Fed official says subprime mess hasn't hurt economy

WASHINGTON -- Although subprime lending has caused pain for individual homeowners, it has not hurt the U.S. economy, a Federal Reserve official said Thursday as lawmakers questioned if the Fed should have done something to try to prevent the subprime problems from building.

"The real economy does not yet seem to be affected by this," Federal Reserve Governor Randall Kroszner told members of the Senate Banking Committee who were hearing from nominees to the Fed.

One of the nominees said earlier action from the Fed could have prevented some of the subprime problems.

Kroszner's comments about subprime and the economy echoed recent statements from other Fed officials, including Chairman Ben Bernanke. Still, lawmakers said they were concerned that problems with subprime mortgages — home loans made to borrowers with impaired or limited credit histories — posed a serious threat.

"This is a looming economic issue," Banking Committee Chairman Sen. Christopher Dodd, D-Conn., said, noting that home foreclosures could lead to falling home values in communities. "I can't go anywhere without this issue being raised."

The comments came during a confirmation hearing for three governor slots on the Federal Reserve. President Bush re-nominated Kroszner, 45, to the Fed for a full, 14-year term after he finishes the end of a term that is expiring next year. Nominees for two open positions also testified: Klane and Elizabeth Duke, 55, chief operating officer for TowneBank.

Fed governors are nominated by the president and must be approved by the Senate.

Although the Fed's most visible role is in setting interest-rate policy and oversight of the economy, the Fed also supervises banks.

While the senators asked the nominees a few questions about the economy, subprime was the main focus of the 2½-hour hearing. Many of the mortgages signed in recent years are adjustable rate. Defaults on the loans, already jumping, are expected to rise as many of the loans reset to sometimes sharply higher rates, and borrowers cannot afford the payments.