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Paulson: Markets will respond to economy

US Treasury Secretary Henry Paulson said Tuesday wavering financial markets will respond to the underlying strength of the US and world economies. Fed pumps $3.75 billion into financial system.

In an interview aired on CNBC, Paulson said credit problems “we’re experiencing right now are coming from bad lending practices, and during extended periods of benign markets, excesses creep in. We’ve had some bad lending practices. This will take time to work itself out, for the markets to readjust.” A major part of “that readjustment is recalibrating risk,” he added. He conceded that the administration is concerned about millions of people who could lose their homes because of foreclosure, and without being specific, said officials were looking at a number of solutions.

Democrats in Congress have been pressing for government-sponsored agencies such as Fannie Mae and Freddie Mac to buy more endangered mortgages. But Paulson insisted markets will eventually right themselves. “We’ve been seeing stresses and strains in a number of capital markets,” he said, “but this is against the backdrop of a very strong global economy, a very healthy US economy … markets ultimately follow the economy.”

The Federal Reserve on Tuesday pumped $3.75 billion into the financial system to help beat back a widening credit crisis. The injection was announced by the Federal Reserve Bank of New York, which handles such operations for the Fed, on its website. Since Aug. 9, the Fed has injected a total of $101.25 billion into the financial system to ease tightening credit stemming from the troubles in the US high-risk subprime mortgage market, which offers loans to people with lower credit and income. On Friday, the US central bank approved a half-percentage point cut in its discount rate on loans to banks to “promote the restoration of orderly conditions in financial markets.” The decision means the discount rate, the interest rate that the Fed charges to make direct loans to banks, will be lowered to 5.75% from 6.25%.

But the Fed did not change its target for the more important federal funds rate, the interest commercial banks charge each other on overnight loans. The benchmark interest rate has remained at 5.25% for more than a year. In the statement announcing the interest rate cut, the Fed said it “is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.” (,