UPDATE 1-Credit squeeze to hit U.S. economy hard - economists
(Adds Fed officials' reactions paragraphs 3-5, 9-12)
NEW YORK, Feb 29 (Reuters) - U.S. subprime mortgage delinquencies and the credit squeeze of the past year will trigger $400 billion in losses to the U.S. financial system and knock 1.3 percentage points from economic growth in 2008, according to a paper released on Friday by four leading economists.
"While these estimates have many caveats, they still suggest that the feedback from the financial market turmoil to the real economy could be substantial," a quartet of academic and Wall Street economists wrote in a paper presented at a monetary policy forum organized by the business schools of the University of Chicago and Brandeis University.
A senior Federal Reserve official said the estimate of the drag on U.S. economic growth caused by the rising default rate in the U.S. home mortgage market and subsequent global credit squeeze may be off the mark.
"Although this number is not implausible, there are reasons to be suspicious of it," said Fed Governor Frederic Mishkin, who delivered a response to the paper at the same forum.
"It might overstate the impact of the decline in leveraged institution lending on the economy ... on the other hand, the estimated impact on the economy could be too low," he added.
The economists said half of the $400 billion in losses will be borne by leveraged U.S. financial institutions, many of which took risky bets on subprime mortgage securities that turned sour when delinquencies rose.
RETREAT FROM LENDING
The paper's authors -- David Greenlaw of Morgan Stanley, Jan Hatzius of Goldman Sachs, Anil Kashyap of the University of Chicago, and Hyun Song Shin of Princeton University -- said that as hard-hit financial institutions shore up their capital bases, they will retreat from extending credit to the tune of about $910 billion.
A drying up of credit availability will cause businesses and consumers to pull back from spending and investing, the authors said.
Mishkin said he agreed with the author's basic premise that problems in the relatively small market for subprime mortgages reverberated more widely because they caused a dramatic pullback in lending.
But Mishkin said he believes current financial turmoil is the result of the broader difficulty the financial system is now having in channeling funds to productive investments and is not confined to those institutions worried about too-thin capital cushions.
Boston Fed President Eric Rosengren, who spoke at the same conference, said that while some large institutions have experienced significant write-downs as a result of their exposures to soured credits, they have been able to attract new capital.
Also, he added that while there is a risk that balance sheet constraints could become more widespread among banks if house prices fall further, lower interest rates should help stabilize housing markets.
SLUGGISH GROWTH Continued...
