- The Washington Times - Monday, March 17, 2008

ASSOCIATED PRESS

The Bush administration will “do what its takes” to stabilize chaotic markets and minimize the economic damage, Treasury Secretary Henry M. Paulson Jr. said yesterday after a tumultuous week, capped by the government rescue of a teetering investment bank.

All eyes are on Wall Street now, as leading financial advisers prepared for a meeting today with President Bush, and the Federal Reserve weighs another deep interest-rate cut tomorrow to stem even more deterioration.

Mr. Paulson, in a series of news show appearances, defended the Federal Reserve’s extraordinary step Friday to provide emergency financing to one of Wall Street’s most venerable firms, Bear Stearns Cos. The central bank’s intervention was “the right decision,” he said.

The Treasury chief sidestepped questions about what would have happened if the Fed had not ridden to the rescue, whether other firms are on shaky ground or the possibility of additional bailouts similar to Bear Stearns’.

At the same time, however, Mr. Paulson sought to send a calming message that the administration is on top of the turbulent situation. “The government is prepared to do what it takes to maintain the stability of our financial system,” he said. “That’s our priority.”

Mr. Bush planned to meet today with his advisory panel on financial markets, whose members include Mr. Paulson and Fed Chairman Ben S. Bernanke. The panel on Thursday recommended stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of a credit crisis threatening to drive the country into the first recession since 2001.

Consultations about the Bear Stearns situation continued through the weekend and involved the Treasury Department, the Fed, financial institutions and others. “I’ve been very involved, you know, been on the phone for a couple days right now helping to work through this,” Mr. Paulson said. He offered no details.

Economists increasingly think the spreading fallout from a severe credit crisis has pushed the country into recession. The situation has led to record-high home foreclosures, forced financial companies to take multibillion losses from bad mortgage-linked investments and rocked Wall Street.

“No one is debating the fact that this economy has slowed way down,” Mr. Paulson said. “We feel it, we know it, the American people know it.”

To help shore things up, the Fed is poised to make a big cut to its key interest rate, now at 3 percent. Some economists are predicting a reduction of half a percentage point, while others are calling for a more hefty cut of three-quarters to a full percentage point.

The Fed used a Depression-era procedure to come to Bear Stearns’ aid along with JPMorgan Chase & Co. Bear Stearns had made a fortune in mortgage-backed securities but faced a possible collapse after those investments soured. Wall Street nose-dived as fears spread about whether other big firms were in jeopardy.

“I really support the Fed’s work here,” Mr. Paulson said during one of his three broadcast appearances. “To me, this was not difficult because the priority in a time like this has got to be the stability of our financial system and minimizing the likelihood that this disruption spills over into the real economy.”

Some critics contend the Fed’s move was akin to a government bailout — something the administration has repeatedly said it is against.

“We’re very aware of moral hazard,” Mr. Paulson said. “But our primary concern right now — my primary concern — is the stability of our financial system, the orderliness of the markets. And that’s where our focus is,” he said.

The financial system, he said, is “more fragile than we would like right now.”

Asked whether other financial companies are in a situation similar to Bear Stearns’, Mr. Paulson did not directly answer. He did seek to strike a confident tone. “Well, our financial institutions, our banks and investments banks are very strong,” he said. “And I’m convinced that they’re going to come out of this situation very strong.”

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