U.S. Treasury Secretary’s Priority

Henry Paulson (center) at AARP headquarters. With him are AARP Board Chair Bonnie M. Cramer and CEO Bill Novelli. Photo by Louie Palu/Zuma Press

Treasury Secretary Henry Paulson distanced himself from a second economic stimulus plan today, saying that his attention was focused instead on the coordinated effort to stabilize world markets and the U.S. financial system.

Meeting with AARP’s board of directors, Paulson said the current economic turmoil would continue for some time and acknowledged the angry public reaction to the initial steps in the bailout plan. “People are angry and frustrated and rightfully so,” he said.

Paulson also thanked AARP for supporting congressional approval of the recent $700 billion financial aid package. He addressed the board just hours after President George W. Bush had outlined the ambitious plan to invest $250 billion in the nation’s private banking system, the most aggressive public investment in private banks since the Great Depression. The announcement came after the Dow Jones industrial average soared 938 points on Monday. Market enthusiasm dampened Tuesday, and the Dow dropped 76 points to close at 9310.99. 

Paulson’s remarks came amid growing interest in a second economic stimulus program. Both presidential candidates, Sens. Barack Obama and John McCain, have announced tax and spending plans of nearly $60 billion aimed at igniting an economy that they fear is headed into recession. Congressional Democrats are also planning to develop a new stimulus package after the November election. AARP supports the general idea of a new round of spending and savings initiatives.

But Paulson said that stabilizing the market system was far more important than a second stimulus plan. “I’m so far removed from thinking about a second stimulus,” he said. “What we’re doing here dwarfs that.”

What they are doing is systematically injecting federal funds into private banks in an effort to jump-start lending and trading that had been virtually frozen by the global economic chaos.

“We have taken steps that I think go a long way to stabilizing the financial system,” Paulson said. “It does not mean that the problems are behind us. It will be a bumpy road. Clearly we have a lot to do.”

Implementing the program has been hampered by widespread public criticism that it favored Wall Street at the expense of broader public need and at the same time undermined the nation’s traditional free-market principles. “We have not done as good a job at communicating as we should have,” Paulson said. “Our objective has never been to save a particular financial institution, but to serve the public interest.”

Then he presented a broader rationale: “Stability in the financial system is a social good,” he said. “If we don’t have confidence in the financial system and our markets, the people who are the losers are the American people. And the biggest losers are those who are retired and on fixed incomes and those who are working hard to make ends meet. It’s a crushing burden.” (Video: Paulson talks more about stability.)

He also emphasized that the program’s $700 billion price tag is not the true cost of the program because it involves purchasing troubled properties and businesses that later will be resold, presumably at a higher price. “This is not an expenditure. This is an investment,” he said. “The cost is not the cost of executing the program, but the havoc that is wreaked on the group of people if the plan is not put in place soon enough … in growth, in jobs, in 401(k)s. That’s the real cost we’re working to avoid and minimize.”

The objective is confidence, Paulson said. “We have to build confidence. This is the United States of America. We are the world’s richest country. Of course we will get through this.”

People are right to be angry, but stabilizing financial markets is more important than new economic assistance plans, Paulson said. 

James Toedtman is the editor of The Bulletin.