Paulson sees markets regaining balance

By Glenn Somerville

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Thursday that financial markets are starting to regain their equilibrium and signaled a willingness to work with Democrats on a federal mortgage guarantee plan.

In an interview with Reuters, the Treasury chief also announced that Americans will begin receiving tax rebates on Monday -- ahead of schedule as emphasis shifts to getting a $152-billion stimulus into place quickly to try to keep a flagging economy from deteriorating further.

Electronic payments of up to $600 a person and $1,200 a couple will start flowing to tax filers at a rate of 800,000 daily on Monday, Tuesday and Wednesday, with 5 million more on Friday, May 2. Paulson said the rebates and investment incentives could spark the creation of some 500,000 jobs.

Paulson, a 30-year veteran of Wall Street before taking over as Treasury secretary in mid-2006, acknowledged that some parts of financial markets were still not operating normally but said he was encouraged by signs that investors were coming back to buy leveraged loans and mortgages at a discount.

Mounting U.S. mortgage defaults sparked turmoil in credit markets worldwide last August, forcing policy-makers to pump in hundreds of billions of dollars to keep them from seizing up completely. Despite those efforts, markets remain queasy.

OPPORTUNITY IN DISTRESS

Paulson said occasional bouts of market stress were normal. "I've also seen that there's a history of astute investors taking advantage of periods of distress to come in and put capital to work, and you're seeing that process begin," he said.

"You can point to plenty of signs that say the markets aren't functioning as normal, but I see progress," Paulson insisted, providing a more upbeat assessment of credit market conditions than he has in other recent remarks. "I think the progress has been driven by, first of all, time, and markets making progress at reassessing risk."

He acknowledged that U.S. economic growth had "slowed down significantly" and said it faces downside risks from a declining housing sector and financial market tremors.

But he said every effort was being made to ease distress in housing markets, where some 2 million foreclosures are anticipated this year, even expressing limited approval for a Democratic plan to expand federal mortgage guarantees.

A panel led by Rep. Barney Frank, chairman of the U.S. House of Representatives' Financial Services Committee, on Thursday began drafting legislation to give the Federal Housing Administration more capital and greater leeway to buy distressed mortgages.

"We are behind the objectives. We like some parts of it better than others and we have not issued a veto threat," Paulson said. But he specified his backing would be for a targeted program to help stressed homeowners meet their monthly obligations and not for a plan that simply tries to curtail foreclosures, some of which he suggested were inevitable.

"Even in a good year when housing prices were skyrocketing, there were 650,000 foreclosures in the U.S.," he pointed out.

STRONG-DOLLAR MANTRA

In the interview, Paulson repeated his familiar backing for a strong U.S. dollar but refused to be drawn on whether the greenback, which has lost about 40 percent of its value since 2002 against a basket of currencies, could drop too far.