Paulson pledges strong actions to deal with financial crisis

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WASHINGTON, Oct 22 (AP): The Bush administration is pledging to do whatever it takes to battle a severe financial crisis that is threatening to push the country into a steep recession.
But even with the aggressive steps the government has already taken, Treasury Secretary Henry Paulson says it will take time before things get turned around.
"Clearly, we're going to have a number of difficult months ahead of us in terms of the real economy," Paulson said Tuesday in an interview on "The Charlie Rose Show."
Asian markets veered sharply lower Wednesday, with Tokyo's Nikkei index tumbling 6.79 per cent. Hong Kong's Hang Seng was down 6.2 per cent, while South Korea's main index shed 5.1 per cent.
A week after Paulson announced the administration would spend $250 billion to buy stakes in US banks, the Federal Reserve stepped up Tuesday with a new programme to help money market mutual funds that have been squeezed by worried investors demanding to cash out their holdings.
The Fed said it would provide up to $540 billion in financing though a programme run by JPMorgan Chase & Co to purchase from mutual funds certificates of deposit, bank notes and commercial paper. The programme, to be called the Money Market Investor Funding Facility, is designed to revive the market for commercial paper, short-term loans that are critical for keeping businesses running.
"If these money markets are not working properly, then the economy is significantly threatened because this is where businesses get their short-term financing for their day-to-day operations," said Mark Zandi, chief economist at Moody's Economy.com.
Money market funds hold about one-third of all commercial paper and Fed officials said that about $500 billion had flowed out of prime money market funds since August as investors became increasingly worried about their ability to redeem shares. On September 18, the Treasury Department announced that it was tapping a $50 billion Treasury fund to provide guarantees for the assets in the money market accounts.
The Fed has already announced that starting next Monday it will begin making direct purchases of commercial paper in a further effort to bolster this market.
In other government actions to deal with the unfolding crisis, the Treasury Department announced that it had selected two major accounting firms to help manage the government's $700 billion financial-system rescue programme passed by Congress on October 3.
The programme to buy distressed assets from banks is expected to spend $100 billion initially, while Paulson announced last week that another $250 billion would be committed to buying stock in banks as a way of shoring up their capital reserves so that they will resume more normal lending operations.
Paulson said in his television interview that banks might use part of the money they receive from the government to make acquisitions of weaker banks.
"There will be some situations where it is best for the economy and for the banking system for there to be a consolidation," he said.
That element of the programme could prove controversial if strong banks employ the money they receive from the government not to make new loans but to swallow up rivals.
Meanwhile, members of Congress are moving forward with efforts to overhaul the regulatory system with what could be the most sweeping changes since the 1930s, another period when Congress revamped how the financial system was regulated in response to the 1929 stock market crash and a wave of bank failures.
House Financial Services Committee Chairman Barney Frank, who held hearings Tuesday on what changes should be made, said that what Congress produces next year will be "as important a set of economic decisions I think this country will be making since the Depression."
Democrats in Congress are also pushing efforts to assemble a second economic stimulus programme that could total $150 billion or more. The White House has yet to endorse the idea, but has said President Bush was at least willing to consider a second stimulus measure.
Reuters adds: Treasury Secretary praised Tuesday China's cooperation in taming global financial turmoil and urged the next president to continue an active economic dialogue with Beijing.
In his first major speech on China in two months, Paulson said he has held useful and constructive discussions with Chinese Vice Premier Wang Qishan on the turmoil rocking global markets.
"It is clear that China accepts its responsibility as a major world economy that will work with the United States and other partners to ensure global economic stability," Paulson said to the national committee on US-China Relations in New York.
Paulson said the United States has demonstrated that it will "do what is necessary" to strengthen financial institutions, unlock credit markets and minimise the impact of financial instability on the broader US economy. He urged other governments to do the same.