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| The Treasury secretary says the turmoil in credit markets may continue. Andy Nelson – staff |
Paulson: Credit turmoil to last a while
But the Treasury chief says the economy is strong enough to weather the storm.
from the September 12, 2007 edition
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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.' "
However, there are others who believe any Federal involvement might only prolong the crisis or even make it worse in the future.
One of those is Bruce Bent, chief executive of The Reserve, a New York cash management firm with $62 billion under management. "The markets do wonderful things," says Mr. Bent.
He points to a hedge fund operated by Goldman Sachs that was hit hard by the devaluation of subprime loans this summer. It's still up and running, because of new capital injected by wealthy investors: Eli Broad, Hank Greenberg, and Goldman Sachs itself. "That's not really a stupid group of people," he says.
A market-based approach
Multiply actions like that – the give-and-take of the marketplace – and order can be restored to the mortgage markets, Bent says. Congress and the White House could cut the supply of credit even more, he says, if they impose new regulations that push good lenders out of the business.
Ironically, cash has been pouring into money funds in recent weeks as investors become more conservative. One investor in asset-backed commercial paper, Mark Simenstad, head of fixed-income mutual funds at Thrivent Financial for Lutherans in Minneapolis, says the coming weeks are pivotal.
"It will take a while for this to resolve itself," he says. "The next few weeks are fairly important to see whether these asset-backed [securities] programs can continue."
Administration's reform agenda
Paulson, in Tuesday's wide-ranging meeting with reporters, also laid out the reforms the administration hopes to accomplish in its remaining months. Among them:
•He encouraged the Senate to work with the House on reform of oversight of Fannie Mae and Freddie Mac, government-created corporations that were designed to boost homeownership in America. In recent weeks, "we've spent a lot of time talking" with these entities about how to "come up with products for homeowners that are in danger of losing their home." He said such initiatives could move forward in conjunction with regulatory reforms of those agencies under review in Congress. The House has moved its bill forward, and Paulson urged the Senate to follow suit.
•In an effort to boost prospects for reform of programs such as Medicare and Social Security, the Treasury is launching an effort to publish analytical papers on these challenges. "I want to depoliticize this," he said, affirming that the Bush administration is willing to talk with Democrats in Congress about securing future funding for the two programs with no policy options off the table.
•The administration wants to address the alternative minimum tax, which was designed to keep the wealthy from claiming too many deductions but is forcing a growing numbers of middle-class Americans to pay higher taxes. "We clearly need to patch the AMT," he said.
In the long run, he said, the US economy will be at a serious disadvantage to other nations if it maintains its current corporate tax rates. "The rest of the world has moved past us," Paulson said, realizing that high taxes on business will have a direct impact on job creation. The last thing the economy needs right now, Paulson said, is rising taxes.
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