31 August 2007

"Bernanke & Bush, please hold"

In what may prove to be a watershed, Ben Bernanke faces his first and perhaps his most crucial test of his ability to handle an economy threatening to spin into recession at 10 AM today.

In a speech the rookie Federal Reserve chairman has titled "Housing, Housing Finance and Monetary Policy," (sounds exciting!) Bernanke will outline to other U.S. central-bank governors gathered in Jackson Hole, Wyoming, his view of the world's largest economy and the now extremely difficult challenges it faces.

There may be pressure on Bernanke to tighten the reins on mortgage lending practices -- such as those used in the all but dormant subprime market that gave money to people who could ill-afford the payments -- but the only question we want answered is whether the Fed chairman, now nearly 18 months into the job, is ready to cut interest rates.

The wild card here is the Fed, with the market basically begging for a rate cut, and the Fed still on hold.

Other traders fear things will only get worse if Mr. Bernanke does not at least signal the Fed is prepared to cut its key interest rate from 5.25% to stimulate the economy.

"I once got a bonus, this big"

In other news, sharing the spotlight later today Bush is due to announce a plan that could help stem a wave of mortgage defaults.

Under the plan, the Federal Housing Administration mortgage insurance program will be changed to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages.

People who have missed mortgage payments are now ineligible for FHA insurance.

The president's plan would allow them to be eligible for FHA insurance if the amount they are required to pay each month increases, as has happened on many adjustable loans with so-called "teaser" introductory rates.

Officials expect that 2 million mortgages made to risky, or subprime, borrowers will adjust upward in the next 2 years, with a total value of more than $500 billion.

The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance.

Bush will offer relief for some on home loans {Herald Tribune}

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