Bernanke Speaks at the Economic Club in New York
At this speech Ben Bernanke, Chairman of the Federal Reserve, stated that the past several months have been an eventful period for the US economy. That many of the financial markets have had increased concerns about credit quality because of investor fear.
He also stated that over all this year economic performance has been reasonably good. This rate of expansion slowed slightly late 2006 and early 2007 but second quarter growth was very solid and looks to carry over into the third quarter.
The housing correction has hit the financial markets as investors have become concerned about the credit quality of mortgages especially in the subprime market. By August the rate of delinquencies on subprime mortgages with adjustable rates rose to 16 percent which is roughly triple the recent low in mid 2005. These subprime mortgages have not been the only loan products hit by the drying up of liquidly. Most notably the secondary market for private securities backed by prime jumbo loans has taken a huge hit. Even though the default rates on such mortgages has remained very low, the experience with subprime mortgages has made investors more sensitive to the risks associated with other housing related assets.
Problems with the mortgage related sector have traveled through the financial systems and even into commercial loans. Before investors had typically viewed these commercial loans as as safe because of the quality of collateral and because the loans are often supported by bank’s commitments to provide lines of credit or assume some risk.
Bernanke also ended stating that the Federal Reserve will continue to take actions to ease the liquidity strains in the financial markets. These actions are similar to the actions that the central banks have taken many ties in the past. Promoting financial stability and the orderly functioning of the financial markets is a key function of central banks.
You can read the minutes from the speech about the recent financial turmoil over on the Federal Reserve website.