a moment of opportunity now.

We believe we have to provide very substantial forms of financing.

(UNKNOWN): Today we love Geithner. Two weeks ago, we didn’t like him. We thought he was nothing. Today we like him. He’s a genius.

(END VIDEO CLIP)

STEPHANOPOULOS: In his first Sunday interview, the secretary of the Treasury, Tim Geithner.

Plus, Geithner’s most prominent critic.

(BEGIN VIDEO CLIP)

PAUL KRUGMAN, NEW YORK TIMES: It’s a plan to rearrange the deck chairs and hope that that keeps us from hitting the iceberg.

(END VIDEO CLIP)

STEPHANOPOULOS: Nobel Prize winner Paul Krugman joins our roundtable, with George Will, Cokie Roberts and Matthew Dowd.

And as always, the Sunday funnies.

(BEGIN VIDEO CLIP)

(UNKNOWN): Michelle Obama’s planting a vegetable garden on the White House lawn. You know the economy is bad when the Obamas are afraid of running out of food.

(END VIDEO CLIP)

STEPHANOPOULOS: Hello again. Last week, he was under fire; this week, he was everywhere, rolling out new proposals to shore up America’s finances. And today, Treasury Secretary Tim Geithner joins us for his first Sunday morning interview. Welcome to “This Week.”

GEITHNER: Thanks, George. Good to be here.

STEPHANOPOULOS: So you lay out the first phrase of the bank plan back in February. The Dow drops 382 points. This week, you laid out the new phase of the bank plan, 500-point rise over the course of the week. Do you feel like the comeback kid?

GEITHNER: George, we’re facing still a lot of challenges. Can’t judge a plan on the reaction one day one week. But we’ve done a lot in these eight weeks. You know, the president’s housing plan has already helped bring down interest rates. Millions of Americans now are going to be able to take advantage of lower interest rates. If you take a typical family living in a $180,000 home, the rate reductions we’ve already seen could save them as much as $2,000 a year.

STEPHANOPOULOS: And we did see a lot of encouraging signs in the economy this week. New home sales were up. Mortgage refinances, as you pointed out, were up. Even durable goods orders were up, and inventories went down. And of course, a 20-percent rise in the stock market over the last couple of weeks. What does this tell you? What should Americans know right now about where the economy is and whether recover is in sight?

GEITHNER: Well, these are encouraging signs, and it’s good when you see the new surprise on the upside, rather than the other way.

STEPHANOPOULOS: So you were surprised?

GEITHNER: Well, I think these are, again, they came in above expectations, much (inaudible) — that’s a very good sign. But it’s very important for people to understand that, you know, it took us a long time to get into this mess. It’s going to take us a while to get out of this. Progress is not going to be even. It’s not going to be steady. The really important thing is that the administration is going to do what is necessary working with the Congress to making sure we’re putting in place very powerful programs to get Americans back to work.

STEPHANOPOULOS: So you’re barraged by economic statistics every day. I’m sure there are a bunch of screens in your office. What is the single most important statistic that you are looking at, that you’re tracking to say, when this turns, we’re out of the woods?

GEITHNER: There is no single number you have to look at. You need to look at what people are doing with the income and the savings they have. Are they spending? Are businesses expanding? Are they hiring more people? Are interest rates coming down? Is credit starting to flow again? You have to look at that broad suite of things. There’s no single number that gives you the health — the measure of the health of the economy.

STEPHANOPOULOS: What is the next shoe to drop? In talking to business leaders over the last couple of weeks, I hear a lot of concern about the commercial real estate market. And from bankers especially, they’re concerned that as unemployment rises, their credit card defaults could really go through the roof?

GEITHNER: There’s no doubt there’s more losses ahead for the financial system, but George, we’ve had a lot of adjustment already. One of the things about the American economy is, change happens here with brutal force, much more quickly than it happens around the world. And we’ve already had — you know, we’re 18 months into this, and we’ve had…

STEPHANOPOULOS: It’s a long recession.

GEITHNER: It is a long recession, and it’s a — it’s been dramatic and painful and brutal in some ways, in part because adjustments happen here so quickly. But that’s a good thing too, because that means more of that adjustment process is behind us.

Now, the important thing, though, is that we keep at it. You know, the big mistake governments make in recessions is they put the brakes on too early.

