Loan crisis fallout worries economists

New survey shows inflation also troubling
By MARTIN CRUTSINGER, Associated Press

Posted Tuesday, March 4, 2008
WASHINGTON -- The cascading fallout from the subprime loan crisis, barely a cloud on the horizon a year ago, is now viewed by experts as the economy's gravest threat.

In a survey released Monday, 34 percent of the members of the National Association for Business Economics ranked the financial market turmoil from those loan defaults as the No. 1 threat to the economy over the next two years.

That compares with 18 percent from an August survey. The most serious threat that month, 20 percent of the economists surveyed said, was terrorism and the conflicts in the Middle East.

A year ago, the credit crisis did not even register as a chief threat.

The questioning of 259 economists took place during the first two weeks of February. Events since then have underscored the credit crisis problems.

At the heart of financial institutions' problems are securities backed by subprime mortgages that have gone into default at record rates because of the housing market's steep slump. These loans were extended to borrowers with weak credit histories.

A separate 49-member NABE forecasting panel recently raised its expectations of a recession, with close to half thinking a downturn will start before year's end.

But 55 percent of the forecasting panel still thinks a downturn can be avoided with the help of an $168 billion economic-aid plan and aggressive interest-rate cuts by the Federal Reserve.

Some 10 percent of respondents said inflation was the No. 1 economic problem, a rating that put it behind worries about subprime mortgages and debt.

In congressional testimony last week, Fed Chairman Ben Bernanke signaled that the central bank believes weak growth is the biggest threat at present, boosting chances of an additional rate cut when the Fed meets on March 18.

The new NABE policy survey found that only 48 percent of those questioned believed the Fed's policies were "about right."

Of those unhappy with Fed policy, 34 percent felt the central bank was lowering rates too much; some 13 percent felt it was still being too restrictive and not cutting rates fast enough.

The new survey was taken after the Fed's January cuts in the federal funds rate of 1.25 percentage points, the biggest one-month reduction in a quarter-century.