WASHINGTON, Aug 21: US Treasury Secretary Henry Paulson expressed confidence on Tuesday that the credit crunch roiling America’s financial markets will ease over time as investors reprice risk.
Paulson, a former chief executive of investment banking titan Goldman Sachs, said that US economic growth will likely be dented by the credit turmoil, but said the global and US economies were strong.
The Treasury chief spoke after US stock markets have experienced strong volatility in the past week due to concerns about the ailing housing and mortgage markets.
“Economic growth will be less than it ordinarily would have been,” Paulson said.
Rising home foreclosures have seen investors shun mortgage-backed securities and prompted big banks to tighten their lending practices. Fears of evaporating credit have spooked Wall Street.
“We’ve been seeing stresses and strains in a number of capital markets, but this is against the backdrop of a very strong global economy, a very healthy US economy,” Paulson said.
The Treasury secretary spoke ahead of a meeting later on Tuesday with Federal Reserve chairman Ben Bernanke and Senator Christopher Dodd, the chairman of the Senate Banking Committee and a Democratic presidential contender.
The Fed last week slashed the interest rate it levies on loans to commercial banks on Friday, to 5.75 per cent from 6.25 per cent, in a bid to lower borrowing costs and keep the banking system from gumming up.
Economists say the Fed is also under pressure to cut its key federal funds short term interest rate from 5.25 per cent, where it has been pegged since June 2006.
Paulson said he had “great confidence” in the Fed. He said the central bank was addressing liquidity problems affecting the financial system.
The Treasury chief has spoken with government officials and Wall Street executives in recent days and the Treasury is keeping a close eye on the credit markets.
“The problems that we’re experiencing right now are coming from bad lending practices,” Paulson said, referring to the troubled mortgage industry.
Rising foreclosures and tightening credit have forced dozens of mortgage firms out of business this year, and some lawmakers claim home loans were doled out improperly to people who could not afford the repayments during the housing boom which ended in early 2006.
Paulson said the Treasury was assessing various potential legislative fixes with lawmakers that could be applied to the mortgage industry, but did not detail any specifics.—AFP
