When Treasury Secretary Henry Paulson trekked to Capitol Hill Tuesday to sell his (latest) proposal to unwind the mess flowing from the mortgage meltdown, he had a track record to contend with…and a cloudy crystal ball.

The Secretary’s public statements and forecasts have been less than stellar, suggesting members of Congress may want to take his latest predictions and broad brush statements with a degree of caution.

On Jan. 18, speaking about the proposed “short term growth package” -- neither the White House or any members of the Administration called it a “stimulus” until it was signed into law -- Paulson asserted “the long-term fundamentals of the economy are strong, and I believe our economy will continue to grow.”

At the end of July, the Bureau of Economic Analysis reported the U.S. economy did not grow, but actually shrank during the first quarter of this year (January-February-March).

At the end of January, Paulson was pushing the “growth” package, which included tax rebates and told the Real Estate Roundtable it “is expected to help create more than half a million jobs by the end of 2008. We know from experience that both immediate tax relief for income tax payers and incentives for businesses to invest and hire are effective in creating growth and jobs in the short-term.”

The bill was passed in February, and the first rebates were distributed at the end of April. But, in the seven months since Paulson’s forecast, instead of creating “more than half a million jobs,” the U.S. economy shed 529,000 jobs.

On Jan. 7, Paulson spoke about housing and capital markets in remarks to the New York Society of Securities Analysts about the growing problems confronting homeowners.  

“To meet this challenge,” he said “this Administration -- without committing any taxpayer money -- helped foster an industry-wide effort to prevent this market failure. By preventing avoidable foreclosures, we will safeguard neighborhoods and communities, and fulfill our primary responsibility of protecting the broader U.S. economy.”

When Paulson offered these remarks, the national foreclosure rate, according to RealtyTrac was one for every 534 homes; in August the foreclosure rate was one per 416 homes.

But, he said, “fortunately, credit-worthy borrowers looking for a conforming mortgage will find that Fannie Mae (FNM) and Freddie Mac (FRE) have remained active, and traditional conforming mortgage products are readily available. Fannie and Freddie's securitization volumes have risen dramatically since June of 2007, even as other mortgage markets slowed. However, they are also experiencing stress due to the housing downturn and both companies reported substantial third quarter losses. I am pleased that Fannie and Freddie have moved quickly to raise capital and, through their securitization activities, remain a positive force for home finance.”

In September the Treasury (and the Federal Reserve) used legislative authority granted in July to nationalize the government sponsored enterprises [GSEs] Freddie Mac and Fannie Mae.

“In July,” Paulson said “Congress granted the Treasury, the Federal Reserve and FHFA (Federal Housing Finance Agency) new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs -- including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

“Based on what we have learned about these institutions over the last four weeks -- including what we learned about their capital requirements -- and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

Paulson’s view of other elements of the capital markets was similarly skewed.

In January, he said, “One thing I have learned over my career is that if a financial institution needs capital, it should move quickly to raise it. Moving to strengthen balance sheets better prepares financial institutions to exploit new opportunities and confront inevitable challenges.  As Treasury Secretary, I continue to firmly believe in the value of this approach; it is a positive for financial institutions, capital markets and our economy.

In March, Bear Stearns was acquired in a fire sale by JPMorgan Chase (JPM), in early September, venerable investment bank Lehman Brothers filed for bankruptcy and investment banks Morgan Stanley (MS) and Goldman Sachs (GS) voluntarily submitted themselves to federal oversight by becoming banks.

Even as he eventually pushed for the major initiative to use $700 billion to rescue the financial sector, Paulson was saying, “Again, let me be clear that no single policy or action will undo the excesses of the last few years. President Bush and his Administration recognize the risks we face, and the primary importance of keeping the economy as strong as possible as we weather this housing correction.”

Paulson had a similarly misplaced view as when he told the National Association of Business Economists in March “many in Washington and many financial institutions have been floating proposals for a major government intervention in the housing market, with U.S. taxpayers assuming the costs of the riskiest mortgages. Today, 93% of American homeowners -- 51 million households -- pay their mortgages on time. Many are on tight budgets, sacrificing other things in order to make that payment. Only 2% are in foreclosure.”

“Most of the proposals I've seen,” he added “would do more harm than good -- bailing out investors, lenders or speculators who, instead of getting a free pass, should be accountable for the risks they took. Let me be clear: I oppose any bailout. I believe our efforts are best focused on helping homeowners who want to stay in their homes.

The problem, he said, was limited to subprime ARM borrowers and explained why Treasury programs “focused on this small group of borrowers.”  They represent, he said, a disproportionate share of foreclosures adding “while subprime mortgages make up only 13% percent of outstanding mortgages, about 50% of the foreclosure starts in the third quarter 2007 were subprime loans. And more astonishing is the fact that, while subprime ARMs are only 6.5% of mortgages, they represent 40% of third-quarter 2007 foreclosure starts.”

According to the Mortgage Bankers Association National Delinquency Survey, the percentage of all mortgage loans past due rose in the second quarter to 6.41% from 6.35%: the percentage of all subprime loans past due fell, but the percentage of all prime loans past due increased. According to the MBA report the percentage of prime ARM loans past due increased and the past due percentage of subprime ARM loans dropped.

Paulson too, in March, said adjustable rate mortgage borrowers benefited from “the recent decline in short-term interest rates, which are very significantly mitigating the effects of mortgage resets.”

On March 3, when Paulson spoke, the interest rate for the 10-year Treasury -- the benchmark rate for the 30-year fixed rate mortgage -- was 3.54%; on Sept. 22 it was 3.81%. The rate for a two-year Treasury was 1.60% on March 13 and 2.12% on September 22.

In March, Paulson all but rejected further intervention in the mortgage markets. “Amid this [housing] correction,” he said, “there are many calls to ‘do something about housing.’ When people say this, they are urging any number of possible things -- minimize foreclosures, make affordable mortgages more available, improve the secondary market and liquidity for mortgages, improve the mortgage origination process, prosecute fraud, reduce the inventory of homes for sale, or help communities hardest hit by foreclosures.

The `to do' list tends to get conflated. We must sort through each of these shared and desired outcomes, carefully choosing policies that minimize the impact of -- but do not slow -- the housing correction.

In May, he had this to say when the Senate Banking Committee approved a housing rescue plan: “As we all know, one element critical to reaching the end of this correction will be the cost of mortgage finance -- the price of a mortgage will impact how many buyers come into the market and when they do so. Investor confidence in the secondary mortgage market is vital to the continued flow of affordable mortgage capital for American home buyers. And a strengthened regulator for the two largest sources of mortgage finance is vital to the confidence of all mortgage market participants and regulators.”