WASHINGTON (AP) -
businessminute
The Bush administration will "do what its takes" to stabilize chaotic
markets and minimize the economic damage, Treasury Secretary Henry Paulson said
Sunday after a tumultuous week capped by the government rescue of a teetering
investment bank.
All eyes now are on Wall Street as leading financial advisers prepared for a
Monday meeting with President Bush and the Federal Reserve weighs another deep
interest rate cut Tuesday to stem even more deterioration.
Paulson, in a series of news show appearances, defended the Federal
Reserve's extraordinary step Friday to provide emergency financing to one of
Wall Street's most venerable firms, Bear Stearns Cos. The central bank's
intervention was "the right decision," he said.
The treasury chief sidestepped questions about what would have happened if
the Fed had not ridden to the rescue, whether other firms are on shaky ground
and the possibility of additional bailouts similar to Bear Stearns'.
At the same time, however, Paulson sought to send a calming message that the
administration is on top of the turbulent situation. "The government is prepared
to do what it takes to maintain the stability of our financial system," he said.
"That's our priority."
Bush planned to meet on Monday with his advisory panel on financial markets,
whose members include Paulson and Fed Chairman Ben Bernanke. The panel on
Thursday recommended stricter regulation of mortgage lenders as part of a broad
effort to prevent a repeat of a credit crisis threatening to drive the country
into the first recession since 2001.
Consultations about the Bear Stearns situation continued through the weekend
and involved the Treasury Department, the Fed, financial institutions and
others. "I've been very involved, you know, been on the phone for a couple days
right now helping to work through this," Paulson said. He offered no details.
Economists increasingly believe the spreading fallout from a severe credit
crisis has pushed the country into recession. The situation has led to
record-high home foreclosures, forced financial companies to take multibillion
losses from bad mortgage-linked investments and rocked Wall Street.
"No one is debating the fact that this economy has slowed way down," Paulson
said. "We feel it, we know it, the American people know it."
To help shore things up, the Fed is poised to make a big cut to its key
interest rate, now at 3 percent. Some economists are predicting a reduction of
one-half a percentage point, while others are calling for a more hefty cut of
three-quarters to a full percentage point.
The Fed used a Depression-era procedure to come to Bear Stearns' aid along
with JPMorgan Chase & Co. Bear Stearns had made a fortune in mortgage-backed
securities but faced a possible collapse after those investments soured. Wall
Street nose-dived as fears spread about whether other big firms were in
jeopardy.
"I really support the Fed's work here," Paulson said during one of his three
broadcast appearances. "To me, this was not difficult because the priority in a
time like this has got to be the stability of our financial system and
minimizing the likelihood that this disruption spills over into the real
economy.
Some critics contend the Fed's move was akin to a government bailout --
something the administration has repeatedly said it is against.
"We're very aware of moral hazard," Paulson said. "But our primary concern
right now -- my primary concern -- is the stability of our financial system, the
orderliness of the markets. And that's where our focus is," he said.
The financial system, he said, is "more fragile than we would like right
now."
Asked whether other financial companies may be in a situation similar to
Bear Stearns', Paulson did not directly answer. He did seek to strike a
confident tone. "Well, our financial institutions, our banks and investments
banks are very strong," he said. "And I'm convinced that they're going to come
out of this situation very strong."
The government will tackle any other problems that may arise, he said.
"From the beginning I have said, as we work through this period, if this was
like other times in the past, there are going to be bumps in the road. There are
going to be unpleasant surprises. You are going to find that an institution or
so has problems. And when they do have problems, you work to deal with it,"
Paulson said.
On other matters, Paulson was cool to the need for additional economic
stimulus, which congressional Democrats are promoting. A recently enacted aid
plan includes tax rebates for people and tax breaks for businesses. Paulson said
it should help bolster the economy and produce 500,000 to 600,000 jobs this
year.
To Democrats, though, Bush is not doing enough to help.
"We're in the most serious economic problem we've been in in a very long
time, much worse than 2001. The president's hands-off attitude is reminiscent of
Herbert Hoover in 1929, in 1930," said Sen. Charles Schumer, D-N.Y. "There are
lots of things that can be done, particularly on housing. Housing has been the
bull's eye of this crisis."
House Speaker Nancy Pelosi, D-Calif., said, "Much of what the administration
has done has been too late."
On the plunging value of the U.S. dollar, Paulson stuck to the position of
past treasury chiefs when he said a strong dollar is in the national interest.
The dollar has dropped to a new low against the euro and a fallen sharply
against the Japanese yen. That helps sales of U.S. exports to foreign buyers
because it makes U.S. goods less expensive. But the drooping dollar increases
inflationary pressures.
Paulson appeared on ABC's "This Week," "Fox News Sunday" and "Late Edition"
on CNN. Schumer was on Fox and Pelosi on ABC.
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