Subprime Defaults, Debts Are the Biggest Risks: NABE

The combined punch of subprime mortgage defaults and heavy debt remains the biggest risk to the health of the U.S. economy, a panel of business economists said Monday.

AP

"NABE members are increasingly concerned over the short-term risks associated with subprime mortgages and other forms of indebtedness, while they continue to cast a wary eye on inflation," said Ellen Hughes-Cromwick, president of the National Association for Business Economists.

The conclusion was based on a survey of 259 members conducted between Feb. 1-15 and updates a poll conducted in August.

Of the members polled for the NABE semiannual Economic Policy Survey, 52 percent said the combined threat of subprime mortgage defaults and heavy debt was their No. 1 concern, up from 32 percent in August.

Inflation was a distant third at 10 percent in March, up from 6 percent, the survey showed.

Only 9 percent of the members polled said terrorism was now their top concern, compared with 20 percent in August.

"Fewer respondents support monetary and fiscal policies being implemented to address the credit situation, with more than one-third saying current monetary policy is too stimulative," said Hughes-Cromwick.

Just 48 percent judged monetary policy to be "about right", a drop from 72 percent in August and 81 percent in March 2007.

Two-thirds of those surveyed expect short-term interest rates to decline over the next six months, with about half of those respondents expecting a cut between 25 basis points and 50 basis points, NABE said.

The Federal Reserve has aggressively cut the benchmark federal funds interest rate, bringing it down to 3 percent from 5.25 percent in mid-September to bolster the economy against the housing downturn and credit squeeze.

The most frequently cited concerns about lower interest rates are the threat of inflation and the sense that lower rates might "bail out investors who should have known better," NABE said.

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