SINGAPORE — 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, a Harvard University professor of economics, said Tuesday. “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 about $500 billion in credit-market losses for banks globally and led to the collapse and sale of Bear Stearns. Bonds of regional banks such as National City and Keycorp are under pressure on expectations of more fallout. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation’s biggest mortgage-finance firms.
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.”
Last month, President Bush signed into law a housing bill that provides Treasury Secretary Henry Paulson the power to make equity purchases in Fannie Mae and Freddie Mac. Paulson asked for the authority July 13 after the shares of the firms, which own or guarantee almost half of the $12 trillion of U.S. mortgages, slid to their lowest levels in more than 17 years.
Banks repossessed almost three times as many U.S. homes in July as a year earlier, and the number of properties at risk of foreclosure jumped 55 percent, according to RealtyTrac Inc., an Irvine, Calif.-based seller of foreclosure data. U.S. builders broke ground on the fewest houses in 17 years last month, according to a Bloomberg News survey.
Rogoff told a conference in Singapore on Tuesday that the credit crisis is likely to worsen and a large bank may fail, Reuters reported earlier. He was the IMF’s chief economist from August 2001 to September 2003.
“Like any shrinking industries, we are going to see the exit of some major players,” Rogoff told Bloomberg, declining to name the banks he expects to fail. “We’re really going to see a consolidation even among the major investment banks.”
IndyMac Bancorp, once the second- largest U.S. independent mortgage lender, filed for bankruptcy protection Aug. 1, three weeks after it was taken over by the Federal Deposit Insurance Corp. amid a run by depositors that left it strapped for cash. Bear Stearns collapsed in March and sold itself to JPMorgan Chase for $10 a share.
“The only way to put discipline into the system is to allow some companies to go bust,” Rogoff said. “You can’t just have an industry where they make giant profits or they get bailed out.”
