KEY POINTS:
The Bush Administration is working to combat the United States' severe housing crisis but there is no simple solution, Treasury Secretary Henry Paulson said yesterday, adding that a correction in the housing market is "inevitable and necessary".
Paulson, in remarks prepared for a New York speech, said the US was facing an unprecedented wave of 1.8 million sub-prime mortgages that are scheduled to reset to sharply higher rates over the next two years.
He said this raised the possibility of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain sub-prime rates for five years to allow the housing market to recover.
"By preventing avoidable foreclosures, we will safeguard neighbourhoods and communities and fulfil our responsibility of protecting the broader US economy," Paulson said. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years." Paulson said the deal the administration brokered did not involve the use of any taxpayer money.
Conservative critics have complained the administration's plan represented government intrusion in the operation of markets that would end up rewarding some people who had taken out risky mortgages.
The steep slump in housing has been a serious drag on the overall economy.
There are rising fears that the country could topple into a recession. Those worries were heightened after a report last week showed the unemployment rate had jumped to a two-year high of 5 per cent in December, with job growth slowing to a crawl.
Paulson called the current housing correction inevitable after what occurred during the five-year boom in which sales and prices climbed to record levels.
Paulson and President George W. Bush were both delivering speeches this week on the state of the economy.
Bush received an update last week from Paulson, Federal Reserve Chairman Ben Bernanke and other market regulators about how markets have been performing following a severe credit squeeze that began in August and has roiled financial markets around the world.
The credit crisis was sparked by raising defaults on sub-prime mortgages.
Those defaults have already resulted in multibillion-dollar losses at many financial institutions who bought securities backed by sub-prime mortgages that have gone bad.
Paulson said that those large write-downs showed the system was working. He said financial institutions entered the current period of turbulence with large reserves of capital to cushion against losses and he said he expected them to continue to have sufficient capital reserves.
- REUTERS
