Hub Fed chief: Credit problems may spread
US balance sheet constraints are largely confined to a few large institutions, but there is a risk they could become widespread if house prices fall further, Boston Federal Reserve Bank president Eric Rosengren said today.
Rosengren cited estimates on US mortgage credit losses of about $400 billion, with half of that being borne by leveraged institutions.
"Balance sheet constraints are primarily occurring at a few large institutions with significant exposure to more complicated financial products," Rosengren told a forum sponsored by the University of Chicago Graduate School of Business and Brandeis University International Business School.
"But then again, there is downside risk that balance sheet constraints could become more widespread ... - particularly if housing prices experience more significant declines."
So far, Rosengren said, small and medium-sized businesses are "not complaining" about credit conditions, which reflects the lack of exposure these companies had to securitized products or the risky subprime mortgage market.
He also said that despite the potential risks, he was optimistic that US monetary policy would help mitigate troubles in the mortgage and credit sector.
"Lower rates are likely to result in higher house prices than would occur in the absence of monetary easing," he said. "This should reduce the foreclosure rate and reduce some of the concern that housing problems will become more widespread."
He added though that monetary policy is not a "panacea" to the credit sector's problems, but a solution would involve a combination of monetary, regulatory, and fiscal measures.
He said some of the possible solutions to addressing the credit problems are not tied to monetary policy.
In recent years, he said the subprime market had become the major avenue for low- and moderate-income borrowers to buy homes. "There would seem to be a strong economic incentive for borrowers to seek FHA (Federal Housing Administration) insurance and get a prime rather than a subprime rate." (Reuters)
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