Credit Crisis Now Hurting Economy: Fed's Rosengren

Source : The Business Times, October 17, 2008

BOSTON - The troubled housing and credit markets are hurting the broader US economy, requiring a proactive policy response that includes direct outreach to homeowners, a top Federal Reserve official said on Thursday.

Boston Federal Reserve President Eric Rosengren said in prepared remarks that rekindling short-term borrowing for corporations was also crucial to keeping growth from veering too far off track.

'While housing and financial markets are most impacted, there is little doubt that the effects are spilling over to the rest of the economy,' Mr Rosengren said.

But he added: 'With appropriate and determined policy actions under way, I believe much of the spillover can be mitigated and the economy can return to growth that is closer to potential next year.'

Equity markets, however, remain extremely volatile despite Thursday's rally, and interbank borrowing is still costly and in short supply.

Meanwhile, news on the economy was increasingly grim. In the latest string of reports, industrial production posted its biggest monthly fall in 34 years, while a regional manufacturing index dropped to its lowest reading since 1990.

Mr Rosengren said that making sure credit-worthy borrowers regain their access to capital was paramount to laying the groundwork for recovery.

'Firms with top credit ratings can be critical stabilizers during difficult times,' he said.

Hitting home
Mr Rosengren placed great emphasis on dealing with falling home values. The ripple effects of the housing downturn have been enormous, exacerbated by highly-leveraged bets of financial institutions on real-estate linked assets.

This requires that any rescue measures look to boost sentiment in the market at the micro level.

'Individuals shopping for homes need to be confident that appropriate financing is available. Individuals need to be more confident in housing transactions proceeding normally. And individuals need to feel that there is potential for housing prices to rise,' Mr Rosengren said.

To that end, the Boston Fed head cited his bank's recent conference on foreclosure prevention, which he said was aimed at grappling with a widespread problem by helping thousands of people in one sitting.

Mr Rosengren said an absence of mechanisms for an honest attempt at mortgage renegotiation presents serious challenges.

'A persistent complaint among distressed borrowers has been their inability to reach informed representatives of the loan servicers, to discuss and resolve their payment problems,' he said. 'In many accounts, borrowers report repeated efforts to reach servicers' representatives and describe the frustration of bouncing around a 'telephone maze.' -- REUTERS