The US Could Face Prolonged Economic Downturn

The U.S. could face a prolonged economic downturn due to its subprime mortgage woes, but is unlikely to plunge into a recession, Nobel economics laureate Joseph Stiglitz said Thursday.

Rising defaults on U.S. 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 who is here 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 U.S. gross domestic product was some 20% higher now from 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 (U.S. Federal Reserve) will respond. The lack of transparency means we don't know how deep the problem is," he said. "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 U.S. President George W. Bush's economic policies in 2001 when Bush cut taxes for the rich, slashed interest rates and encouraged people to borrow more than they could afford to stimulate the economy. The U.S. is living beyond its means, borrowing some $850 billion last year, while household savings in the country is nil or negative, he said. "President Bush has mismanaged the economy very badly. The magnitude of total government borrowings in the eight years of his presidency will be over $4 trillion," Stiglitz said. "President Bush has put America in an impossible place." Bush's terms ends in January 2009. Stiglitz, who won the Nobel Prize for economics in 2001 and is author of "Globalization and its Discontents," warned the next U.S. administration faces a tall task in restoring fiscal sanity as this involves cutting back on expenditures or raising taxes - which could lead to bigger budget deficits. "The timing has to be done very carefully ... if it is not carefully managed, the fiscal consolidation will further depress the economy," he said. Stiglitz indicated that East Asian countries may not be severely hit by the U.S. fallout, as the region has built large reserves and are much more resilient after rebounding from its own financial crisis a decade ago.