Rogoff, the former chief economist of the International Monetary Fund, told a conference in Singapore that the financial problems in the US were far from over – in fact, he thinks the worst is yet to come. ‘We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper,’ he said (an outburst that briefly set alarm bells ringing at Burger King).
Far from there being an end in sight, Rogoff reckons that the US financial crisis is only at ‘the halfway point’ and conditions will continue to deteriorate. The likely consequence, he believes, is that ‘one of the big investment banks or big banks’ is likely to go under in the coming months. The end result of all this carnage, he said, would be more consolidation in the banking sector (like we saw when JP Morgan swallowed Bear Stearns).
But Rogoff isn’t actually worried about this. In fact, he thinks that banks should be allowed to fail, to restore better discipline and reflect the shrinking size of the market (now lots of these complex debt products have been consigned to the dustbin of history). But this would also mean that recent moves by sovereign wealth funds to buy up banking stocks might not prove to be as shrewd as everyone thinks, he said: ‘That view neglects the point that the financial system has become very bloated in size and needed to shrink’. That must have gone down well with his hosts, given that Singaporean funds GIC and Temasek have been two of those investing heavily…
The big-brained economist, who’s now a professor at Harvard, also predicted that US mortgage companies Fannie Mae and Freddie Mac will not survive in their current form. The stock of both companies has plummeted this week amid reports that their massive losses will force the US Government to bail them out – which would add weight to Rogoff’s claims that the worst of the crisis may be yet to come.
One thing’s for sure: this kind of negativity (he also criticised the US Federal Reserve for aggressively cutting interest rates, despite the risks of inflation) from such a respected figure is only going to make the jittery market even more nervous – as the subsequent stock market falls on both sides of the Atlantic shows. Although it’ll be an awful lot worse if he turns out to be right...
In today's bulletin:
Tenants super for gloomy house sellers
US economist: we're going to see a whopper!
BAA secures its future - for now
Editor's blog: I Don't Know How He Does It, Part Three
PRs to be thrown into the Lake of Fire?