Paulson Warns of Limits to Propping Up Economy

By Zachary A. Goldfarb
Treasury Secretary Henry M. Paulson Jr. said today that there are limits to what the government can do to contain the unfolding economic downturn, but he defended the steps taken to stimulate the economy and stabilize the financial markets.

"When there are excesses, excesses we've seen in the housing market, a correction there is inevitable. You're going to see a correction. Can we outlaw the forces of gravity? You know, how much can government do?" Paulson said on "Fox News Sunday. "But this administration has been focused on this."

Paulson stood by the decision last week by the Federal Reserve to help bail out investment bank Bear Stearns. "I think we made the right decision. I think the Federal Reserve made the right decision here," Paulson said.

Paulson added that the financial markets remain strong but that the government "is prepared to do what it takes to maintain the stability of our financial system."

The treasury secretary appeared on three Sunday talk shows after another brutal week for the stock market and a growing consensus among economists that the nation is in a recession. The Bush administration has taken steps to prop up the economy, but President Bush has warned against the government intervening too much in the private economy.

Critics say the administration has done too little, too late, and some have asked why the government is spending billions to prop up banks instead of to do more to help Americans whose homes are going into foreclosure. Paulson responded to such views by saying the administration is "at the right spot" in offering assistance to these homeowners. On ABC's "This Week," he cited statistics indicating that 92 percent of homeowners are making their mortgage payments on time each month.

House Speaker Nancy Pelosi (D) disagreed with Paulson, saying "I think that much of what the administration has done has been too late."

The debate over the state of the U.S. economy spilled into discussions among advisers to the presidential candidates.

On CNN's "Late Edition," Gene Sperling, of the Clinton campaign, and Douglas Holtz-Eakin, of the McCain campaign, agreed the economy was facing serious threats.

Sterling said the economy probably is in recession. Holtz-Eakin would not go that far, but acknowledged, "it's really tough out there."

Holtz-Eakin criticized the plans of the Democratic contenders: "We need more capital into our banking systems, so that these firms have a good foundation. At exactly that moment when we put capital in, if you do the right thing economically, Senators Clinton and Obama would say thank you by hitting them as hard as they can with the tax code."

Trying to knock down arguments that Clinton was a tax raiser, Sperling argued that Clinton is not in favor of tax rates going up during a recession. But he added that the Bush tax cuts should be allowed to expire in 2011. "So the only real difference between Senator Clinton and Senator McCain is a big one. It is, after 2011 and beyond, should we spend another $100 billion just for tax cuts for the well off?" he said.

Amid the economic discussions, some guests were quizzed about potential risk to the Democratic Party as its presidential nomination campaign drags onto into the spring and possible summer.

Pelosi said she thinks "the tone could be improved. I definitely do." Clinton and Obama's "people are going at each other," she added. "And I think that that's wearing out. I mean, I don't think people are interested in that."

Pelosi predicted, however, "Before we go to the convention, we will have a nominee. We're going to that convention unified."

She repeated her warning that if superdelegates at the convention overturn what happened in the state-by-state elections, "it would be harmful to the Democratic Party."

By Post Editor |  March 16, 2008; 5:29 PM ET
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As long as "Federal Reserve Note" is right on the money, there are no limits.

Posted by: George | March 16, 2008 6:24 PM

What Paulson should be explaining is why the Bush administration is closing the barn door after the horse is out and whether the government is going to extend the same degree of help to homeowners who are having difficulties because of the economy as they are to Bear Stearns. A good start would be having the senior execs at Bear Stearns turn over all their assets to the company before it gets another dollar from the taxpayers. A few business execs walking the streets with the rest of the homeless would be a good lesson to the others.

Posted by: Bob22003 | March 16, 2008 6:37 PM

Republicans argue that we should use taxpayer money to bail out private banks but not raise taxes to do so. We should borrow, which is what has got the banks into trouble in the first place. And since when should banks be allowed to gamble with taxpayer financed deposit insurance money, which is essentially what they've done by leveraging their investments up to 99%, and not be required to pony up on April 15?