STEPHANOPOULOS: Is that what happened during the depression? Is that what Franklin Roosevelt did?

GEITHNER: That’s one thing that happened in the depression. It’s happened in Japan, too. It’s happened in a lot of countries in the world. They see that first glimmer of light, and the impetus to policy fades and people are putting on the brakes, and we’re not going to do that.

STEPHANOPOULOS: But I wonder about, as you look in the long term — and you believe we’re obviously going to come out of this at some point. You believe the recovery will start, what, the end of this year?

GEITHNER: Most private economists believe you’re going to find a more durable bottom in the second half of this year and then have growth come back.

STEPHANOPOULOS: But even if we come out of that, a lot of economists worry that this recovery is going to feel like a recession, that we’re going to have a jobless recovery. Very — I see you nodding your head. You believe that?

GEITHNER: I think a lot — people worry about this. You have a recession like this, which is born out of a period where people borrowed too much, and we let our financial system take on too much risk. The risk in that conduct is you have a longer, slower, more gradual process of adjustment and recovery.

STEPHANOPOULOS: And some experts believe that we’re really entering a brand new world. I was struck by a piece of research I saw from a branch of Citigroup. This was — and I’m going to share it with our viewers. They’re saying, “Don’t be in a state of denial, we are really entering a brand new economic world even after the recovery, because for so long the U.S. has been acting like a leveraged hedge fund.”

And they go on to say: “Not only is the lifestyle and wealth creation likely to be unsustainable going forward, but if you believe, as we do, that we’ve been operating in a leveraged economy, then the new normal in terms of economic data, profitability of companies, et cetera, may be a shadow of the past.”

So do Americans have to get used to the idea that the boom times really aren’t coming back?

GEITHNER: Well, we’re going to emerge out of this stronger. And we’re going to do that because the president and the Congress are going to make sure that we have the government doing a better job of things it needs to do.

So we have a more productive economy in the future, better education outcomes, better health care system, better energy policies, stronger infrastructure.

STEPHANOPOULOS: Stronger, but as affluent as we were in the past?

GEITHNER: Well, you know, we want to have sustainable growth. We don’t have — we don’t want to have a recovery which is going to be artificial and short-lived, just produce the seeds of the next crisis.

We want to have a durable recovery based on a stronger foundation that has a stronger, more productive economy emerging through it where the gains are more broadly shared across the economy as a whole.

STEPHANOPOULOS: So income inequality goes down?

GEITHNER: It should go down. Again, you know, if you look at the record of performance in the ’90s, you know, we had very strong productivity growth during a period of fiscal discipline, fiscal responsibility, strong private investment, and the gains were shared much more broadly.

We can do that as a country, but it requires getting this government to do a better job of doing things only governments can do. That’s why I assume important we get better outcomes. That’s why fixing our health care system and get costs growing more slowly is so important. That’s why we need a better energy policy. And that’s why infrastructure needs to be improved.

STEPHANOPOULOS: But do you really believe we’re going to get back to what we saw in the 1990s in terms of the kind of affluence we saw across the board?

GEITHNER: George, I think Americans should be optimistic about the future of this country. We are a strong, remarkably resilient country. We are still the most productive economy in the world by many measures.

We have a university system that is the envy of the world. People with an idea still want to come to the — America to grow business, build on that idea. That’s a great source of strength for our recovery.

But we need this government, though, to do a better job of doing what governments have to do.

STEPHANOPOULOS: And you are obviously trying to do that with your plans to shore up the banking system. You laid out what to do about these legacy toxic assets in the banking system this week. And a lot of people are wondering, will it actually work? The stock market definitely seemed to like it, so did a lot of experts. As you know, the Nobel Prize-winning economist Paul Krugman was not a fan. And I want to show what he wrote this week in The New York Times.

He said when he read this plan, it gave him a sense of despair. And he went on to say: “Financial executives literally bet their banks on the belief that there was no housing bubble and the related belief that unprecedented levels of household debt were no problem. They lost that bet and no amount of financial hocus-pocus, for that is what the Geithner plan amounts to, will change that fact.”

Financial hocus-pocus.

GEITHNER: George, this is a piece of a series of initiatives we’ve put in place to help get the financial system doing what it needs to do, which is to provide the credit necessary for recovery. You know, economies depend on financial systems. They’re what is — provide the oxygen, the blood that economies need to grow.

