Bush, Paulson Say Stimulus Decision Still Pending (Update2)
Jan. 7 — President George W. Bush and Treasury Secretary Henry Paulson said that U.S. economic indicators are sending “mixed” signals and that they are considering whether a stimulus is needed.
“We’re all focused on this,” Paulson told the New York Society of Security Analysts. “This is a decision he still has to make,” Paulson said of the president, who told an audience in Chicago today “indicators have become increasingly mixed.”
The U.S. stock market is off to its worst start since 2000 as the housing slump and credit crunch weaken job growth and manufacturing. Government reports in the past 10 days showed home sales fell to the lowest in 12 years and the jobless rate jumped to a two-year high of 5 percent in December.
Paulson, who brokered an agreement by the housing industry to help subprime homeowners avoid foreclosure, said he expected mortgage servicers to “begin fast-tracking borrowers in the next few weeks.” The plan will be adjusted as necessary, he added.
The Treasury chief said enhancements to the initiative, which will voluntarily freeze some mortgage rates for five years, may be extended to “adjustable-rate mortgages other than subprime if it will benefit homeowners and investors.”
American Securitization Forum spokeswoman Katrina Keller in New York didn’t immediately return a call seeking comment. The group lobbies for investors, traders, underwriters, accounting firms, ratings companies and other institutions involved in the creation and sale of mortgage-backed securities.
No Decision Yet
Bush “hasn’t made a decision yet as to whether he’s going to propose” an economic stimulus package, Paulson said, while reiterating the administration wants Congress to make previous tax cuts permanent. Bush said “in a time of economic uncertainty, we don’t need to be taking money out of your pocket.”
Former Treasury Secretary Lawrence Summers and Harvard University’s Martin Feldstein are among the economists saying a policy response, including tax cuts, is needed to avoid a recession. The last U.S. economic contraction occurred in 2001, Bush’s first year in office.
Feldstein, head of the National Bureau of Economic Research and a member of the group that dates economic cycles, said Jan. 5 that there’s a greater than 50 percent chance the economy will contract.
Paulson said he expected the economy would keep growing and suggested the administration wouldn’t rush to Congress with a fiscal stimulus plan. “Working through the current situation and getting the policy right is more important than getting the policy announced quickly,” he said.
“This economy is really quite resilient in the face of some pretty strong headwinds,” Paulson said. At the same time, he added that “the consumer is facing some real challenges right now — the housing downturn, energy prices, the unemployment numbers.”
Paulson also said it’s “encouraging” that banks are taking on the assets of units they set up to invest in high- yielding debt. The so-called structured investment vehicles suffered billions of dollars of losses after the market for securities linked to subprime mortgages collapsed.
The Treasury chief conceded that regulators should have paid more attention to SIVs, whose losses contributed to the credit crunch. He said he and the heads of the regulators that make up the President’s Working Group on Financial Markets are working on making the market more transparent.
“Complex and opaque financial instruments and structures, such as the use of conduits and SIVs, contributed” to the market turmoil, Paulson said. “We recognize the importance of addressing these policy issues, and we are.”
The next few months may be difficult for financial markets and for consumers, Paulson indicated. “It will take additional time for markets to regain confidence,” Paulson said in his first speech of 2008. “We will likely have further indications of slower growth in the weeks and months ahead,” the Treasury chief added, citing the “overhang” of unsold houses as the “biggest downside risk” facing the economy.
Neither Bush nor Paulson indicated what new steps they are considering. “The smartest thing we can do is to keep taxes low,” Bush said.
Paulson said making permanent the tax reductions Bush implemented in 2001 and 2003 would “provide great relief” to investors. He acknowledged that it’s unlikely he will be able to convince a Congress led by Democrats who campaigned on pledges to reverse some of Bush’s tax policy to go along.
“It’s a very heavy lift to get them to make that tax relief permanent,” Paulson said in answering questions after his speech.
Paulson, Federal Reserve Chairman Ben S. Bernanke and the rest of the President’s Working Group on Financial Markets met with Bush Jan. 4.
After that meeting, Bush said he would work with Congress to “do everything we can” to ensure the economy doesn’t slip into a recession.
Paulson, the former head of Goldman Sachs Group Inc., assessed the state of various capital markets in his speech.
Equity and Treasury markets are functioning “well,” he said. The U.S. market for “high-grade debt” is “performing satisfactorily,” and the “high yield” market is “impaired but operational,” Paulson said. The asset-backed paper market is showing “progress,” he said.
Paulson also today reiterated Congress should pass legislation toughening oversight of Fannie Mae and Freddie Mac, two government-chartered enterprises that are the country’s biggest sources of mortgage financing. With a stronger regulator, Paulson said the administration would back a temporary, higher limit on the size of loans the firms are allowed to securitize.