Housing threatens US economy - top policy chiefs

16 October 2007 21:23  [Source: ICIS news]

WASHINGTON (ICIS news)--The two most senior US financial policy makers warned on Tuesday that the nation’s housing market crisis likely will continue into 2008 and poses a significant risk to the broader US economy.

 

Treasury Secretary Henry Paulson told a financial conference:  “Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy.”

 

Federal Reserve Board Chairman Ben Bernanke told a separate economic group that “further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year”.

 

The housing industry is a key downstream consuming sector for the US chemicals industry because a broad range of chemicals and chemicals-based products go into new home construction and the broader market of home improvements associated with existing home sales.

 

Both new home construction and existing home sales have been hit hard by the collapse of the subprime mortgage loan market that began early last year.

 

In remarks circulated on Tuesday, Bernanke said the Federal Reserve Board - the US central bank - “has highlighted as a downside risk the possibility that housing weakness might spill over to other parts of the economy - for example, by acting as a restraint on consumer spending”.

 

“Thus far, direct evidence of such spillovers onto the broader economy has been limited,” Bernanke said.  “However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions.”

 

Paulson said that the underlying US economy remains healthy and diversified and will continue to grow.  Even so, “the ongoing housing correction is not ending as quickly as it might have appeared late last year”.

 

“And it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet,” Paulson added.

 

Paulson said that the federal government “has no interest in bailing out lenders or property speculators” hurt in the subprime mortgage market meltdown.

 

“Still, we must recognize the very real harms to families affected by the housing downturn,” he said, indicating Bush administration support for financial rescue legislation now pending in Congress.  “We must take steps to minimise the neighbourhood effects and the macroeconomic effects of this housing market correction,” Paulson said.

 

Fed chairman Bernanke also said that government should not intervene to rescue investors who made poor choices, but he hinted broadly that the central bank may move again to lower interests rates when bank governors meet later this month.

 

“It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions,” Bernanke said.

 

“But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy,” he said.

 

“The Federal Reserve has a mandate from Congress to promote maximum employment and stable prices, and its monetary policy actions will be chosen so as to best meet that mandate,” Bernanke said.

 

The US Commerce Department is to report on Wednesday statistics on new home construction - called housing starts - for September, and those figures are expected to show another decline.

By: Joe Kamalick
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