Posted by: RMA | March 16, 2008 6:53 PM

Ultimately, it makes more sense to get over what, by this time,
appears to be a knee-jerk bias against helping save the mortgages
at the individual homeowner level. The question is, since we are
so free-handed in printing dollars to lower the Fed interest rate
to try to ease adjustable rate mortgage resets and other market
manipulations, and since we are so free-handed in bailing out
failing Wall Street actors, and since we are so free to ask
sovereign wealth funds and foreign central banks for bailouts, why
does it make sense to continue to treat solving the problem at the
individual homeowner level as charity? Every course of action in
the foregoing list, except the last option (an individual
mortgage-level writedown and refinancing effort), makes us
dysfunctional beggars. While we are going hat in hand begging for
foreign money and printing increasingly worthless dollars, a
contemptuous attitude toward individual homeowners, that helping
them stay in their homes and avoid foreclosure, comprises charity
is kind of arrogant. It is a kind of dysfunctional denial.

Lately, foreign investors and foreign banks have lost interest in
helping so long as banks are clearly not addressing the problems.
Why is Citibank continuing to pay $6B in dividends to shareholders
while they are sitting on a highly leveraged portfolio containing
many hundreds of billions of dollars of SIV's that they haven't
managed, and when they are not decreasing their leverage?

We are running out of foreign partners who are interested in
collaborating with us in our dysfunctional mismanagement of this
mortgage debacle.

We are running out of gimmicks and tricks to create temporary,
palliative fixes of symptoms. The IMF will be dumping its gold
reserve with the U.S. blessing. Exchanging gold for dollars is an
incomprehensible move at this time in my opinion, unless the move
comprises what gold bugs think is an attempt to stop the spiraling
cost of gold. The IMF will absorb some dollars with its gold reserve
dump, but not nearly enough. Gold stalled briefly on its
announcement, then started its climb again. Bush and Cheney
have been pressing Opec to pump more oil, and Opec is telling
them that there is no oil shortage but mismanagement of the U.S.
economy is causing the price inflation. (In fact, Opec countries
did pump more oil in February and broke their quotas, and prices
continued to soar anyways.) The mortgage problem has gotten so
bad that even serious attempts to manage the symptoms of the
problem by changing market fundaments fail.

Posted by: Annette Keller | March 16, 2008 7:07 PM

This government sure as hell has limits...

Posted by: Rubber Ducky | March 16, 2008 7:09 PM

By the way, the "market correction" in real estate that Bush wants is happening, but only partially. When home prices fall and homeowners go under water, the banks' portfolios take the hit and the taxpayer bails THEM out. Also, the inflation we are seeing are partly due to the asset class inflation. I.e. inflation is eating part of the margin of home values that are not falling.

I expected inflation when we refinanced back in 2005. Who wouldn't expect inflation, with spiraling oil costs, a growing world economy and escalating housing prices? But we refinanced for a 30-year fixed rate mortgage at about 5%, so I planned on inflation making my loan easy to pay and for inflation to rise instead of home prices falling. Now, our home absolute dollar price has fallen off a little bit, but I expect inflation has taken additional value off the home.

At this point, Bush is trying to force asset class deflation and propping the situation up by printing more dollars (lowering the Fed rate). So what happens is that he is achieving the worst of both worlds: inflation (possibly impending hyperinflation) AND asset class deflation in real estate.

Not an optimal solution.

Posted by: Annette Keller | March 16, 2008 7:18 PM

There is a way to stop the mortgage failures that doesn't
comprise a bailout, that forces banks to eat some of their losses and
homeowners to pay mortgages. Writing down mortgage values and
renegotiating loans, for those homeowners whose appraisal values
exceed home values, would force the bad actors to eat some losses and
pay most of the obligations.

