CREDIT CRUNCH

With the high levels of corporate and personal debt overtaking terrorism as the top concern of economists, regulators are pushing for stronger lending standards. This may help future borrowers, but will do little to help those already facing foreclosure. Ensuring lenders can negotiate repayment plans, as President Bush proposed recently, is the best short-term solution.

The good news is that economists see the current financial woes as a relative short-term problem, after which their concerns return to health care and the aging population.

According to a recently completed survey by the National Association of Business Economics, subprime loan defaults and excessive corporate and household debt were the top short-term concerns. Terrorism and energy prices were the top concerns in 2005 and 2006.

Debt is a growing concern on many levels. The inability of some homeowners to repay their mortgages has caused several lenders, especially those heavily involved in the subprime market, to go out of business. Default concerns have also toppled hedge funds heavily invested in the subprime market, which caters to lenders with poor credit that are unable to quality for conventional bank mortgages.

If interest rates rise, corporate borrowing will become more expensive, which could slow national economic growth.

Carl Tannenbaum, NABE president and chief economist at LaSalle Bank/ABN-AMRO in Chicago, said easing the debt concerns should focus on two areas. One, which is already under way, is for lenders to tighten their standards. This will mean fewer people will qualify for home mortgages and other loans, but should help ensure people don’t borrow more than they can repay. More than 60 percent of NABE members who answered the survey said that new mortgage lending rules were appropriate, but 90 percent said such rules would be “a little late.”

The second area is improved financial literacy for the public. Many borrowers facing problems had loans with terms they didn’t understand.

Maine lawmakers last year passed a comprehensive bill that requires more disclosure of loan terms and counseling before borrowers could accept higher-risk loans.

The NABE survey, however, shows that literacy shortcomings aren’t limited to those outside the financial arena. Nearly half of the economists surveyed didn’t have a good grasp of hedge funds, privately run funds that typically require at least $1 million to participate and invest in a variety of markets, including mortgages. Larger numbers didn’t fully understand more complex investment schemes such as credit default swaps and collateralized debt obligations.

Fortunately for the average investor, such schemes don’t need to be familiar because they stick with more traditional investments such as stocks and bonds. However, with billions of dollars invested in riskier, hard-to-understand types of funds, the ripple effects are felt through global financial markets. Last week, for example, the stocks of two Chinese banks dropped after it was revealed that they held more than $10 billion worth of subprime mortgage-backed securities.

Expect more market turbulence before the “credit crisis” is over.