Analysts call for more US measures to ease credit crunch

Source : The Sunday Times, Sep 2, 2007

Many want the Fed - which has pledged to act to limit impact on economy - to cut interest rate

Nearly two million US homeowners are at risk of losing their homes.

NEW YORK - THE White House and the US Federal Reserve remain under pressure to aggressively address the sub-prime crisis, despite their attempts on Friday to reassure investors.
Although analysts welcomed the moves, several of them want the Fed to lower interest rates on Sept 18 to ease the credit crunch, while Democrats called for more relief from the government.

Fed chairman Ben Bernanke on Friday pledged to act to limit the spillover of a credit crunch on the economy, as President George W. Bush unveiled aid to homeowners facing foreclosure.

The two separate announcements were aimed at curbing contagion from a housing crisis that some fear could derail the US economic expansion by causing credit markets to freeze up further.

Wall Street closed out another erratic week with a big gain on Friday after investors took the speeches as signs that they will not be left to deal with problems in the mortgage and credit markets on its own.

The Dow Jones Industrial Average rose 119.01, or 0.90 per cent, to 13,357.74 on Friday. The broader Standard & Poor's 500 Index rose 16.35, or 1.12 per cent, to 1,473.99.

Markets viewed the Fed remarks as opening the door to a potential interest rate cut on Sept 18 that could lower borrowing costs and stimulate credit markets.

Citigroup economist Robert DiClemente said he believes that 'the speed and magnitude by which the overall financial setting has deteriorated are consistent with downside risks...that justify policy (rate) action'.

The Fed's existing measures - offering discount rates to banks - have not been enough to keep the affected debt markets liquid, said Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna in a note to clients.

'The current medicine (of easier discount window lending) has not worked,' they said.

'The asset-backed commercial paper market has remained completely frozen. If this situation continues, a much broader credit crunch could develop, which would have serious negative consequences for the economy. The Fed will not take this chance.'

Professor Alan Binder at Princeton University, and vicechairman of the Fed from 1994 to 1996, said: 'There was a tone of guarded pessimism as opposed to guarded optimism. I think they should and they will' cut the benchmark interest rate.

There is also a 'significant' chance that the US economy will sink into recession if the Fed stays on the sidelines, said Mr Martin Feldstein, president of the National Bureau of Economic Research.

'My judgment is there is enough of a risk that the Federal Reserve should be responding,' Mr Feldstein said.

Meanwhile, Democrats wanted the government to do more and said the issue is likely to become a topic in the 2008 presidential elections. Senator Christopher Dodd, chairman of the Senate Banking Committee, said Mr Bush still needed to 'get serious about this problem' and go further.

AFP, AP, Bloomberg, New York Times