Stock markets rose yesterday as both US president George W Bush and Federal Reserve chairman Ben Bernanke made vigorous statements designed to calm volatility.
Mr Bush set out measures to help homeowners with subprime mortgages refinance into new loans, but warned that the government's job was not to bail out speculators.
His comments chimed with remarks earlier by Mr Bernanke that it was not the central bank's responsibility to protect lenders and investors who made mistakes.
Mr Bernanke said the Fed was "following closely" developments in financial markets that could put further pressure on the housing market.
"The committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," he said in a speech to a symposium organised by the Kansas City federal reserve.
Escalating non-payments on high-risk subprime mortgages has triggered a crisis in confidence in credit markets in recent weeks, resulting in extreme volatility in financial markets and causing liquidity in some asset classes to freeze up.
Stock market traders focused on aspects of Mr Bernanke's speech that appeared to support expectations for an interest rate cut at the Fed's policy meeting in September. Investors also latched on to his remarks that suggested the central bank would act as needed to protect the economy.
That raised optimism the Fed would reduce its overnight lending rate next month.
On Wall Street, benchmark indexes surged, led by financial and energy stocks in thin pre-holiday trade. US financial markets are closed for the Labour Day holiday on Monday.
Shares also pushed higher in Europe, with the Iseq finishing just 1 per cent stronger.
Mr Bush proposed expansion of the Federal housing administration to help refinance more subprime mortgages and urged Congress to change tax laws that make it harder to escape crippling home loans.
He also urged lenders to show flexibility towards subprime borrowers and voiced support for efforts to make the mortgage market more transparent.
"I've made this a top priority to help our homeowners navigate these financial challenges so that many families as possible can stay in their homes," he said.
Mr Bush said the government had "a role to play" but stressed it would be "limited".
"A federal bailout of lenders would only encourage a recurrence of the problem," he said. "It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford."
Mr Bush said lenders had "a responsibility" to help people keep their homes. "There are many American homeowners who can get through this difficult time with a little flexibility from their lenders or a little help from their government," he said.
