Treasury Secretary Henry Paulson said Tuesday that the turmoil in financial markets triggered by subprime mortgage lending will last “for a while” but is unlikely to sink the U.S. economy.
In a breakfast session with reporters here, Paulson asserted that “there is no quick fix” for the credit crunch that is roiling financial markets and making it especially hard for businesses that rely on corporate bonds to raise funds.
Although many economists believe the economy could slip into a recession because of the turbulent markets, Paulson said he expects that the penalty would be slower growth but not a downturn. One reason for his relative optimism, he said, is because “this is the strongest global market I’ve seen in a lifetime.”
Paulson said he is closely watching financial-market developments this week because about $120 billion in commercial paper has to be refinanced, and a significant slice involves mortgage-backed securities.
As he tries to contain the crisis and its impact on the economy, he said, “What we don’t need are tax increases.”
Paulson did not say what tax increases he referred to, although Congress is considering a bill that would, in effect, hike taxes on hedge funds. And Democrats are balking about extending President Bush’s tax cuts.
Paulson said he is concerned that Congress has yet to approve a “patch” for the alternative minimum tax, a levy originally passed to prevent wealthy Americans from avoiding taxes but which is increasingly hitting the middle class because it has not been indexed for inflation.
Unless Congress approves the patch, which would raise the income level to be subject to the law, more than 20 million people, many of them middle class, would face higher taxes for this taxable year. Congress is expected to do so, but Paulson said lawmakers have never waited so long in the year to make the needed changes.
He said the Senate has been slow to pass House-approved legislation to reform oversight of government-sponsored agencies like Freddie Mac and Fannie Mae that handle mortgage-backed securities. The administration has discussed proposals that would enable these organizations to help homeowners at risk of losing their homes, he said. The Senate should work with the House to see that they are approved, he said.
On Social Security, Paulson said “everything is on the table” in reforming the system, and that the administration is willing to talk to Democrats about a bipartisan agreement. He didn’t indicate whether the White House would drop its idea to establish personal accounts within Social Security. To many analysts, the market turmoil is another blow to the individual-account proposal.
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wneikirk@tribune.com
