Treasury Secretary Henry Paulson defended the changes made to the $700 billion rescue plan aimed at helping consumers. He told the NewsHour he never expected it to lead to a quick recovery of bank lending.
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And to our Newsmaker interview with Treasury Secretary Henry Paulson. I talked with him earlier this evening.
Mr. Secretary, welcome.
HENRY PAULSON, U.S. Treasury Secretary:
Good to be here.
Is it correct to say at this point, Mr. Secretary, that the $700 billion rescue plan has not worked?
Oh, I wouldn't say that at all. I would say quite the opposite, that what we've been able to do since that legislation has been passed is stabilize our financial system. And I think that was very important.
The financial system was at the tipping point. The interbank credit market was frozen; banks weren't lending to each other. That situation has resolved itself. When you look at the Fed funds rates and the interbank rates and so on, that market is working better.
Now, I would say that the economy has some very significant challenges, and the financial markets have some significant challenges, and they will for some time. We're not going to work through these stresses until the biggest part of the real estate price correction is over, and it's going to take — it took a long time to build these things up, and it's going to take a while to work through them.
But the expectations — would you not agree, Mr. Secretary, when in September, when you and others, everybody was saying, "Hey, we've got to pass this rescue plan. If we don't, things are going to get worse."
The plan was passed, and things have gotten worse in the financial markets, in the economy. Everything is — every measurement is worse, is it not?
Yes, I think in the economy that's right. The economy has worsened. But I think what we sure tried to say is that, if this isn't passed, things are really going to get worse, because we need a stable financial system that is functioning.
And so part of the issue we always had was, I think, to the American people generally, they look at the equity markets, some of them going up and down. They're not focused on the interbank funding or the credit markets or the banking system.
But what we saw when we went to Congress was we saw that the markets were frozen, lending had stopped, the economy was turning down, so we could see all of this happening. And we knew how severe it was going to get if we didn't stabilize the system.
But I never intended to say — nor did I ever say — that the process of recovery and repair was going to be a quick one. The situation we've confronted is the kind of thing that happens once or twice every 100 years.
But the lending, for instance, that was a key part of the rescue plan. I almost said "bailout." I know that's a bad word. But at any rate, they're still not lending. People still can't borrow money. They can't buy a house, or buy a car, all those things.
Well, let's go back. Lending is going to be a key part of this. And what happens when you're in a period of financial stress, banks pull in their horns, regulators reinforce it, as banks are concerned about continuing slowdown in the economy and credit losses that is restricted.
What we have done by taking steps to make sure the banks are well capitalized. And let's remember that we are still in the process of getting that money out.
The nine big banks have $125 billion, and they account for 55 percent of the assets, and we've got another 20 or so out the door. But we've got much more to go there.
But, again, to get back to your point, the thing that I will say, if this works, if this works, lending will be much more than it would have been, OK, than it would have been.
But the key is that, if the banks are confident and people are confident in dealing with the banks, there's going to be more lending. But the first benefit is the stability of the system.
And let me say one other thing about lending, which I think is very important and it happened this week, that I can exhort banks to lend, but I'm not a regulator.
And what happened this week — which was for the first time I've ever heard of — we had a statement come out, signed by the four regulators in this country — the Fed, OCC, OTS, and FDIC — that addressed four things.
It addressed lending. It addressed compensation practices. It addressed dividend policy and the area of mitigating foreclosures. And it was a strong statement focused on the need for prudent lending.
Now, for that statement to come out is one thing. And then when you look at what the regulatory supervisors will do, I think will make a meaningful difference.
But, again, you should not take my comment as meaning that this credit is immediately going to become available like it used to be and that the economy is going to turn around right away.