U.S. economy isn't hurt, three Fed nominees say

Delinquencies and defaults on subprime mortgages are likely to worsen, but they haven't hurt the nation's broader economy so far, three nominees to the Federal Reserve Board of Governors said yesterday.

Lawmakers are considering the nominees after Senate Banking Committee Chairman Christopher J. Dodd (D., Conn.) demanded that the Fed make stricter rules against lending practices that contributed to rising defaults on subprime mortgages, which are home loans to borrowers with shaky credit histories.

"That specific issue will probably get a lot worse before it gets better," nominee Elizabeth Duke said of subprime loans under questioning from Dodd at yesterday's confirmation hearing. She is a former chairwoman of the American Bankers Association.

Fed Governor Randall Kroszner, who was nominated to a new term on the board, said the "real economy does not yet seem to be affected by this."

But the third nominee, Larry Klane, an executive at credit card issuer Capital One Financial Corp., said he was concerned about the potential economic implications.

The comments came in one of the most exhaustive hearings for Fed nominees in years. Dodd; Sen. Richard Shelby of Alabama, the panel's ranking Republican; and other lawmakers grilled the trio for 21/2 hours on issues including mortgages, credit scores, and potential biases as regulators.

Dodd stressed that he wanted to ensure that the nominees shared his priority of tightening lending standards to avoid defaults.

The candidates, nominated by President Bush in May, require Senate approval.

In June, the Bear Stearns Cos. Inc., the fifth-biggest U.S. securities firm, was forced to lend $1.6 billion to one of its hedge funds to rescue it from immediate collapse after bad bets on subprime mortgages. Last week, the stock market tumbled on concern that losses from the subprime rout would spread through Wall Street.

Dodd said during the hearing that the Fed's actions in recent years on subprime lending and credit cards had been unsatisfactory.

He questioned the nominees on whether the Fed could have done more, or done it faster, to police subprime mortgages and keep the number of defaults in check. Duke said that, "looking at it in hindsight, clearly something different could have been done."

Klane said: "If the Fed had acted somewhat earlier, we might have had, to some extent, a better outcome."

Fed policymakers are scheduled to meet Tuesday to discuss interest rates and the economy. The central bank, caught between a lengthening housing slump and inflation that has not yet slowed convincingly, has left the benchmark rate at 5.25 percent since June 2006, the longest stretch without change since 1998.

Kroszner, 45, was an economics professor at the University of Chicago's business school before joining the Fed board in March 2006. He is a former economic adviser to Bush.

Duke, 55, was the first chairwoman of ABA, the banking industry's Washington trade group, since its founding in 1875. She is senior executive vice president at TowneBank, a Portsmouth, Va., bank with operations in southeast Virginia.

At Capital One, the biggest independent U.S. issuer of credit cards, Klane, 47, is head of the savings bank and oversees U.S. small-business and home loans, acquisitions and operations in the United Kingdom and Canada.