Paulson: 'Expect more bumps' ahead

Top financial leaders, faced with the biggest crisis to hit the global economy in at least a decade, are pledging to strengthen their regulation of banks and other financial institutions while anxiously hoping the slump in the United States will be a short one.

After an opening round of talks among the world's seven richest industrial countries, financial officials were scheduled to reconvene Saturday for discussions focused on the 185-nation International Monetary Fund and the IMF's sister lending institution, the World Bank.

The IMF, the lender of last resort for countries in trouble, is facing its own economic hard times. Officials were to discuss a proposal that would trim 15 percent of the agency's staff and sell about $11 billion in the institutions' vast gold reserves.

The biggest agenda item during the three days of meetings was the severe credit crisis that hit last August and could result in losses approaching a staggering $1 trillion before it is over, according to an IMF estimate released this week.

Treasury Secretary Henry Paulson assured the IMF's policy-setting panel on Saturday that the Bush administration was moving aggressively to deal with the economic slowdown in the United States, but he said risks remain.

"The weak housing market, together with high energy prices and stress in financial markets, is penalizing U.S. economic growth," he said. "We must expect more bumps in the road."

In a joint statement after talks Friday, the Group of Seven nations -- the United States, Japan, Germany, Britain, France, Italy and Canada -- endorsed an action plan to bolster regulation of big banks, investment houses and other financial firms that have already announced billions of dollars in losses from a credit crisis that began with rising defaults on subprime mortgages in the United States, but quickly spread to other types of investments around the world.

"The turmoil in global financial markets remains challenging and more protracted than we had anticipated," the G-7 officials said in their joint statement. In their comments, the officials left no doubt that they are all watching to see how developments unfold in the United States.

"The U.S. economy has to get over the economic unrest," Japanese Finance Minister Fukushiro Nukaga told reporters, because what happens in the United States will affect Asia and other parts of the world.

The IMF issued an economic outlook that predicted the United States would endure a mild recession this year and that weakness in the world's biggest economy raised the risks of a global recession to one in four.

Paulson and Federal Reserve Chairman Ben Bernanke tried to reassure their colleagues that U.S. policymakers are doing everything possible to unfreeze credit markets in the United States so that businesses and consumers will be able to get loans more easily and the economy will start to pull out of the slowdown.

The crisis claimed its biggest victim last month with the forced sale of Bear Stearns (BSC, Fortune 500), the nation's fifth largest investment house.

Axel Weber, head of Germany's central bank, said the "measures that were taken in the US have already had some effect" and the aggressive interest rate cuts from the Federal Reserve should help bolster growth in the second half of this year.

While Democrats in Congress are pushing for a more aggressive program to help an estimated 2 million homeowners at risk of defaulting on their mortgages, Paulson said the administration believed its plan, which relies heavily on voluntary efforts by the private sector, was the best approach.

Regarding the larger proposals, Paulson told reporters Friday night, "I see very little likelihood that anything like that will pass."

The G-7 communique's biggest change from the joint statement the group issued at their last meeting in February revolved around the discussion of currencies.

Europeans won in an effort to note "concern" about the sharp fluctuations that have been occurring in currency values. It was the first major change in the G-7 language on currencies in four years and was meant to underscore European worries about the dollar's decline to record lows against the euro. That has led to cries of protests from European manufacturers losing sales to American producers whose goods are now more competitive.

French Finance Minister Christine Lagarde said the true test of the changed currency language would come on Monday when currency markets reopen. However, there was no expectation that the words would be backed up by any joint intervention to prop up the dollar.

The action plan to beef up financial regulation was developed by the Financial Stability Forum, led by Mario Draghi, head of Italy's central bank.

It calls for strengthening oversight to make sure financial companies have sufficient capital to protect against losses and improved risk-management procedures and establishes deadlines in an effort to make sure countries move quickly to implement the regulatory reforms.

In an effort to get a reading on the crisis from the private sector, the G-7 officials met over dinner Friday night with executives of some of the world's biggest financial companies including Citigroup (C, Fortune 500), Deutsche Bank (DB), Credit Suisse (CS) and Barclays (BCS).