US Credit Crisis More Than Half Over: Paulson

Source : The Business Times, May 2, 2008

He still expects the US economy to keep growing

(WASHINGTON) US Treasury Secretary Henry Paulson said the credit crisis probably is more than half over and retained his forecast for the US economy to keep growing.

'We are closer to the end of this problem than we are to the beginning,' Mr Paulson said in a Bloomberg Television interview on Wednesday in Washington.

Mr Paulson: Acknowledges that there will be some more bumps in the road before the US gets through the credit turmoil

Even with 'headwinds and despite some of the things that we're going through, this economy is still growing, albeit modestly', he said.

Mr Paulson, a former chief executive of Goldman Sachs Group Inc, joins the heads of Wall Street firms including JPMorgan Chase & Co and Lehman Brothers Inc in viewing the credit turmoil as nearer an end.

He also said he is focusing on existing efforts to address the housing slump, playing down a proposal for the department to use government funds.

The Treasury chief said a government report yesterday showing the economy grew 0.6 per cent in the first three months of the year had not altered his assessment.

The figures on US gross domestic product indicated that only an increase in stockpiles of unsold goods prevented a contraction in the last quarter.

'There inevitably will be some more bumps in the road before we get through this' credit turmoil, Mr Paulson said. He conceded that 'we're in a tough quarter right now'.

Mr Paulson also said the Bush administration's policies of encouraging voluntary loan renegotiations for struggling homeowners and tougher oversight of Fannie Mae and Freddie Mac remain his focus in addressing the country's housing recession.

Federal Deposit Insurance Committee chairman Sheila Bair said last week that Congress should authorise the Treasury to make home loans to help pay down as much as 20 per cent of the principal on mortgages.

Mr Paulson said he would 'look carefully' at the FDIC plan, while emphasising his confidence in the Hope Now Alliance of lenders spearheading a private effort to modify home loans.

'It's only fair to point out our priority is doing the things we're already doing administratively, doing the things we're already doing working with the private sector,' he said. 'That's where we are, that hasn't changed, despite my high regard for Sheila.'

Under the FDIC plan, borrowers would be responsible for paying back the loan and the restructured mortgage. Participation would be restricted to Americans in owner-occupied homes with mortgages obtained between January 2003 and June 2007 whose monthly payments exceed 40 per cent of household income.

In the interview, Mr Paulson said he has 'great confidence' in the Fed, declining to comment specifically on the rate decision. He did indicate that the central bank's initiative to lend directly to primary bond dealers had eased some concern in financial markets.

Asked whether the US economy will fall into recession, Mr Paulson said he didn't want to 'enter into a technical debate' about the official start and ends dates of a contraction.

The Federal Reserve may cut interest rates to one per cent as US housing foreclosures worsen, said Mark Mobius, who oversees US$47 billion in emerging-market equities at Templeton Asset Management Ltd.

Mr Mobius added that the US dollar's slide, down more than 7 per cent against the euro and yen this year, is likely to slow because it is 'completely bombed out'.

'I was looking at one per cent a few months back. I still adhere to that,' Mr Mobius, executive chairman at Templeton Asset Management, said in an interview with Bloomberg Television on Wednesday. 'I don't think the fear is over. You're going to continue to get more pressure on them to lower and lower.' - Bloomberg