Paulson sees faster growth by year end

Treasury Secretary Henry Paulson said Friday he expects "to see a faster pace of economic growth before the end of the year."

Speaking at a luncheon in Washington, Paulson said the economy will still have its "ups and downs" but he stressed that the economic stimulus plan worked out with Congress, which includes the payments being sent out now, will help fuel economic growth later in the year.

Discussing the nation's financial markets, Paulson said he thinks "we are closer to the end of the market turmoil than the beginning."

"Overall, I believe we are on the right path to resolving market disruptions and building a stronger financial system," Paulson said.

Economic stimulus. Paulson said the stimulus checks going out are a key part of any recovery.

"This fiscal stimulus will provide support to the economy as we weather the housing correction, capital markets turmoil and higher energy and food prices," Paulson said.

By the middle of July, nearly 130 million households will have received about $100 billion in stimulus payments, Paulson said.

But with gas prices rising and the peak driving season on the horizon, Paulson conceded that some Americans will use their stimulus money to, "fill up the gas tank for their summer vacation." But he argued that this is "still helpful."

On the issue of foreign oil imports, Paulson said "there's no immediate solution there."

Growing demand in developing countries and shrinking reserves worldwide are part of the problem, he said, adding that the nationalization of oil and gas resources in countries such as Russia and Venezuela also complicate the issue.

Paulson said he envisions a "multi-year solution," to the nation's energy crisis. "We need to develop new source, alternative sources and new technology," he said.

Capital Markets. Addressing the short-term issues arising from the financial market turmoil has been the Treasury Department's "highest priority," Paulson said.

Paulson said the capital markets are considerably calmer now than they were in March, and that signs of progress are emerging.

"The de-leveraging and re-pricing of risk continue, as does the capital-raising that is so essential for our financial institutions to continue to support the broader economy," Paulson said.

Market liquidity and investor confidence are gradually improving, Paulson said. But he cautioned that the financial markets still face obstacles.

"We should not expect to work through this process quickly and we should expect some bumps in the road ahead," he said.

"Looking forward, I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions and, specifically, by the recovery of the housing sector," he added.

Housing Markets. Paulson said the administration's focus on helping homeowners avoid preventable foreclosures has been a success.

"We encouraged the creation of the HopeNow Alliance of mortgage lenders, servicers and counselors to streamline efforts to help struggling borrowers," said Paulson. "Since July, the industry has helped 1.4 million homeowners with loan workouts that allowed them to stay in their homes. The rate of workouts has increased to 2 million a year."

The administration has also expanded access to FHA loans, which has enabled 200,000 borrowers to refinance into affordable mortgages.

Still, he said, "There is no silver bullet to undo the lax underwriting standards of recent years. Foreclosures will remain elevated even if we avoid every single preventable foreclosure."

The housing correction is progressing but has further to go. Expect to see more headlines of home price declines and foreclosure increases. But the number of new homes for sale has fallen 18% from its peak and housing starts are off 62% since January 2006, so the inventory overhang is being worked off.

Paulson stated that, two years into the housing correction, forecasters still expect a prolonged period of adjustment. He said he's committed to monitoring and improving the operations of the HopeNow Alliance, creating a regulator for Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500) to increase confidence in secondary mortgage markets, and modernizing FHA programs.

"Housing is the biggest risk to our economy; we are constantly monitoring the situation and examining approaches to address the problem," he said.