STEPHANOPOULOS: But he says it’s just not going to work, that these banks are insolvent, and that even if you put more capital in them, eventually you’re going to have to take them over.

GEITHNER: But I just wanted to — let’s step back for a sec. So this is piece of a broad framework of initiatives we’re undertaking to help restore the strength of the financial system. Part of our plan — a core part of our plan involves making sure banks have enough capital to provide the lending we’re going to need to get recovery back on track.

Now banks are going to need — some banks are going to need some large amounts of assistance, and we’re going to make sure that that assistance comes with conditions, designed to make sure they restructure, provide accountability on boards of management, that these institutions emerge cleaner, stronger going forward.

STEPHANOPOULOS: But one of the things you’re hearing from the banks is in part because they don’t want all of these new restrictions, they may not sell these legacy assets.

GEITHNER: That is a risk. And it’s very important that people recognize that. To get out of this, we need banks to take a chance on businesses, to take risk again. We had a long period where banks were taking too much risk. The challenge for us is that they take too little now.

And for us to get through this, we need investors and banks to be willing to take a change again on providing credit to that business that has got a great idea and needs to grow, expand.

STEPHANOPOULOS: Well, one of the other criticisms is that the investors, especially in the plans to buy up these toxic assets, are not taking all that much of a risk. They’re going to put up $6 and they’re going to get 93 percent from the government. We will share on the upside, yes, but they’re protected against huge losses.

GEITHNER: George, let’s just step back for a sec. The problem we’re facing on our financial system is that we — banks made a bunch of loans, backed real estate that are now facing losses. And those loans are clogging up the financial system.

They’re taking up room that could otherwise be used to provide new credits to a business or a family. Now we have two choices, we can let — leave that as it is, hope that banks earn their way out of this over time. That would be a mistake. That would leave us with a strong — with a deeper, longer recession.

We’re not prepared to adopt that basic strategy.

STEPHANOPOULOS: But there is a third choice…

GEITHNER: There is another choice — let me say, there’s another choice that a lot of people suggest is the government itself comes in, buys these assets, sets the pricing of an asset, takes on all of the risk in that strategy.

And that would leave the taxpayer taking on much more risk, much greater risk of loss over time. We don’t think that’s an appropriate approach.

The approach we’re adopting, though, is to have private investors come in and put their capital risk alongside the government. That helps make sure we’re using their incentive to set the price for these assets, rather than having the government set the price and risk overpaying.

This is a conservative structure. It’s, sort of, basically like what happens when you buy a house, put money down, borrow it to buy a house. It’s a more conservative structure than banks typically run with. And we think it’s a much better way, again, to make sure the taxpayer’s not taking on risk the taxpayer should not take.

STEPHANOPOULOS: So you’re saying your proposal is the middle course. I guess there’s a fourth option that Senator McCain lays out, other Republicans have laid it out. He says, just go in and shut them down.

GEITHNER: Right.

STEPHANOPOULOS: These banks ought to be shut down. He says they should be taken over, their management and shareholders suffer the consequences, and their assets resold to private-sector entities.

What’s wrong with that idea?

GEITHNER: Well, George, the approach we’re adopting, again, is to make sure that there’s capital in the financial system where we need capital. And that capital will come with conditions.

As the senator said, make sure these institutions emerge stronger, not weaker. We don’t want to be sustaining the weak at the expense of the strong. But our system…

STEPHANOPOULOS: But is that plan B, if your plan fails, is that plan B, go in, take them over, shut them down eventually, unwind their assets?

GEITHNER: The way I would describe it, George, is that we need to move to make sure the banking system is able to provide the credit recovery needs.

When they do that, again, with strong conditions to protect the taxpayer, make sure they restructure where they need to restructure.

But, you know, our system doesn’t just depend on banks. In a typical — in a typical market, more than 40 percent of lending comes from outside of banks, so in the securities markets, through the secondary markets that are so critical to student loans, small- business lending, consumer lending.

And so we have a very aggressive program in place to help provide credit directly, going around banks, get those markets working again.

Now, this is not something any country’s faced in the past. We are moving much more aggressively than the U.S. moved in the S&L crisis, than Japan moved in the 90s. We’re moving at a much earlier stage to help preempt failure, make the system stronger, with tough conditions to protect the taxpayer.

