With the economy slipping closer toward recession, President Bush and Henry Paulson ensured that the economy is fundamentally sound in a speach on Monday.
There is no simple solution to America’s housing crisis and a correction in the housing market is “inevitable and necessary,” Treasury Secretary Henry Paulson said. With the “mixed” signals that the U.S. economic indicators are sending, top officials are considering whether a stimulus is needed.
As the U.S. stock market got off to its worst start since 2000, a Government report also showed that home sales over the past 10 days have fell to their lowest level in 12 years. With an unprecedented wave of 1.8 million sub-prime mortgages to reset over the next two years, Paulson said, the administration had to broker a deal with the mortgage industry to freeze rates over the next 5 years, thus allowing the housing market to recover.
“By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy,” Paulson said in a speech in New York.
The current rate freeze plan only involves sub-prime mortgages, but Paulson raised the issue that a “systematic approach” may need to be developed to help prime borrowers who took out risky adjustable rate mortgages that will be resetting to higher interest rates.
With the down turn in the housing market, there are rising fears that the country may be headed into a recession. After a report on Friday showing that the unemployment rate jumped to a two year high, fears of recession were heightened.
Paulson, Federal Reserve Chairman Ben S. Bernanke and the rest of President Bush’s Group of Financial Markets met with the President on January 4th. After the meeting, Bush said he would work with Congress to “do everything we can” to make sure that the economy does not slip in recession.
Feldstein, head of the National Bureau of Economic Research and a member of the group that dates economic cycles, said that the chances of that the economy will enter into recession are great than 50 percent.
With a five year boom which lead to record high levels of sales and home values, a housing correction was inevitable. As the housing correction has taken a toll on the economy, Paulson said “It will take additional time for markets to regain confidence.”
Paulson expects the economy to keep growing and suggested that the administration would not rush to Congress with a fiscal stimulus plan. “Working through the current situation and getting the policy right is more important than getting the policy announced quickly,” he said.
During the speech Monday, both Paulson and President Bush declared the economy as fundamentally sound. The economic stimulus that the administration is considering may include tax cuts to help ward off a recession. If President Bush decides to go ahead with the stimulus package, he is expected to unveil the details around the time of the state of the union address on January 28th.
When asked about the stimulus package, Paulson said “This is a decision the President still has to make. When he makes it, we will report to all of you.”
The credit crisis was started by the rising number of foreclosures on sub-prime mortgages which resulted in multi billion dollar losses at many financial institutions. “As markets reassess, we should not be surprised or disappointed to see financial institutions writing down assets and strengthening balance sheets,” Paulson said as the large write downs showed that the system was working.
Paulson wants Congress to pass legislation that would toughen the oversight of Fannie Mae and Freddie Mac. The two government chartered enterprises are the country’s biggest source of mortgage financing. Paulson said that the administration would back a temporary, higher limit on the size of loans the firms are allowed to securitize if stronger regulations are passed.
The speech was Paulson’s first since a three state trip in December in which he promoted his plan to ease the sub-prime mortgage crisis by temporarily freezing interest rates. It is expected that mortgage servicers will “begin fast tracking borrowers in the next few weeks,” whose mortgage payments are in default.
Paulson’s administration is continuing to work with mortgage lenders to freeze sub-prime mortgages of borrowers who are current on their mortgage payments before their interest rates adjust.
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