Paulson Tries to Calm Investors, Says Stability Will Return
In midst of credit crisis, treasury sec. says economy is fundamentally strong.
Aug. 21, 2007 -- Treasury Secretary Henry Paulson today paired a sober outlook with measured confidence, saying it "will take some time" before the market emerges out of the current credit crunch and restores itself back to health.
"We've had some bad lending practices," Paulson said on CNBC. "This is going to take a while to play out."
Though he warned the end is not immediately in sight for the credit crunch that has slowed the market ever since the collapse of the subprime mortgage market earlier this year, Paulson added that the economy remains fundamentally strong and will eventually rebound from its current difficulties.
"Economic growth will be less than it ordinarily would have been," Paulson said. But he nonetheless added, "I expect the economy to continue to grow and create jobs."
This morning the Federal Reserve also pumped another $3.75 billion into the financial system, the latest in a series of maneuvers that has pumped over $100 billion into the market since last week.
Saying he has "great confidence" in the Federal Reserve, Paul said these maneuvers will help investors focus on the principal problem on hand -- the repricing of risk.
"As the Fed addresses liquidity this makes it possible, this makes it easier, for the market to focus on risk and pricing risk," Paulson said. "This will play out over time and liquidity will return to normal when the market has a better understanding, investors have a better understanding, of the risk-return trade off."
Stocks fell in early trading Tuesday after Paulson's remarks.
The market has slowed down ever since investment banks and hedge funds began to realize earlier this year that they were over-invested in risky high-yield subprime loans, used for home mortgages given to individuals with poor credit. With home values stagnant, these owners will be unable to refinance their loans when higher interest rates kick in beginning later this year, raising the specter of large-scale defaults on these loans.
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