Bernanke Pleads: Lower The Principle

It is March 4 2008 and Bernanke, my favorite Federal Reserve Chairman, is back in the news at a meeting in Orlando Florida. With the interest rate expected to be reduced on March 18 2008, today Bernanke urged the Bankers to do more for the homeowner to prevent an increase in foreclosures. Bernanke suggested the financial institutions to reduce the principle on what is owed, allowing the struggling home owner to hold on to their home a little longer and wade out the storm of the troubling economy. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke explained as he spoke of the home owners inability to remain in their homes with little or no equity. "They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said about the lenders. Still he was talking of a more permanent solution instead of the limited temporary one that would just have more foreclosures down the line.

"When the mortgage is `under water' a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure." Bernanke goes on to say "Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs."

Bernanke also warns that the Bush Administration Bush administration's promoted rate freezes only "reduce the impact somewhat, but interest rate resets will nevertheless impose stress on many households," Bernanke said.