McCormick Says Credit Crisis Is Threat to Entire U.S. Economy

By Rebecca Christie

Sept. 25 (Bloomberg) -- Mortgage-market woes could pull down the entire U.S. economy unless the government takes quick action to help credit markets heal, David McCormick, the Treasury's undersecretary for international affairs, said today.

``The failure to address the troubled mortgage-related assets would mean that every aspect of our financial and funding markets, ranging from consumer credit to money-market funds, would be impaired,'' McCormick said in a speech prepared for delivery by videoconference to a Hong Kong investors' forum.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are struggling to get Congress to approve a $700 billion plan to buy troubled assets from banks and unfreeze credit markets. They face opposition from Democratic and Republican lawmakers, concerned that taxpayers stand to lose too much.

``Now is the time to act quickly, decisively and collaboratively with regulators and market participants around the world to restore stability and confidence to our markets,'' McCormick said.

The chain reaction that began with bad housing loans and spread through Wall Street led to U.S. credit markets tightening ``dramatically'' last week, with even some non-financial companies finding it difficult to finance day-to-day operations, the official said.

``If this situation was to persist, it would threaten all parts of the U.S. economy,'' he said.

Lawmakers are negotiating whether to scale back Paulson's plan, shift its focus or supplement it with provisions to assist homeowners and prevent taxpayer losses.

Bernanke said yesterday that the U.S. is facing ``grave threats'' to financial stability and warned that the credit crisis has started to damage household and business spending.

``Economic activity appears to have decelerated broadly,'' he told a congressional Joint Economic Committee hearing, downgrading the assessment of Fed officials when they met on Sept. 16. ``Stabilization of our financial system is an essential precondition for economic recovery.''

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net