WASHINGTON 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
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
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)