Economic downturn tests Treasury secretary

Henry Paulson, a veteran of more than three decades of Wall Street booms and busts, knew the good times couldn't last forever when he left his perch as head of Goldman Sachs two years ago to become President Bush's third Treasury secretary.

He just didn't know yet what form the downturn would take.

“I didn't realize I would have to learn so much about housing,” Paulson said in an interview in his office at the Treasury Department, just steps from the White House. But, he added, “the possibility that I might be sitting here in the middle of all this didn't seem that unlikely to me.”

Now, 10 months into housing and credit crises that are reverberating across financial markets and the broader economy, Paulson faces a long list of complicated economic problems. The dollar is extremely weak, oil prices are very high and, with home prices tumbling, foreclosure rates are spiking. Plus, Wall Street is reeling from its exposure to home-loan defaults, as evidenced this week by Lehman Brothers' decision to oust two top executives and raise $6 billion to offset its mortgage market risks.

Paulson's imprint on the Bush administration's response is clear. He was pivotal in negotiating the $168 billion economic stimulus package with lawmakers from both parties and played a key role in brokering the Federal Reserve-backed purchase of the troubled investment bank Bear Stearns by J.P. Morgan.

Yet to be seen is how history will judge these interventions.

The jury is out, for example, on whether the rebate checks sent to taxpayers – the cornerstone of the stimulus plan – will spur enough consumer spending to head off a recession. And while the Bear Stearns rescue may have prevented a potentially destabilizing collapse, the deal has some economists worried that the government may have encouraged more unhealthy risk-taking down the road by not allowing the investment bank to fail.

At the same time, Democrats complain that Paulson and the Bush White House are not doing enough to stem the tide of mortgage foreclosures and keep more Americans in their homes.

Mark Zandi, chief economist at Moody's, believes the government had little choice but to put taxpayer money on the line for the Bear Stearns buyout. Yet he sees inconsistencies in the administration's unwillingness to do the same thing to help distressed homeowners.

“Henry Paulson has skillfully and competently managed the situation he inherited,” said Roger Porter, a Harvard University professor and former economic adviser in several Republican administrations.

He added, however, that it is too soon to know how successful Paulson will be in pushing his own longer-term priorities. One top priority, a sweeping overhaul of financial services regulations, has gained little traction.

And the challenges facing Paulson as he seeks to calm a turbulent economy and establish his legacy may only get tougher since he serves under an unpopular, lame-duck president at a time when much of the action has moved to the Federal Reserve and a Democratic-controlled Congress.

Paulson, who is married with two grown children, is also a strong proponent of moving the U.S. beyond the petroleum age – for the sake of the economy and the environment. An avid birdwatcher, he is past chairman of The Peregrine Fund and The Nature Conservancy. His office is adorned with dozens of pictures of birds and other creatures.

Recognizing this interest, Bush has put Paulson in charge of a planned international fund to help finance clean energy technologies in developing nations. Paulson is also likely to press his concerns about the environment in economic talks next week with a delegation from China, which is expected to be a major producer of global warming gases in the years ahead.

In an administration that doesn't always listen to Democrats, Paulson has earned a reputation as a pragmatist and a deal maker. He has developed a particularly good working relationship with House Financial Services Committee Chairman Barney Frank, D-Mass. The two have collaborated on a House bill that would give the government more power over mortgage finance companies Fannie Mae and Freddie Mac.

Still, Senate Banking Chairman Christopher Dodd, D-Conn., complains that the administration has been slow to recognize the magnitude of the problems facing the economy and has shown “a great deal of timidity” in its response.