Harvard University economist Martin Feldstein said the US housing slump threatens a broader recession, and the US Federal Reserve should lower interest rates.
"The economy could suffer a very serious downturn," Feldstein, head of the group that charts US business cycles, told a Fed conference in Jackson Hole, Wyoming, on Saturday. "A sharp reduction in the interest rate, in addition to a vigorous lender-of-last-resort policy, would attenuate that very bad outcome."
Feldstein made a case for lowering the overnight lending rate between banks to 4.25 percent from 5.25 percent to cushion the economy from the fallout of defaults on subprime mortgages.
Fed Chairman Ben Bernanke told the same gathering last Friday that the Fed will do what's needed to stop this month's credit-market rout from ending the six-year expansion.
Lowering interest rates may result in a "stronger economy with higher inflation than the Fed desires," a situation Feldstein described as the "lesser of two evils."
"If that happens, the Fed would have to engineer a longer period of slow growth to bring the inflation rate back to the desired level," Feldstein said.
Some investors speculated that Feldstein was a candidate for Fed chairman before Bernanke was picked to succeed Alan Greenspan.
Bernanke wasn't in the room for Feldstein's speech, though most other Fed officials were, along with central bankers and economists from around the world who traveled to the annual mountainside conference hosted by the Kansas City Fed bank.
"Marty is a guy of good judgment," said former Fed governor Lyle Gramley, who attended the event. "Everybody in the room recognizes that. Everybody, including the people at the Fed, will think carefully about what he said."
The US economy expanded at a 4 percent annual rate in the second quarter, the fastest pace in more than a year, before turmoil in the credit markets forced the Fed to warn in an Aug. 17 statement that risks of slower growth had increased "appreciably."
Already, some indicators are suggesting a weakening economy. First-time applications for jobless benefits rose to the highest level since April in the week ended Aug. 25.
Property values in 20 metropolitan areas fell 3.5 percent in June from a year earlier, an Aug. 28 report by S&P/Case-Shiller said.
Feldstein outlined a "triple threat" from housing: a "sharp decline" in home prices and construction; higher borrowing costs and a "freeze" in credit markets stemming from subprime-mortgage losses; and fewer home-equity loans and refinanced mortgages, leading to less consumer spending.
Investors expect the Fed to cut the federal funds rate on overnight loans between banks to 5 percent on Sept. 18 and at least another quarter point by year's end. The central bank has left the rate at 5.25 percent since June last year after raising it from 1 percent over a two-year period.
Gramley, a senior economic adviser at Stanford Group Co in Washington, said he was surprised by the gloominess of Feldstein's 25-minute speech, which capped a conference where many participants were pessimistic.
Kansas City Fed President Thomas Hoenig, speaking briefly after Feldstein, said the symposium gave him and probably his colleagues "a lot of useful information to use as we deal with some difficult issues that confront us all."
Earlier in the day, Fed Governor Frederic Mishkin presented a paper in which he said that US banks can cope with "stressful" conditions and that the financial system is in "good health" even with the disruptions of the mortgage market.
Mishkin also reiterated that policy makers should avoid setting interest rates according to swings in the housing market and respond "only to the extent that they have foreseeable effects on inflation and employment."
That point was challenged by some participants, including Bank of Israel Governor Stanley Fischer.
Feldstein had said in an interview last Friday that there is a "significant risk" of a downturn and urged the Federal Reserve to cut borrowing costs.
TAIWAN IS TAIWAN: US Representative Tom Tiffany said the amendment was not controversial, as ‘Taiwan is not — nor has it ever been — part of Communist China’ The US House of Representatives on Friday passed an amendment banning the US Department of Defense from creating, buying or displaying any map that shows Taiwan as part of the People’s Republic of China (PRC). The “Honest Maps” amendment was approved in a voice vote on Friday as part of the Department of Defense Appropriations Act for the 2026 fiscal year. The amendment prohibits using any funds from the act to create, buy or display maps that show Taiwan, Kinmen, Matsu, Penghu, Wuciou (烏坵), Green Island (綠島) or Orchid Island (Lanyu, 蘭嶼) as part of the PRC. The act includes US$831.5 billion in
‘WORLD WAR III’: Republican Representative Marjorie Taylor Greene said the aid would inflame tensions, but her amendment was rejected 421 votes against six The US House of Representatives on Friday passed the Department of Defense Appropriations Act for fiscal 2026, which includes US$500 million for Taiwan. The bill, which totals US$831.5 billion in discretionary spending, passed in a 221-209 vote. According to the bill, the funds for Taiwan would be administered by the US Defense Security Cooperation Agency and would remain available through Sept. 30, 2027, for the Taiwan Security Cooperation Initiative. The legislation authorizes the US Secretary of Defense, with the agreement of the US Secretary of State, to use the funds to assist Taiwan in procuring defense articles and services, and military training. Republican Representative
Taiwan is hosting the International Linguistics Olympiad (IOL) for the first time, welcoming more than 400 young linguists from 43 nations to National Taiwan University (NTU). Deputy Minister of Education Chu Chun-chang (朱俊彰) said at the opening ceremony yesterday that language passes down knowledge and culture, and influences the way humankind thinks and understands the world. Taiwan is a multicultural and multilingual nation, with Mandarin Chinese, Taiwanese, Hakka, 16 indigenous languages and Taiwan Sign Language all used, Chu said. In addition, Taiwan promotes multilingual education, emphasizes the cultural significance of languages and supports the international mother language movement, he said. Taiwan has long participated
The paramount chief of a volcanic island in Vanuatu yesterday said that he was “very impressed” by a UN court’s declaration that countries must tackle climate change. Vanuatu spearheaded the legal case at the International Court of Justice in The Hague, Netherlands, which on Wednesday ruled that countries have a duty to protect against the threat of a warming planet. “I’m very impressed,” George Bumseng, the top chief of the Pacific archipelago’s island of Ambrym, told reporters in the capital, Port Vila. “We have been waiting for this decision for a long time because we have been victims of this climate change for