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Wednesday, December 19, 2007

Subprime Response

Larry Summers is worried:

Ex-Treasury Secretary Calls For Tax Cut, Spending Plan, by Michael M. Phillips, WSJ: Former Treasury Secretary Lawrence Summers, once a fiscal hawk among Clinton Democrats, said the government should consider a $50 billion to $75 billion tax-cut and spending package to stave off a deep recession.

Mr. Summers ... also urged the Federal Reserve to take more aggressive action to ensure that its rate cuts actually reduce consumers' interest charges and stimulate spending.

"Insufficient action to contain recessionary forces has much more serious consequences than excessive action to contain recessionary forces," Mr. Summers said...

Mr. Summers's comments put him among the most pessimistic economic prognosticators and were a slap at the Bush administration's handling of the subprime-mortgage crisis and the constriction of U.S. credit markets. "The kind of comprehensive approach that is necessary to minimize the risks is neither in place nor in immediate prospect," he said. ...

"I believe that slow growth is a near certainty, that a recession is more than a 50% chance, and that there's a distinct possibility of a more serious recession that will lead to the worst economic performance since the late 1970s and early 1980s," he said.

Even a mild recession, he said, would cost the average family of four between $4,000 and $5,000 in lost income each year, while driving up the annual government deficit by $100 billion.

The government, he said, should counter the downturn through targeted, temporary spending, including a pre-emptive extension in unemployment benefits, an increase in food stamps and a universal tax rebate. Taxpayers shouldn't have to pay income taxes on the value of any mortgage reduction that lenders grant them amid the current crisis, he said.

Mr. Summers's critique also extended to the Fed. He said the effect of the central bank's rate-cutting has been blunted by the reluctance of financial institutions to extend credit. ... To correct that, the Fed should pull its monetary-policy levers to the extent necessary...

He leveled a similar broadside against the centerpiece of the Bush administration's response... Treasury Secretary Henry Paulson has backed a voluntary industry plan that would expedite new mortgages or rate freezes ... over the next two years.

Mr. Summers projected that the plan -- aimed only at subprime borrowers who are current on their payments -- would result in a total reduction in mortgage payments of less than $5 billion and would miss the millions of other borrowers whose payments are also expected to jump.

Instead, he proposed changes in bankruptcy laws to allow insolvent homeowners to reduce their existing mortgage debt. He argued that such moves would allow more borrowers to keep their homes, and ultimately cost lenders less money than would a raft of foreclosures...

    Posted by on Wednesday, December 19, 2007 at 02:25 AM in Economics, Housing, Policy | Permalink  TrackBack (0)  Comments (55)

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