STEPHANOPOULOS: But, as you said, this is likely to cost far more in capital injections for the banks. And I guess the big question is, where is that money going to come from?

According to our calculations, there was only about, going into today, about $32 billion, maybe a little more, left in the TARP, the financial rescue program.

Late last night, the Treasury Department said that number is actually far higher, more than $130 billion. That is a huge difference. And it is the first time the Treasury Department has ever put a number on what is left over.

Where did you come up with that extra $100 billion?

GEITHNER: George, we have roughly $135 billion left of uncommitted resources. Less is out the door, but in terms of, if you look at what’s not committed yet, it’s roughly, you know, $135 billion.

Now, that — that estimate includes a judgment, a very conservative judgment about how much money is likely to come back from banks, that are strong enough not to need this capital, now, to get through a recession.

But that’s a reasonably conservative estimate. And it gives us — and this is very important — substantial resources to move ahead with this broad-based suite of initiatives to help get the financial system back in the business of providing credit. STEPHANOPOULOS: So does that mean, now, that with this $130 billion, if you’re correct, you’re going to take care of the auto companies; you’re going to take care of unforeseen problems; these new capital injections in the banks.

Earlier in the year, the president and you seemed very concerned that — and you warned the Congress — we’re going to be coming back for money.

Is that less likely now, now that you have more than $130 billion left in the TARP?

GEITHNER: George, the important thing is that we are going to work with the Congress to make sure that we have the resources needed to do this right.

Again, the lesson of financial crises is governments tend to do too little; they wait too long to escalate.

STEPHANOPOULOS: Right, but I talk to people on Capitol Hill a lot, and there is no support, right now, for adding more money to the TARP.

Can you get through the rest of this year with the money you have?

GEITHNER: We have substantial resources. We’re going to use them quickly, as carefully as we can, make sure they’re diverted to things that are going to get credit flowing again. And we’ll cross that bridge when ewe come to it, in terms of whether we need additional resources.

And, of course, if we come to that point, we’ll go to the Congress and give them the strongest case possible and help them understand why this would be cheaper over the long run, for us to move aggressively…

(CROSSTALK)

STEPHANOPOULOS: But are you farther away from the bridge than you thought you’d be a few months ago?

GEITHNER: No, I think we’re about where we were. You know, this is not easy for people. I mean, this is people — there is a deep amount of public anger and frustration about the fact the American economy is suffering so much damage from the consequence of people who took too much risk.

And, you know, the tragedy of the financial crisis is they are — the damage is brutal; it’s indiscriminate. It affects not just the people who took too much risk but people who were careful and responsible in their decisions.

But the important thing is these things don’t bring themselves out without catastrophic damage.

STEPHANOPOULOS: So Congress should be braced for another request?

GEITHNER: No, I’m not saying that. I just saying that the important thing — and Congress, again, has already moved, really, before the administration took office, to authorize a very substantial amount of resources. And we’re moving very quickly to put those to work for the American financial system. And where we’ve done that…

STEPHANOPOULOS: But they took the funds out of the budget to pay for the next round of bailouts.

GEITHNER: Well, I wouldn’t — you know, that was about ’09 — I mean, that was about the ’010 budget, not the ’09 budget. But look what’s happened already, George. You know, where we had moved, and we moved very, very quickly, much more quickly than governments had typically in the past. And if you look at what’s happened in housing, even in small-business lending, you’re seeing significant effects already in opening up these markets, bringing interest rates down, and that has very powerful effects in the American economy.

STEPHANOPOULOS: Let’s talk about — last week was a much worse week for you than this week. AIG, the whole outrage over the bonuses. And one of the members of Congress you’ve worked closely with, Charles Rangel, the chairman of the Ways & Means Committee, was very tough on you this Friday over the AIG issue. He lumped you and Secretary of Treasury Paulson together as coming out of the culture of Wall Street. Take a look.

(BEGIN VIDEO CLIP)

REP. CHARLES B. RANGEL, D-N.Y.: They drink a different water. They breathe a different air. They don’t know what pain is, and so getting a $6 million bonus is just natural to them. They don’t know shame. They don’t know how to apologize.

