Paulson Backs Bush Comment About Wall Street's 'Hangover'

Treasury Secretary Henry Paulson, a former investment firm executive, says "absolutely there's a lot of truth" to President Bush's comment that Wall Street "got drunk and now it's got a hangover," in understanding the current economic climate.

Paulson also is taking a wait-and-see approach on a possible second round of economic aid, an idea that congressional Democrats are pushing to a vote. The $168 billion program of tax rebate checks that Bush signed into law in February was the right size to help the struggling economy this year, Paulson said. He wants to see how it ends up helping the economy in the July through September period and worries about driving the budget deficit higher with a second plan.

But House Speaker Nancy Pelosi plans to have the House vote on additional aid when lawmakers return in September from their summer vacation. She believes more is needed to counter higher gasoline prices and other costs.

The economy is struggling to emerge from crises in the housing, financial and credit markets and cope with rising prices at the pump and grocery store. Paulson, in a television interview broadcast Sunday, asserted that the country's economic fundamentals are sound.

But asked about Bush's remark, the former Goldman Sachs chairman and chief executive acknowledged Wall Street has played a role in the current downtown, particularly in its borrowing and lending practices.

"Absolutely there's a lot of truth to what the president said. And in terms of Wall Street, there was too much leverage in the system and more leverage than was appropriate and more than people recognized, because the leverage came into the system in the form of highly complex, structured products, which were difficult to understand," Paulson said. "So there was excess leverage, excess complexity."

The president, in an unguarded moment, made the comment at a political fundraiser in Houston last month after asking members of the audience to turn off their video cameras. The request was ignored and a snippet wound up on a blog. The media was barred from the event.

"There is no question about it. Wall Street got drunk," the president said. "That's one reason I asked you to turn off your TV cameras."

"The question is, How long will it (take to) sober up and not try to do all these fancy financial instruments?"

Paulson has offered a 218-page blueprint for overhauling regulation of the nation's financial system. The plan would create three super agencies with power over the financial industry. It is the broadest proposal since the current system was formed in response to the biggest financial crisis of the last century, the 1929 stock market crash and Great Depression.

"We have, of course, one priority getting through this period with as little damage, as little negative impact as possible on the economy. But the second part is to take steps to reduce the likelihood of these sorts of things happening in the future," Paulson.

But time is running out on the administration's term -- Bush leaves office in January -- and Paulson said he would not continue serving as treasury secretary under the next president in hopes of seeing the new rules through.

He said the $168 billion stimulus effort has helped the economy and he wants to give the tax rebate checks more time to boost growth.

"We sized that program to say how could we do something that will be meaningful this year but not so big that it would jeopardize some of our long-term priorities and our fiscal priorities and balancing the budget. So again, my view would be let's see how this program works in the third quarter," Paulson said.

He said the current focus is on the housing rescue bill that Bush recently signed. It is designed to help 400,000 families avoid losing their homes to foreclosures and to provide a financial lifeline to Fannie Mae and Freddie Mac, the mortgage companies that own or guarantee nearly half of the nation's home mortgages.

The Democrats' new aid plan could include additional tax rebates, heating and air-conditioning subsidies for the poor, public works projects, higher food stamp payments and aid to the states.

Paulson said it would take "well beyond the end of the year" to work through the serious problems in housing, an industry experiencing its worst downturn in more than two decades.

But Paulson repeated his belief that the nation's economy remains fundamentally sound despite the mounting losses on bad mortgage loans that have shaken Fannie Mae and Freddie Mac.