Alan Greenspan Urges U.S. to Help Those Facing Foreclosure
Alan Greenspan, former chairman of the Federal Reserve, said Sunday that the government should provide direct financial assistance to homeowners who are threatened by foreclosure in the worsening credit crisis.
In an interview on “This Week” on ABC, Mr. Greenspan said that helping homeowners directly would create “a short-term fiscal problem” for the government, but that doing so would be more effective than solutions like freezing mortgage rates.
Two ways to help homeowners directly would be to reduce taxes or to give cash grants similar to those given to disaster victims.
Either approach would strain the federal budget, but Mr. Greenspan said, “It’s far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates.”
Either of those efforts, Mr. Greenspan said, would “drag this process out indefinitely.”
“It’s important to recognize that there are a very large number of people who are in very major stress and having great difficulty in paying off their mortgages,” Mr. Greenspan said.
“Cash is available,” he added, “and we should use that in larger amounts, as necessary, to solve the problems of the stress of this.”
In one step taken by the Bush administration, Henry M. Paulson Jr., the secretary of the Treasury, has negotiated a freeze on interest rates on some subprime mortgages. Mr. Paulson has not called for any government spending to help homeowners or banks.
Two Democratic presidential candidates have urged the federal government to take a more direct role. Senator Hillary Rodham Clinton of New York has urged a suspension of foreclosures and John Edwards, a former senator from North Carolina, has suggested that the government set up a rescue fund for homeowners in trouble.
Last Tuesday, the Federal Reserve cut its benchmark short-term interest rate a quarter of a percentage point, to 4.25 percent, in hopes of bolstering the economy. But the stock markets had hoped for a larger cut, causing stock prices to drop sharply. Last Wednesday, the Federal Reserve and other central banks announced a plan to lend billions of dollars to private banks to encourage them to make loans more available and thus spur the economy.
The Fed said it would make $40 billion available for lending to banks during December. Other central banks around the world said they would provide $50.2 billion in December and January.
Banks routinely borrow from one another to provide loans. But the cost of interbank borrowing has risen sharply at the same time that banks are being required to hold more capital on their books.
As the economy was slowing and talk of an impending recession increased, Mr. Greenspan and other economists said they worried about inflation. Mr. Greenspan said it was “critically important” that the Federal Reserve be permitted to suppress “the inflation rate that I see emerging, not immediately, but clearly over the intermediate and longer term period.”
Mr. Greenspan said he was not sure that directly helping homeowners would solve the credit crisis. “I don’t know if it would work,” he said, “but it would certainly help people. It would help their incomes; it would help their personal state.”
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