Paulson tells BW "months" for bulk of housing correction

Posted by: Peter Coy on July 21

Treasury Secretary Henry Paulson told BusinessWeek editors on July 21 that he think it will take months, not years, to work through “the largest part of the housing correction.”

Paulson said that while some of the excesses in housing will take “more than months” to be washed away, “The more reasonable question is how long will it take to work through the largest part of the housing correction.” Added Paulson: “I think there is a reasonable case to be made that when you look at the housing correction, the largest part of this we can work through in months.”

Paulson said that once home prices stabilize, the housing sector could begin contributing to economic growth “well before we’re through all the issues in housing.” He said, “At the heart of the economic issue is housing.”

Other points that Paulson made during his visit to BusinessWeek:

*Paulson took a swipe at critics from both the left and the right who have criticized the Bush Administration’s handling of Fannie Mae and Freddie Mac, the two big mortgage-finance companies that the Treasury has offered its support for. Said Paulson: “They all stand up now and say ‘I told you so,’ but they didn’t get anything done.”

*Ever since becoming Treasury Secretary, Paulson said, he has advised the CEOs of banks as well as Fannie Mae and Freddie Mac to make sure they are well-capitalized. Paulson said, “I can’t think of cases in history where CEOS got into trouble for raising too much capital.” He also said, “If there’s any reasonable likelihood that you’re going to need it, you should raise the equity.”

*Despite that statement, Paulson refused to comment when asked whether he thinks Fannie Mae and Freddie Mac should sell more shares now. Freddie Mac is planning to raise around $5 billion in equity, although it has not said when. Fannie Mae has not announced any plans for share issuance. Said Paulson: “I don’t want to be prescriptive right now because I want flexibility in the market.”

*Paulson declined to comment when asked whether an explicit commitment from Fannie and Freddie to raise money from shareholders would help win support from Congress for the Treasury’s request for the right to make unlimited loans to Fannie and Freddie. He said he expects the Treasury’s request “will sail through Congress.”

*Paulson said he doesn’t want to discuss long-term issues about Fannie and Freddie’s structure at the moment. “My job is to deal with the here and now,” he said.

UPDATE
More points from Paulson:

*While Paulson said that stories about people losing their homes to foreclosure are “very sad” and “very regrettable,” there are “remarkably few” cases in which people lost homes that they could have afforded to stay in and wanted to stay in.

*Paulson said that the nation’s commercial banks remain very safe. He said 99% of bank assets are in banks that fall into the highest safety category.

*On the topic of financial derivatives, Paulson said he favors efforts by the Federal Reserve Bank of New York and others to standardize products and reduce complexity. “We don’t have all the tools in the toolboxes that we’d ideally like to have,” he said.

*Paulson said his Chinese counterpart in the U.S.-China Strategic Economic Dialog, Vice-Premier Wang Qishan, said to him recently, “We’ve been listening a lot to you and now we find out our teacher has problems.” Paulson said he responded, “Learn from us and you can avoid some of the mistakes.” But Paulson acknowledged to BusinessWeek editors that pushing American-style financial reform and free markets isn’t as easy since the credit crunch began. Said Paulson: “If you’re asking me if it’s a harder sell today than it was before—you betcha.”

—by BW Economics Editor Peter Coy

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Reader Comments

Ho-Hyung (Luke) Lee

July 21, 2008 07:12 PM

Every western nation has adopted policies for economic revitalization with greater urgency over the past year, but I believe most of them have been ineffective, and created instead numerous abnormal phenomena in the market. A cold and objective review of the current conditions in the market leads one to conclude that there must have been a serious problem in the market process. That is, the existing market systems, which realize the market process, might not have been able to satisfy the requirements of the modern information market. In other words, the outdated existing market systems could be the real cause of the serious economic situation which now engulfs us.

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Numbers

July 21, 2008 09:17 PM

Mr. Paulson talks about "housing correction" and "price stabilization". He needs to explain the acceptable levels of these two parameters and due to what course of action the current situation will improve in "months". His statement "the housing sector could begin contributing to economic growth" should be rather, "economic growth will begin to contribute to the housing sector". Selling houses to each other with barrowed money won’t help our economy!

Jack

July 21, 2008 10:31 PM

Paulson is lying. The Bush government is lying. BW editor, why don't you do some real investigating and find out what Mr. Paulson is doing with his own money.

Viking

July 22, 2008 12:45 AM

The question is,why should I believe anything that Paulson or Bernanke or any other government official tells me?They have consistently tried to downplay the extend of the crisis,only to later adjust,as it becomes clear to the masses that it is much worse.A case in point,today American Express reported disappointing earnings for the second quarter.They said that increasing default rates among even borrowers with the highest credit ratings had caused unexpected losses.So as the subprime loans work their way thru the system the credit problems are becoming worse in the prime credit areas,so we are nowhere near the bottom.I for one would welcome some frank talk from government officials,especially members of the Bush Administration,as they are not running for re-election and therefore have nothing to lose,but everything to gain by telling us how things really are,that there are no quick solutions,or easy answers to the problems we face.If we faced up to our problems and put in place a real plan,we would be able to get back to a healthy and growing economy in 3-5 years,but if we continue to bury our heads in the sand and deny our fundamental problems of over consumption and under savings,it will take a lot longer!!

Lord

July 23, 2008 02:49 PM

There is an end to be found. That will be when it becomes cheaper to buy than rent. We are still not there, and rising mortgage rates spell it is receding rather than approaching unless lenders offer below market rates on their properties or continue to lower the price to meet them. It already seems they are overwhelmed if not buying time trying to enter the rental market themselves, leading more to freeze in the market than a thaw. It will be over once they really get desperate.

Mike Reardon

July 29, 2008 04:15 PM

Paulson is now offering a “covered bond“ market that could be tied to real-estate to help in financing housing going forward. All I know about it is what NYT and WSJ had in there articles, they are looking for a $40 billion start input for Fannie Mae and Freddie Mac and that that the “covered bond“ market is established in Europe and is $3 trillion in size, and large banks are supportive to the new market.

What I want to know is, is Paulson now offering a “covered bond“ market going to give a really restrictive debt instrument to the next Administration? and will Congress have to give full backing to these bonds? And who gets first call on mortgages in a Bank bankruptcy.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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