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Paulson Says US Shouldn't Prop Up Housing Prices

U.S. Treasury Secretary Henry Paulson said Wednesday policy-makers should not interfere with an "inevitable" drop in housing prices but should work to minimize the impact on the economy.

"A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and
housing will again contribute to economic growth," he said on prepared remarks for delivery to the U.S. Chamber of Commerce.

Henry Paulson
AP
Henry Paulson

The U.S. Treasury chief also said no one should conclude that broker-dealers and other big financial firms will get permanent access to new lending facilities made available by the Federal reserve to ease market stresses.

In wide-ranging comments on current conditions in credit and housing markets, Paulson tried to sound a note of reassurance about the future. He said capital markets remain flexible and resilient and that regulators and policy makers were "vigilant" about the risks the economy faces.

He said the Fed's actions in taking a series of moves to boost market liquidity and to offer broader access to its so-called discount window for loans were helpful but exceptional.

"At this time, the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil," Paulson said.

He said policy makers were fully aware that it was a housing downturn that precipitated capital market turmoil and posed the biggest risk to the economy but made clear he felt it had room to run yet and should be allowed to do so.

Amid calls for action to minimize foreclosures, make more affordable mortgages available and reduce fraud, Paulson said it was vital to choose policies that "minimize the impact of -- but do not slow -- the housing correction."

Paulson said that only about 2 percent of U.S. home mortgages were in foreclosure but said that as many as 2 million foreclosure starts might occur this year. In addition, he said that 8.8 million households may now have negative home equity -- meaning their mortgages are higher than the house could be sold for -- and said that will rise.

Still, he said that if homeowners who are "underwater" on their mortgages walk away from them, they are no more than speculators and don't deserve special help.

"Washington can not create any new mortgage program to induce these speculators to continue to own these homes, unless someone else foots the bill," Paulson said.

He noted that a number of lawmakers have proposed initiatives to ease the strain on homeowners and welcomed their ideas but added "most are not yet ready for the starting
gate."