Sunday, December 16, 2007

Bet the House on It

The economy faces a vicious downward spiral of foreclosures, declining property values and mounting losses on mortgage-backed securities and related financial assets.

The resetting of interest rates on more than 2 million subprime loans will prompt a large number of foreclosures, perhaps a million a year in both 2008 and 2009. These huge waves of foreclosures will depress the price of residential real estate still further. Plummeting real estate values and escalating foreclosures will cause further losses on mortgage-related securities and will further burden American consumers already dealing with higher energy prices and substantial debt.

Given the dampening effects of these developments on both consumption and investment spending, it is increasingly likely that the economy will slip into recession next year.

Laura Tyson, a professor of business and public policy at the University of California, Berkeley, and the chairwoman of the Council of Economic Advisers from 1993 to 1995.