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Housing, Credit Crunch, Oil Prices Spur Economic Jitters

Treasury Secretary Henry Paulson delivered a somber assessment of the U.S. economy Tuesday, calling the housing and credit crunch "the most significant current risk" to the economy. Financial experts look at the factors affecting the nation's economic health, including sky-high oil prices.

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  • JIM LEHRER:

    Margaret Warner has our economy story.

  • MARGARET WARNER:

    It was a sobering assessment delivered by Treasury Secretary Henry Paulson in Washington today. The housing and credit crunch is the most significant current risk to the economy, he said, and shows no signs of ending soon.

  • HENRY PAULSON, U.S. Treasury Secretary:

    The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth. We must recognize the very real harms to families affected by the housing downturn. We must take steps to minimize the neighborhood effects and the macroeconomic effects of this housing market correction.

  • MARGARET WARNER:

    The problems began earlier this year in the so-called subprime mortgage lending market, which lent money to the riskiest of borrowers. Rising delinquency rates among them led to a wider credit crunch as lenders retrenched, and securities backed by these subprime mortgages saw their value plummet.

    Paulson said today some 2 million subprime mortgages are due to reset to higher interest rates in the next 18 months, raising the prospect of many more foreclosures. All this, coupled with falling home prices, is having a real impact on our economy, he said, particularly in the construction sector.

    Yesterday, the nation's three largest banks — Citigroup, JPMorgan Chase, and Bank of America — announced the creation of a $100 billion fund to buy depressed asset-backed securities to keep them from being dumped on the market. The banks were prodded to do something by Paulson and other government officials, but at this point the fund includes no taxpayer money.

    Another major cause for concern is the skyrocketing price of oil. It traded around $88 per barrel today. And the government is predicting home heating oil prices will soar 22 percent this winter.

    So far, the broader job market seems to be holding steady, except in construction. The economy continues to create jobs at a modest pace, but U.S. industrial output was essentially flat in August and September. The stock market, which took a huge tumble in August, largely regained its footing after the Fed lowered interest rates, though it posted a significant loss yesterday.

    Federal Reserve Chairman Ben Bernanke said last night that he expects further contraction in housing, and that is likely to be a significant drag on growth in the current quarter and through early next year.

    For more, we get the perspective of two economists. Robert Shiller is a professor of economics and finance at Yale University. He's the author of the 2000 book, "Irrational Exuberance," and predicted the bursting of the dot-com bubble. And David Hale, the founding chairman of Hale Advisers, a Chicago-based economic consulting firm with private clients worldwide.

    Welcome to you both.

    Professor Shiller, do you agree with Secretary Paulson that, not only is the current housing crunch, credit crunch, not over, but, in fact, it's going to continue to widen into broader areas of the economy?