President George W. Bush said on Thursday that US economic fundamentals were strong despite a housing downturn and financial markets were well-positioned to work through credit worries that jolted global markets.
Echoing comments he made a day earlier, Bush said low inflation, a strong job market and global economic growth were helping to support the US economy, and that markets had enough cash to allow them to function efficiently.
"The fundamentals of our economy are strong," Bush told reporters. "I'm told there is enough liquidity in the system to enable markets to correct." Bush did not directly address Thursday's turbulence in global financial markets after French bank BNP Paribas froze payments on three funds exposed to the US subprime mortgage sector, sparking fears of a credit squeeze.
The mortgage market has been hurt by soaring default and foreclosure rates, particularly among borrowers with poor credit histories, as credit terms have tightened and house prices have cooled after a five-year boom.
Several banks and hedge funds that bought securities tied to troubled mortgages have disclosed heavy losses, prompting many lenders to shy away from riskier deals and making it harder for some borrowers to get money.
Bush acknowledged problems in the housing market but repeated his view, which he had expressed a day earlier, that the market was likely to experience a "soft landing."
Earlier on Thursday, the European Central Bank injected a record $130.6 billion of liquidity into Europe's money markets, seeking to calm jitters as banks scrambled for cash. European stock markets fell sharply, and US stocks also tumbled in early trade but trimmed losses by early afternoon.
The US Treasury Department said it was keeping a close eye on financial market activity and remained vigilant for any signs of instability. The Federal Reserve added $24 billion to the banking system on Thursday, but analysts viewed the move as a normal operation and not an offering of liquidity similar to the ECB's effort to calm financial markets.
"We are not seeing a so-called 'credit crunch' in the US money market," said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut. Just two days after the Fed decided to keep interest rates unchanged, many investors were predicting a rate cut as early as September.
Bush also said Congress should reform Fannie Mae and Freddie Mac before the mortgage finance companies step deeper into the mortgage market. Fannie and Freddie have pushed their federal regulator to lift a cap on their investments so that they can buy more loans, a proposal that has gained some support from a number of prominent Democratic lawmakers.
"First things first when it comes to those institutions," Bush said. "Congress needs to get them reformed. Get them focused and then I will consider other options." The Bush administration has been pushing for legislation to tighten regulatory oversight of the two congressionally chartered mortgage companies, but the effort has stalled.