| Bernanke warns of housing downturn woes { July 18 2007 } Original Source Link: (May no longer be active) http://business.guardian.co.uk/useconomy/story/0,,2129417,00.htmlhttp://business.guardian.co.uk/useconomy/story/0,,2129417,00.html
6.15pm update Bernanke warns on US housing market
Larry Elliott, economics editor Wednesday July 18, 2007 Guardian Unlimited
Ben Bernanke, chairman of the Federal Reserve, tonight warned that the downturn in the troubled US housing market would get worse before it got better as he pledged action by the central bank to rein in abuses in the sub-prime mortgage market.
Deploring what he described as "the outright fraud" involved in selling some home loans to those on low incomes, Mr Bernanke sent the dollar into a fresh slide when he stressed that the housing market would remain a drag on growth.
The Fed chairman's half-yearly health check on the economy to Congress stressed that growth would remain weak in the rest of 2007 before gathering steam in 2008.
Despite new evidence from US government data today that the real estate sector remains in decline, Mr Bernanke provided scant hope that the Fed would cut interest rates in the near future. Inflation remained too high for comfort, he told Congress on the day when the latest figures for consumer prices showed the core measure of the cost of living up by 0.2% in June and by 2.2% on the year.
"With the level of resource utilization relatively high and with a sustained moderation in inflation pressures yet to be convincingly demonstrated, the (Fed's policy panel) has consistently stated that upside risks to inflation are its predominant policy concern," the Fed chairman said.
Yesterday Wall Street investment house, Bear Stearns, said that its two troubled hedge funds that had bet heavily on risky sub-prime loans were virtually worthless following the bursting of the real estate bubble. The Fed chief today promised a top-to-bottom review of what had gone wrong. Concern that the problems facing Bear Stearns may be rife - but as yet unreported - in the US financial sector has been the main reason behind the dollar's steady decline in recent weeks.
Mr Bernanke said there would be a toughening of the rules to clamp down on "unfair or deceptive" mortgage deals, deploring what he described as "abusive lending practices and outright fraud" that had accompanied an expansion of mortgage lending to borrowers with blemished credit in the sub-prime market.
"Rising delinquencies are creating personal, economic, and social distress for many homeowners and communities - problems that likely will get worse before they get better," Mr Bernanke warned.
When the borrowing frenzy was at its height two or three years ago, many lenders were offering home loans that allowed lenders to falsify their incomes. Others allowed interest-free periods before the full cost of servicing the loan kicked in.
Over the past 12 months, the number of housing starts has fallen sharply as the industry seeks to rid itself of large stocks of unsold homes. Prices of new and existing homes have been under downward pressure.
"To a considerable degree, the slower pace of economic growth in recent quarters reflects the ongoing adjustment in the housing sector," Mr Bernanke said, adding that declines in homebuilding "will likely continue to weigh on economic growth over coming quarters." The Fed chairman said that over time the drag from housing would ease, but Wall Street was left in downbeat mood by his comments.
The dollar, already trading at a 12-year-low against a basket of currencies, fell to a new 26-year-low against sterling. By the close of trading in London, the pound was worth $2.0535, the highest it has been since June 1981. On Wall Street, the Dow Jones industrial average had fallen by almost 100 points by mid-morning.
Subodh Kumar, chief investment strategist of Subodh Kumar & Associates, said the initial view on Wall Street had been that the sub-prime crisis had been contained. "But if you look at the [Bear Stearns] news last night in terms of what they said, and if you look at what Bernanke is saying, as opposed to what the banks are talking about, what they are essentially saying is the sub-prime fallout is not finished, ie, one cannot see that it is contained as of yet."
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