March 18 (Bloomberg) -- The accelerating crisis in U.S. financial markets may pressure the Bush administration to abandon its reluctance to act more aggressively to avoid a meltdown.

President George W. Bush and Treasury Secretary Henry Paulson so far have responded to the upheaval by proposing a series of voluntary measures. The collapse of Bear Stearns Cos. amid a credit crunch and the near certainty of a recession are likely to prompt Paulson to get Bush to embrace a more activist approach, Democratic lawmakers say.

``Paulson will tell him what to do,'' said House Majority Leader Steny Hoyer of Maryland, who has spoken recently with the former chairman of Goldman Sachs Group Inc. ``Paulson gets the depth of the problems.''

The administration, including Paulson through his public pronouncements, has resisted using government funds or guarantees to stem the surge in mortgage foreclosures, which are at the root of the financial crisis. Bush, 61, and Paulson, 61, have preferred that the markets resolve the trouble themselves.

``Delaying that correction would only prolong the problem,'' Bush said on March 15 in his weekly radio address. He vowed to avoid ``bad policy decisions.''

Instead, Paulson -- who on March 13 of last year said the subprime crisis was ``largely contained'' -- has brokered voluntary accords among lenders to freeze interest rates on subprime loans and set up programs to help struggling borrowers renegotiate loans.

Fannie, Freddie

The administration also initially opposed allowing secondary-mortgage purchasers Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, to play an expanded role in alleviating the crisis.

Democratic lawmakers such as House Financial Services Committee Chairman Barney Frank have long sought an increase in the size and amount of loans the two companies could purchase, saying that it would inject cash into the mortgage market. Frank said yesterday that regulators should lower the amount of capital the firms must hold.

The administration, which has been critical of Fannie Mae and Freddie Mac because of their implied connection to the government, insisted that such changes be accompanied by new accounting controls. Only last month did it agree to allow the companies to play a bigger role.

The result of the delay was that much-needed liquidity was withheld from the market, said Howard Glaser, a former chief legal adviser at the Department of Housing and Urban Development under President Bill Clinton.

`Best Players' Sidelined

``The administration has kept its best players on the sideline in this Super Bowl of financial crises,'' said Glaser, who heads the Glaser Group, a consulting firm in Washington.

Doug Elmendorf, a senior fellow at the Brookings Institution, a Washington-based research organization, said the wariness at the White House of measures to force alterations to mortgages was justified, though the crisis now may merit it.

``They were right to be concerned about the effects on future credit supply, but one has to balance that against the ability to help maybe half a million households who might lose their homes,'' Elmendorf said.

White House spokeswoman Dana Perino told reporters yesterday that the administration will look ``at any possible future actions that might need to take place.''

Extraordinary Measures

Unlike the White House, the Fed has taken extraordinary measures to stem the crisis. In emergency action over the weekend, the central bank reduced the rate on direct loans to banks and extended borrowing authority to the 20 firms that buy Treasury securities directly from it.

The Fed will also provide as much as $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns after a run on Wall Street's fifth-largest securities firm. Futures markets expect the Fed to reduce its overnight rate 100 basis points today, the deepest cut in a generation.

``The Treasury and Congress have left the ball in the Fed's lap,'' said Laurence Meyer, a former Fed governor now at Macroeconomic Advisers LLC.

That may be changing. Yesterday U.S. Senate Banking Committee Chairman Christopher Dodd said Paulson is now more receptive to his plan to allow the government to insure ``distressed'' mortgages.

Open to Ideas

``I think there's a greater receptivity to this idea than there was 48 hours ago,'' Dodd said.

On March 3, Paulson called the plan, which has also been put forth by Frank, a ``non-starter.'' Today, he called such proposals ``interesting.''

After a meeting with Bush yesterday, Paulson said the president approved of the Fed's bailout of Bear Stearns. Bush was ``quite pleased with the actions that were taken,'' Paulson said.

Still, say former officials, the government's response isn't sufficient. Concerns about a cash shortage at Lehman Brothers Holdings Inc. underscore the point.

``I don't think our political system is focused on this with the urgency it's going to have to,'' former Treasury Secretary Robert Rubin said on March 14.

Even with the deterioration in the markets, Bush has maintained his optimistic outlook.

``Our financial institutions are strong and our capital markets are functioning efficiently and effectively,'' he said. ``In the long run, our economy is going to be fine.''

``He sounds like Herbert Hoover in 1930,'' said Bruce Bartlett, who served as a Treasury Department economist under President George H.W. Bush.

To contact the reporters on this story: Alison Fitzgerald at Afitzgerald2@bloomberg.net; Matthew Benjamin at mbenjamin2@bloomberg.net

Last Updated: March 18, 2008 09:16 EDT