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The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.
Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely.
“The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,” Prof Rogoff said at a conference in Singapore.
In an ominous warning, he added: “We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one — one of the big investment banks or big banks,” he said.
Rising anxieties over “worse to come” in the credit crisis sent shares tumbling in Europe and Asia.
In London, the FTSE 100 index extended opening losses as widespread fears over the financial sector's woes led to another battering for bank stocks. The FTSE was down 74.8 points, or 1.4 per cent at 5375.4 in early dealing but later pared its losses to stand down some 60 points. Germany's Dax also shed 1.4 per cent, while the CAC 40 in Paris lost 1.2 per cent.
Professor Rogoff, who was chief economist at the IMF from 2001 to 2004, predicted that the crisis would foster a new wave of consolidation in the US financial sector before it was over, with mergers between large institutions. He also suggested that Fannie Mae and Freddie Mac, the struggling US secondary mortgage lending giants, were likely to cease to exist in their present form within a few years.
His prediction over the fate of Fannie and Freddie came after investors dumped the two groups’ shares on Monday after reports suggested that the US Treasury may have no choice but to effectively nationalise them.
The professor also sounded a warning over rising US inflation, which rose last month to its highest since 1991, and criticised the Federal Reserve for having cut American interest rates too drastically. “Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States,” he said.
There does appear to be a major shift in views in the press, this sort of talk was viewed as crazy last year, now it's become an acceptable view.
Question is will one of the big banks go bust and what will happen if they do?
The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.
On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.
The growth in bank loans has turned negative to a halt since March.
"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.
Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.
The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.
Household income is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s.
The M3 data measures both cash and a wide range of bank instruments. It tends to provide an early warning signal of major shifts in the economy, although the US Federal Reserve took the controversial decision to stop reporting the statistics in 2005 on the grounds that the modern financial system had rendered the data obsolete.
Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.
"There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein.
He cautioned that the three-month shifts in M3 can be highly volatile.
If your good at following timelines the big dip in the middle preceded the start of last years credit crunch!!!!!!
The fall now has been even steeper, deeper and quicker.
Brown trouser time?????
If it follows the same pattern as last time I would expect this second wave to maybe hit just about the same time as the US elections.
Although with the speed of the decline its possible that time frame could be shorter.
That's my guess.
Although the above could indicate nothing at all!!!
If DEBT is the problem REPAYMENT is the solution
Debt revenue doesn't equal tax revenue
I will pay for my own stupidity but not for the stupidity of others.
Remember, profits are privatised, losses are socialised.
That's the 21-century Free Market.
Today’s ominous warning from Kenneth Rogoff, the IMF’s former chief economist, of continued peril from the credit crunch, is a timely admonition to unwary investors that in weighing the likely toll on America they should follow one of that country’s favourite rejoinders and “wake up and smell the coffee”.
Professor Rogoff, a distinguished macro-economist now at Harvard, is not the first, and is unlikely to be the last, to caution against a rash assumption that we are close to seeing the end of this crisis, or even the beginning of the end. In recent weeks, similar advice has been proferred by the IMF as well as several other prominent observers.
Yet the professor’s assessment that we may not yet be even halfway through this crisis, that there may be worse upheavals to come and that these could yet claim a “whopper” among US banks as the latest casualty is another, much-needed dose of realism. It comes at a time when at least some investors had begun to be lulled into a misplaced sense of complacency by a rally in banking stocks — albeit one that had already run out of steam.
There are plenty of good reasons to believe that the professor’s prognosis is almost certainly correct. For one thing, the amount of fresh capital, some $400 billion (£216 billion) raised by banks since the crisis began, is still outstripped by the losses they have suffered. Many big institutions remain frail, in dire need of further infusions of funds, and exposed in an environment in which many banks remain reluctant to lend to each other.
Moreover, the danger is growing of a self-reinforcing downward spiral as banks’ plight leads them to curb further lending, further undermining the real economies of Western industrial nations, leading to more loan defaults and mortgage market woes, and yet another wave of credit tightening.
That risk remains very substantial in the US, where the housing slump persists, and may yet claim more victims among the banks. It is also still elevated in the UK, where, as David Miles of Morgan Stanley recently noted, banking groups remain more exposed than some of their international rivals.
It was Professor Rogoff who made it fashionable to quote the American poet Robert Frost’s apocalyptic visions of the world ending in either fire or ice as a way of capturing the conflicting dangers from flagging growth and rising inflation besetting the world economy. It seems the professor has now been reading another of Frost’s verses, where the poet alludes to woods that are “dark and deep”. As Professor Rogoff argues, we are very far from out of the woods.
If DEBT is the problem REPAYMENT is the solution
Debt revenue doesn't equal tax revenue
I will pay for my own stupidity but not for the stupidity of others.
Remember, profits are privatised, losses are socialised.
That's the 21-century Free Market.
Credit crunch may take out large US bank warns former IMF chief
lending giants, were likely to cease to exist in their present form within a few years.
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