Paulson: Housing a ‘Significant Risk’ to Economy

Treasury Secretary Henry Paulson weighed in on the role of housing (and mortgages) in the US economy, and his take was somber, to say the least. The Associated Press reports:

“Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy,” Paulson said in a speech delivered at Georgetown University’s law school. “The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.”

… Paulson said that the housing correction is “not ending as quickly” as it had appeared it would and that “it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet.”

Of course, Paulson’s remarks are well-timed — the Treasury Department yesterday helped orchestrate an $80 to $100 billion fund backed by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. designed to allegedly ease problems in the commercial paper market, which has been hit hard by the mortgage crisis.

The LA Times’ Walter Hamilton got a good feel for just how the plan bail-out was being digested by market participants:

The arrangement was agreed to with the involvement of the Treasury Department, which has been concerned that further troubles in the bond market could force banks to curtail their lending, exacerbating the credit crunch and jeopardizing the overall economy.

The plan will “help to foster orderly capital markets,” the Treasury Department said in a statement.

But some experts said it would help banks avoid losses and delay the ultimate cleanup of bad loans. Critics also said the plan would do little to help the still-creaky credit markets recover, and certainly wouldn’t help individual investors or homeowners hurt by the housing downturn.

“It’s not going to make mortgages easier to get, and it’s not going to stop home prices from going down,” said Peter Schiff, head of brokerage firm Euro Pacific Capital in Darien, Conn.

“It’s a bailout of rich people,” said Richard Bove, an analyst at Punk Ziegel & Co.

What I personally don’t understand about the plan here is that it patently doesn’t involve the purchase of securities backed by subprime mortgages — the credit class that started this mess on Wall Street.

So I guess I’m a little skeptical as to how the benevolent act of buying non-subprime and AAA-rated paper is going to help “get the markets moving again,” when what’s been causing this mess in the first place are RMBS and related derivatives backed by subprime mortgages and in the mezzanine and equity tranches.