(END VIDEO CLIP)

STEPHANOPOULOS: Now, the irony is, you’ve never worked for a Wall Street firm…

GEITHNER: Thank you for saying that. For reminding…

STEPHANOPOULOS: But many of the critics have made exactly the same point, that you’re — because you’ve worked around it for so long, you were too beholden to the Wall Street culture, and that’s what explains the blind spot on AIG.

GEITHNER: Not at all, George. As you said, I’ve worked all my life in public service. I’ve spent my entire professional life helping this government and this country do a better job of dealing with financial crises and helping protect the economy from the damage these causes.

I would not spend a penny on helping a bank for the purpose of helping a bank. Everything we’re doing is for the people that depend on this financial system. Every time we provide assistance to the financial institutions, it’s only because we need them to do a better job of getting credit to help reduce the risk of a deeper recession.

STEPHANOPOULOS: What did you learn from the whole AIG bonus experience? How could you have handled it differently?

GEITHNER: You know, I don’t think our choices would have changed. We had no good choices in those conducts. These were contracts that were set well before the government came in, before Ed Liddy became CEO. We’re a nation of laws. We cannot run this country, expect our country and our economy to work, businesses to function if there is an ongoing fear the government will come in and retroactively change the terms of existing contract. So we had no good choices in that contracts (ph), but we moved very, very quickly to make sure that we were going to get them to renegotiate future payments, that there were strong conditions on compensation going forward. That’s what we’re going to do.

Now, where we have the chance to go back and recoup, where there was evidence of malfeasance of fraud, we will do that.

STEPHANOPOULOS: And some are saying you should go back and recoup on another, much bigger issue having to do with AIG, and that’s all the payments they made to their so-called counterparties. Let me show our viewers who got the money from AIG after they got a government bailout — $13 billion to Goldman Sachs; $12 billion to Bank of America; more than $30 billion to a series of foreign banks. That has upset a lot of members of Congress. Elijah Cummings and 26 other members of Congress have written a letter saying they want to know why an attempt wasn’t made to renegotiate.

Let me read exactly what they said. “Was any attempt made to renegotiate and close out these contracts with haircuts? If not, why not? What was the benefit of the decision to pay 100 percent of face value to the American taxpayers who provided the bailout funds, and how did it support the goal of ensuring the stability of the economic system?”

Now, Goldman Sachs, for example. Their chief financial officer said he had no material economic exposure to AIG. So why weren’t they forced to take a discount?

GEITHNER: George, we came into this crisis as a country without the tools necessary to contain the damage of a financial crisis like this. In a case of a large, complex institution like AIG, the government has no ability, had no meaningful ability to come in early to help contain the fire, contain the damage, prevent the spread of that fire. Restructure the firm, change contracts where necessary, and helped make sure that the financial system gets through this…

STEPHANOPOULOS: But it would have been the right thing to do, right?

GEITHNER: If we had the legal authority, that’s what we would have done. But without that legal authority, we had no good choices. We were caught between these terrible choices of letting Lehman fail — and you saw the catastrophic damage that caused to the financial system — or coming in and putting huge amounts of taxpayer dollars at risk, like we did at AIG, to keep the thing going, unwind it slowly at less damage to the ultimate economy and taxpayer.

STEPHANOPOULOS: So how about now, Goldman Sachs is taking other government money. They got this $13 billion whole from AIG. Congressman Brad Sherman and others have said, they should give that $13 billion back.

GEITHNER: George, the important thing is, we have no legal ability now. That’s why I went to Congress last week, to propose a broad change in resolution authority so that we have the capacity to do what we do with banks now.

STEPHANOPOULOS: But wouldn’t it be the right thing for Goldman?

GEITHNER: To give that money back?

STEPHANOPOULOS: Uh-huh.

GEITHNER: Look, again, the government of the United States in a situation like this has to make sure that we’re containing the damage that might come from default by a major complex financial institution. We need better legal authority to do that, did not have that authority coming into this crisis. It’s a tragic…

STEPHANOPOULOS: So nothing to be done looking back, but going forward, that’s exactly the authority you would want.

GEITHNER: Absolutely. Our obligation now, again, is to defuse and help unwind this deeply complicated problem that AIG presents. But we want to work with the Congress to put in place stronger tools, stronger resolution authority, so the government can come in more quickly, earlier, before things have passed the point of no return, contain the damage, prevent the fire from spreading, restructure the firm, have it emerge stronger, at less risk to the taxpayer. That’s what we need. We should have had this before this crisis, but we didn’t. But we need to move quickly now.

