Treasury Secretary Henry Paulson came to the Bay Area Thursday and Friday amid a slew of bad news on the housing and economy fronts, including a report that 63,000 jobs disappeared nationwide in February.

Paulson is the Bush administration’s top economic policy official and has taken the lead on the government’s program encouraging lenders to offer relief to subprime borrowers.

On Friday, he sat down with The Chronicle before an appearance at Stanford University to talk about the risks facing the economy. The interview has been edited for space and clarity.

Q: The credit crunch seems to be getting worse. Are we falling into a vicious circle in which falling home prices are choking off lending, causing prices to fall further?

A: The risks are clearly to the downside here. We are very focused with what’s going on with financial market turmoil. When the turmoil began in August, I said it would take a while to work through the excesses because they had been building up for some time in the housing markets and the credit markets. We are making progress. There are going to be bumps along the road. There are going to be unpleasant surprises from time to time along the way.

I’ve watched capital markets over my careers and I’ve seen sentiment swing extremely from time to time. In July, financial institutions were aggressively looking for risk. They were too comfortable with it perhaps. Now sentiment has swung back hard to risk adversity. But the institutions are adapting. They are raising capital. I have great confidence in our markets.

My big focus here is to aggressively encourage any big financial institution that may need capital or think they many need capital to go out and raise it because it’s available today.

Because if they don’t have enough capital, then they shrink their balance sheet and they restrain lending, which is vital to keeping our economy healthy and growing

Q: Many Americans are dismayed by how far the dollar has fallen. Should we be worried?

A: As Treasury secretary, I’ve always been very clear that a strong dollar is very much in our nation’s interest. We have a strong dollar policy. Our economy, like any other, has its ups and downs. It’s structurally sound.

The long-term fundamentals are healthy. The risks are to the downside right now, but the long-term fundamentals are healthy. And I have confidence that the long-term fundamentals will be reflected in our currency markets.

Q: Do you think the administration’s initiatives are sufficient to deal with the housing crisis or do you think there’s some merit in Federal Reserve Chairman Ben Bernanke’s position that lenders should be encouraged to recognize principal losses?

A: I don’t believe Chairman Bernanke and I have a different position. We both believe that our policies should reach out to homeowners that want to stay in their home and are able to afford to do so and to reach out to them through the industry to make modifications, do refinancings, is a very good program. We know foreclosures are expensive and they hurt homeowners and communities and the economy.

Clearly, writing down principal on a loan is one of the tools that financial institutions have. They can address the problem by writing down principal on the loan, they can address the problem by reducing interest rates. They can do it through other forms of modification of the loans when they make sense. That’s the program we are supporting very aggressively. We have this industry alliance to get out to all homeowners that may have a problem, but particularly those who have subprime adjustable-rate mortgages.

Q: What about people who are underwater?

A: There’s been a lot of discussion about homeowners who have zero or negative equity. The way I’ve looked at that is, if you are a homeowner and you can afford to make your mortgage payment, you should be honoring that mortgage payment. If you say, “I don’t want to honor that payment, and I’m going to leave unless someone else takes my losses,” I don’t think the government should be taking those losses any more than the government should be bailing out any investor who has a loss. In many instances, people who are walking away are speculators who put little or no money down.

Q: What do you say to the growing number of our readers who tell us they can’t make ends meet? To what extent do our public officials bear responsibility for the situation?

A: First of all I want to say that I empathize with your readers. There are many people working hard and struggling to make ends meet. There’s no doubt that high energy prices today are a headwind. That food prices are an issue. That we have the housing correction. That our economy is slowing down. That’s why a huge part of my focus and the president’s focus is to do things that will make a difference.

Growth in this country was almost 5 percent in the third quarter. But when we saw the economy slowing down, we moved very, very quickly to work with Congress on the economic stimulus package. I’m going to be working very diligently with the Internal Revenue Service to get those payments out to your readers beginning May 2.

When we’ve had excesses like we’ve seen in a number of markets and unsustainable home price increases, a correction is unfortunately inevitable and it’s necessary.

E-mail Sam Zuckerman at szuckerman@sfchronicle.com.

WASHINGTON, June 18 (UPI) — Monday begins the second week of debate in the U.S. Senate over the proposed energy bill, H.R. 6.

Since June 11, when the bill went to the floor, more than 100 amendments have been filed. The legislation is a compilation of proposals from the Senate Energy and Natural Resources Committee and two other committees.

No voting is scheduled for Monday, but Senate Majority Leader Harry Reid, D-Nev., has made it clear he would like the legislation finished by the end of the week.

The major points of contention have been auto mileage standards, coal, renewable electricity and the tax package.

Last week several amendments were rejected including one on refinery revitalization and Outer Continental Shelf development. The Senate also tabled a clean-power amendment that opposed requiring greater use of renewable sources of energy.

This week, according to a release by the Energy and Natural Resources Committee, issues expected to be brought to vote include amendments to lessen the proposed increase of the corporate average fuel economy standards, require utilities to supply a specific percentage of electricity from renewable energy sources, create a loan program for equipment to control greenhouse gas emissions at coal plants and the energy tax package.

(03-08) 04:00 PST Washington — The Federal Reserve is taking bigger steps to ease the nation’s credit crisis, including increasing the amount of loans it plans to make available to banks this month to $100 billion.

The Fed said Friday that it will boost the size of auctions planned for March 10 and March 24 to $50 billion each, up from the $30 billion limits it had announced previously. The auctions serve as short-term loans to get banks the cash they need to keep lending to their customers.

The Fed said it plans to continue the auctions for at least six months and will move to larger auction amounts if needed.

In a second step, the Fed said it will make $100 billion available through weekly 28-day repurchase agreements, where the central bank will lend cash in return for assets such as mortgage-backed bonds.

The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit. The central bank started its new type of auction in December to provide short-term loans to cash-strapped banks in hopes of keeping them lending. So far, the Fed has made available $160 billion in short-term loans to banks through six auctions.

A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch. Financial companies racked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market’s bust. Problems first started in the market for subprime mortgages- those made to people with blemished credit histories. However, troubles have spread to other areas.