Plenty of Work Ahead to Restore Economy, Paulson Says
Tuesday, November 18, 2008
Jacqueline Gilbert // Washington Correspondent | 11.18.08
In what was said to be an unprecedented situation, even so much as an occurrence only happening once or twice in a hundred years, Henry Paulson, the present treasury secretary, says there’s plenty of work ahead to restore the U.S. economy. Paulson's notion is echoed by past and perhaps future treasury secretaries.
“Restoring the financial system will go a long way with helping the economy recover,” he said last night at a Wall Street Journal conference in Washington. “The economy has turned down, housing prices are still declining…the recovery process is going to take longer. There’s going to be stress in the capital markets for months.”
Paulson was joined by two of President-elect Barack Obama’s top economic advisers: Robert Rubin, Citigroup Inc. director and senior counselor and first-term treasury secretary for the Clinton Administration, as well as Lawrence Summers, Rubin’s successor during Clinton’s second term.
The current treasury secretary wasn’t alone in his sentiment regarding the nation’s long road toward recovery, as both Rubin and Summers agreed.
“I think that it’s a strong probability that the psychological crisis, the pervasive anxiety that we’re in right now will abate in a reasonable period of time,” Rubin said. “The single most important thing we can do right now is a very large fiscal stimulus married with a commitment, once the economy is healthy again, to put in place a multi-year program to get back to a sound fiscal position.”
Summers, who is currently being vetted as a strong candidate for treasury secretary in the Obama Administration, agreed with his predecessor, but said the fiscal stimulus should be speedy, substantial and sustained over a several-year interval. “We’re going to need some impetus to the economy over the next two to three years,” he said. “I think there is no question over the long term that we have to pay attention to the fiscal questions.”
The National Association of Business Economists (NABE) released a survey yesterday forecasting a prolonged recession and Paulson’s statements last night seemed to mirror NABE’s outlook.
“Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of spillover to the real economy,” said NABE President Chris Varvares in a statement released yesterday.
Following a small contraction in the third quarter of this year, Varvares says NABE expects real GDP to decline at a 2.6 percent rate in the fourth quarter, implying growth of just 0.2 percent in 2008.
“With the recession continuing into 2009, GDP growth next year is expected to be a meager 0.7 percent. This would be the slowest growth over a two-year period since the early 1980s,” he said, also citing the projected dismal unemployment rate, forecast to hit 7.5 percent by the end of next year. NABE also predicts a drop in home prices of 3.5 percent next year, following a 6 percent drop in 2008.
Just last week, Paulson announced that the government's plan to purchase financial institutions' under-performing mortgages had been put on hold. Treasury put off the bailout’s original intent of purchasing bad loans and instead decided to continue injecting capital directly into financial markets.
During the first part of the Monday WSJ event, Paulson characterized the Treasury’s change of plans as an adaptation to what was happening in the financial markets.
“I’ve seen no experimentation in terms of the illiquid asset purchase program. I’ve seen just the opposite,” Paulson said. “We went to Congress and when the markets froze up we said we had a problem in terms of capital in banks, we have a systemic event, we’re facing the collapse of a finance system and the way we were going to approach it was to buy illiquid assets. And so we asked for $700 billion to buy illiquid assets to capitalize the banks. Then the situation got much worse. Institutions were failing…and so then what we said was, what we need to do is something that is more powerful and quicker.”
Paulson says Treasury moved very quickly, with “lightening speed” and took a step, along with the Federal Deposit Insurance Corp. and the Federal Reserve, in which he believes, stabilized the financial system.
“Then earlier last week, again I looked at it,” Paulson said. “Given the state of the economy, and given that we have roughly half that much left, and given what it takes to make a difference with the illiquid assets, we made a decision to not go ahead with that program and to keep working to develop other capital programs because we believe…capital is more powerful.”
The treasury secretary spoke of his meeting with Speaker of the House Nancy Pelosi and other leading Democrats hours before the Monday night event, where he and Fed Chairman Ben Bernanke provided an update to Congress on the $700 billion financial bailout.
“When we were there, we said we could see what was happening to the economy. We can see what’s coming. We foresaw what was coming. And we said if we don’t do this it’s going to be much, much worse,” he said. “Right now the American people see what’s happening with the economy, but what you don’t get credit for is what you prevented.”
With the first $350 billion in taxpayer funds currently being allocated, Pelosi and the other Dems rallied behind FDIC Chairman Sheila Bair's $24 billion proposal to prevent nearly 1.5 million foreclosures, according to Reuters.
Upon deteriorating economic news, including a steep rise in foreclosures and increased number of Americans filing for jobless claims, Pelosi issued a statement for resolve from Congress and the Bush Administration.
“The need for action is clear and urgent, but the Administration is failing to move aggressively to stem the tide of foreclosures and refusing to use the authority it has been given by Congress to help homeowners,” Pelosi said in her Nov. 13 statement. “Addressing the underlying problem of home foreclosures and stopping the drop in home values is necessary to restore confidence in our financial system, get credit moving again, and boost economic growth.”
As the Treasury works on a macro level and rapidly designs economic programs to fix credit markets, other problems exist, like the inability to bolster home retention programs for homeowners in distress.
“If the Administration is going to sponsor meaningful home retention programs among the major financial institutions, it needs to secure buy-in from investors (i.e., mortgage-backed securities pool trustees),” said Gerry Alt, president and COO of LOGS Network and HEART Financial Services, a division of LOGS that focuses on loans that have already been referred for foreclosure or bankruptcy legal representation. “Many of the potential workouts, short sales, and other foreclosure alternatives are thwarted by the inability of servicers to gain the consents they need to modify the terms of securitized loans. In many cases either the approval process takes too long, or consent is impossible under the terms of the pooling and servicing agreements, prior to placing the loan in foreclosure.”