I think that some sort of federal lawmaker intervention should force
banks to do what Fed Chair Bernanke pointed out banks are failing to
do: write down mortgage values for houses that are under water and
renegotiate the loans respective to the homeowners' real income and
the realistically appraised home value. I also think that some
marginal portfolio government loan guarantee could then act as
incentive. I.e. if a bank writes down mortgage values on $100M of
mortgages and renegotiates them successfully, the federal
government can then provide, say, loan guarantees for 10% of the
value of the portfolio of renegotiated mortgages. The federal law
should provide banks with immunity from contractual disputes from
mortgage derivative product investors if they reappraise homes,
write down individual mortgage values and renegotiate mortgages
with homeowners who are under water. Some kind of forced
write-down, transparent appraisal and marginal loan guarantee
should stabilize the mortgage markets fairly quickly with the banks
and homeowners bearing more of their share of the burden instead of
the taxpayer. This solution would cost the taxpayer less than all of
the alternatives, which include big time bailouts and big downside
risks.

Posted by: Annette Keller | March 16, 2008 7:22 PM

I'm from Phoenix and two or three years ago you could have a conversation with almost anyone involved in the real estate market and learn that lending practices were extremely lax. Not only lax but predatory. Everyone knew a bubble was in the making and we did nothing about it, so what can we expect now.

Posted by: RMA | March 16, 2008 7:51 PM

The Government can go only so far, unless you happen to be Bear Sterns or some other major financial entity. But it can't cross the road for the average citizen.

This debacle may never have happened, if adequate protections had been in place and agencies properly funded and manned.

The meltdown may never have started, if the federal government had put a small percentage of the new tax incentives into mortgage relief in July.

Mr. Paulson, you have cremated your reputation on the funeral pyre of the Bush Administration. You haven't fought for your principles or for your country. You deserve the ignominy history will assign you.

Posted by: Mainegirl | March 16, 2008 8:10 PM

This administration and the Republican party that spawned and supported it, is directly responsible for the wreck of the U.S. economy. This does not excuse the Democrats who rode along on the wave, but they are not the problem, they are simply not the solution.

It will be a long, long time before the dumbed down American public are in any position to change the terrible conditions that have destroyed our system of government and our way of life. Let's face it folks, we're in for a long, hard ride. Let's grit our teeth and bear with it.

American is now waiting for another F.D.R. to bail us out of this mess. Stay tuned..............!!

Posted by: Anonymous | March 16, 2008 8:11 PM

Annette Keller, excellent post.

Bailing out Bear-Sterns, one of the baddest actors in this whole mess really shows who's interests this administration is protecting, this amounts to super-welfare for near crooks.

I don't see why mandating renegotiating these dodgy over-priced sub-prime loans into fixed-rate standard home loans, even if they have a slightly higher interest rate because of the extra risk, would not be the best way out. The goal here is to reduce the homeowner default rate as much as possible, not protect excessive lending profits and the instructions that encouraged that.

If foreclosed properties start to salt and pepper neighborhoods, the diverse problems that will cause -will cost tax payers plenty, kill real estate values and expose currently stable owners to unacceptable asset contraction and then may even "snowball" into more foreclosures in the prime markets.

Yeah, some banks and investors would take a hit, but the pain would be spread out.

As for the upcoming tax relief checks being handed out... that is like peeing on a forest fire. The economy may get a general 'bump" but it will do nothing for this problem.

Posted by: Anonymous | March 16, 2008 8:12 PM

Sure, anytime the banks or wall street is affected with this economy, here come Bush and his administration to "bail out the rich folk." Sorry, to little to late. The signs for a recession have been here for over a year now. Just like everything this administration does, to little to late. We haven't even seen the worst of this mess yet.

Posted by: kubrickstan | March 16, 2008 8:18 PM

The $2 deal for Bear Stearns is tantamount to a government sponsored fraud on the market worse than Enron. One day its trading at $34 or more and the next JP Morgan gets a sweetheart deal to buy Bear at $2. Let the bloody firm die would be better than this crap. And dont forget this deal was brought to you by Bernanke and the GOP.

Posted by: Paul Nolan | March 16, 2008 8:36 PM

Unfortunately, it is our tax money bailing out those wall street criminals. Bad government in the worst form.

