Paulson: Credit turmoil to last a while
But the Treasury chief says the economy is strong enough to weather the storm.
When he wakes up in the morning, Treasury Secretary Henry Paulson admits that the first thing on his mind is the turmoil in the credit markets.Skip to next paragraph
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And, as an indication of how much time he's spending on it, Mr. Paulson in recent weeks has met with a range of mortgage officials from debt counselors to the companies that homeowners send their money to. He talks to Federal Reserve officials multiple times a day. He says his focus now is on developing a product for homeowners in danger of losing their houses – what he terms the "riskier area."
At a Monitor breakfast for reporters, the Treasury chief, a veteran observer of many Wall Street meltdowns, said the complexity of the markets and the global nature of the problem mean that "we need to expect this period of turbulence to go on for a while."
This is a crucial week for the credit markets. Some $120 billion of commercial paper needs to be reissued, a significant amount of it overseas. Half of that is asset-backed commercial paper, a product that has been very hard to get investors to add to their portfolios. Paulson says the funding of this part of the market is of special concern to him.
Despite the credit market issues, Paulson says the turmoil is taking place against a backdrop of a strong global economy. On Tuesday, he was quick to point to the continued rise in US exports and the slowing of imports. And, despite the recent drop in the employment numbers, he says, "We have in my judgment a healthy US economy."
Housing woes are slowing economy
Paulson admits the weakness in the housing market is providing a penalty to growth. That's also true of the turmoil in the credit markets – and last week he says he met with some of the nation's top CEOs to find out how the financial market was affecting their business. His conclusion: The economy is strong enough to weather the storm.
So far, the Fed is under the most pressure to act. Some investors would like to see the central bank aggressively drop interest rates by as much as a half of a percentage point next Tuesday.
"The Fed will cut by a quarter of a percent – but hopefully by half of a percent," says Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston. "If there is not aggressive action, if the inflation numbers make the Fed cautious, then there is more risk and the thought that the liquidity crisis is contained goes out the window."
Some investors urge federal action
But there are also other moves investors believe the Bush administration can take. For example, David Kotok, chairman of Cumberland Advisors, argues it is the role of the Fed to assist innocent victims who financed a home and were duped.
"Say you've got a working mom, living some distance from work, and she wanted a little house with some grass and a playground and took out a mortgage with a low teaser rate [a rate that would adjust after a period of time depending on the direction of interest rates]," explains Mr. Kotok. "Now, the mortgage payment has doubled, she needs some relief, perhaps through the tax code. That is not the Fed's job, but it could be the Treasury's job."
Mr. Kleintop sees the Treasury as acting like the stern old grandfather in terms of telling the nation's banks they need to be more willing to take some additional risk in order to provide liquidity. "This is the type of activity where bank managers can get fired if they take too much risk, but the Treasury has to say, 'We expect you to do this to provide liquidity.' "