Interview Transcript: Henry Paulson

The following is the unofficial transcript of a CNBC interview with Treasury Secretary Henry Paulson on CNBC's "Squawk on the Street" today at 9:00 AM ET. All references must be sourced to CNBC.

In the CNBC exclusive interview, Paulson discusses the credit crisis, the economy and the housing market, among other topics:

Steve Liesman: Joining us for an exclusive CNBC interview, Treasury Secretary Henry Paulson. Good morning, Mr. Secretary.

Henry Paulson: Steve, good morning.

Liesman: Thanks for being here. Let me start off, some see the recent decline in treasury bill yields as a sign of panic out there that investors are fleeing for safety and that the federal reserve has not done enough. What kind of signal do you get from what happened to Treasury bill yields in the des -- recent days?

Paulson: Steve, before I get to your question, let me make the point that we've been seeing stress and stains in a -- strains in a number of capital markets but this is against the backdrop of a strong global economy, a very healthy U.S. Economy, and the reason I start by making this point is that markets ultimately follow the economy. I've been through periods of stress, turbulence in the market for over the course of my career, various times, and never in any of those other periods have we had the advantage of a strong economy underpinning the markets. Now let me get to your question. As I’ve been saying for some time, credit is being repriced, reassessed across our capital markets so this is going on. Now, as the -- and as the market focuses on these issues in some of the markets that -- as the market focuses on these issues in some of the markets under the most stress, there is a liquidity concern and there's an issue related to the pricing of risk. Now, as the fed addresses liquidity, this makes it possible, makes it easier for the market to focus on risk and pricing risk. Now, this will take a time to play out, because the global economy is more integrated than it's been in the past, we have more complex products, but this will play out over time and liquidity will return to normal when the market has a better understanding and investors have a better understanding of the risk return tradeoff, and as I said, this will take place over time and we have the benefit of having a very strong economy to absorb some of the losses along the way.

Liesman: Mr. Secretary, the Federal Reserve cut the discount window rate by 50 basis points or one half of a percentage point. Do you feel that's enough to address the current problem?

Paulson: Listen, the fed is independent, I talked with him regularly, their job is liquidity. I have great confidence in the fed. And as i said, there's two issues when we look at some of these markets:  there's liquidity concern and there's concerns about understanding the risk. The fed, doing what they do and easing and addressing liquidity makes it easier for the markets to focus on the risk, investors to focus on risk, and as i said, this will take some time but we'll work through it.

Liesman: Is that enough in and of itself to set markets straight here?

Paulson: Well, lot me say markets straighten themselves out over time. This will -- this is going to take a while to play out. As I said, the -- what we have here is an economy that is increasingly complex, integrated globally, but again -- and let me talk a little bit more about why I made the point about the economic strength. If a market turbulence is precipitated by economic weakness or by the credit quality of the corporate sector, it's one thing, but we have, again, strong economies, we have a healthy corporate sector, we have a healthy financial sector, major financial institutions, so the problems we're experiencing right now are coming from bad lending practices. And during extended periods of benign markets, excesses creep in. We've had some bad lending practices. This will take a time to work itself out for the markets to readjust and as I said, I think a big part of that readjustment isrical operating risk.

Liesman: You had said in your interview -- isrical operating risk. You had said that you are vigilant in monitoring the situation. Is there a specific action the treasury is doing now and should be doing?

Paulson: Let me say it's always important to vigilant, so the time has not passed for vigilance. I see my role as treasury secretary is to really have responsibility for policies and focus on keeping our economy strong and stable and growing and a big part of that is capital markets, and when I came to Washington, I saw how important it is to have orderly, efficient, competitive capital markets. We've reenergized the president's working group on financial markets. I think it's my job to talk regularly to market participants, but also to talk regularly with the key regulators and make sure that we are seeing the same issues, the same problems, working toward the same solutions.

Liesman: Mr. Secretary, can you talk about specific actions that the Treasury Department either is doing or will be doing to help calm and unenclosing some of these log jams in credit markets these days?

Paulson: let me say, as I said to you a couple of times, this is going to take a while to work through. There's not going to be a quick solution to some of the issues in the credit markets. But, again, we will work through these, we will work through these issues because we have an economy that's strong and the market participants are i think recalculating -- are calibrating, repricing risk and it's my job to stay on top of that, to stay close to the market participants, to stay close to my fellow regulators, make sure we see the issues the same, we're working towards a common solution, and to continue to remind people that these issues have not been precipitated by weak economic conditions, weak credit conditions. They've been precipitated by excesses and by bad lending practices, and so it will take a while to work themselves out, but we'll work through this just fine.

Liesman: Mr. Secretary, you're saying that this this take a while to work out. What is your expectation for the effect of what's happening in credit markets on the economy?

Paulson: As I said, we've got a very healthy economy. What's going on right now in the capital markets will in all likelihood take a penalty, take a toll out of economic growth, economic growth will be less than it ordinarily would have been but it is my view that the underlying economy remains healthy and I expect to see the economy continue to grow, to create jobs, and to raise the standard of living.

Liesman: Are you concerned that, as some have said, millions of Americans could lose their home as a result of what's going on in the mortgage market right now?

Paulson: Of course I am. And we're very focused on the mortgage market, we're talking to a wide variety of participants in that market, including Fannie Mae and Freddie Mac, we're thinking through options to reduce the strain in the mortgage mark the and clearly -- in the markets and the president wants us to be clearly focused on actions that can be taken, things we can do, to help mortgage holders who are in danger of losing their homes.

CONTINUED : More from the interview...

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