Posted by: David | March 16, 2008 9:14 PM

US Tresury Secretary Paul O'Neill said in 2000 this would happen then Bush fired him. Henry Paulson got the job to steal as much money as he could for his personal company. The wire tapes worked well as you see how companies are taking over other companies. The Carlyle Group stolen as much money as they could in the 7 years of the Bush Administration and now closed and took the profits. Now the memebers of the Carlyle Group Bush Family, Dick Cheney, Bin Laden Family, Middle East Leaders and big businessmen got their big profits and closed shop. The Economy can't be fixed the the crooks that messed it up. George W. Bush is on something because he says there's nothing wrong. The idiot Fed Chief Bennie is just giving out money left and right and has no idea what he's doing. The Foreign Investors are right to pull their money out while the crooks are in the White House with their idiot team. With Senator Obama saying he made many mistakes dealing with an indicted criminal and getting thousands of campain money from him for many years we know he can't be trusted. McCain is so sad he's asking the people overseas for campain money because the Americans wont give him any. Cindy McCain must be tired of writing those checks for her husband as he cozies up with the younger Cindy look alike Lobbyist.

Who was the last President to balance the Budget, that's right the Media isn't allowed to say his name when it a positive fact. As the US has a 10 Trillion dollar debt I guess the Media and White House will say Bill Clinton did it. For the pass 7 years as the US has gone down hill fast the Republicans, Media and Americans have blame Bill Clinton for this mess. For the pass 7 years George W. Bush was in Disneyland.

Posted by: Jackie | March 16, 2008 10:19 PM

What in the hell are these cowboy's in Washington doing? Also, Bernanke and Paulson. First they lower interest rates, which makes the dollar slide, which makes the price of oil more expensive. Then they do it again and again and again. They [WE the TAXPAYER] BAIL out Bear Sterns. We have greedy lenders floating loans to greedy home buyers for seven or eight years and now the taxpayer should bail them out, not to mention they lie or won't tell you about inflation which they really should be paying attention to as the elderly in this country on a fixed income are the ones who will suffer in the end. Is congress ready to raise the SS checks by 30% next year?? whiteagle38

Posted by: whiteagle38 | March 16, 2008 10:21 PM

This ploy is all about protecting the wealth of the wealthy!!!!!!!!!!whiteagle38

Posted by: whiteagle38 | March 16, 2008 10:41 PM

Of course Paulson will defend it. He'll never have to decide between paying his rent, energy bills, medicine, or buying groceries. Just another mouthpiece for corporate America.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. The old-boy-network is in place to put in the fix to help all the investment banks!

I hope the whole corrupt system melts down on Monday.

Posted by: Chris | March 16, 2008 10:45 PM

This move to sell BS for $2.00 a share (down over 2,500% within 72 hours !!) really exposes the depth of the crisis and will create much more uncertainty and risk perception, rather than stabilize the markets. I would be scared stiff as an investor or creditor in dollars at this moment. It really makes you wonder how stupid Paulson, Bernanke and Bush think we really are. It appears they are really intent on screwing the vast majority of their constituents, just to save their core supporters of ultra-capitalists. Note that there is no greater and more destructive form of socialism than the government bailing out financial institutions.

Posted by: AgentG | March 16, 2008 11:27 PM

Don't blame me. I have never voted for a Republican...

Posted by: an atheist | March 16, 2008 11:32 PM

You may not believe this but my name is Granny Goose.So said the Marlboro Man in the 1960's T.V. potato chip commercial.Buying Bear Stearns for 2 bucks a share is not a bailout,anyone who has been holding that stock for a few months or even a couple of weeks is really going to take it in the rear.The truth is that the stock isn't worth a penny and J.P.Morgan has bought themselves 230 million bucks worth of trouble.

Posted by: hamaser | March 17, 2008 1:06 AM

I think its incredibly short sited to try to pin this on "Republicans" when the neither party has a clue whats going on, except maybe Ron Paul - and the American voter, dense as they are, roundly disregarded him as a crackpot for wanting a return to sound money and the gold standard. As long you have a government that can print money by fiat, we'll have these boom and bust cycles, and they'll *always* have us like hamsters on a wheel, conscripting our labor ad-infinitum by inflating the currency.

Posted by: Bob Miller | March 17, 2008 6:58 AM

Just another example of corporate welfare.

