Kenneth Rogoff: "The worst is yet to come"

Stories by Bloomberg and Reuters on a talk by Kenneth Rogoff, former chief economist for the IMF and currently a Harvard professor, fail to mention perhaps his most relevant credential as far as opining on the US credit crunch is concerned. He and Carmen Reinhart of the University of Maryland have done an extensive study of financial crises, going back 900 years, and have done more intensive work on post 1800 and post World War II episodes. Rogoff and Reihart, among other things, put together a short presentation comparing the US’s woes to what they called the post-war “Big Five” that makes for sobering reading.

From Bloomberg:

`The worst is yet to come in the U.S.,” Rogoff, a Harvard University professor of economics, 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.”…

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.”

Reuters, which first reported the story, provided further detail:

“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,” said Rogoff….

“We have to see more consolidation in the financial sector before this is over,” he said, when asked for early signs of an end to the crisis.

“Probably Fannie Mae and Freddie Mac — despite what U.S. Treasury Secretary Hank Paulson said — these giant mortgage guarantee agencies are not going to exist in their present form in a few years.”…

Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.

“There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they’re great buys, sovereign wealth funds come in and make a lot of money by buying them.

“That view neglects the point that the financial system has become very bloated in size and needed to shrink,” Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek have invested billions in Merrill Lynch and Citigroup…

Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as “dramatically” as it did.

“Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States.”

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  1. doc holiday

    Wow and duh! The Baby Boomer Generation started life living with The Cuban Misle Crisis, and so ends the days of their lives, with this systemic crisis, which is devoid of leadership, intelligence or a plan.

    Imagine if Kennedy would have been greedy and gone for the fast easy solution!

    Thank God Congress and The Senate have great connections with lobby groups; now if we could just get those rating numbers back up for the election!

  2. Anonymous

    “Vampire bats are harming our members” , an advocate for cows who sleep standing up claims. “They should find more productive use of their abilities
    than draining our members blood”. But a representative of the bats countered, “It’s what we’ve been programmed to do through millions of years of evolution. This is our livelihood. Without it our children would starve”

  3. Anonymous

    Ok, everybody back to school for spelling and grammar booster shots! Perhaps this is a universal matter of de-evolution related to trickle down economics, i.e, those at the top of the food chain are passing on madcow-like problems to those of us below… (I’m running a full spectrum spell check on this now, and remain open to any and all suggestions).

  4. Carlosjii

    from my studies we are looking at a complete revamp or destruction of the Federal Reserve itself in 2009, beginning January. Don’t forget it’s nothing but a debt kiting scheme.

    “The combat and instability would continue because its real source was the political contract struck between democracy and capital back in 1913, the implicit decision that democratic politics could not be trusted to act responsibly in the national interest. Therefore, the authority and responsibilities of elected politicians were permanently curtailed. Put another way, the elected government was allowed to be permanently irresponsible – free to indulge its own follies and protected from the accountability by the higher authority, the non-elected central bank. The creation of the Federal Reserve represented a great retreat from democratic possibilities. The maturing of self-government was forever stunted.” Pg. 534, Secrets of the Temple – How the Federal Reserve Runs the Country, William Greider, Simon and Schuster, 1987

  5. doc holiday

    I saw a post on CR last night about The Fed looking at what limits it has, which is like having a few pounds of blow in front of an addict, and starting discussions on how to manage the supply… Not smart!

    Here is a great link to that story, which came from : Shanghai: Gold Medal in Cliff Diving:

    mock turtle writes:
    Bernanke Tries to Define What Institutions Fed Could Let Fail

    By Craig Torres
    More Photos/Details

    "Aug. 18 (Bloomberg) — Ben S. Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes….

    the Federal Reserve chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac….

    Reinhart, now a resident scholar at the American Enterprise Institute in Washington, is one of several Fed alumni who say they are concerned the central bank will next face requests to rescue hedge funds or insurance companies whose failure might damage the financial system."

    The link:
    Bernanke Tries to Define What Institutions Fed Could Let Fail

  6. Anonymous

    “Only when the tide goes out do you discover who’s been swimming naked.”

    Or when the tide goes out, how the paperwork trail lies stinking in the mud.

  7. joe

    I agree, of course, with carlos.

    We can only begin to repair ourselves from the sludge of that outgoing financial tide when the people’s government hold up that big mirror in front of Mr. Bernanke and his ilk, along with a “Ben, meet the enemy!” sign.

    The notion is preposterous that we the people are going to sit back with our fingers crossed while Mr. Bernanke decides who goes and who stays, after the FED has bankrupted, illiquidated and insolvent-ized our financial future.

    The FED itself goes DOWN!
    Into the Treasury.
    Controlled by the Joint Committee on Currency and Monetary Policy.

    Establishment of a government-issue credit system, i.e. without debt, to expand the nation’s money supply.

    No more government borrowing from people who don’t have the money.

    Oh, wait.
    Forget that.

    Put the bankers in charge.
    NOT !

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