Big US bank 'could go under soon'

Aug 20, 2008
Big US bank 'could go under soon'
Harvard don says worst of credit crunch still ahead, lean times loom
By Bonnie Oeni

A LEADING United States economist warned yesterday in a speech
delivered in Singapore that a major US bank could collapse within
months, in the continuing fallout from the global credit crunch.

Professor Kenneth Rogoff, former chief economist at the International
Monetary Fund (IMF), said the worst of the US financial crisis may
lie ahead.

'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,' Reuters quoted Prof
Rogoff as saying. He is now an economics professor at Harvard
University.

He said US mortgage giants Fannie Mae and Freddie Mac - on the brink
of collapse earlier this year - may also fail 'despite what the US
Treasury says'.

Prof Rogoff was the keynote speaker at a conference organised by RAM
Holdings, held at St Regis Hotel. The conference discussed market
liquidity and its implications for the world economy.

Borrowing a biblical reference, Prof Rogoff noted in his speech that
the world had enjoyed seven fat years, and that it therefore might
expect seven lean years.

He said that even China will suffer economic hard times. He foresees
its growth dropping to 6 per cent or less over the next two years
from the current double-digit growth, given that 'every city does
badly after the Olympics'.

He warned that the US financial crisis would continue to deepen. The
problems faced by the financial sector are only at the halfway point,
given the way the Federal Reserve has sliced interest rates in order
to prop up the sagging sector.

He said the US financial sector was bloated, contributing 8 per cent
to economic output, compared to 0.5 per cent around a decade
ago. 'There just aren't enough profits and lines of businesses to go
around,' he said. 'The financial industry needs to consolidate
naturally and you can't save them all. There will be more losers than
winners.'

He criticised the Fed for cutting interest rates too drastically.

Regional countries such as Malaysia, India and Thailand which aped US
monetary policy will similarly face crippling inflation in future,
given the sudden huge monetary expansion that has to work its way out
of the system, he said.

China faces an uphill challenge too, with inflation of over 7 per
cent. Although the investment rate in China is heading towards 50 per
cent, he believed this would not be sustainable in the long run,
given increasing urbanisation which will end the era of 'super cheap
excess labour from the countryside'.

He pre-empted that with the mood of change in the US, the Democratic
Party could win in both Houses overwhelmingly and implement
protectionist policies that would slow growth next year and beyond.
Such policies could include the biggest tax hike since World War II
and a strengthened labour union.

However, some hope remained. He suggested that the global downturn
was merely a corrective recession after a long boom, and that it
would not be a sustained one since it did not involve large-scale
economic restructuring.

The European Central Bank's policy of raising interest rates
reflected its tougher stance against inflation, and long-term
optimism that once the supply of commodities increases to meet
demand, the global economy would bounce right back.

'We had a great growth period, and now we're having a digestion
problem. But things will pick up again,' he reassured the audience.