Bernanke Says Credit Crisis Damage Likely to Be ‘Long-Lasting’
By Craig Torres
Summary
Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause “long-lasting” damage to home prices, household wealth and borrowers’ credit scores. The U.S. central bank has cut the marked lending rate to as low as zero and taken unknown steps to stem the credit crisis through direct support of consumer finance and mortgage lending. The Fed plans to purchase as much as $1.25 trillion in agency mortgage-backed securities this year to support the housing market and is providing financing for securities backed by loans to consumers and small businesses
Federal Reserve Board approved rules last July to toughen restrictions on mortgages, banning high-cost loans to borrowers with no verified income or assets and curbing penalties for repaying a loan early. The Fed action came after members of Congress and other regulators urged the Fed to use its authority to prevent abusive lending.
Connection
The branching banking in Canada would have been a better system to responding to the loan demands of large borrowers due to the ease of transferring assets from the other branches. A bank that has a number of branches spread over a wide area is likely to be more stable than a bank with only one office, because it will have more diversified assets and liabilities. Funds can be transferred between branches to account where they are need the most. If each bank is independent, it is likely that the majority if its loans are in one are or are concentrated in certain industries. This can be more risky from the point of view of bank stability.
Conclusion
The cutting down of lending rates to as low as zero and taking steps to stem the credit crisis by directly supporting consumer finance and mortgage lending will encourage people to lend more money for their mortgage payments instead of caving out from paying their loans. This will encourage the circulation money in the banks and will eventually encourage people to borrow money for other purposes like their small business which will also strengthen people’s faith in the banks again. Although this will not come soon, it will eventually come as time and the financial crisis begins to turn to the better.
