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Thursday, 3 July 2008

Paulson says US economy enduring 'rough period'

WASHINGTON - US Treasury Secretary Henry Paulson said on Wednesday that the US economy was enduring 'a rough period' and warned that home foreclosures would likely remain high in the near future.
The US Treasury chief said soaring crude oil prices, a widespread credit crunch and a two-year long housing market slump had taken some of the wind out of the sails of the US economy.

'The US economy is going through a rough period. US foreclosures will remain elevated and we should not be surprised at continued reports of falling home prices,' Mr Paulson warned during a speech in London.

His remarks were also released by the Treasury in Washington. The Treasury chief and former banker stopped off in London on Wednesday amid a whistle-stop tour of European capitals.

He said the giant economic stimulus - stuffed with tax rebates and backed by the administration of President George W. Bush - had helped shore up US growth, but that the housing downturn poses a 'significant' downside risk to economic momentum.

Foreclosures have soared in recent months as home sales and property prices have continued to tumble across many parts of the United States.

The world's biggest economy posted sub-par growth of 1.0 per cent during the first quarter of the year, and some analysts believe the economy is on the brink of a recession.

Mr Paulson said the sooner house prices stabilise, the sooner the economy will bounce back to stronger growth. He also blamed rocketing oil prices for extending economic angst.

'High oil prices will in all likelihood prolong our economic slowdown,' he said, as world oil prices hit new record peaks above US$144 (S$195) a barrel.

Economic growth has been weighed down by the credit squeeze as major banks, including Citigroup and Merrill Lynch, have announced multibillion dollar losses tied to ailing mortgage investments.

Many other banks have also suffered similar losses and reined in lending as they seek to restore stressed balance sheets.

Mr Paulson said US regulators, including the Federal Reserve and the Securities and Exchange Commission, are collaborating closely on developing new measures to help offset the credit squeeze.

But the authorities have to walk a fine line, he said, as officials do not want to promote irresponsible market risk-taking by suggesting they would always ride to rescue of an imperiled bank or finance house.

'For market discipline to be effective it is imperative that market participants not have the expectation that lending from the Fed, or any other government support, is readily available,' Mr Paulson said during the speech at Chatham House in London which houses the Royal Institute of International Affairs.

The Fed and Treasury have been criticised for assisting in the rescue of the US investment bank Bear Stearns in March, and for helping to broker a takeover of Bear by JPMorgan Chase.

Fed chairman Ben Bernanke has said the central bank stumped up billions of dollars to support deal because a Bear Stearns collapse could have destabilised Wall Street.

US lawmakers are considering possible changes to the regulatory environment that could help avoid a repeat of the credit crunch and the downfall of a major financial institution like Bear Stearns.

'To that end, we should create a system that gives us the best chance of foreseeing a crisis, including a market stability regulator with the authorities to avert systemic issues it foresees,' Mr Paulson said.

'We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,' the Treasury chief added. -- AFP

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