Tuesday, January 8, 2008

Hank Paulson: honest speech

Hank Paulson recent speech has drawn interest not only from Wall Street but also from outspoken representatives of the recession camp. Finance blogger Felix Salmon argues that Paulson "effectively is in the 2008 recession camp." Economist Nouriel Roubini writes: "Is US Treasury Secretary Hank Paulson becoming as bearish – in his recent speech assessing the financial excesses and the risks to the economy – as yours truly, Nouriel Roubini?"

I disagree and do not think that his speech is "dark and pessimistic". Paulson speaks of challenges, reasons and solutions. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years." he concedes.

He speaks of Foreclosure prevention efforts:
After years of unsustainable price appreciation and lax lending practices, a housing correction was inevitable and necessary. That correction is underway. Over the next two years, we also face an unprecedented wave of 1.8 million subprime mortgage resets, raising the potential of a market failure. Because the industry does not have the capacity to manage this volume, without action, unnecessary foreclosures would result. To meet this challenge, this Administration – without committing any taxpayer money – helped foster an industry-wide effort to prevent this market failure....
...We are monitoring results on all aspects of the plan, to ensure participants are fulfilling their commitments and that homeowners are being contacted and, when possible, helped.

mortgage credit market update:
Unsustainable home price appreciation in the past few years caused a large supply response, and it will take time for demand to catch-up. Housing starts have fallen by nearly half since their peak in early 2006, and new home sales are down just as sharply. House prices are falling in many parts of the country, and elevated housing inventories suggest that the price adjustment is not yet complete.
....Fortunately, creditworthy borrowers looking for a conforming mortgage will find that Fannie Mae and Freddie Mac have remained active, and traditional conforming mortgage products are readily available.
....In the third quarter alone, the twelve Federal Home Loan Banks provided an additional $184 billion to borrowers within the system, funding that enables banks and thrifts to continue to lend.

capital markets update:
Our capital markets remain resilient and continue to show progress towards stability. Equity markets are functioning well and finished up for the year, across a broad range of indices. The Treasury market is operating well with elevated volumes at much lower yields than the first half of 2007. Our high grade debt market is performing satisfactorily and issuance has been solid with spreads in line with the last five years' historical averages. Our high yield market is impaired but operational. High yield issuance volume is down significantly and spreads are wider, but still within levels experienced just four years ago.

on the US economy:
Looking across the entire economic landscape, the housing downturn and credit disruption will, as I have said for some time, weigh on our economy and impose a penalty on our economic growth.....While growth looks to have slowed considerably in the last part of 2007, our economy remains resilient and I expect it to continue to grow.

Overall a rather honest assessment of the current macro environment. This goes to show it is important to go to the source of information rather than relying on somebody else's opinion.

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