Quickly enacting a government program to save U.S. financial markets is the best option to avoid seeing the turmoil spread toward the broader economy, said Treasury Secretary Henry Paulson in his prepared testimony to be read before the Banking, Housing, and Urban Affairs Committee on Tuesday.
"We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy," said Paulson in his prepared remarks.
The Treasury Secretary said government action so far has been enacted on a case-by-case basis, which has been "necessary but not sufficient." He said now is the time to take action at the heart of the crisis: illiquid mortgage-related assets that have created a chain reaction and which could eventually threaten "all parts of our economy."
"We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil," he said.
Paulson said addressing the underlying problem will restore confidence to financial markets, and that by calming those markets, taxpayers will be protected.
"When the financial system doesn't work as it should, Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened," he said.
Paulson said the needed government action must be implemented quickly and effectively, with necessary provisions to ensure transparency and oversight.
Paulson's proposal to Congress was released on Saturday. It gives the Secretary broad authority to purchase mortgage-related assets from any U.S. financial institution, which is hoped to restore confidence in the financial system by clearing up toxic assets obstructing bank-to-bank lending.
The proposal will give the Secretary the power to purchase junk mortgage debt "without limitation" and as deemed necessary for two years from the first exercise. However, the Secretary would be required to report to appropriate committees within three months of the plan's launch, and semi-annually thereafter.
By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008