Subprime losses could hit $100 billion: Bernanke

WASHINGTON Thu Jul 19, 2007 3:50pm EDT

1 of 2. U.S. Federal Reserve Chairman Ben Bernanke speaks at a Senate Banking, Housing and Urban Affairs committee hearing in Washington July 19, 2007.

Credit: Reuters/Jason Reed (UNITED STATES)

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WASHINGTON (Reuters) - U.S. Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending, but he sought to reassure lawmakers that the central bank was working quickly to strengthen lending regulations.

"The credit losses associated with subprime have come to light and they are fairly significant," Bernanke told the Senate Banking Committee in a second day of testimony on the Fed's twice-yearly economic report.

"Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems," he said, referring to a segment of the mortgage market that caters to borrowers with shaky credit.

That figure may sound large, but it would represent a tiny fraction of the $56.2 trillion in U.S. household net worth. Still, many investors have worried that problems in the subprime sector could spill over into other credit markets.

In his prepared remarks, Bernanke acknowledged those concerns but pointed out that while credit spreads on lower-quality corporate debt had widened somewhat, they remain near the low end of their historical ranges. He also said inflation remained the Fed's primary concern.

Bernanke told the Senate panel that the most reliable indicators show home prices had not declined nationally and said that so far the housing slump had not led U.S. consumers to cut back on spending.

He said, however, that if prices did drop, households might trim spending by as much as 9 cents for each dollar of wealth lost.

INFLATION WATCH

The Fed acknowledged in its report that a downturn in housing construction had been weighing on economic growth.

In a sign of its toll, Fed policy-makers trimmed their growth forecasts for this year and next, although they believe the drag should ease over time.

While Bernanke said a deeper-than-expected housing slump presents a downside risk to the Fed's forecasts, minutes of the central bank's last policy-setting session in late June released on Thursday showed officials had grown less worried housing might seriously undermine growth than they had been at their previous meeting in early May.

Stock markets posted modest gains and debt prices were mostly flat after Bernanke's testimony and the Fed minutes, as the message remained largely the same as a day earlier.

"The bond market has already taken on board the idea that the economy's recovery is more likely to be tepid than not," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Bernanke outlined steps the Fed has taken or plans to take to ensure that the subprime problems do not recur, but sharp questions from members of the committee showed some lawmakers think the Fed was not acting swiftly enough as foreclosure rates soar.

He testified that the central bank was progressing as fast as it responsibly could.

In testimony before lawmakers in the House of Representatives on Wednesday, Bernanke had said that licensing mortgage brokers could be a good idea and he promised to institute new rules on mortgage loans within six months.

The Fed chief also faced pointed questioning over China's currency policy as U.S. lawmakers argue that China keeps the value of its yuan currency CNY= artificially low to gain an edge for its producers in international markets.

The committee's chairman, Democratic Sen. Christopher Dodd of Connecticut, said the panel planned to vote on a bill before lawmakers leave Washington for an August recess that could push the U.S. Treasury to declare China a currency manipulator.

Bernanke said he shared the frustration over China's slow progress in allowing the yuan to appreciate, but added that exchange rates alone would not solve an imbalance that has seen the U.S. trade gap with China balloon to new record highs.

The weak currency distorts China's economy in favor of exports, Bernanke said, but he added that the yuan regime was not a "subsidy" in the legal sense of the word.

Last December, Bernanke caused a stir when he wrote in a speech that the undervalued yuan provided an effective subsidy to Chinese exporters. He stood by that statement under questioning from Congress in February.

(Additional reporting by David Lawder in Washington and Rachel Breitman in New York)

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