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Changing their subprime tune

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KAI RYSSDAL: The collective Washington economic wisdom about the housing market so far has been: everything’s gonna be fine. Both Mr. Paulson at Treasury and Mr. Bernanke at the Federal Reserve have said, more than once, that they thought the fallout would be contained. That’s the actual word.

But in a speech last night from the Fed chairman, and another one this morning from the Treasury secretary, we learned that might not be the case — that problems in the U.S. housing market pose a significant risk to the economy. Marketplace’s Steve Henn reports.

STEVE HENN: When it came time to asses the strengths and weaknesses of the U.S. economy, Treasury Secretary Hank Paulson was blunt:

Hank Paulson: Right now the biggest risk is housing.

And Paulson says he doesn’t think the housing market’s problems will clear up soon:

Paulson: It may continue a while longer, and as housing prices stay flat or decline.

Paulson’s take echoes comments Fed chairman Ben Bernanke made last night when he said the housing contraction was likely to be a significant drag on growth for months.

Today at Georgetown, Paulson outlined a series of possible regulatory reforms aimed at preventing abusive mortgage lending in the future.
But Peter Morici, an economist at the University of Maryland says Paulson and Bernanke’s most immediate task is to nudge the market for mortgage-backed securities into action.

Peter Morici: Paulson is trying to get lenders lending again.

Which is why the Treasury Department helped several banks organized a massive, multi-billion-dollar fund to buy mortgage-backed debt yesterday.

Morici: Right now, everybody’s frozen in place and afraid to act — they are all looking at the other guy to take action. And what Paulson is trying to do, like a grand conductor, is strike the baton and get everybody playing again.

But fixing these problems is not just a matter of Paulson tapping his sheet music and striking up the band. Paulson says some long-term regulatory reforms could take years — so for now, he is pushing private-sector players to work together to avoid massive defaults.

In Washington, I’m Steve Henn for Marketplace.

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