Paulson Says U.S. Credit-Market Crisis Is `Closer to the End'

By Peter Cook and John Brinsley

May 1 (Bloomberg) -- Treasury Secretary Henry Paulson said the credit crisis, now in its ninth month, probably is more than half over, and retained his forecast for the U.S. economy to keep growing.

``We are closer to the end of this problem than we are to the beginning,'' Paulson said in a Bloomberg Television interview yesterday in Washington. Even with ``headwinds and despite some of the things that we're going through, this economy is still growing, albeit modestly,'' he said.

Paulson, a former chief executive officer 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's 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 percent in the first three months of the year hadn't altered his assessment.

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

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

Citigroup Inc. Chief Executive Officer Vikram Pandit said April 22 that the credit-market contraction is abating, echoing remarks by Jamie Dimon, his counterpart at JPMorgan, who said April 16 that the credit-market freeze is more than half over. Richard Fuld, CEO of Lehman, Goldman CEO Lloyd Blankfein and Morgan Stanley CEO John Mack offered similar assessments.

Stocks Recover

The Standard & Poor's 500 stock index has increased 7.6 percent since the Fed and the Treasury helped arrange the rescue of Bear Stearns Cos. March 16 to prevent the firm from filing for bankruptcy.

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 housing recession.

Federal Deposit Insurance Committee Chairman Sheila Bair yesterday said Congress should authorize the Treasury to make home loans to help pay down as much as 20 percent of the principal on mortgages.

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

`Hope Now' Effort

``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 percent of household income.

Hours before Paulson's comments, the Federal Reserve cut its benchmark interest rate by a quarter percentage point to 2 percent, its seventh reduction since September. The Fed yesterday said the ``substantial'' amount of easing would help foster growth.

In the interview, 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.

Recession Concern

Asked whether the economy will fall into recession, Paulson said he didn't want to ``enter into a technical debate'' about the term.

``The American people know that they're facing some significant headwinds: the price of oil, what it takes to put gas in their car today, the food prices -- housing, the biggest risk to the downside,'' he said.

Paulson also reiterated his support for a strong U.S. currency.

``I'm a strong dollar man, we have a strong dollar policy,'' he said. ``Our long-term economic fundamentals compare very favorably when I look around the world, and I think they're going to be reflected in the value of our currency.''

To contact the reporters on this story: Peter Cook in Washington at Pcook6@bloomberg.net John Brinsley in Washington at jbrinsley@bloomberg.net .

Last Updated: May 1, 2008 00:01 EDT

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