STEPHANOPOULOS: Let’s talk about government debt. A lot of Americans more and more are concerned about that. According to the Congressional Budget Office, in 10 years, the government debt will be 82 percent of GDP. And I’m going to read a question that came in from one of our viewers, Bruce Gower of Rock Hill, South Carolina. He asks, “how do you justify printing money out of thin air and the amount of debt you are subjecting future generations to with this budget? Who cares if roads are smoother if I or my children can’t afford a car to drive because of the hyperinflation that had taken away all their spending power?”

Are you worried about hyperinflation down the road?

GEITHNER: That’s not going to happen in this country, will never happen.

STEPHANOPOULOS: Why?

GEITHNER: Will never happen. Because we have a strong, independent Fed, with a clear authority from the Congress to keep inflation low at — stable at low levels going forward.

STEPHANOPOULOS: The Fed has been putting so much money into the system.

GEITHNER: But that’s not going to create the risk of hyperinflation in the future.

We have a strong independent Federal Reserve with a very strong mandate from the Congress, and they will do what’s necessary to keep inflation low and stable over time.

But George, just step back for one second. You know, when I left the Treasury in 2001, we had large surpluses — large surpluses projected. We started this administration with a $1.3 trillion deficit and a deepening recession, enormously challenging global financial crisis. The cost of fixing that crisis is going to require larger deficits in the short term, but the best way to make sure we get those deficits down in the future is to get recovery established, get — make the economy stronger going forward. That’s the best way to get us back on a path to fiscal responsibility.

STEPHANOPOULOS: And from what you were saying earlier, you’re actually more concerned about putting the brakes on too quickly.

GEITHNER: That would cause more damage to the productive capacity of this economy and would risk larger deficits in the future. Again, the big mistake governments make in financial crises is to sit back, hope it’s going to work itself out, put the brakes on too quickly, not act aggressively enough, and we can’t afford to make that mistake.

STEPHANOPOULOS: Announcement coming tomorrow on autos. And I have a question that my friend George Will gave for you, and he said why is Chrysler too big to fail but Studebaker wasn’t?

GEITHNER: George, I’m not going to get ahead of the president’s announcement tomorrow, but it’s important to know that we want to have a strong automobile industry. We want it to emerge from this period of challenge stronger. That’s going to require a lot of restructuring. We’re prepared as a government to help that process if we believe it’s going to provide the basis for a stronger industry in the future that’s not going to rely on government support.

STEPHANOPOULOS: But is Chrysler really too big to fail?

GEITHNER: George, I’m not going to get ahead of the president’s — as I said, it’s very important for our country that we have a strong automobile industry going forward.

STEPHANOPOULOS: We’re just about out of time, but you — there was a real sign that you had made it in the Washington culture just a couple of weeks ago, parodied on Saturday Night Live just two weeks ago. Here’s what they said.

(BEGIN VIDEO CLIP) (UNKNOWN): This $420 billion will be placed in a special fund and will go to the first individual who comes up with a workable plan to solve the banking crisis.

(END VIDEO CLIP)

STEPHANOPOULOS: So what did you think when you saw that?

GEITHNER: I didn’t see it, but my kids saw it. They thought it was pretty funny. But you know, one of the great things in this job is people have a lot of ideas. We get ideas all the time.

STEPHANOPOULOS: Even from Saturday Night Live?

GEITHNER: Well, not from Saturday Night Live, but we get it — from people who are smart, thoughtful, credible, have been part of solving these crises in other countries, and we listen to everybody. We have got no pride of authorship in ideas, and we’re going to do — the only test that matters to us, is, is it going to work? Is it going to get credit flowing again at acceptable risk, least cost to the taxpayer?

STEPHANOPOULOS: And what’s the most important single thing you’ve learned over the last three months?

GEITHNER: That to get through this, governments need to act. Great obligation responsibility for governments to act to solve these things. The market will not solve this, and the great risk for us is we do too little, not that we do too much.

STEPHANOPOULOS: Secretary Geithner, thanks very much for your time this morning.

GEITHNER: Thank you, George.

END