WASHINGTON (Reuters) –
Treasury Secretary Henry Paulson said on Monday that solid progress has been made in stabilizing the U.S. financial system but it will take considerable time to restore it to health.
"In terms of where we need to be, in the first case we were dealing with systemic events. ... We've got a lot of work to do to restore the financial system, and I think restoring the financial system will go a long way toward helping the economy to recover," Paulson said at a conference organized by The Wall Street Journal.
At the same conference, former Treasury Secretary Lawrence Summers said he felt the economy will need "speedy, substantial, sustained" stimulus lasting for years in order to fully recover.
Paulson said there were signs that multiple efforts to get the financial system working better were paying off.
"If the issue was to stabilize the financial system and prevent a collapse and get by the point where the market is rattled, wondering which big institution will go down next, I think on a scale of 1 to 10 we're very close to 10 there." he said.
But he cautioned that a weakening housing sector means the recovery process will be prolonged.
"There's going to be stress in the capital markets for a number of months here because housing prices are still declining and now I think it's moved beyond housing," Paulson said.
RUBIN: ANXIETY MAY ABATE
Former Treasury Secretary Robert Rubin, on the same panel with Paulson and Summers, said that with the fiscal and monetary actions now taken, "there's a strong probability that the psychological crisis, the pervasive anxiety that we're in right now, will abate within a reasonable period of time."
He refused to specify what a reasonable period of time might be, but noted that in view of the serious damage that has occurred in markets it would be "certainly well into next year."
Summers, who is regularly listed as a possible pick by President-elect Barack Obama to become Treasury secretary again, has been calling for months for more economic stimulus and said he now feels it was more urgent than ever.
"I frankly think the situation has deteriorated very substantially...and so I would go for speedy, substantial and sustained (stimulus) over a several-year interval, he said.
"I think we're going to need some impetus to the economy for two to three years."
Summers said there was ample global demand for U.S. debt securities now because investors worldwide are in search of safety. But, he said, "That's a situation that could and will change on a dime when the situation improves," so it is essential to get the economy back on track and begin to exert fiscal control to get deficits down.
With Capitol Hill Democrats already trying to come up with new measures for aiding the auto industry, Paulson turned aside questions whether he felt U.S. carmakers deserved help.
He remarked jokingly: "We have a Prius," referring to Toyota's (7203.T) hybrid car, but said, "I don't think it would be good to see a failure of an auto company in this period, in this tough period that we're going through right now."
He added, however: "I, again, feel very strongly that anything we do has got to be a path to sustainability and viability."
Paulson said he hadn't studied the U.S. industry's problems in detail but noted that just giving out money was not necessarily a guarantee of viability.
The White House on Monday opposed a proposal by Senate Democrats for a $25 billion bailout for the auto industry that would use funds from the Treasury Department's Troubled Asset Relief Program. The Bush Administration favors amending a law approved in September that allocated $25 billion for technology loans to the industry.
(Editing by Leslie Adler)