Monday, March 17, 2008

Treasury Secretary Henry M. Paulson Jr. said yesterday that there are limits to what the federal government can do to contain the unfolding economic downturn, but he defended the steps taken to stimulate the economy and stabilize financial markets.

"When there are excesses, excesses we've seen in the housing market, a correction there is inevitable. You're going to see a correction. Can we outlaw the forces of gravity? You know, how much can government do?" Paulson said on "Fox News Sunday." "But this administration has been focused on this."

Paulson stood by the decision last week by the Federal Reserve to bail out investment bank Bear Stearns. "I think we made the right decision. I think the Federal Reserve made the right decision here," he said. (Later yesterday, Bear Stearns agreed to be acquired by J.P. Morgan Chase. See story, Page A1.)

Paulson added that the financial markets remain strong but that the government "is prepared to do what it takes to maintain the stability of our financial system."

The Treasury secretary appeared on three Sunday talk shows after another brutal week for the stock market and a growing consensus among economists that the nation is in recession. The administration has taken steps to prop up the economy, but President Bush has warned against the government intervening too much in private markets.

Critics say the administration has done too little, and some have asked why the government is spending billions to prop up investment banks instead of doing more to help Americans whose homes are going into foreclosure. Paulson responded to such views by saying the administration is "at the right spot" in offering assistance to such homeowners.

House Speaker Nancy Pelosi (D-Calif.) disagreed with Paulson, saying on ABC's "This Week," "I think that much of what the administration has done has been too late."

The economic discussion also drew in advisers to the presidential candidates. On CNN's "Late Edition," Gene Sperling, of Sen. Hillary Rodham Clinton's campaign, and Douglas Holtz-Eakin, of Sen. John McCain's campaign, agreed that the economy is facing serious threats.

Sperling said the economy probably is in recession. Holtz-Eakin would not go that far but said, "It's really tough out there."

Holtz-Eakin criticized the plans of the Democratic contenders: "We need more capital into our banking systems, so that these firms have a good foundation. At exactly that moment when we put capital in, if you do the right thing economically, Senators Clinton and Obama would say thank you by hitting them as hard as they can with the tax code."

Trying to knock down the accusation that Clinton would raise taxes, Sperling responded that she is not in favor of tax rates going up during a recession. But he argued that Bush's tax cuts should be allowed to expire in 2011.

"The only real difference between Senator Clinton and Senator McCain is a big one. It is, after 2011 and beyond, should we spend another $100 billion just for tax cuts for the well-off?" he said.

By Zachary A. Goldfarb