“Restoring the financial system will go a long way with helping the economy recover,” he said last night at a Wall Street Journal conference in Washington. “The economy has turned down, housing prices are still declining…the recovery process is going to take longer. There’s going to be stress in the capital markets for months.”
Paulson was joined by two of President-elect Barack Obama’s top economic advisers: Robert Rubin, Citigroup Inc. director and senior counselor and first-term treasury secretary for the Clinton Administration, as well as Lawrence Summers, Rubin’s successor during Clinton’s second term.
The current treasury secretary wasn’t alone in his sentiment regarding the nation’s long road toward recovery, as both Rubin and Summers agreed.
“I think that it’s a strong probability that the psychological crisis, the pervasive anxiety that we’re in right now will abate in a reasonable period of time,” Rubin said. “The single most important thing we can do right now is a very large fiscal stimulus married with a commitment, once the economy is healthy again, to put in place a multi-year program to get back to a sound fiscal position.”
Summers, who is currently being vetted as a strong candidate for treasury secretary in the Obama Administration, agreed with his predecessor, but said the fiscal stimulus should be speedy, substantial and sustained over a several-year interval. “We’re going to need some impetus to the economy over the next two to three years,” he said. “I think there is no question over the long term that we have to pay attention to the fiscal questions.”
The National Association of Business Economists (NABE) released a survey yesterday forecasting a prolonged recession and Paulson’s statements last night seemed to mirror NABE’s outlook.
“Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of spillover to the real economy,” said NABE President Chris Varvares in a statement released yesterday.
Following a small contraction in the third quarter of this year, Varvares says NABE expects real GDP to decline at a 2.6 percent rate in the fourth quarter, implying growth of just 0.2 percent in 2008.
“With the recession continuing into 2009, GDP growth next year is expected to be a meager 0.7 percent. This would be the slowest growth over a two-year period since the early 1980s,” he said, also citing the projected dismal unemployment rate, forecast to hit 7.5 percent by the end of next year. NABE also predicts a drop in home prices of 3.5 percent next year, following a 6 percent drop in 2008.
Just last week, Paulson announced that the government's plan to purchase financial institutions' under-performing mortgages had been put on hold. Treasury put off the bailout’s original intent of purchasing bad loans and instead decided to continue injecting capital directly into financial markets.
During the first part of the Monday WSJ event, Paulson characterized the Treasury’s change of plans as an adaptation to what was happening in the financial markets.
“I’ve seen no experimentation in terms of the illiquid asset purchase program. I’ve seen just the opposite,” Paulson said. “We went to Congress and when the markets froze up we said we had a problem in terms of capital in banks, we have a systemic event, we’re facing the collapse of a finance system and the way we were going to approach it was to buy illiquid assets. And so we asked for $700 billion to buy illiquid assets to capitalize the banks. Then the situation got much worse. Institutions were failing…and so then what we said was, what we need to do is something that is more powerful and quicker.”
Paulson says Treasury moved very quickly, with “lightening speed” and took a step, along with the Federal Deposit Insurance Corp. and the Federal Reserve, in which he believes, stabilized the financial system.
“Then earlier last week, again I looked at it,” Paulson said. “Given the state of the economy, and given that we have roughly half that much left, and given what it takes to make a difference with the illiquid assets, we made a decision to not go ahead with that program and to keep working to develop other capital programs because we believe…capital is more powerful.”
The treasury secretary spoke of his meeting with Speaker of the House Nancy Pelosi and other leading Democrats hours before the Monday night event, where he and Fed Chairman Ben Bernanke provided an update to Congress on the $700 billion financial bailout.
“When we were there, we said we could see what was happening to the economy. We can see what’s coming. We foresaw what was coming. And we said if we don’t do this it’s going to be much, much worse,” he said. “Right now the American people see what’s happening with the economy, but what you don’t get credit for is what you prevented.”
With the first $350 billion in taxpayer funds currently being allocated, Pelosi and the other Dems rallied behind FDIC Chairman Sheila Bair's $24 billion proposal to prevent nearly 1.5 million foreclosures, according to Reuters.
Upon deteriorating economic news, including a steep rise in foreclosures and increased number of Americans filing for jobless claims, Pelosi issued a statement for resolve from Congress and the Bush Administration.
“The need for action is clear and urgent, but the Administration is failing to move aggressively to stem the tide of foreclosures and refusing to use the authority it has been given by Congress to help homeowners,” Pelosi said in her Nov. 13 statement. “Addressing the underlying problem of home foreclosures and stopping the drop in home values is necessary to restore confidence in our financial system, get credit moving again, and boost economic growth.”
As the Treasury works on a macro level and rapidly designs economic programs to fix credit markets, other problems exist, like the inability to bolster home retention programs for homeowners in distress.
“If the Administration is going to sponsor meaningful home retention programs among the major financial institutions, it needs to secure buy-in from investors (i.e., mortgage-backed securities pool trustees),” said Gerry Alt, president and COO of LOGS Network and HEART Financial Services, a division of LOGS that focuses on loans that have already been referred for foreclosure or bankruptcy legal representation. “Many of the potential workouts, short sales, and other foreclosure alternatives are thwarted by the inability of servicers to gain the consents they need to modify the terms of securitized loans. In many cases either the approval process takes too long, or consent is impossible under the terms of the pooling and servicing agreements, prior to placing the loan in foreclosure.”
