Bernanke announces the Fed will act to curb fallout of “credit crunch”

Federal Reserve Chairman Ben Bernanke informed congress today that the credit crisis has caused “significant market stress”. He offered new assurance that regulators would take steps to curb fallout related to the mortgage mess. This statement was made in testimony before the House Financial Services Committee just two days after the Fed cut a key interest rate by a half-percent. This cut was to help release the stress from the sinking economy due to the housing and credit problems.

Bernanke also stated that “Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans”. Because of this situation he states that it “has created significant market stress.”

When asked about the housing market at todays news conference President Bush states “I say that the fundamentals of our economy are strong.” Although bush did acknowledge the problems in the housing market and said that he is looking forward to working with Congress to solve them.

Bernanke also expressed concern about cracking down on abusive or bad lending practices. He states “The Federal Reserve takes responsible lending and consumer protection very seriously. Along with other federal and state agencies, we are responding to the subprime problems on a number of fronts. We are committed to preventing problems from reoccurring, while still preserving responsible subprime lending.” The Fed is still working on these steps to insure that customers get a fair deal on their mortgages, and to remove the fraud that has been in the industry.

Treasury Secretary Henry Paulson, who was also at the meeting today, stated that the administration should consider allowing Fannie Mae and Freddie Mac to buy, bundle, and sell any loans exceeding $417,000. This would allow borrowers with “jumbo” loans to be able to get better rates and easier guidelines. Paulson stated that this should only be a temporary change. This temporary change would if allowed would be a way to inject liquidity into the stretched mortgage market. Paulson also said that the change involving jumbo loans could only occur in tandem with tighter oversight of the two government-sponsored mortgage companies.

Bernanke added to Paulson’s statement about increasing the loan limits that if congress were inclined to do so it should be done only on a temporary basis. He did not state how long he believed that should be. He also did not give any clues as to the Fed’s next move on interest rates for the October 30th meeting. However many economists believe the fed will reduce rates again.

Source: CNBC