WASHINGTON -- What happened to the Hammer?
After decades at Goldman Sachs, where his nickname came from his aggressive deal-making, Treasury Secretary Henry M. Paulson Jr. was hailed last year when he took office as being especially equipped to manage potential market crises.
But the financial disorder this August has brought few public appearances and only general reassurances on economic fundamentals from Paulson, who has left it to the Federal Reserve to act. There has been no talk of bailouts, policy changes, new federal regulations or other Treasury actions to stem the contagion in global markets.
"I don't believe that more regulation of private pools of capital, or more regulations or laws in general, would insulate investors from losses or would be effective," Paulson said in a New York Times interview yesterday. "I don't think it's constructive right now in the middle of this market turmoil to start pointing fingers and making specific policy recommendations."
While the Fed usually takes the lead in times of crisis, Treasury secretaries have also played important roles by reassuring the public that they have a grip on the markets' problems and stand ready to address the financial system's vulnerabilities.
But Treasury officials have also always been cautious about predicting which way markets will go, knowing that their comments can backfire embarrassingly.
The administration's upbeat comments last week, for example, almost seemed to be mocked by subsequent market declines. And after President Bush said there was "enough liquidity" in the system last week, the Federal Reserve the next day provided large infusions of cash.
Still, many on Wall Street and in Washington expected that Paulson would have been more visible in talking about the economy over the past two weeks, especially considering his reputation for seizing the agenda.
"It's reasonable that some time would elapse before the administration proposes anything," said Alan S. Blinder, a former Fed vice chairman, who is a professor of economics at Princeton. "But I think they should be thinking about what, if anything, ought to be done after the dust has settled. They may not be doing that."
Paulson did say that the administration and Congress might want to look at the housing sector, especially the causes of the collapse in the subprime mortgage market, which has tightened lending across the board and rocked stock markets around the globe. He ruled out any immediate fixes, however.
And while Paulson declined to be specific, Treasury officials indicated that the department may be rethinking its opposition to a request by the two giant federal mortgage agencies, Fannie Mae and Freddie Mac, to raise the caps on their mortgage portfolios in an effort to ease the credit squeeze.
Paulson first spoke about the market turmoil early last week and then went silent until an interview with The Wall Street Journal, which appeared yesterday, declaring that the current market chaos might lower the national growth rate but would not cause a widespread downturn.
"You're not going to get a forecast from me as to how long this period will last," Paulson said in the Times ' interview, referring to the current instability. "It could take a while to work through this situation. It could be that there will be more unpleasant news on the way, some organizations that don't exist and some losses."
"But our economy is resilient," he added. "The markets are resilient. They can absorb those losses. We've gone through challenging times in the markets, and we will rise to the challenge."
The market instability is nonetheless certain to prompt debate in Washington over whether the Bush administration has been right to resist more regulation of American capital markets, on the ground that regulations have made them less competitive with those in Europe.
Paulson acknowledged that he was wary of making as many public comments about the markets as some may want.
"My view from the day I came down here was not to talk unless I had something to say," Paulson said. "It's not my role to do play-by-play commentary on the markets."
Paulson said the crisis, which began in a weak sector, spread to stronger sectors because of the "unstructured nature of capital markets," the "dramatic increase" in private pools of capital beyond the reach of regulators, and the complexity of the derivatives and other products they invest in or trade.
He said there needed to be more transparency in the system - that is, more disclosure of the holdings and actions of hedge funds and other private pools of capital. "How can you be against more transparency?" he asked, adding that the best way of achieving it was through the funds drawing up their own best practices on disclosure and other safeguards.
Arthur Levitt Jr., the former chairman of the Securities and Exchange Commission, said in an interview that it was too early to say whether the voluntary approach would be adequate or whether federal regulators would need to play more of a role.
"After the past two weeks, I think you will hear calls for greater transparency throughout government, from the Treasury, from the SEC and maybe even from the White House," said Levitt, who is heading an advisory panel on auditing reforms for the Treasury. "But the last thing the country needs is false reassurance from political figures. Even less do they need calls for regulation that represent overkill."
Paulson said that, in principle, he also believed that while regulators should try to eliminate fraud and market manipulation, it was improper for them to try to eliminate risk in the economy.