Paulson Warns TARP Isn’t `Panacea’ for Economy Ills (Update1)

Nov. 18 (Bloomberg) — Treasury Secretary Henry Paulson rejected using the government’s financial-rescue program as a “panacea” for economic difficulties, clashing with lawmakers who want the funds to help beleaguered homeowners and automakers.

“The rescue package was not intended to be an economic stimulus or an economic recovery package,” Paulson said in testimony to the House Financial Services Committee in Washington. The $700 billion Troubled Asset Relief Program was designed to stabilize financial markets and the flow of credit and “is not a panacea for all our economic difficulties.”

Barney Frank, who heads the House panel, took issue with Paulson, urging the Bush administration to step up efforts to stem record foreclosures. Democrats are also pursuing legislation to deploy part of TARP to prevent General Motors Corp., Ford Motor Co. and Chrysler LLC from collapsing due to lack of cash.

Federal Reserve Chairman Ben S. Bernanke told lawmakers at the hearing that using the TARP for buying stakes in banks is “critical for restoring confidence and promoting the return of credit markets to more normal functioning.” He warned that lending conditions are “still far from normal.”

Paulson, who has pledged $250 billion of TARP for buying stakes in banks, said capital injections and a “modest” contribution to a Fed program for consumer finance are the best ways to use the bailout money. Paulson has also used $40 billion to help American International Group Inc.

`Clearly Powerful’

“We have seen that capital purchases are clearly powerful in terms of impact per dollar of investment, which is a major advantage under the current circumstances,” Paulson said today in his prepared remarks.

Frank countered that “public confidence in what we have done so far is lower than anybody would have wanted to be.”

“There is an overwhelmingly powerful set of reasons why some of the TARP money must be used” for preventing foreclosures, said Frank, a Massachusetts Democrat.

Paulson flagged efforts already under way to prevent mortgage foreclosures, rejecting use of TARP funds for buying mortgage-related assets.

“While I understand the interest in spending TARP resources on other approaches, the efforts already under way will do more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP,” Paulson said.

`Progress’ Made

Paulson said officials have made “substantial progress” in reducing foreclosures where possible, Paulson said. He hailed the Federal Deposit Insurance Corp.’s program with the failed IndyMac Bancorp., as well as new mortgage-servicing guidelines backed by Fannie Mae and Freddie Mac, the home-loan financers now in government-run conservatorship.

Instead of pouring money into mortgages, the Treasury seeks to set aside some of the rescue funds for shoring up the secondary market for consumer loans.

“By investing only a modest share of TARP funds in a Fed liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit,” Paulson said.

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