Paulson Warns Against Regulation Overkill

Treasury Secretary Sees "Long-Term Harm" To Economy If U.S., World Adopt Severe Regulation

(CBS/AP)  Treasury Secretary Henry Paulson called the financial crisis now plaguing the world economy a "once or twice" in a 100 years event, even as he warned Thursday against imposing too-strict regulations to prevent a repeat calamity.

Paulson's remarks follow pledges by world leaders attending last week's emergency economic summit to begin an overhaul of the world's financial regulatory system.

With the next summit slated for the spring, the work on fleshing out details for the Herculean task will fall to the incoming administration of President-elect Barack Obama and his new Treasury secretary.

Paulson, whose boss President George W. Bush leaves office on Jan. 20, acknowledged that the financial crisis was caused by many factors including "government inaction and mistaken actions, outdated U.S. and global financial regulatory systems, and by the excessive risk-taking of financial institutions."

Still, he cautioned against the U.S. and other countries developing a too-onerous regulatory response.

"If we do not correctly diagnose the causes, and instead act in haste to implement more rather than better regulations, we can do long-term harm," Paulson said in a speech in Simi Valley, Calif.

Paulson's remarks followed more grim economic news, as new claims filed for unemployment insurance zoomed last week to 542,000, the highest since the summer of 1992, when the nation was recovering from a recession, the Labor Department reported.

Congressional leaders also indicated Thursday that they would put off any vote on an auto industry bailout until next month in the face of steady resistance from the Bush administration, despite the fact that a bipartisan group of several lawmakers announced a compromise proposal on a rescue package for Detroit's Big Three automakers.

Earlier this week, lawmakers blasted Paulson for his handling of a $700 billion financial bailout package to help ease the crisis and restore stability and confidence to unhinged markets.

Paulson on Thursday again defended his management, including his decision last week to officially abandon the original rescue strategy: buying rotten mortgages and other bad debts from banks to free up their balance sheets and get them to lend more freely.

"By proactively addressing the problems we saw coming and being pragmatic enough to change strategy in the face of changed facts and despite the inevitable criticism - we prevented a far worse financial crisis," Paulson insisted.

Focusing the bailout program on infusing billions into banks - and possibly other types of companies - to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilizing the financial system than the original centerpiece of the plan, he said.

"There was no playbook for responding to a once or twice in a hundred year event," Paulson argued, saying he needed to shift strategy to respond to worsening financial and economic conditions.

Paulson again said he believed the Bush administration has taken the necessary steps to prevent a financial market collapse, but he cautioned that it will take time for markets and lending conditions to return to normal.