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Fed official: Mortgage 'meltdown' may shave 1.3 points off US GDP

Fed official: Mortgage 'meltdown' may shave 1.3 points off US GDP

Federal Reserve Governor Frederic Mishkin said Friday that the ripple effects of the mortgage market 'meltdown could subtract more than a percentage point from overall U.S. gross domestic product growth.
Mishkin's remarks came in the form of a discussion of a paper written by several Wall Street and academic economists that was presented to a U.S. monetary policy forum in New York sponsored by the University of Chicago and Brandeis University.
The paper, written by David Greenlaw of Morgan Stanley, Jan Hatzius of Goldman Sachs, Anil Kashyap of the University of Chicago and Hyun Song Shin of Princeton University, concluded that the decline in credit due to the mortgage market crisis will reduce GDP over the following year by 1.3 percentage points.
In his commentary, Mishkin said that figure "is not implausible," but "there are reasons to be suspicious of it." The authors may have assumed too much economic impact from the decline in lending by leveraged financial institutions, Mishkin said.
"On the other hand, the estimated impact on the economy could be too low," Mishkin said, since "the disruption to the financial system is far broader than just to leveraged institutions."
"To the extent that the meltdown in the mortgage market has revealed even deeper problems in the financial system, the negative impact on economic activity could be even larger" than the authors estimate, he said.
Mishkin's remarks didn't address monetary policy. However, his recognition of the sharp hit the economy could take due to the housing crisis supports financial market expectations that the Fed will keep lowering interest rates to provide insurance against downside economic growth risks.
The basis of the authors' estimates is that mortgage credit losses will total about $400 billion (euro263.7 billion) over the next couple of years. "The beauty of the authors' approach is that they go at the problem in very different ways," Mishkin said, noting that each of the different methods used comes up with the $400 billion (euro263.7 billion) figure.
The paper assumes that leveraged institutions like banks, hedge funds, thrifts and government-sponsored enterprises will absorb about half of that hit, or $200 billion (euro131.8 billion). Mishkin called that estimate "not unreasonable, but it is very rough."
The paper's authors then calculated that the $200 billion (euro131.8 billion) in losses by leveraged institutions will ultimately decrease lending by $910 billion (euro600 billion).
In his remarks, Mishkin said that while financial liberalization and innovation improve information, they "often have flaws and do not solve information problems as well as markets may have hoped they would."
"When these flaws become evident, financial markets sometimes seize up, often with very negative consequences for the economy."
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Brian Blackstone is a correspondent of Dow Jones Newswires.


Updated : 2021-08-06 06:10 GMT+08:00