Paulson says stimulus to ensure growth

Treasury Secretary Henry Paulson said he expects the government's fiscal stimulus plan will boost economic growth in the second half of the year, offsetting a housing downturn and high energy prices.

"While our economy faces substantial difficulties that will continue to be a drag on growth in the short term, it is important to remember our long-term fundamentals are strong," Paulson said in a speech at the Exchequer Club in Washington Thursday. "I expect our economy to continue growing this year although at a moderate pace."

The Treasury secretary's comments followed a report earlier today that showed U.S. growth in the second quarter fell short of economists' forecasts. Paulson, who promoted a rescue plan of mortgage companies Fannie Mae and Freddie Mac signed into law Wednesday, said housing "remains our most significant downside risk."

Paulson said he expected the $168 billion stimulus package enacted in February "to continue to support the economy in the second half of the year."

Signals in the housing industry are mixed, Paulson said. Single-family housing starts "look to remain weak through this year" because of bloated inventories, new-home sales "appear to have stabilized" and house prices should begin to recover "in months rather than years," he said.

House prices in 20 U.S. metropolitan areas fell at a faster pace in May than a month earlier, a private report showed earlier this week. The S&P/Case-Shiller home-price index dropped 15.8 percent from a year earlier, the biggest decline since records began seven years ago.

"Until the housing market stabilizes further, we should expect some continued stresses in our financial markets," Paulson said.

Today's Commerce Department report showed gross domestic product increased at a 1.9 percent annualized rate, compared with the median projection of 2.3 percent in a Bloomberg News survey. A separate report showed that more Americans filed claims for unemployment insurance last week than at any time in more than five years.

"The housing correction, credit-market turmoil and high energy prices remain a considerable drag on the economy," Paulson said.

He reiterated his stance that oil prices are a function of "supply and demand factors" that can only be alleviated with "a long-term, comprehensive effort."

Paulson last week prevailed in persuading Congress to give the Treasury the power to buy equity in Fannie Mae and Freddie Mac for 18 months and expand their lines of credit with the government.

The measure, signed by President George W. Bush Wednesday, also tightens regulation of the two so-called government- sponsored enterprises, or GSEs, which account for almost half of the $12 trillion U.S. mortgage market.

The housing law "includes significant, temporary provisions that will boost market confidence in the two current, largest sources of U.S. mortgage finance," Paulson said.

Paulson reiterated that "there are no plans" to use the Treasury's temporary authority regarding the two mortgage finance companies, and said the firms' new regulator should work to correct their "structural concerns."

"All parties must get to work immediately to begin to address the systemic risk issues posed by the GSEs," he said.

Responding to questions after the speech, Paulson said restoring confidence in Fannie Mae and Freddie Mac was essential to reducing financial-market turmoil.

"The highest priority today is restoring our capital markets, not just these institutions but our capital markets broadly, and having these institutions continue to play the vital role they need to play in the housing market," he said.

The Treasury chief used the speech to reiterate his push for the Federal Reserve to take a greater role in financial- market oversight to prevent the reoccurrence of a credit crisis that has caused about $480 billion in write downs and losses worldwide.