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Will federal deficits surge from subprime fallout?

*Financial Times, by James Politi and Krishna Guha, April 24, 2008

“Barney Frank, the powerful Democratic chairman of the House financial services committee, issued a stark warning at a breakfast meeting with reporters in Washington on Thursday. If lawmakers and the administration failed to agree on new housing legislation, the US recession would be “longer and deeper” than expected.

The corridors of Capitol Hill have emerged as the critical venue for the shaping of economic policy and Mr Frank, veteran congressman from Massachusetts, is one of the key actors in the legislative drama.

Along with Chris Dodd, chairman of the Senate banking committee, Mr Frank is proposing a high-stakes government intervention in the US mortgage market, using up to $400bn (£202bn) in guarantees backed by taxpayers.

The negotiations over the legislation, which was moving through Mr Frank’s committee on Thursday, are ex-pected to become tougher in the coming weeks.

For most of last year, Washington’s response to the credit crisis was being directed by the Federal Reserve, which was lowering interest rates, and the Treasury department, which was attempting to encourage private-sector loan modifications in the increasingly troubled housing industry.

But by early December, it became clear that significant action was needed on a legislative level. The first move was to forge a consensus on a $170bn fiscal stimulus package designed to bolster consumption in the second half of 2008.”


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