Transcript: Hank Paulson on 'FOX News Sunday'

WASHINGTON – The following is a partial transcript of the March 16, 2008, edition of "FOX News Sunday With Chris Wallace":

"FOX NEWS SUNDAY" HOST CHRIS WALLACE: And we are back now to talk about the economy with Treasury Secretary Henry Paulson.

Mr. Secretary, welcome back to the program.

TREASURY SECRETARY HENRY PAULSON: Chris, good to be here.

WALLACE: Well, you just heard Senator Schumer, Senator Dodd — Senator Schumer particularly — calling this now the Bush recession, comparing him to Herbert Hoover and failing to do what he could have done months ago to prevent this situation from getting so bad.

Your reaction, sir?

PAULSON: My reaction is we're all over this. And the president is very focused on what's going on in the economy. We got out ahead of it early, coming off a third quarter where the GDP grew at 4.9 percent.

We actually were criticized for some for moving too fast with a stimulus package. With the help of Congress — great leadership there — we have a program and we're working on getting those checks out to the American people beginning early in May. And it's going to make a meaningful difference.

WALLACE: Well, I want to pick up on that, because you have been criticized and the president has been criticized for striking such positive notes.

When you were last here on the program seven weeks ago, you said, quote, "The economy is going to continue to grow." But by every measure, things have gotten worse since then.

And I'd like you — if I may, just take a look. The dollar closed at a record low this week against the euro. Oil is at a record high. We've lost 85,000 jobs in the last two months. And retail sales continue to drop.

Mr. Secretary, don't all signs point to the economy continuing to decline for months to come?

PAULSON: Chris, what I said is I believe the economy is going to continue to grow but the risks are to the downside. The risks are housing, capital markets turmoil, the price of oil.

We're focused on it. We're all over it. I think it's much less important what you call this. Economists will be debating that for months and months and months. It's much less important what you call it than what you're doing about it.

And we're working very hard, working to prevent those foreclosures which are preventable, avoidable, working to minimize the spillover from the capital markets, turmoil on the real economy.

And I think the stimulus package is going to make a difference.

WALLACE: But let me ask about that, because I think the concern, whether it's called a recession or not — and we should point out that the Wall Street Journal had a survey of 51 top economists this week. Seventy percent of them said the economy is already in a recession. But let's not even play that semantics.

PAULSON: Right.

WALLACE: I think the growing concern is that you, the president, keep saying, "We're all over this." And then a few months down the road, things are worse. And so they wonder are you out ahead of these things, or are you always behind the curve?

PAULSON: Well, Chris, there's a question what — when there are excesses, excesses we've seen in the housing market, a correction there is inevitable. You're going to see a correction.

Can we outlaw the forces of gravity? You know, how much can government do? But this administration has been focused on this, I think very early involved — very early, beginning in August, working very hard to avoid foreclosures that are preventable, putting in place programs that are making a difference, are working.

Are they going to prevent the inevitable correction in housing prices? No. But we're working hard on that. And again, I think we were early with the stimulus package.

WALLACE: All right. Let me ask you about some specific issues that you're facing and the government is facing today. On Friday, the Federal Reserve helped bail out Bear Stearns, the first time that it has taken such action since the great depression.

Are more Wall Street firms in danger, at risk, of going under?

PAULSON: Chris, I've got great confidence in our financial market, our financial institutions. Our markets are resilient. They're flexible. Our institutions, our banks and investment banks, are strong.

And I am very confident with the help of the regulators and market participants we're going to work our way through this.

WALLACE: But forgive me. If I'd asked you this a week ago, you probably would have said that about Bear Stearns. And the fact is that on Friday, they reached a crisis. They would have gone under if it hadn't been for this huge injection of funds.

So my question is are there other Bear Stearnses out there? Are there other firms at risk of going under?

PAULSON: Chris, what I've said — and I'll just repeat it. I've got confidence in our markets and in our financial institutions. You saw action which I — you know, I've been very involved — you know, been on the phone for a couple days right now helping to work through this.

And there is always a decision that needs to be made and to say what's best for the stability of the marketplace, the orderliness of the marketplace. I think we made the right decision. I think the Federal Reserve made the right decision here.

And again, I don't know what to say other than what I've just said — is we've got strong financial institutions. Our markets are the envy of the world. They're resilient. They're innovative. They're flexible.

