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Subprime crisis greatest threat to US economy: poll

The cascading fallout from the subprime loan crisis, barely a cloud on the horizon a year ago, is now viewed by experts as the gravest threat to the US economy.

In a survey released yesterday, 34 percent of the members of the National Association for Business Economics (NABE) 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, when the most serious threat was seen by 20 percent of the economists as terrorism and the conflicts in the Middle East.

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

The latest survey found that 18 percent of association members listed excessive debt held by households and businesses as the top problem.

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

On Friday, the Dow Jones industrial average plunged by 315.79 points. The decline resulted from a combination of grim economic news, including a new estimate from UBS Securities analysts that the financial system losses from securities backed by mortgages and other debt would total US$600 billion. That far surpassed the US$400 billion that many economists projected until recently.

At the heart of financial institutions' problems are securities backed by subprime mortgages. They 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 US$168 billion economic aid plan and aggressive interest rate cuts by the US Federal Reserve.

But the survey highlighted the bind the Fed finds itself in. 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.

The Fed has taken on the credit crisis and weak economic growth by cutting interest rates. But to fight inflation, the Fed would have to raise rates. It cannot battle both threats at the same time.
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