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Washington: US Treasury Secretary Henry Paulson said on Friday that markets have calmed down to the point where prices will be driven by economic factors including an improving housing market rather than by fear.
"The markets are considerably calmer now than they were in March," Paulson told regional business leaders. "Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing market."
He repeated that he thought the period of market turmoil was nearer an end than a beginning but warned that home foreclosures will remain high while a correction that includes falling house prices continues. "We should not expect to work through this process quickly and we should expect some bumps in the road," Paulson said, though he forecast the economy will be growing more rapidly by the end of the year than it is now.
He said a treasury-sponsored alliance of home mortgage lenders called Hope Now has made "enormous progress" in helping holders of subprime mortgages, those made to less credit-worthy borrowers, modify their terms to avoid foreclosure. Still, he cautioned a housing correction that began in 2006 will take time to resolve because past underwriting standards for loans were so sloppy that inventories of homes are bloated and it will take time for normal activity to resume. "There were years of excesses," he said. "And this won't be resolved quickly."
Like Fed chairman Ben Bernanke did a day earlier, Paulson said that lenders who suffered losses as a result of the housing crisis should actively raise capital so that they can continue making credit available.
Major banks have reported upward of $200 billion in writedowns so far on mortgages, though some of that money could be recouped if the value of assets underlying them recovers.
Investment: Visit to Middle East
US Treasury Secretary Henry Paulson will visit the Middle East later this month to reassure oil-rich countries the US remains open to foreign investment and to underscore the fight against terrorist financing.
"In addition to investment, Paulson will discuss with officials efforts to stem the flow of money to terrorist groups and efforts to protect the global financial system from abuse,'' the Treasury said in a statement.
Paulson is scheduled to visit Saudi Arabia, Qatar, Kuwait and the UAE from May 30 to June 2.
- Bloomberg
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