U.S. ready to maintain financial stability: Paulson

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Sunday tried to allay election-year fears about the economy amid growing market turmoil, saying the government was prepared to do what it takes to maintain stability in the financial system.

Paulson appeared on several Sunday television talk shows to express confidence in the U.S. economy and financial firms after the Federal Reserve moved on Friday to inject capital into Bear Stearns BSC.N, the fifth-largest U.S. investment bank, which ran short of cash to repay its lenders.

Paulson told "Fox News Sunday" the Fed made the right decision to come to the rescue of the investment firm and that maintaining stability in financial markets was a top priority of the government.

"The government is prepared to do what it takes to maintain the stability of our financial system," Paulson said. "That's our priority."

Paulson said officials were continuing discussions about the financial market turmoil through the weekend. President George W. Bush plans to meet with his top economic advisers on Monday. Many analysts believe the Fed will decide to sharply cut interest rates at its policy meeting next week.

The housing crisis, a broadening credit crunch, a weaker dollar and the softening labor market have put the economy ahead of the war in Iraq as the top concern of voters heading into the November presidential elections.

Continued market turmoil and a protracted economic downturn could bode ill for presumptive Republican nominee John McCain as Democrats have tried to link him to Bush's economic policies.

Paulson said the $152 billion economic stimulus plan enacted in February should help lift the economy as soon as the government checks, up to $600 for individuals, are put in the mail as early as May.

He expressed confidence that the economy and financial markets would work their way through the current crisis.

"I have great, great confidence in our capital markets and in our financial institutions," Paulson told CNN's "Late Edition." "Our financial institutions, banks and investment banks are strong, our capital markets are resilient, they're efficient, they're flexible."

Bush also sought to calm fears about the economy in his weekly radio address on Saturday.

"In the long run, we can be confident that our economy will continue to grow, but in the short run, it is clear that growth has slowed," Bush said.

DEMOCRATS' PACKAGE

U.S. House of Representatives Speaker Nancy Pelosi told ABC's "This Week" that congressional Democrats are drafting a second economic package, which would include an extension of unemployment benefits for jobless workers, even though Bush has said he wants to wait and give the current plan a chance to work.

"I don't know that we have that luxury," Pelosi said, adding that much of what the administration has done has been too late.

In a separate interview with ABC's "This Week," Paulson said the housing price decline was unavoidable and that some policies being pushed by Democrats could make things worse.

"What's going on right now is an inevitable decline, and a necessary decline, in home prices," Paulson said noting that home prices skyrocketed between 2002 and 2006, doubling in some markets in Florida, California and Arizona and Nevada.

"You can't have that kind of appreciation without having some sort of correction," Paulson said. "We have a program that is designed to get to those homeowners who can afford to stay in their homes, who want to stay in their homes, and to help them stay in their homes."

With the dollar hitting a record low this week against other currencies, Paulson said that a strong dollar is in U.S. interest and that over the long run it will reflect the underlying strength of the economy.

"Our economy has its ups and downs like any other economy, but I believe that that long-term strength is going to be reflected in the dollar," Paulson said in the "Fox News Sunday" interview.

(Additional reporting by Andy Sullivan; Editing by Eric Beech)