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US Treasury Secretary Says Credit Markets Slowly Returning to Normal

U.S. Treasury Secretary Henry Paulson expects further weakness in housing but sees gradual improvement in credit markets buffeted from nine months of turmoil. VOA's Barry Wood reports Paulson is predicting a stronger US economy in the second half of the year.

Paulson told a Washington forum that credit markets are considerably calmer than they were in March. He said there is more liquidity in the market and that investor confidence is stronger than it was. Credit markets froze up last August following the disclosure of billions of dollars of bad loans related to subprime US home loans. Banks worldwide have had to write down the value of U.S. housing related bonds they had purchased. In March the crisis led to the near collapse of Bearn Stearns, one of America's biggest investment banks.

Paulson, a successful Wall Street financier before coming to Treasury two years ago, said home prices have not yet begun to recover and that two million higher-risk homeowners could lose their homes this year.

"We know that the (housing) correction has further to go. So we should not be surprised at headlines that note rising foreclosures and falling home prices. But the correction is progressing. We are working through the excess inventory," he said.

Paulson indicated that a greatly slowed pace of economic activity is not likely to pick up until home prices start to rise. He believes that will occur in the second half of the year.

"In my judgement, we're closer to the end of the market turmoil than the beginning. Looking forward, I think the financial markets will be driven less by market turmoil and more by broader economic conditions, and specifically by the recovery of the housing sector," he said.

Paulson said the government's economic stimulus package, which is delivering about $100 billion of cash to taxpayers, will boost economic growth. He acknowledged that higher fuel and food prices are causing considerable pain.

While the stock market has bounced back over the past two months, consumer confidence is still declining, in large part because oil prices continue to rise. A closely watched measure of confidence declined in May to its lowest level since July 1980. Most forecasters predict US growth could slow to no more than one half of one percent this year. In 2007 the US economy expanded by over two percent.