Paulson, Summers, Rubin Agree More Action Is Needed for Economy

By John Brinsley

Nov. 18 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson and two of President-elect Barack Obama's top economic advisers agreed that further steps are needed to shore up the economy, while clashing over tax policies.

``There's still a good bit to be done because the economy has turned down,'' Paulson said at a conference late yesterday in Washington. Lawrence Summers, a former Treasury chief who's a candidate to hold the post again, called for a two- to three- year fiscal stimulus. Robert Rubin, Summers's predecessor under Bill Clinton, said a ``very substantial'' package is needed.

Paulson and Summers sparred over whether President George W. Bush's tax cuts should be allowed to expire, with Paulson saying any increases would be ``not helpful.'' Summers countered that what matters is the overall fiscal position of the government, and that relief for middle-income families is most effective.

The exchange may foreshadow disputes between the incoming Obama administration and a diminished Republican minority in Congress. Rubin predicted a large government stimulus ``is going to happen,'' with Summers highlighting infrastructure investment and health-care initiatives as potential areas for new spending.

Paulson refrained from outlining new proposals, after the Bush administration earlier signaled to congressional aides it doesn't plan to use the remaining half of a $700 billion financial rescue fund. At a meeting with top Democratic lawmakers, the outgoing Treasury chief was pushed to apply the money to stemming mortgage foreclosures.

`Immediate Action'

The Democrats ``made it clear to Secretary Paulson and Fed Chairman Bernanke that they must take immediate action and do everything they can to help hardworking Americans stay in their homes,'' House Speaker Nancy Pelosi, a California Democrat, said in a statement after the meeting.

Paulson and Bernanke are scheduled to testify before the House Financial Services Committee today at 9:30 a.m. in Washington on the government's implementation of the so-called Troubled Asset Relief Program.

The Treasury has completed about $159 billion in preferred equity purchases of large and medium-sized banks, out of $250 billion set aside for capital injections into financial companies. The department and the Fed are also working on a new plan to ease strains in the markets for car and student loans, as well as credit-card debt, that ``would take relatively modest amounts of TARP assets,'' Paulson said.

During the panel discussion, Paulson, who has opposed the use of TARP for the auto industry, reiterated that any rescue for the companies must take into account their ability to recover and compete.

Automakers' Future

``I feel very strongly that anything we do has got to have a path to sustainability,'' he said. ``It would be a huge mistake to just say, `well, how do we know what viability is, so let's just give them some money.'''

General Motors Corp., Ford Motor Co. and Chrysler LLC are seeking aid as industry-wide sales plummeted to a 17-year low. GM this month said it lost $4.2 billion in the third quarter and almost $73 billion since the end of 2004.

Rubin said that ``we need to avoid a failure of the auto companies, but we need to marry that with a plan to get the auto companies into an economic model that will succeed.''

Paulson warned yesterday that financial markets will remain distressed for ``a number of months,'' even as fears of major bank collapses subside. Rubin predicted an end to the psychological crisis within a ``reasonable period,'' while foreseeing continuing problems thereafter.

`Clogged' Markets

``When you look at what this economy may need, it's pretty hard to believe we're going to get the kind of recovery we need with the credit markets in a number of areas still as clogged as they are,'' Paulson said.

Bush's Treasury chief also said strains on the country's budget will require his department to sell $1.5 trillion in Treasury debt this fiscal year, which began Oct. 1. The Treasury announced on Nov. 3 plans to borrow $550 billion in the current quarter and $368 billion in the January-March period.

Summers said ballooning debt isn't a major issue for now because there's ``excess demand'' for Treasuries rather than excess supply, as investors flock to government debt as a haven. Clinton's last Treasury secretary also said fiscal stimulus may lead to higher revenue for the government over time, to the degree that it spurs added economic growth.

The sharpest exchanges between Paulson and Summers came on taxes. Paulson followed up on an audience question at the forum organized by the Wall Street Journal, asking Summers if he favored letting tax cuts expire even while seeking a fiscal stimulus.

Tax Dispute

When Paulson later took issue with Summers on international tax practices, he said he wasn't aiming ``to be argumentative.'' Summers, who served from 1999 to January 2001, blamed one of Paulson's two Republican predecessors for junking a Clinton initiative to reduce international tax competition.

``Would it be your view that a priority use of federal resources right now should be corporate rate reductions?'' he asked Paulson.

``I didn't say that,'' Paulson replied.

Rubin said that from a competitiveness standpoint, tax rates are secondary to education for the U.S.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.netRich Miller in Washington rmiller28@bloomberg.net