Paulson Defends Bear Stearns Bailout as 'The Right Decision'

"We're very aware of moral hazard," Treasury Sec. says of Bear Stearns bailout.

ByABC News
January 8, 2009, 12:27 AM

March 16, 2008— -- Secretary of the Treasury Henry Paulson Sunday defended the Federal Reserve's recent bailout of investment bank Bear Stearns.

"The right decision here, I am convinced, was the decision that the Fed made, which was to do things, work with market participants to minimize the disruptions," Paulson said in a "This Week" interview with George Stephanopoulos.

When asked if the Bear Stearns loan goes against the administration's consistent refusal to use tax dollars to bail out financial institutions, Paulson said, "We're very aware of moral hazard. But our primary concern right now -- my primary concern -- is the stability of our financial system."

He declined to "speculate about what the outcome of this situation is going to be." And he added that "we're working our way through this right now. We have a lot of conversations going on."

The Bear Stearns bailout has come under scrutiny from critics questioning why the Fed can manage to funnel money to a major bank, but not to homeowners facing foreclosure, as Congressional Democrats have proposed.

In response, Paulson explained that "what's going on right now is an inevitable decline, and a necessary decline, in home prices."

He went on to reiterate the administration's desire to limit government intervention. "I'm looking very carefully at any proposal. But all the ones I've seen, which call for much more government intervention, raise more problems and do more harm than they would do good."

In line with the Bush administration, Paulson declined to say that the U.S. is in a recession, noting, "I think it's less important what you call it than what you do about it."

But he added that "no one is debating the fact that this economy has slowed way down. We feel it, we know it, the American people know it. We are on it very early."