Federal Reserve Chairman Ben Bernanke, in a second day of testimony before Congress, said this morning (July 19) that the Fed expects losses from subprime loans gone bad will total between $50 billion and $100 billion, which would not be big enough to threaten the larger economy. This was the first time Bernanke put a number on the subprime problem.
Testifying today before the Senate Banking Committee, Bernanke explained that he expects the subprime shakeout to remain confined, although he allowed that it is likely to continue to put downward pressure on the housing business. He reiterated testimony he gave yesterday before the House Committee on Finanical Services that he expects the downturn in new home building to persist over the next several quarters into 2008.
In his July 18 testimony, Bernanke said, "Sales should ultimately be supported by growth in income and employment as well as by mortgage rates that--despite the recent increase--remain fairly low relative to historical norms. However, even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes."
He continued, "The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates."
He concluded: "Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time."
Bernanke's testimony before the House committee on Wednesday was taken in the markets as a signal that no cuts in interest rates would be forthcoming, and the Dow swooned. On Thursday, the markets seemed to shrug that off by staging a rally that had the Dow up 74 points by midday, with most of the builder stocks caught in the updraft.