Posted by: groetzinger | March 17, 2008 9:34 AM

The ultimate result of the Bear Stearns Bail-out will make the eventual monetary collapse much worse. This action by the Federal Government only increases inflation, and further weakens the dollar. If you don't believe it, look at the price of gold. Gold is the world standard believe it or not! Is it really about helping the middle class; give me a break? It's all about political power and control.

Posted by: Janhalt | March 17, 2008 11:50 AM

What concerns me most is that the talk so far is focused only on the potential failure of investment houses. Not one is talking about the details of what exactly might be the "ripple effect" on the broader economy. I'm not talking about falling housing prices or inflation.

What I wonder about is what happens to you if your everyday bank is owned by one of those investment houses that fail? Will you be locked out of your checking or savings account? Just imagine.

Posted by: Shira | March 17, 2008 2:20 PM

yes it is

Posted by: cyril, from nebraska | March 18, 2008 5:37 AM

No one is listening. No one wants to hear.

Posted by: Nancy | March 20, 2008 1:17 PM

So then Peolis is telling Richardson that as a superdelegate he should be voting for Hillary - didn't she win his state??

Posted by: Katy | March 23, 2008 4:57 PM

Hamaser,
Of course, hamsters on a wheel. Good analogy. That is of course the point, keep the masses entertained, but just scared enough to work their lives out for the bosses.

Posted by: Roger | March 23, 2008 5:10 PM

Richard j Pollak fersur@sbcglobal.net 4541 C.R. 138A Alvin, TX 77511

Prompt and Current on all first Twelve payments until Escrow shortage problems forced lender to increase for 12 Months demand by nearly $120.00 per Month, for Payment Misapplications Escrow Arrearage!

B.B.B. removed Washington Mutual's chief arbitrator chair and Membership for Three Years from ignoring Loan History requested, My Judge famed for largest Historic Schlumberger Russia Bankruptcy and Second Judge {Appeal} famed for Enron.

Borrowed at 6.5% for 15 Years, no second, from Bank One N.A. {"CC" Comptroller of the Currency.} April, 2001.

Loan was Transferred to Homeside Lending F.A. {"O.T.S." Office of Thrift Supervision} November, 2001, later Washington Mutual acquired Homeside Lending and actual Loan Manager Supervisor's employ.

For Five Years regulator "C.C." forwards all My inquiries to "O.T.S." that fails to govern or reply, "O.T.S." never responds, A.G. never responds, D.O.J. never respond. Regulation by the C.C. instead of O.T.S will force Lender accountability eliminating stuck between, but Lender CEO's are destroying homesteads, helped by Stock Market & Future Trading. C.C. regulation transferred with Loan to O.T.S. regulation failures, altered DEED Contractually.

Bank One Curtailed {Coveted Prepayment} final Payment before Transferring Loan to Homeside Lending that admitted in effort to balance Loan, it Curtailed Escrow, {Coveted Escrow reduction} Both Curtailments related to same November, 2001 so Damage multiplied. {Source Curtailment; defined as to cut off Tail, Horses Tail.}

Bank One Curtailment N.A. was a Breach of Loans small print {actually DEED Cover page, Bold print formatted that to Prepay requires Signature} with occurrence damage stipulation that if coveted, loan originator refunds all funds instead of compiling Damages with arbitration, Judge edited Loan TERM Paragraph by cropping off top half, on Judgment rendered, actually reformatting standard agreement DEED substance without publishing, Case was and is Case Law Important.

Homeside Lending stated Bank One Curtailed Principal before loan transfer and attempting to repair Principal Curtailment, admitted Escrow was reduced, but errantly Escrow Curtailment did not address Principal Curtailment, both stood without Merit {Escrow Curtailment is My definition} argued concealed prepayment? Defended in Testimony as Common Practice! Trial concluded without Judgment until 100 Days expired, Learned Attorney related pretrial Lawsuit was for theft. I relate Washington Mutual equates jeopardizing Robbery Prosecution, Blatantly Corporate accountability empowerment amuck.

Requested real-time Loan History skirted/omitted time-frame of loan transfer Curtailments, coveted before Bankruptcy, forced Bankruptcy, then from Bankruptcy Attorney's.

