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Paulson Says U.S. Economy Can Withstand Market Turmoil: WSJ

U.S. Treasury Secretary Henry Paulson said the turmoil in global markets will exact a penalty
on U.S. growth but the financial system and economy was strong enough to withstand it without provoking a recession.

"The economy and the markets are strong enough to absorb the losses," Paulson told the Wall Street Journal in an interview published on its Web site on Thursday.

Paulson's comments come as mounting signs of distress in credit markets, highlighted by the troubles of No.1 U.S. residential mortgage lender Countrywide Financial, caused a heavy
sell-off in Wall Street and Asian stock markets.

The former chief executive at U.S. investment bank Goldman Sachs also said the global economy was in much stronger shape than in previous periods of market stress, such as in 1998 when markets seized up following a Russian debt default and the near-collapse of hedge fund LTCM.

Paulson also said the repricing of risk in markets should not surprise anyone and was inevitable, and that nothing should be done to guarantee market players against losses or restrain them from taking risks.

"When you have periods of benign markets, particularly in situations where parts of markets and the economy are growing at levels that are unsustainable, market participants aren't going
to be as vigilant as they should be," he was quoted as saying.

"One of the natural consequences of the excesses is that some entities will cease to exist," he said.

Paulson also said the big U.S. mortgage financing companies, Fannie Mae and Freddie Mac, should use the ability they already have to help the mortgage market for lower-income and subprime borrowers.

U.S. regulators have so far rejected requests by Fannie and Freddie to lift the caps on the size of their mortgage portfolios so they could have more leeway to lend.

The troubles in credit markets have stemmed from the spreading array of losses in credit instruments backed with U.S. mortgage loans extended to borrowers with patchy credit
histories, reaching banks and funds from Germany to Australia.

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