Money Matters - Simplified

Greenspan wants Government to Rescue Foreclosure Affected Homeowners

U.S Federal Reserve, former chairman, Alan Greenspan, said on Sunday that direct financial assistance should be provided by the government to homeowners who are jeopardized by foreclosure in the deteriorating credit crisis.

Speaking in an interview on “This Week” on ABC, Greenspan said that assisting homeowners directly will be “a short-term fiscal problem” for the government, but doing so would be a better bet than solutions like freezing mortgage rates.

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.” He added that homeowners could be helped directly either by reducing taxes or by giving cash grants similar to those given to disaster victims.

Greenspan said, “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.”

He went on to say that cash reserves are available with the government and they should be used in greater amounts, as necessary, “to solve the problems of the stress of this.”

The Bush administration has taken a step in this direction with the secretary of the Treasury, Henry M. Paulson Jr., negotiating a freeze on interest rates on some subprime mortgages. However, 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.

Hoping to improve the economy, the Federal Reserve had cut its benchmark short-term interest rate a quarter of a percentage point, to 4.25 percent last Tuesday, but the stock markets had expected a larger cut which led to a sharp fall in stock prices.

The Federal Reserve and other central banks had announced last Wednesday, 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 be lending $40 billion to banks during December. Other central banks around the world said they would provide $50.2 billion in December and January.

Greenspan and other economists have expressed their fears about rising inflation with the slowdown in the economy and increasing talks of an impending recession. 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.”