Treasury Secretary urges action on housing downturn

Paulson says correction is 'most significant current risk' to economy
Inman News
Treasury Secretary Henry M. Paulson on Tuesday called for aggressive action to work through the current housing correction that he says will continue to adversely impact the U.S. economy and struggling homeowners for some time.

"The ongoing housing correction is not ending as quickly as it might have appeared late last year," Paulson said in remarks to students at the Georgetown Law Center this morning.

Despite strong economic fundamentals in the current economy, the secretary views the housing downturn as "the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth," he said.

In his most sobering view of the housing downturn to date, Paulson said the government and financial industry need to act to minimize the impact on the overall economy. He called on the financial industry to help as many borrowers as possible stay in their homes, but warned against relieving investors of the "costs of bad decisions."

"I have no interest in bailing out lenders or property speculators," Paulson said.

The secretary also called for public policy changes that would reduce the chances of a similar situation building up in the future, while maintaining access to credit for able homeowners.

Paulson's speech came a day after officials from three of the nation's largest banks announced a plan to establish a multibillion-dollar investment fund aimed at lessening the credit crunch by providing up to $100 billion in liquidity for mortgage securities and other investments.

The Treasury department facilitated the discussions leading up the announcement, but no government resources have been pegged for it.

Federal Reserve Chairman Ben Bernanke also spoke on the housing slump Monday, saying the situation will continue to drag on the U.S. economy at least through early 2008.

While the housing market "is likely to be a significant drag on growth" over the next several months, Bernanke added, "it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions."

The Fed in September cut its target for the federal funds rate by 50 basis points in response to tightening credit conditions brought on by troubles in the mortgage lending market.

The September reduction in the federal funds rate, to 4.75 percent, was the first rate cut since June 2003. The Fed had raised the rate 17 straight times from June 2004 to June 2006.