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Treasury's Paulson on the R-word, and on jawboning banks

October 15, 2008 |  7:16 pm

From Larry Kudlow’s interview with Treasury Secretary Henry M. Paulson on CNBC today:

Kudlow: "Do we have to take a recession? Are we in a recession right now, sir?"

Paulson: "Well, Larry, what I'm saying is, we're clearly in a difficult period, and it clearly -- the financial turmoil and the very, very difficult time we've had where the credit markets have frozen up, and when loans weren't being made, weren't being made to small businesses, people -- it was hurting jobs, it was hurting confidence, and this has to have an impact. And it's having an impact. But by far the most important thing we can do here is stabilize the markets, stabilize the banking system, and I'm very confident that the moves we've done, taken, will do just that."

You'd think he could just say 'We don't know if it's officially a recession, but we know it's a bad situation, and we're trying to fix it.' That would even be factual.

Kudlow also asked Paulson how the Treasury would make sure that its $250-billion capital injection plan for the banking industry -- in return for preferred stock that will pay the Treasury a 5% annual dividend yield -- would result in a pickup in bank lending, as opposed to more cash-hoarding by the banks.

Kudlow: "What's to stop them from getting the new government money at 5% and retiring the outstanding paper that's much more expensive rather than deploying this new capital in the economy for the purposes you've just described?"

Paulson: "Well, that's a -- that's a key question, and let me say, even before that, the reason we set the terms where they were set, we didn't think this term should be set at the -- what the market would demand in a crisis situation. That's why the government's coming in to begin with. We wanted the terms to be like that you would have in a normal situation."

"Now, the way you get bankers to deploy the capital -- because they know it's their job to deploy the capital, making the loans which are so vital to our economy -- the way you get them to do that is they've got to have, first of all, plenty of capital; they've got to be well-capitalized. Secondly, they've got to be confident in the system. They've got to be confident that as the money flows between and among banks that they've -- they're confident in that and confident in the strength of the system."

Kudlow: "Will you jawbone from time to time -- that's a bad word, jawbone -- will you be talking to them in consultation as you did on Monday, for example?"

Paulson: "I will clearly be doing that, but I will also say to you that they understand this, and regardless of whether -- the -- we had had government investments there, we would be jawboning and encouraging them to do the right thing."