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US central bank prepared to take more actions to keep the credit crisis from hurting the economy: Ben Bernanke

Monday, September 3, 2007

U.S. Federal Reserve Chairman Ben Bernanke said that the central bank of US is prepared to take more actions to keep the credit crisis from hurting the economy. "The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets," Bernanke said at a Fed symposium in Jackson Hole, Wyoming. Though the chairman did not specify what the Fed's next move will be.

He said that It is not the responsibility of the Federal Reserve, nor would it be appropriate, to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.

In the light of the recent financial developments, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Fed continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets, he said.

Since Aug. 9, the Fed has injected a total of $ 147.25 billion into the financial system to ease tightening credit stemming from the troubles in the high-risk subprime mortgage market, which offers loans to people with lower credit and income. On Aug. 17, the Fed approved a half-percentage point cut in its discount rate on loans to banks to promote the restoration of orderly conditions in financial markets. The decision means the discount rate, the interest rate that the Fed charges to make direct loans to banks, has been lowered to 5.75% from 6.25%.

But the Fed did not change its target for the more important federal funds rate, the interest commercial banks charge each other on overnight loans. The benchmark interest rate has remained at 5.25% for more than a year. Many expect the Fed to cut its target rate by at least one-quarter percentage point on or before Sept. 18, its next regularly scheduled meeting. If so, that would be the Fed's first rate cut in over four years.

US President George Bush has outlined ways to help US homeowners facing foreclosure. It is the administration's first effort to deal with an expected wave of defaults fuelled by the mortgage crisis that has roiled financial markets around the world.

The initiatives, which are not aimed at bailing out lenders or speculators, are designed to help homeowners with risky mortgages keep their houses. In remarks at the White House, Bush also discussed efforts to prevent the problems from arising in the future. "The government's got a role to play, but it is limited," Bush said. "A federal bailout of lenders would only encourage a recurrence of the problem."

The President insisted that the US economy was strong and could weather recent turbulence in the financial markets. He said the mortgage market, especially the subprime sector, has shown particular strain. One of the most troubling developments has been an increase in adjustable-rate mortgages, which start out with low interest rates, then reset to higher rates after a few years.

"This has led some homeowners to take out loans larger than they could afford based on overly-optimistic assumptions about the future performance of the housing market," Bush said. "Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments, or facing foreclosure."

One of the key elements of Bush's plan would allow homeowners with a good credit history, but who cannot afford their mortgage payments, to refinance into mortgages insured by the Federal Housing Administration to stop them from defaulting. Earlier this month, Bush predicted that the continuing decline in the housing market would not become precipitous, but would result in a "soft landing".

He rejected any direct government aid to homeowners losing their houses to foreclosures, saying he only supported federal government help that would encourage refinancing and educate prospective home buyers about risky mortgage terms. Bush urged Congress to pass legislation that would give the Federal Housing Administration more flexibility in assisting mortgage holders with subprime mortgages. He pledged to work with Congress to reform the tax code to help troubled borrowers rework their loans and called for the rigorous enforcement of predatory lending laws and strengthening of lending practices.

Posted by FR at 9:12 AM  

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