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IMF Economist: Credit Crisis to Worsen; Large Bank May Fail

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"The worst is yet to come in the U.S.''
-Kenneth Rogoff, former chief economist at the International Monetary Fund

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Unfortunately, I have to agree. We have yet to really feel any severe impact from the credit crunch in the broader economy, or in the markets.

Excesses in one direction lead to similarly severe unwinds in the opposite direction. Hence, the unbridled credit creation in the early part of the decade is now being met with credit tightening. Any asset class that depends too heavily on credit for price appreciation -- think private equities, homes, and even some forms of stock activity like share buybacks and IPOs -- are now going through a period of price depreciation.

From Bloomberg:

"Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

"The worst is yet to come in the U.S.,'' Rogoff said in an interview in Singapore today. "The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''

The U.S. housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Rogoff said the government should nationalize Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance companies, which have lost more than 80 percent of market value this year.

Freddie Mac and Fannie Mae "should have been closed down 10 years ago,'' he said. "They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''

While I agree that Phony and Fraudy are no longer viable companies, the burden shouldn't be shifted onto the taxpayers merely because the corrupt management -- when they weren't busy committing accounting fraud -- managed to dupe a bunch of bond buyers into thinking their paper was US guaranteed.

That everyone in this country is on the hook for the bad actions of corporate weasels is beyond sad -- its pathetic . . .

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Previously:
Strongest & Weakest US Banks and Thrifts (August 2008)
http://bigpicture.typepad.com/comments/2008/08/strongest-banks.html

Source:
Large U.S. Banks May Fail Amid Recession, Rogoff Says
Shamim Adam 
Bloomberg, Aug. 19 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a08cRVrtu86I&

Related:
Lehman May Put a Prized Unit on the Block   
JENNY ANDERSON and LOUISE STORY   
NYT, August 18, 2008 
http://www.nytimes.com/2008/08/19/business/19lehman.html   

Tuesday, August 19, 2008 | 07:02 AM | Permalink | Comments (27) | TrackBack (0)
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Comments

Consider that what we have seen occur thus far in terms of the credit crisis has merely been the unwinding of one of the biggest asset bubbles and leveraged bull markets in modern history. We have yet to see the credit deterioration that typically occurs in a consumer recession, which has now arrived after a long lag. This phase of consumer-led financial strains is only just beginning, which is why talk of a "bottom" in anything from credit to housing to equities is far too premature, in our opinion".

Posted by: David Rosenberg | Aug 19, 2008 8:05:29 AM