Paulson: Economy Is Better But Housing Still a Threat

The US economy should be growing faster and financial markets should be more stable by the end of this year, but housing will still pose the biggest economic threat, Treasury Secretary Henry Paulson predicted.

"Although we are still working through housing and capital markets issues, and expect to be doing so for some time, we also expect to see a faster pace of economic growth before the end of the year," he said at a Washington Post lunch honoring the top 200 businesses in the capital area.

Henry Paulson
Henry Paulson

In a wide-ranging review of the economic situation and the administration"s responses, Paulson attributed his relative optimism partly to the tax rebate stimulus checks going out now.

He said 130 million households will have received nearly $100 billion by the middle of July.

Most private economists agree the stimulus is enough to push up second- and third-quarter growth but fear it will fall back toward the end of the year -- the so-called W-shaped recession.

Paulson"s capital markets outlook was also on the optimistic side of the opinion spectrum.

"In my judgment, we are closer to the end of the market turmoil than the beginning," he said. "Market liquidity and investor confidence are gradually improving," although not across the board.

Although there are signs of progress and stability, there will still be, in one of Paulson"s favorite phrases, "bumps in the road ahead." He said "it simply takes time to reassess and re-price risk, and regain confidence.

The housing market got a less sanguine evaluation.

Paulson still said "housing is the biggest risk to our economy," and warned that "foreclosures will remain elevated even if we avoid every single preventable foreclosure."

Critics have complained that the Bush administration"s efforts to help people hold on to their homes have been slow and inadequate.

The Treasury Secretary"s response was that the workout rate for homeowners in financial trouble has now reached 2 million per year and 1.4 million have been helped already.

"These are significant numbers, and a significant achievement when you consider that 2 million is also the estimated number of homes that will go into foreclosure this year." Though he did not specifically criticize any of the more generous housing aid plans Democrats are sponsoring in Congress, Paulson emphasized the limits he sees to government"s role.

"If someone can"t afford their home and must move, it's painful," he said.

If someone walks away from a mortgage they can afford, it"s irresponsible.

In both these cases, however, there is little government or industry should do to prevent foreclosure." Some of the Congressional plans include writing down part of the principal balances of loans on which homeowners might be able make payments, but which are now larger than the value of their houses.

Earlier today, Federal Deposit Insurance Corporation chairman Sheila Bair said that without such writedowns, housing will go into a downward spiral of mortgage defaults and falling home prices.

She has proposed federal loans that would let homeowners pay down up to 20% of their mortgage balances.