Washington Mutual received Loan History Homeside Lending was concealing following release of Bankruptcy Stay {same day} on December 15, 2005. Then posted Loan History that forced admittance of Bank One Curtailment in 2001 and related Escrow Curtailment in November, 2001, argued intended for December, 2001, unsupported because accounting errors were skirted/coveted for Five Years fraudulently, I.R.S. 1098 Form deceaved reporting $383.88 Intrest with Credit Report deception.

Real time Lender statements support December, 2001 Unfunded, Unpaid and not Due, statements just blanked-out Decembers payment {evidenced in Court.} Bank One filled 2001 Form 1098, Homeside Lending filled errant 2001 IRS FORM 1098 reporting Total Interest Applied $383.88 from "0" funds because Homeside Lending received first payment January, 2002, false in House Forth Credit Reporting Agency accompanied to damage loan, forcing Voluntary Bankruptcy filling December, 2002, Judgment stated Predisposed to Bankruptcy on Judgment.

Checks Displayed demanding credit at recorded Bankruptcy Conformation Hearing, Judge ordered Attorney to file borrowers "Proof of Claim" before Bankruptcy Conformation enactment, Conformation was delayed for 60 Days to Address Loan Check Payment History, same Judge's $1,000.00 Judgment was later Appealed {oil-field worker.} Printer never recieved U.S. Supreme Court Case.

Attorney failed to file Proof of Claim and Quit, New Attorney posted Certified Mail RESPA "qualified written request" for loan history, Ignored and later Judge refused to admit into evidence, with no response I drafted "Qualified Written Request" Judge awarded Attorney fees and $1,000.00 damage for lender Washington Mutual Ignoring My RESPA Request {B.B.B was also Ignored and Expelled Washington Mutual for cause, Judge was forced to revert Defendent Homeside Lending back to Origional Washington Mutual} to date substance requested ignored, including through discovery and absent on Judgment related in Trial, matter taken under advisement later ignored.

November 15, 2005 Bankruptcy release of stay and loan history received, {same day} been squatting in my Home 29 Months. Filed Core Bankruptcy Adversary against Washington Mutual but Judge under Seal made defendant Homeside Lending {former entity} but Washington Mutual Attorney Witnessed My Homeside Lending Loan Manager who admitted both received check payments misapplications, by stating Curtailments are Bank One "Common Practice" and Homeside Lending "Common Practice" recorded in Testimony under direct.

Appealed Judgment up-to US Supreme Court but Appellate Attorney failed to verse Merits, or submit Case to Printer, allowing expiration. March 25, 2008 Loan called to foreclose March 6, 2008 received on March 29, 2008 the day News announced "C.C." to replace "O.T.S." the regulator never regulating.

Universally every/all Loan Term Months needs Law enforcement, costly penalize Lenders if coveted Misapplications account. Fix is Signed adjustable without Refinancing costs for all Loans, expanding choice of Months {simply if a borrowers behind, lenders loan skips a month adds a Year, reducing payments a bit for a small fee.} Any/all Loan Monthly Terms Tabled before Lending for borrowers choice, eliminating 2 extra payments per year, from lack of options.

Universally Loan Term Months needs Law enforcement, costly penalize Lenders if coveted Misapplications account. Signed adjustable without Refinancing costs for all Loans, expanding choice of Months {simply if a borrowers behind, lenders loan skips a month adds a Year, reducing payments a little for a small fee.}

Bankruptcy arrearages paid-off in full Years ago if Foreclosed on, equation is Judge awarded Check payments of nearly $1,500.00 as allowed theft by Washington Mutual defended as Common Practice, similar to Bank robber claiming "Common Practice" Defense. Recent return of Core Bankruptcy Arrearages skirts damages and overrides Judgment by default admittance, day rate damage Judgment was substance Judge ignored!

Posted by: Richard Pollak Alvin Texas 77511 | March 31, 2008 11:25 AM

If you want to know more email me at herbgura@lake.org

Posted by: Herb Gura | April 5, 2008 10:27 PM

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