Nobel laureate warns of long US downturn

August 31, 2007|Associated Press

KUALA LUMPUR, Malaysia - The United States could face a prolonged economic downturn because of its subprime mortgage woes, but is unlikely to plunge into a recession, Nobel economics laureate Joseph Stiglitz said yesterday.

Rising defaults on US subprime mortgages have increased risks to the economy, with a worsening housing slump, credit problems, and turbulence in global financial markets, said Stiglitz, a former World Bank chief economist in Malaysia to attend a conference.

Some 1.7 million Americans may lose their homes due to foreclosures and bankruptcy this year, piling further pressure on house prices, he said. Wages have stagnated although the US gross domestic product was some 20 percent higher now than six years ago, he said.

"Mortgage payments are going up, house prices coming down, incomes are stagnating. It's not a pretty picture. So the dynamics could unravel more and where it stops, we can't be sure," Stiglitz told reporters on the sidelines of the conference.

"We don't know how well the [US Federal Reserve] will respond. The lack of transparency means we don't know how deep the problem is. The most likely outcome is that it will be a rather prolonged slowdown but not a recession."

Stiglitz said the credit crunch was a "totally predictable disaster" due to President Bush's economic policies to cut taxes for the rich even as the Fed reduced interest rates, which encouraged people to borrow more than they could afford.