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Greenspan favours govt bailout for home owners

ATLANTA – FORMER United States Federal Reserve chairman Alan Greenspan says he favours using US government money to bail out mortgage borrowers who risk losing their homes because they cannot make payments.

Mr Greenspan, speaking on ABC’s This Week programme aired last Sunday, said cash bailouts, while creating a larger budget deficit, had the advantage of helping home owners without distorting property prices or interest rates on mortgages.

‘Cash is available, and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this,’ he 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. If you do that, it’ll drag this process out indefinitely.’

Mr Greenspan’s suggested approach differs from that of US Treasury Secretary Henry Paulson, who negotiated a freeze on the interest rates of some sub-prime mortgages without pledging any government money to help home owners or banks.

Mr Allan Meltzer, a professor of political economy at Carnegie Mellon University, said Mr Greenspan’s proposal for a cash bailout might cost ‘hundreds of billions’ of dollars and would be counterproductive.

‘It is not a good idea for the government to bail out people who make mistakes,’ said Mr Meltzer, the author of a 2002 book on the early history of the Fed.

US President George W. Bush announced this month that Mr Paulson and other members of his administration had reached an agreement with the mortgage industry to help as many as 1.2 million home owners avoid foreclosure when their adjustable-rate mortgages jump to higher rates.

Working with Mr Paulson and the government’s housing regulators, lenders and the companies who manage home loans agreed to freeze some adjustable mortgages at current rates for five years. Others will be given help refinancing or qualifying for loans backed by the Federal Housing Authority.


Source: BLOOMBERG NEWS (The Straits Times 18 Dec 07)


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