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Last Updated: Friday, 31 August 2007, 20:45 GMT 21:45 UK
Bush moves to ease lending crisis
US President George W. Bush
President Bush 's speech was being closely watched

US President George W Bush and Federal Reserve head Ben Bernanke have each unveiled plans to ease economic problems caused by the housing slump.

President Bush announced a package of measures to help homeowners struggling to pay their mortgages amid the current sub-prime loan crisis.

Meanwhile Mr Bernanke hinted that rates may be cut as the Fed seeks to "promote general financial stability".

Related losses had exceeded "the most pessimistic of projections", he said.

Recent disturbances in the sub-prime mortgage industry are modest in relation to the size of our economy
President George W Bush

These losses stem from defaults on sub-prime mortgages, higher risk loans offered to people with poor credit ratings or on low incomes.

'No bail out'

President Bush said the measures were aimed at stopping more people defaulting on their repayments and to allow owning a home to remain "at the centre of the American dream".

Calling on Congress to pass laws giving more flexibility to the Federal Housing Administration to assist those with sub-prime mortgages.
Pledging to reform the tax code, aiding borrowers to refinance loans.
Demanding stronger lending practices and the enforcement of laws designed to stop predatory lending.

They include reform tax laws to help troubled borrowers refinance their loans, but the President added that it was not the government's job to bail out speculators.

"Recent disturbances in the sub-prime mortgage industry are modest, modest in relation to the size of our economy," the President said.

"But if your family's one of those having trouble making the monthly payments, this problem doesn't seem modest at all."

Mr Bernanke insisted it was not the job of the Fed "to protect lenders or investors from the consequences of their financial decisions".

But he added: "The Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of the markets."

The Fed will meet to set rates on 18 September amid growing speculation that it will cut the cost of borrowing to ease the current liquidity problems in the financial markets.

Wall Street investors saw Mr Bernanke's remarks as a hint of potential interest rate, which could lower borrowing costs and give a boost to credit markets.

In Friday trading the Dow Jones index and the Nasdaq ended 0.9% and 1.2% ahead respectively.

"The Fed continues to embrace the market with tough love, but will do what is necessary," said Stephen Gallagher, economist at Societe Generale in New York.

Loan guarantees

Worries about loan defaults have roiled stock markets and investors around the world, and raised the cost of borrowing worldwide.

Ben Bernanke, Fed chairman
The Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of the markets
Ben Bernanke

The Fed has so far released billions of dollars of emergency funds into the financial system in an attempt to ease fears over the lack of available credit.

It has also cut the interest rate at which it lends to banks.

The crisis in the US sub-prime mortgage sector has been caused by American mortgage rates rising sharply over the past year.

This has meant a growing number of sub-prime borrowers have been unable to meet their monthly payments as their initial low rates expire, leading to record levels of defaults.

The result has not only been significant financial difficulty for banks and investment firms heavily exposed to the sub-prime market, but also the recent stock market turmoil.

This is because of fears that the crunch in the sub-prime sector will spread to the wider loans market as banks become far more cautious about whom they lend to.

The situation has been exacerbated by the fact that sub-prime debt is often resold as part of a wider debt package, meaning that banks and investors are, as yet, unsure about how far the sub-prime downturn could spread.

A number of firms have already been knocked by the turmoil, most notably the US investment bank Bear Stearns.

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