I think we move very quickly to address situations in this country. And as I said, our financial institutions are strong.

WALLACE: You talk about the decision that you made and that it was the right decision. If another investment bank faces a Bear Stearns situation, is the government prepared to bail them out?

PAULSON: I'm not going to speculate on things that might happen. But I just clearly am going to say our focus, our priority, number one priority, is the stability of our financial system, the stability of our financial markets, orderly markets.

What we are working to do — and this gets back to your conversation with Senators Dodd and Schumer. What we're working to do is to minimize impact of what's going on in housing, what's going on in the capital markets, on the real economy.

That's our first priority. That's our responsibility right now.

WALLACE: So is the government prepared to do more, if necessary, to maintain that stability in the financial...

PAULSON: The government is prepared to do what it takes to maintain the stability of our financial system. That's our priority.

And I've got to tell you, it's a great financial system, and we have market participants. As you work your way through a period like we've been working our way through and, you know, risk is being repriced — I've been saying all the way along that there will be — there always are — surprises along the way, bumps on the road. You hit rough spots. These things happen.

And the question is how do you deal with them.

WALLACE: But isn't the result of this that U.S. taxpayers might end up holding billions of dollars in bad mortgage securities?

PAULSON: I'm not going to speculate about the outcome of this specific situation. You're going to have to wait and see.

Conversations are going on, you know, over the weekend. I'm very involved in those conversations. I'm confident that this was the right thing to do.

Sometimes there are difficult decisions. This, in my judgment, was not a difficult decision. It was a right decision. And again, our markets are very important.

WALLACE: But there's an overarching philosophical and policy question here that I want to try to get at with you about the government's role.

Why should the government, and thereby U.S. taxpayers, bail out lenders and borrowers who made bad decisions? And if they know they're going to be bailed out, what does that do to the moral hazard argument that they don't end up paying a price?

PAULSON: Well, first of all, I really understand the moral hazard argument. So on the one hand, you've got a moral hazard. On the other, you've got what's right for the markets, what's right for the stability of the financial system, the U.S. economy.

All of these situations are situation-specific, depending on what's going on in the markets at the time. You're jumping to a conclusion about what the cost is going to be to U.S. taxpayer. So I just want to point that out.

And this situation hasn't played out yet. And wait and see how that plays out.

But to get to your general question, this is something that — you need to balance these two considerations. And I would say at this time, given where we are, and given how important it is to minimize disruptions in our capital markets, and how important it is to protect the economy which you were talking about earlier, this was the right decision.

WALLACE: Finally, I want to ask you about the dollar, which, as I mentioned, is at a record low this week. With fuel's inflation and our dependence on foreign money, you and the president say — and this has become kind of a mantra over previous administrations as well, that the strong dollar is in, quote, "our national interest."

Why not take a more aggressive stance and support a stronger and stable dollar and even implement policies to make a — to prop up the dollar?

PAULSON: Well, I'm going to step back and say a strong dollar is in our nation's interest. Our long-term fundamentals in this country, economic fundamentals, are strong.

Our economy has its ups and downs like any other economy, but I believe that that long-term strength is going to be reflected in the dollar.

And to get to your point, we are — the president has policies we're advocating very strongly, policies that are going to increase confidence in the U.S. economy and make our economy stronger over time, keep it stronger over time.

And you know what those policies are. It's pro-growth tax. It's being open to foreign investment. It's embracing and welcoming trade. That's why we're working so hard to get Congress to accept the Colombia free trade agreement.

WALLACE: But very briefly, because we've only got about 30 seconds left, you're not going to change your stance and push more aggressively for a stronger, increased value dollar.

PAULSON: Well, I don't know how we can be any stronger in saying that a strong dollar is in our interest. And we're going to keep pressing.

Everything I'm doing when I'm here, Chris, is to make this U.S. economy more competitive, stronger, minimize — you asked me about the Bear Stearns situation.

I think actions like that — anything we can do to enhance confidence in our marketplace, in our capital markets, in our economy, are the policies that increase confidence in our economy over time.

WALLACE: Secretary Paulson, we want to thank you so much for coming in today. And please come back as this situation continues to develop to bring us up to date on it, sir.

PAULSON: Thank you.

WALLACE: Thank you.