IE 11 is not supported. For an optimal experience visit our site on another browser.

Paulson rules out bailout for mortgage crisis

The Bush administration reacted coolly to a suggestion from former Fed chief Alan Greenspan that the government should consider bolder efforts to deal the mortgage crisis.
/ Source: The Associated Press

The Bush administration reacted coolly Monday to a suggestion from former Federal Reserve Chairman Alan Greenspan that the government should consider bolder efforts to deal with the current mortgage crisis.

Asked about Greenspan's suggestion that perhaps public money should be used to help struggling homeowners, Treasury Secretary Henry Paulson said the administration remained opposed to any type of government bailout.

"I don't think what we need is a big government bailout right now," Paulson said in an interview on Fox Business News. "I think what we need is to help the markets work the way they're intended to work and avoid those foreclosures that are preventable."

Greenspan said Sunday that the least harmful way of intervening would be to give direct financial aid to distressed homeowners.

"Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this," Greenspan said during an appearance on ABC's "This Week."

"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," Greenspan said. "If you do that, it'll drag this process out indefinitely."

Administration critics were likely to cite Greenspan's comments to bolster their own arguments that President Bush has been slow to recognize the threat to the economy from the unfolding mortgage crisis and so far has offered too little in the way of assistance.

Paulson, however, defended the administration's approach, saying that it was heavily reliant on getting the mortgage industry to do what is in its best interests to help as many homeowners as possible to avoid foreclosures.

"Our plan won't prevent every foreclosure and a modification will be available only when it's a financially feasible and necessary solution," Paulson said in a speech on housing Monday in Orlando, Fla.

Earlier this month, the administration announced it had brokered an agreement with the mortgage industry to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures. Critics say it will not help enough people facing foreclosure with 1.8 million subprime mortgages scheduled to reset over the next two years to sharply higher rates.

The administration hopes the rate freeze will slow the pace of foreclosures, buying time for the housing market to stabilize and begin to recover. A rebound in sales and home prices will allow struggling homeowners to switch their current adjustable-rate mortgages to more affordable fixed-rate loans.

The housing slump has caused multibillion-dollar losses at some of the largest banks and investment firms and roiled financial markets. All these problems are expected to drag down economic growth to near recession levels over the final three months of this year and into early 2008.

Paulson's appearance in Orlando at a housing townhall meeting was the first of three speeches he has scheduled this week in areas that have been hurt by the housing slump.

On Tuesday, Paulson was scheduled to speak at housing events in Kansas City, Mo. and then later in Stockton, Calif., to promote the benefits of the administration's approach to the housing crisis.

While Greenspan has said the risk of a recession has been rising, Paulson said he still believed the economy was "fundamentally sound" and would continue to grow.