PR - Credit Crisis Overtakes Terrorism as Top Threat to U.S. Economy

Nearly one-third of business economists consider the combined threat of subprime loan defaults and excessive indebtedness has supplanted terrorism and the Middle East as the biggest short-term threat to the U.S. economy, according to the Economic Policy Survey from the National Association for Business Economics. Just 20% of NABE members surveyed listed terrorism and the Middle East as their top concern in August, compared to 35% in March. Meanwhile, 18% of those surveyed pointed to the effects of the subprime debacle as their biggest concern, and the related issue of “excessive household and/or corporate debt” was cited by another 14%.

“Financial market turmoil has shifted the focus away from terrorism and toward subprime and other credit problems as the most important near-term threats to the U.S. economy,” says Carl Tannenbaum, NABE President and Chief Economist, La Salle Bank/ABN-AMRO. “However, these concerns appear to be somewhat transitory, as the five-year outlook for housing remains positive.”

These responses were similar to survey rankings from 2005 and 2006. Education and skilled labor rank close behind, with 17% seeing them as the nation’s most important long-term challenge.

The consensus on monetary policy was beginning to fray even before the survey ended on August 14. The percent of respondents judging monetary policy to be “about right” slipped to 72% in August from 81% in March, while those calling policy “too restrictive” almost doubled to 16%. A plurality (47%) of NABE members continue to call U.S. fiscal policy “too stimulative,” although the 45% who think it is “about right” is more than twice as large as a year ago.

Responding to a series of questions first asked in the August 2005 Policy Survey, more NABE members now view the boom as a credit-induced bubble. Just over 29% now call the boom a “serious national bubble,” compared to only 14% two years ago. Virtually all of this increase came from the group of respondents who previously ascribed the trend to “local bubbles.” The percentage citing “easier credit standards” as the number one or number two cause for the housing boom jumped to 64% from 34% in 2005. Just over 60% of NABE members polled agreed that the new mortgage lending rules issued by federal banking regulators are “necessary and appropriate;” however, among these supporters a vast majority (over 90%) also termed the action “a little late.”

A slight plurality (42%) of respondents expects U.S. home prices to be flat, on average, over the next five years. But respondents who expect home prices to rise on average over the next five years (41%) far outnumber those who expect prices to fall (16%). NABE members continue to place low odds (1 in 10) on a large drop in U.S. home prices similar to that experienced in Japan during the 1990s.

Substantial percentages of economists report little familiarity with complex instruments and other financial innovations. Despite the prevalence of NABE members holding advanced degrees in economics and other business-related disciplines, substantial percentages admitted to having little or no familiarity with the structure, activities, and risks associated with hedge funds (45%), private equity funds (40%), asset-backed securitization (48%), credit default swaps (CDS, 68%) and collateralized debt obligations (CDOs, 51%).

The greatest threat to financial stability is thought to arise from CDOs, followed by hedge funds and CDS. In terms of regulation and reporting requirements, members were generally split between “fine as is” and “prefer more,” with the greatest need for regulatory and reporting enhancements seen for hedge funds (57%) and CDOs (48%). More than six out of ten those surveyed agreed that the “carried interest” gains earned by partners in private equity funds should be taxed as ordinary income.

The NABE Economic Policy Survey reflects the consensus of a panel of 258 members of the NABE. Conducted semiannually, the latest survey was taken July 24-August 14, 2007. Catherine L. Mann, Brandeis University; Richard A. Brown, FDIC; and Kathleen Camilli, Camilli Economics, conducted the analysis for the report.