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Hearing On Subprime Crisis
The Fed discusses the credit crunch and the economy
The Fed discusses the credit crunch and the economy
The Fed discusses the credit crunch and the economy
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By: AP | 20 Sep 2007 | 01:54 PM ET
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Federal Reserve Chairman Ben Bernanke told Congress Thursday the credit crisis has created "significant market stress" and offered fresh assurances that regulators would take steps to curb fallout related to the mortgage mess.

Ben Bernanke
Pablo Martinez Monsivais
Federal Reserve Board Chairman Ben Bernanke.

Bernanke made the statement in testimony before the House Financial Services Committee. It came just two days after the Federal Reserve sliced a key interest rate by a bold half-percentage point to prevent the weight of housing and credit problems from sinking the economy. It was the first time in more than four years the Fed cut this rate.

"Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans," the Fed chairman said. The situation, he acknowledged, "has created significant market stress."

The meltdown in the housing and mortgage markets has shaken Wall Street and Main Street.

President Bush, at a White House news conference, was asked Thursday to assess the chances of a recession.

"I say that the fundamentals of our economy are strong," he replied, although Bush acknowledged problems in the housing market and said he looked forward to working with Congress to solve them. But he also said he would fight any move on Capitol Hill to raise taxes.

Bernanke promised lawmakers that the Fed will take steps to crack down on abusive or bad lending practices.

"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," he said. "We are committed to preventing problems from recurring, while still preserving responsible subprime lending." The Fed has taken a number of steps already and other proposals are being considered.

Paulson Also Testifies

Treasury Secretary Henry Paulson, who also appeared at the hearing, signaled that the administration would consider allowing the big mortgage companies Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities any loans exceeding $417,000, known as "jumbo" loans.

Henry M. Paulson
Lefteris Pitarakis / AP
Henry Paulson

The idea, which represents a policy change for the administration, is portrayed as a way to inject liquidity into the stretched mortgage market.

Paulson said the change involving jumbo loans could occur only in tandem with tighter oversight of the two government-sponsored mortgage companies.

Bernanke also weighed in, saying that if Congress were inclined to make let Fannie Mae and Freddie Mac buy jumbo loans, it should be done only on a temporary basis. He didn't specify how long that should be.

In his prepared testimony, Bernanke did not offer new clues about the Fed's next move on interest rates.

The Fed chief, repeating the rationale offered on Tuesday for cutting rates, acknowledged that the financial turmoil stemming from the troubled housing and credit markets have "increased the uncertainty to the outlook." That was the same language he and his Fed colleagues used on Tuesday.

Some economists believe the Fed probably will reduce rates again at its next meeting in late October.

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