U.S. Treasury Secretary Henry Paulson (ex-head of Goldman Sachs) says financial markets are bouncing back from the credit crisis, declaring that “the worst is likely behind us.” (“Likely” clearly being the operative word here.) But we’re not seeing too many rainbows and unicorns yet, what with the EU’s statistics office saying today that European retail sales fell by a record in March and U.S. retail sales for April (to be released tomorrow) expected to be utterly dismal, since everyone’s slashing their prices to death – which has a funny way of eroding earnings. Paulson has been in Washington for awhile now. Read this and you tell us – has he already drank way too much of the Beltway Kool-Aid?

Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch and that "the worst is likely to be behind us," marking possibly the most optimistic comments yet from the Bush administration on the financial crisis.

Mr. Paulson's comments, made in an interview Tuesday, reflect Treasury's view that the administration and the Fed have already taken steps necessary to quell the situation. Bolstering that notion, the White House Tuesday threatened to veto legislation that has become the cornerstone of the Democrats' response, a rescue plan that would provide government insurance for some $300 billion in troubled mortgages.

"There's no doubt that things feel better today, by a lot, than they did in March," Mr. Paulson said. He pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns Cos. and to provide liquidity to other investment banks as "an inflection point" in the crisis.

The Treasury secretary was careful to predict that there would be further "bumps along the road," and that it will take "some months longer" for the market distress to fully dissipate.

The financial turmoil began last year with a wave of defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities. The administration's response has included an industry-led effort to ease the terms on certain troubled subprime mortgages and an expansion of the authority of the Federal Housing Administration to insure home loans.

Mr. Paulson is urging Congress to pass two measures he considers critical: one to improve the regulation of Fannie Mae and Freddie Mac, the government-chartered mortgage titans, and another to overhaul the FHA.

House Democrats slipped those provisions into a larger mortgage bill scheduled for floor debate Wednesday. They hoped that move would secure President Bush's support for a more sweeping plan to enlarge the FHA's authority to back refinanced home loans if lenders agreed to reduce the outstanding principal.

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