Housing to hit growth but economy good: Treasury

JIMBARAN, Indonesia - Weak housing and credit markets are challenging U.S. growth, but the economy is fundamentally sound, senior U.S. Treasury officials said on Tuesday.

In separate remarks in Bali and London, the officials said they expected the weak housing market to penalize growth, but said the United States would avoid recession in 2008.

"The housing market is very difficult right now, it's declined significantly. The credit markets are also very challenging," Treasury Under Secretary for International Affairs David McCormick told Reuters on the sidelines of U.N. climate change talks on the Indonesian island of Bali.

"The underlying economy remains strong, although those challenges I mentioned will certainly penalize our growth in the fourth quarter and the coming course of 2008," McCormick said, adding that the Treasury believes the economy will continue to grow and inflation remains under control.

David Nason, the Treasury's assistant secretary for financial institutions, said in London that the housing market correction was the most serious risk to the U.S. economy.

"Other challenges include financial market dislocations and high energy prices. But our solid economic fundamentals, coupled with the backdrop of a strong global economy, should support continued economic growth in the United States," he said in remarks at the City of London Corporation.

U.S. President George W. Bush last week announced plans to head off a wave of anticipated subprime home loan foreclosures. This has been spurred by declining house prices and a credit crunch that prevents borrowers facing steep increases in their mortgage bills from refinancing at more affordable rates.

"Foreclosure starts have almost doubled in the last year and a half, and signs point to further increases," Nason said, adding that the measures would not assist speculators or bail out lenders.

But he cautioned that the healing process would not be speedy and may suffer setbacks requiring more action.

"It will have the effect of reducing preventable foreclosures. The goal is not to prevent all foreclosures," Nason said of the plan in a question-and-answer session.

REGULATORY REFORM

Nason devoted a good part of his speech to the upcoming overhaul of the U.S. financial regulatory system, which is characterized by a number of overlapping regulatory institutions and practices which the Treasury wants to modernize.

He said the credit crunch had highlighted the need for regulatory reforms.

Treasury will propose "some broad ideas" for a new, improved regulatory structure to adapt to the global nature of the modern financial industry, Nason said, but he gave only vague clues about what was in store.

"This optimal structure will not match our current structure exactly. This will be a newly designed model for the U.S. financial services industry that should meet the needs of today," he said.

The United States relies on various regulatory bodies to oversee the financial services industry, including the Federal Reserve, the Federal Deposit Insurance Corp., the Officer of the Comptroller of the Currency, and the Office of Thrift Supervision.

This contrasts sharply with the super-regulator approach adopted by Britain. U.S. Treasury Secretary Henry Paulson in June launched a review of the U.S. system that is expected to issue recommendations on how to streamline it early next year

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