Foreclosure Crisis - Greenspan Seeks Government Help for Foreclosures Victims

December 17th, 2007

The former chairperson of Federal Reserve, Alan Greenspan opines that the government should directly come forward with help for foreclosure victims. The crisis is getting worse by the day. He admitted that this might cause temporary monetary problems but such efforts would be more effective than the freezing of mortgage rates.

House owners harangued by foreclosures could be helped in two ways – reduction of taxes or providing cash relief similar to those doled out to disaster victims. Either way the federal budget would be under pressure but it would be better than creating a ‘short-term fiscal problem’. The latter would then extend on to fixing prices of property and interest rates. This would just drag on the process for an indefinite period. The most important point to bear in mind, Greenspan stressed, is the huge number of people undergoing distress. Cash is there. It should be used for the right purpose at the right time.

Paulson, the secretary of the Treasury has brokered a freeze on interest rates on some types of sub-prime mortgages but he has not asked for government funds to be released to help the borrowers or the banks. Senator Hillary Clinton (D) and John Edwards (D) have suggested that the government should open a rescue fund for foreclosure victims.

On 11^th December the Federal Reserve cuts its benchmark short-term rate of interest hoping to prop up the economy. But the stock markets saw a drop. On 12^th December the Federal Reserve and other central banks declared a plan to loan out billions to private banks to persuade them to advance more loans. Federal Reserve announced that it would grant $40 billion to banks during this current month. Other central banks dotted across the globe are coming forward with $50.2 billion during December and January.

It is a custom among banks to borrow from one another. But of late the cost of inter-bank borrowing has sharply risen. Also bank regulations stipulate that they hold on to more capital in their books. There is an impending sense of urgency with predictions about recession and inflation. Greenspan thinks that at this critical juncture the Federal Reserve should be allowed to check the inflation rate – not for a short spell but stretched out over a longer period of time. The direct offer of help would of course help some individuals badly affected by foreclosures.