Paulson says credit crisis fading
The worst of the credit crisis may have passed, Treasury Secretary Henry Paulson said Wednesday, while acknowledging that rising gas prices will blunt the effect of 130 million economic stimulus checks. He ruled out a second stimulus package for now.
In an interview with The Associated Press, Paulson said that the turmoil that has gripped Wall Street and took a turn for the worse again in March has eased somewhat. "There’s progress," he said. "I think we’re closer to the end of this than the beginning."
A prolonged housing slump, a severe credit crisis and soaring energy costs have pushed the economy to the edge of a recession. To help cushion the blow, the Bush administration and Congress speedily enacted a $168 billion stimulus package of tax rebates for people and tax breaks for businesses.
With oil surging to record levels above $123 per barrel and gasoline prices hovering around all-time highs of $3.62 per gallon, Paulson acknowledged that the high price people are paying at the pump would diminish the impact of the stimulus payments that are designed to give the economy a jump-start.
"Obviously, the high price of gasoline is unwelcome and is a challenge and is a headwind," he said.
The first batch of rebate payments started hitting bank accounts last week through direct deposits. Paulson, Vice President Dick Cheney and other Bush administration officials head to government check printing centers around the country on Thursday for events highlighting the fact that millions of rebate checks are going in the mail.
"We will get some help from the stimulus," Paulson said in the interview. "Later this year, I expect growth will pick up." Still, he acknowledged that the country was facing "tough times" as people struggle with soaring gasoline prices, higher medical costs and a weak jobs market.
Paulson said the steep slump in housing, which has depressed home sales and prices, remained "the biggest risk to the economy." But he said he believed that the steep turmoil that began last August in credit markets has calmed since mid-March when the crisis claimed its largest victim with the forced-sale of Bear Stearns (BSC, Fortune 500), the nation’s fifth largest investment firm, to JP Morgan Chase & Co (JPM, Fortune 500).
But even though the markets are "somewhat calmer now," Paulson said large portions of the credit markets — ranging from mortgages to student loans to loans that banks make to each other — still are not functioning in a normal way payday loan easy fast cash. While he said progress was being made, "I wouldn’t be surprised at all to see more bumps in the road."
Paulson rejected for now the notion of a second stimulus bill, including such things as extending unemployment benefits being pushed by Democrats in Congress. He said it would be unprecedented to extend unemployment benefits from the current 26 weeks with unemployment at the relatively low level of 5% as it is now.
He said the administration’s focus at the moment was getting the current 130 million stimulus payments into the hands of taxpayers. The administration believes the rebates will energize overall economic growth and will create an additional 500,000 jobs later this year.
The Treasury chief spoke on a day when President Bush threatened to veto a broad housing rescue package being considered by Congress. Paulson said the measure being pushed by House Financial Services Committee Chairman Barney Frank, D-Mass., was too broad in its effort to insure up to $300 billion in new mortgages for homeowners facing the threat of defaulting on their current mortgages.
Paulson said the administration would continue negotiating with Congress to come up with an acceptable bill but he did not offer any details of what type of mortgage relief the administration would support.
"Housing is an important area and there are certain things that we need to get done there from Congress," he said. "I view my job as to work to get something that is acceptable and that the president can sign. That is what we always should be doing. We are working to get a housing bill that the president can sign, and I’m going to work to that end."
The administration, meanwhile, has been backing a voluntary effort by the mortgage industry to modify current mortgages to keep distressed borrowers in their homes. Treasury officials met for six hours with mortgage industry executives on Tuesday and Paulson said he was encouraged by the progress being made, although he did not give details.
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