Paulson says U.S. housing correction "necessary"

WASHINGTON (Reuters) - A slump in U.S. homebuilding that slowed growth at the end of 2007 will help wring out excesses and the Bush administration is not trying to ward it off, U.S. Treasury Secretary Henry Paulson said on Wednesday.

Treasury Secretary Henry Paulson addresses the Real Estate Roundtable's State of the Industry meeting in Washington January 30, 2008. REUTERS/Jim Young

“After years of unsustainable home price appreciation, this is a necessary correction,” Paulson said in prepared remarks for delivery to a real estate roundtable. A proposed fiscal stimulus package “is not intended or expected to slow down the housing correction,” he added.

Paulson said the housing downturn’s impact was evident in the sharp deceleration in national economic growth to a 0.6 percent annual rate in the fourth quarter, which the Commerce Department reported earlier on Wednesday.

He spoke to the realtors, who greeted him warmly, minutes after the Federal Reserve announced it was slashing U.S. interest rates by an additional hefty half percentage point and cheered on the U.S. central bank’s action.

“Let me say I’m a big believer in what the Fed is doing, because I think monetary policy is an effective tool,” Paulson said. But he added: “It’s not the answer to everything”, in a plug for support for a complementary fiscal stimulus package.

Paulson said he was confident the U.S. economy will keep growing “although not as rapidly as we have seen in recent years,” rather than stall into recession.


Paulson praised the U.S. House of Representatives for voting to approve a package of fiscal stimulus measures worth about $146 billion and warned the Senate should similarly act quickly and keep the measures simple so they are effective.

“If the process bogs down, the American people will lose patience and we will also lose the momentum that’s absolutely needed for quick action and quick results,” he said. Some senators want a bigger package and one that will, among other things, offer an extension in unemployment insurance benefits.

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The package approved by the House included a temporary hike in size of the home loans government-sponsored enterprises like Fannie Mae and Freddie Mac can hold in their portfolios. Paulson said that was “inconsistent with the GSEs’ affordable housing mission” and said they continue to need reform.

“Under the House bill, these higher limits expire at the end of this year, and this should not be an excuse for postponing much-needed reform,” he said, adding that the Treasury Department would keep pressing for stronger GSE regulatory oversight.


Paulson said capital markets remain under strain because of the housing correction that has reduced liquidity and affected lending, but said there were “some encouraging signs.”

Banks have been able to find new capital, much of it from overseas sources, and GSEs have raised equity, which shows that markets are functioning despite strains.

“While this transition period is difficult, and will take more time, it is appropriate and reflects a healthy return to fundamentals,” Paulson said, adding that one of the lessons was that easy credit and lax lending rules were major causes of the problems that now beset markets.

Paulson said that he was talking to his counterparts in Europe, Asia, and elsewhere, and at central banks about queasy market conditions but suggested the “global architecture” for coordinating action was inadequate because emerging-market countries have become much more influential.

The U.S. Treasury chief, who is traveling to Tokyo next week for a meeting of Group of Seven finance ministers from rich countries, acknowledged the G7 represents only a portion of the global economy.

“You need to get the G20 together to get to 90 percent of the economy,” he told a questioner, referring to the larger group of countries that includes key emerging powers like China, India and Brazil. “You can’t say that the architecture that we have is ideal for dealing with the situation that we have.”

(additional reporting by David Lawder and Tim Ahmann)

Reporting by Glenn Somerville; Editing by Diane Craft