Hillary Clinton said in an interview published today that she fears the US is slipping into a Japanese-style economic malaise that will overwhelm the Federal Reserve's considerable powers. US Treasury Secretary Hank Paulson said on Wednesday that 29% of US mortgages were originated in 2007 with no down payment.

The Democratic presidential candidate said the US government should be ready to buy troubled mortgages from investors and lenders to spur a recovery and avoid a lengthy period of stagnation because of unaddressed weaknesses in the financial sector.

"We might be drifting into a Japanese-like situation," she said Wednesday in a wide-ranging interview with The Wall Street Journal on economic issues. "I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone. I think the Japanese tried that and tried and tried that."

Senator Clinton outlined new details of her plan to have the Federal Housing Administration purchase underwater mortgages -- those in which homeowners owe more than houses are worth -- from investors and lenders. Such a program could work in combination with a federally backed system to auction mortgages in default.

The Journal says that Clinton didn't estimate the size of a government loan purchase program. Mark Zandi, chief economist of Moody's Economy.com, estimates there are 8.9 million homeowners under water with $1.9 trillion in mortgage debt.

The issue of home foreclosure is an important one in the upcoming Pennsylvania primary.

Read the full transcript.

US Treasury Secretary Hank Paulson, delivered remarks on Wednesday, March 26, 2008, at the US Chamber of Commerce Capital Markets Summit.

On Wednesday, US Treasury Secretary Hank Paulson said that much attention has been given to the fact that an estimated 8.8 million households may currently have negative home equity. He said that he expects that number to rise as the housing correction plays out, and to begin to reverse once the correction has run its course. 

"Homeowners with negative equity are more common in this housing downturn because lending practices changed dramatically in recent years. In 2007, 29% of mortgages were originated with no down payment. Some of those mortgages went to speculators; others to responsible borrowers who were able to buy a home because of expanded access to credit," Paulson said. "But let me emphasize that we do not need a system-wide solution for the vast majority of loans where a homeowner temporarily has negative equity. Negative equity does not affect borrowers' ability to pay their loans. Homeowners who can afford their mortgage payment should honor their obligations --- and most do. They know that there are housing cycles, and they bought more than houses. They bought homes to become part of a community, and they bought them as places to live, not as investments. And if they live in them for the long term, they are likely to become good investments.

Let me also emphasize that any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator. Washington can not create any new mortgage program to induce these speculators to continue to own these homes, unless someone else foots the bill." he added.

Speaking at the US Chamber of Commerce Capital Markets Summit, Paulson said on home foreclosures: "First, 92% of all homeowners with mortgages pay that mortgage every month right on time. Roughly 2% of mortgages are in foreclosure. Even from 2001 to 2005, a time of solid U.S. economic growth and high home price appreciation, foreclosure starts averaged more than 650,000 per year.

Last year there were about 1.5 million foreclosures started and estimates are that foreclosure starts might be as high as 2 million in 2008. These foreclosures are highly concentrated – subprime mortgages account for 50% of foreclosure starts, even though they are only 13% of all mortgages outstanding. Adjustable rate subprime mortgages account for only 6% of all mortgages but 40% of the foreclosures. So we are right to focus many of our policies on subprime borrowers.

There are approximately 7 million outstanding subprime mortgage loans. Available data suggests that 10% of subprime borrowers were investors or speculators. This figure is likely higher, as some investors misrepresented themselves to take advantage of a cheaper rate, and others speculated on a primary residence, expecting prices to continue going up.

Other subprime loans were very poorly underwritten and borrowers simply can not afford the home they bought. Almost 18% of adjustable rate subprime mortgages underwritten in 2006 were in foreclosure six months before the initial rate was scheduled to reset. Subtracting the speculators and those who took on more than they could handle leaves us with our target population of subprime borrowers for whom we are seeking a solution – those who want to keep their homes, have the financial wherewithal, but are facing challenges making their monthly payments."

Paulson's address