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Secretary Paulson Discusses Housing

PETER COOK: Mr. Secretary, good morning from the United States and thank you for the time. I know you must be hurting for sleep right now. And let me begin by asking you, if I could, with everything going on at home, why this trip right now?

SECRETARY HENRY PAULSON: Peter, it is very important that we have this meeting today - excuse me, losing my voice; a lot of talks today - but this is - this bilateral relationship between our two countries is very important to each of our countries. It's very important to the world. We have a new Chinese government after the 18th People's Congress, and it was important for me to meet with my new counterpart, Wang Qishan, who is the new vice premier, who will by counterpart on the SED, and to begin preparations for our upcoming meeting in June.

MR. COOK: Mr. Secretary, you've talked at length about how these two economies are now linked more than ever. Are you warning Mr. Hu and your new counterpart there in China, and others, that the U.S. slowdown is going to take a toll on China's economy?

SEC. PAULSON: Well, we clearly talked about the U.S. slowdown. And I didn't have to warn them because President Hu made the point to me, which we've made repeatedly to each other that what is good for China's economy, the growth - China's economy continue to grow is very important to our economic growth and strength in the U.S., that those in the U.S. who are worried that somehow or other China is going to hurt us by doing too well economically are worried about the wrong thing. And then of course our continued economic strength in the U.S. is important to China. So the Chinese were very interested to hear from me on a first-hand basis about our economy.

MR. COOK: Did you give them any assurances that perhaps things aren't as bad as is some out in the world are predicting. Let me just share with you, at Bloomberg, we're reporting that the international monetary fund is cutting again. Its forecast for global growth this year says there is a 25-percent chance of a world recession, citing, again, the worst financial crisis in the U.S. since the Great Depression. Does that sound right to you?

SEC. PAULSON: Well, I think that sounds a little overblown to me. What I said to the Chinese is that there is no doubt about the fact that we're having a very difficult quarter and that our economy has slowed down sharply. I told them that the were risks were to the downside. We talked about housing and capital markets. On housing I explained to them, we had had just some unsustainable home price increases in the U.S. over a four- or five-year period, and that this correction was necessary, inevitable. And that when the headlines were screaming the negative that housing prices are coming down, I didn't see that as a negative; I saw that as inevitable. And the sooner we get this correction behind us, the sooner home prices can continue to grow again and housing will be adding to the U.S. economy.

I said there was some good news in that the inventory of unsold homes was shortening, that we're seeing more home-buying activity in recent months, the latest data shows that. I said we're watching it very closely. We're talking about the steps we're taking in the U.S. to deal with this. We also talked about our stimulus plan. With regard to capital markets, I explained that what was - we talked a good bit about the turmoil in the capital markets. I explained that the key here was for our financial institutions to make those disclosures and raise capital. And I cited yesterday's activity in the capital markets as how the market responds favorably when institutions raise capital, announce they are going to raise capital, and again, it's important -

MR. COOK: Sir, if I could, let me jump in and ask you about that, if I could, follow up on what we saw in the markets not only in the United States but in Asia as well - major rallies in the equity markets on the heels of that news from Lehman brothers and others. There are some investors out there who sense perhaps maybe the worst is over. Is that a correct sentiment for them to have at this point?

SEC. PAULSON: Well, I also said to the Chinese that we're not through this yet, and that we've got some more bumps in the road, and that our capital markets aren't yet functioning as they need to function, that it's going to take a while longer, but that I have great confidence in our markets. And, again, the key, the key - and this is one we in our country do very well - when there's a problem, we shine a light on it. We make disclosures. Our institutions move to raise capital. And that's going to continue to be very important because if they don't have the capital, the danger is then they shrink their balance sheets and restrict credit to our consumers who need it and the businesses who need it to grow.

MR. COOK: Mr. Secretary, since you left, there have also been developments on the housing front here in the U.S. There's talk of a bipartisan housing bill in the U.S. Senate and some continued reports that the administration is also now prepared for the first time to back federal loan guarantees for some homeowners at risk of default. Is that kind of help in fact on the way coming from the Bush administration?

SEC. PAULSON: Well, I had a number of meetings in the housing area before I left Washington. I'm obviously very much in touch with what's happening back in Washington. I don't see dramatic changes in our approach here. I think we've got the right approach. But there, as we look at ways that the FHA can continue to improve their programs and continue to be responsive to homeowners who are struggling to make the payment to stay in their homes, I think you will continue to see flexibility as we learn and go forward here.

But let me caution to make the point that the fact that there are a good number of homeowners, perhaps as many as 9 million that have negative equity in their home does not mean that those homeowners are going to have trouble making their mortgage payments. Most of them will be able to make their mortgage payments and will in fact make their mortgage payments. And if homeowners want to walk away from a home because they don't have equity in their home, there's not much any of us can do about that. They're speculators.

So the focus of the FHA and the focus of the Bush administration is going to be to help those homeowners who have got the capability to stay in their homes, got the capability - the financial capability - and want to stay in their homes. And the FHA is looking for ways to have more flexible solutions to work with those homeowners who want to stay in their homes and are underwater in their mortgage and are committed to doing what it takes to keep their homes.

MR. COOK: If I'm hearing you correctly, it sounds like more flexibility. You're not essentially ruling out the possibility of more federal guarantees here?

SEC. PAULSON: Well, again, what you're talking about, I believe, is the FHA. And we've been asking Congress for some time to pass FHA modernization. And Congress still hasn't passed that, still hasn't given us a law. So the Bush administration, the FHA, is helping homeowners right now with the FHA secure program, and are working to do that. But FHA modernization, which is on the goal line, Congress hasn't pushed that over the goal line yet. And so, that's where the focus is. And the focus is on things that the FHA can do administratively and things - (audio break) - Congress.

MR. COOK: All right. Looks like our picture broke up there for just one moment. I hope we still have the Treasury secretary. Mr. Secretary, if you still hear me all right, your trip to China also preventing you from testifying tomorrow with Ben Bernanke on the Bear Stearns situation. I know that that was not intentional. If you could have testified tomorrow, what would you tell Congress about that deal? Do you still feel good about how that played out?

SEC. PAULSON: Yes, Peter, very, very supportive of what the Fed did with Bear Stearns. Again, the focus is all on stable financial markets, orderly financial markets. And again, why the focus on orderly financial markets? It's for the American people. This is not about Wall Street; it's not about the bankers; it's about the American workers. And stable financial markets are very necessary to the smooth functioning of our economy. And when our markets are stable and they're working the way they should work, it is a very big positive for our economy. And when our markets don't work the way they're supposed to work and credit is cut off or restrained, then - (audio break).

MR. COOK: And it sounds like we have lost our connection with Treasury Secretary Henry Paulson in Beijing, China. The Treasury secretary, day one of his trip to China concluding; he's got more talks tomorrow as well. Not a lot of sleep for the Treasury secretary, Carol Massar, over the past few days. And certainly, this trip just adding to the long list of items under discussion at the Treasury Department right now.

With that, I will send it back to you in New York. Our apologies to the Treasury secretary for losing that connection. And again, Carol, back to you in New York.

(END)

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