WASHINGTON, Aug 21: Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson met with an influential senator on Tuesday to debate the troubles roiling America’s housing and financial markets.
The central bank and economic heavyweights met behind closed doors in a congressional office with Democratic Senator Christopher Dodd, the chairman of the powerful Senate Banking and Housing Committee.
Dodd told reporters after the meeting that Bernanke and Paulson had both assured him they were ready to use “all the tools” under their power to keep the housing and credit problems from worsening.
Rising home foreclosures have sparked a sharp drop in demand for mortgage-backed securities on Wall Street. The downturn has triggered multibillion-dollar losses for investors and led some big banks to tighten their lending standards.
The credit jitters have played havoc with the stock markets, spurring volatile trading and heavy losses in some stocks, particuarly mortgage and financial firms.
The Fed chairman met Paulson, a former chief executive of investment banking giant Goldman Sachs, and Dodd as a report revealed more woes for overstretched US homeowners.
A monthly survey by RealtyTrac, a private firm that monitors foreclosure activity, showed foreclosure filings running at over 1.1 million in the January-July period, marking a jump of 60pc from the same period of 2006.
Dodd, who is also a 2008 presidential contender, said he was pleased Paulson had stressed the administration of US President George W. Bush is examining ways to ensure people threatened with foreclosure can keep their homes.
“We’re at a 37-year high of the rate of foreclosures in this country. We may have as many as one million and (up to) three million people who could lose their homes ... because they got bad deals on mortgages,” Dodd said.
The lawmaker said he was pleased the Fed had slashed the interest rate it levies on loans to commercial banks on Friday to lower borrowing costs and stop the banking system from clogging up.
The Fed cut its discount rate by half-a-percentage point to 5.75 percent.
“Chairman Bernanke ... intends to utilize all the tools available to him to act,” Dodd said.
Asked if he urged Bernanke to trim the federal funds rate, the central bank’s key short-term interest rate, Dodd replied: “No, I did not specifically ask him.”
The senator said Bernanke, a former academic, also did not make any pledges to him regarding a potential cut in the fed funds rate.
The fed funds rate has been anchored at 5.25pc since June 2006, but economists say the central bank is coming under increasing pressure to cut the rate. Its next policy meeting is scheduled for September 18.
“The Fed understands it,” Dodd said of the housing and credit woes buffeting the world’s largest economy.
Paulson said in an interview with the CNBC business television channel earlier Tuesday that the credit crunch will ease over time as investors reprice risk.
The Treasury chief said the liquidity squeeze would likely dent economic growth, however.
The Fed would normally be expected to cut the fed funds rate during a housing downturn or when economic growth slows to make consumer borrowing cheaper, but the central bank has kept the rate steady to ward off inflationary threats.
Dodd said subprime home loans, loans granted to people with poor credit, had been largely responsible for destabilising the multi-trillion dollar mortgage market.
Hundreds of thousands of subprime loans were doled out during the years-long housing boom which ended in early 2006.
The senator said Congress was mulling possible ways to help homeowners facing foreclosure.
“There is some possibility of funds being made available here to buy the direct assets of people,” Dodd said, adding, however, that he would be reluctant to back such a plan.—AFP