US Treasury Secretary Paulson: US recession is preventable

As the Wall Street Journal covered [subscription required] today, Treasury Secretary Paulson made his first comments since the beginning of the 'downturn' in U.S. markets.

According to Mr. Paulson, "the economy and the markets are strong enough to absorb the losses." In his eyes, the recent repricing of risk was "inevitable" -- an argument that makes sense in hindsight but it seemed to catch many experts to surprise.

In Paulson's eyes there isn't much more that the U.S. government can do to help the economy and stock market. It has already tried to increase transparency among hedge funds, according to the article. However, the rest of the 'action potential' lies in the hands of Bernanke and the Fed. I've spoken to several very smart investors recently who are all becoming increasingly convinced that Bernanke is going to have to cut rates sometime in the next few months to save the credit markets. While this seems dramatic, the current devastation in the fixed income market, especially in the much-publicized subprime mortgage space, is rather incredible.

But the more important question to ask, in my opinion, is whether or not Paulson could have really said anything different. While I'm sure many would argue the answer to that question is an astounding yes, at the present time you have to reflect deeply on that question. Would he really say the United States could potentially enter a recession with the markets as fragile as they currently are? Would he really risk further weakening the US Dollar versus other world currencies? I'd argue the answer is a no.