(RTTNews) - Treasury Secretary Henry Paulson defended his department’s plan to establish a trust fund to assist the floundering financial markets Friday, stating that despite the cost taxpayers will have to bear for the fund the alternative would have been far worse.

Paulson urged Congress to approve the trust fund, the details of which will be hashed out over the weekend in time for congress to debate and vote on the legislation next week before they break for recess.

Paulson noted that the plan is a departure from acting on a “case-by-case basis,” which his Department and the Federal Reserve has been doing in recent weeks, including the government takeover of mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) as well as insurance giant American International Group Inc. (AIG).

While the other recent steps were taken to boost confidence, Paulson said the most recent proposal would address the “root cause” of the financial crisis: mortgage-backed securities stemming from the housing crisis.

These toxic assets are “choking off the flow of credit that is so vitally important to our economy,” Paulson said.

Creating a trust fund for the government to purchase these illiquid mortgaged assets will unblock the credit markets, allowing them to return to normal functioning, he said.

“These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions,” he said. “As a result, Americans’ personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.”

The proposal is akin to extracting a cancerous tumor that has infected the nation’s financial system. However, the plan needs the approval of Congress and will come at a “significant” cost to taxpayers, Paulson warned. He stressed that the continued failure of financial institutions, like the cancer spreading, is a far worse outcome.

“The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars,” he said. “I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.”

Paulson urged Congress to approve the legislation, saying, “Our economic health requires that we work together for prompt, bipartisan action.”

The focus of the Treasury Department remains on stabilizing financial markets, Paulson said.

In the brief question and answer portion of the press conference, Paulson emphasized that there needs to be stability in the housing market in order to achieve long-term stability in the financial markets.

“Until we get stability in the housing market we will not get stability in our financial markets,” he said. “This is the way we stabilize this system and get at the root cause.”

For comments and feedback: contact editorial@rttnews.com

Copyright(c) 2008 RealTimeTraders.com, Inc. All Rights Reserved

Posted in Categories: Economy, Releases, USA.

Subscribe by RSS Subscribe by Email