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Federal Reserve in rate cut hint Bush moves to ease lending crisis
(about 2 hours later)
The head of the Federal Reserve has hinted that rates may be cut to stem the US financial crisis caused by a slump in the housing market. US President George W Bush and Federal Reserve head Ben Bernanke have each unveiled plans to ease economic problems caused by the housing slump.
Ben Bernanke said that the Fed would "promote general financial stability". President Bush announced a package of measures to help homeowners struggling to pay their mortgages amid the current sub-prime loan crisis.
Later, US President George W Bush is expected to set out plans to help millions of homeowners with sub-prime mortgages avoid defaulting. Meanwhile Mr Bernanke hinted that rates may be cut as the Fed seeks to "promote general financial stability".
Sub-prime mortgages are higher risk loans offered to people with poor credit ratings or on low incomes. Related losses had exceeded "the most pessimistic of projections", he said.
Mr Bernanke said that global financial losses in the credit market had "far exceeded even the most pessimistic projections". Recent disturbances in the sub-prime mortgage industry are modest in relation to the size of our economy President George W Bush
And he insisted it was not the job of the Fed "to protect lenders or investors from the consequences of their financial decisions". These losses stem from defaults on sub-prime mortgages, higher risk loans offered to people with poor credit ratings or on low incomes.
'No bail out'
President Bush said the measures were aimed at stopping more people defaulting on their repayments and to allow owning a home to remain "at the centre of the American dream".
PRESIDENT BUSH'S COMMENTS Calling on Congress to pass laws giving more flexibility to the Federal Housing Administration to assist those with sub-prime mortgages.Pledging to reform the tax code, aiding borrowers to refinance loans.Demanding stronger lending practices and the enforcement of laws designed to stop predatory lending.
They include reform tax laws to help troubled borrowers refinance their loans, but the President added that it was not the government's job to bail out speculators.
"Recent disturbances in the sub-prime mortgage industry are modest, modest in relation to the size of our economy," the President said.
"But if your family's one of those having trouble making the monthly payments, this problem doesn't seem modest at all."
Mr Bernanke insisted it was not the job of the Fed "to protect lenders or investors from the consequences of their financial decisions".
But he added: "The Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of the markets."But he added: "The Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of the markets."
Wall Street shares clung to their early gains with the Dow Jones index and Nasdaq both adding about 0.8% in mid-morning trading as investors looked ahead to President Bush's speech. The Fed will meet to set rates on 18 September amid growing speculation that it will cut the cost of borrowing to ease the current liquidity problems in the financial markets.
The Fed will next meet to set rates on 18 September.
Loan guaranteesLoan guarantees
Rising numbers of defaults on such loans have hit banks, which have bought debt that include these loans. Worries about loan defaults have roiled stock markets and investors around the world, and raised the cost of borrowing worldwide.
Worries about defaults have roiled stock markets and investors around the world, and raised the cost of borrowing worldwide. The Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of the markets Ben Bernanke class="" href="/1/hi/business/6972767.stm">In quotes: Ben Bernanke
Reports suggest President Bush will call for Congress to support his plans to allow the government-backed mortgage insurer - the Federal Housing Administration - to guarantee loans for borrowers who are more than 90 days behind with their payments.
President Bush is due to speak at 1110 in Washington (1610 BST)
President Bush is also expected to discuss ways to prevent such a crisis in the mortgage market happening again.
This is likely to include highlighting the need for strong enforcement of laws that prevent irresponsible lending.
Democrats claim the Bush administration should have done this when it first came to power.
Emergency funds
Mr Bernanke will discuss the ongoing housing market and credit woes in a speech to the annual gathering of international central bankers and economists at Jackson Hole in Wyoming.
Many US sub-prime borrowers risk losing their homes
Analysts will be looking out for indications that the central bank's rate-setters will cut the cost of borrowing by one quarter of a percentage point at their next meeting on 18 September.
The Fed has so far released billions of dollars of emergency funds into the financial system in an attempt to ease fears over the lack of available credit.The Fed has so far released billions of dollars of emergency funds into the financial system in an attempt to ease fears over the lack of available credit.
It has also cut the interest rate at which it lends to banks.It has also cut the interest rate at which it lends to banks.
"It's pretty important because Bernanke's going to talk about housing," said Binay Chandgothia, chief investment officer for Principal Asset Management.
"And housing is perceived to be what is causing consumer confidence to go down."
Record defaults
The crisis in the US sub-prime mortgage sector has been caused by American mortgage rates rising sharply over the past year.The crisis in the US sub-prime mortgage sector has been caused by American mortgage rates rising sharply over the past year.
This has meant a growing number of sub-prime borrowers have been unable to meet their monthly payments as their initial low rates expire, leading to record levels of defaults.This has meant a growing number of sub-prime borrowers have been unable to meet their monthly payments as their initial low rates expire, leading to record levels of defaults.
The result has not only been significant financial difficulty for banks and investment firms heavily exposed to the sub-prime market, but also the recent stock market turmoil.The result has not only been significant financial difficulty for banks and investment firms heavily exposed to the sub-prime market, but also the recent stock market turmoil.
This is because of fears that the crunch in the sub-prime sector will spread to the wider loans market as banks become far more cautious about whom they lend to.This is because of fears that the crunch in the sub-prime sector will spread to the wider loans market as banks become far more cautious about whom they lend to.
The situation has been exacerbated by the fact that sub-prime debt is often resold as part of a wider debt package, meaning that banks and investors are, as yet, unsure about how far the sub-prime downturn could spread.The situation has been exacerbated by the fact that sub-prime debt is often resold as part of a wider debt package, meaning that banks and investors are, as yet, unsure about how far the sub-prime downturn could spread.
A number of firms have already been knocked by the turmoil, most notably the US investment bank Bear Stearns.A number of firms have already been knocked by the turmoil, most notably the US investment bank Bear Stearns.
Its former co-president Warren Spector stood down earlier this month following the collapse in June of two mortgage funds that he had headed.
There have also been predictions of job losses on Wall Street and other financial centres around the world as a result of the market turbulence.