Paulson Defends Economy Bailout Efforts

Nov. 17, 2008— -- Treasury Secretary Hank Paulson tonight defended the Bush administration's actions to fend off a financial crisis that has already caused the stock markets to nosedive, financial institutions to crumble, and threatens to sink the U.S. auto industry.

Paulson said that in his remaining two months in office he would continue to focus on supporting capital markets and financial institutions, brushing aside calls for a second round of stimulus and criticism that his Troubled Asset Relief Program has shifted from its original focus. Paulson said that as many as 1,000 banks might apply for bailout funds from the TARP.

He also alluded to yet unrevealed efforts with the Federal Reserve to use TARP funds to get jammed credit markets flowing again.

Speaking before an audience of 100 of the world's CEOs at a dinner to launch the Wall Street Journal's CEO Council meeting, Paulson took exception to the assertion by panel moderator and Wall Street Journal Deputy Managing Editor Alan Murray that the Treasury department has engaged in "relentless experimentation" in attempting to solve the crisis.

Instead, Paulson said his department has been "creatively working" with the Federal Reserve and Congress to obtain wide authority to address the problems.

As evidence, Murray cited how the government's bailout of insurance giant AIG has been revised, its flagship relief program called TARP that's no longer using its $700 billion in authorized funding to purchase troubled assets, and changes in efforts to assist the troubled auto industry.

Paulson argued that the efforts his team has enacted have prevented further deterioration of the economy. He said the administration foresaw possible pitfalls and acted to cut them off.

"It's hard to get credit for what didn't happen," he said.

Paulson noted that during the two weeks that Congress debated the TARP, the situation deteriorated as banks, like Washington Mutual went under and Wachovia needed rescue.

"We had to do something greater," Paulson said. To fix problems he described as "unprecedented," Paulson said that they ultimately determined a focus on investing in capital rather than troubled assets would be more effective.

Asked to place the economy's health on a scale from one to ten, Paulson sidestepped, saying efforts to avert a collapse are near a ten, but warned that it will take much longer for the economy to recover. The Treasury secretary predicted further drops in housing prices and continued stress in the capital markets in the coming months.

Speaking on the panel alongside Paulson, former Treasury Secretary Robert Rubin, who served under President Clinton, predicted that the crisis would recede within a "reasonable period of time," though he said it would last at least another year. Rubin said that the financial system was in better shape now than before the Bush administration took action over the last couple months.

Auto Industry Bailout?

When asked if the government needs to bail out the troubled U.S. auto industry, Paulson, who revealed that he drove a Toyota Prius hybrid car, held his position that it would be a "huge mistake" to just give the car companies loans as has been proposed by congressional Democrats. Paulson maintained that the auto industry is "important" but needed to reform itself in order to achieve "sustainability" and "viability."

As Congress considers whether to pursue a second stimulus package either during this administration or the next, the three panelists, which also included former Treasury Secretary Lawrence Summers, differed on what a package should look like and its possible effect.

Paulson, reiterating the Bush administration's policy, argued that a continued focus on the capital and credit markets would be most effective.

Rubin, echoing calls from Democrats on Capitol Hill, favored another round of stimulus, but said it should be coupled with an unspecified multiyear program to continue building the economy once it is healthy.

Summers, who is rumored to return to the helm of the Treasury Department in the Obama administration, but stressed that he was commenting strictly in his personal capacity, had previously pushed for a stimulus that was "timely, targeted, and temporary."

Instead, tonight he called for a "speedy, substantial, and sustained" stimulative package. He said stimulus might be needed for two to three years, but declined to say how large it would need to be to be effective.

Summers said stimulus should be tied to infrastructure development, renewable energy investment, and health care reform. He again declined to prescribe specific programs or how much they should cost. He argued that tax cuts should be part of the equation, but should come after more simulative measures are enacted to prompt short-term growth.