Wednesday, August 20, 2008

Large US bank to fail claims Rogoff as RBA scrambles to reverse tough stance

Former chief economist at the IMF Kenneth Rogoff claims the world is only midway through a major financial crisis with the worst yet to come.  He forecasts a major US bank will fail as the bloated US financial sector restructures.  I wonder if Australia's RBA have made the same inference with their recently unprecedented moves to preannounce an interest rate decrease with a veiled warning to the oligopolistic banks that they must pass on the decrease.  It is worrying and I would not be buying bank shares at present.

For the life of me I cannot understand why the RBA could not persuade the ACCC to reject the St George-Westpac merger.  As I have previously argued this merger should have been rejected and the 'four pillars' policy strengthened not weakened.  Bank customers in Australia are getting a bad deal at the expense of bank shareholders.

Interestingly, Rogoff rejects US Federal Reserve moves that have cut interest rates to only 2% arguing they willl be severely inflationary.  Australian official rates have been a long way above this which accounts for the strength, until quite recently, in the Australian dollar.   The RBA remain concerned with inflation and continue to the concerned with a possible wages explosion under Labor as interest rates are eased.


Anonymous said...

harry, The former IMF chief doesn't know what he's talking about when it comes to US interest rates.

M1 and M2 have fallen off a friggen cliff in the US it could be one reason why gold has taken a nose dive. The US could be reaching a deflationary problem with the money supply contracting the way it has.

Is he predicting anything the market doesn't know?

Of course he isn't as Wochavia is a basket case and Freddie & Fannie are both on life support with the strong possibility of they will require a federal bailout while the current shareholders get a drubbing.

Lastly i don't know why this dude is looking at the US. The market has more than discounted credit market tension there and we're pretty well fully discounted particularly in terms if US banking stocks.

Despite the veritable kitchen sink thrown at the US economy, US GDP for last quarter still came in at 1.9% growth.

Contrast that with last GDP growth EU wide coming in at negative .2%.

He's looking under the wrong rock for trouble.

And yes, the RBA board ought to be severely beaten for hanging too long with a monetary policy that is far too tight.

Anonymous said...

Amazingly, I sorta agree with both of you. Preventing the St George-Westpac merger oughtta be a no-brainer. And, as I said here a year ago, the RBA has again (as in 1990-1) had the classic "too much, much too late" reaction to the boom and has hence made monetary policy pro-cyclical.

Dunno, though, that the US markets have priced all the trouble in yet. The Euro has led to execrably bad monetary policy - much worse than the Fed's - and that sorta explain the fragility of Europe's real economy. But if a deflationary spiral does set in in the US then there is an awful lot more downside possible ...

Anonymous said...

Oh, and compare:
"M1 and M2 have fallen off a friggen cliff in the US"
"US GDP for last quarter still came in at 1.9% growth"

Poor Milton Friedman. Monetarism fails again.

Anonymous said...

Dunno if monetarism fails here DD, not by a long shot. May be the interest cuts take time to work themselves through the system. Damn well hope so any way.

Could timing issue: could be that the sheer endurance and flexibility of the US economy helps fight the headwinds. Not that good at working it out ahead of time.

However i don't think Milts ideas have been out out to pasture as a result.

Money supply is something that ought to be watched far more carefully by the CB's.

My other point is about the discounting mechanism (which is the market) has worked so far in that all the bad has been absorbed and will continue to as we move forward.

I don't think the former IMF dude was telling us something already don't know.

Anonymous said...


Roubini of RGE monitor is petty good with some of this.

He's an economics prof at NYU and was in the advisory area in the Clinton administration.

He thinks the world goes into a deflationary debt problem next year.

Hope he's wrong.

Was speaking to a building company analyst in NYC last night to see if it is time to buy Toll Bros and some other decent names in the US home building market.

Their view is that we need to see new housing starts fall below 800,000 annualized rate and stay there for a bit of time while the oversupply works itself out.

Sees the foreclosure auctions happening as a good thing. The auctions may actually be showing us the real market clearing price for US housing. They're settling at about 50% below peak.

They think 09 could be an Ok year in relative terms (still bad though). However it may begin again in 10 as we see the most recent ARM reset mortgages actually resetting and the the foreclosure rate could be pretty high from that too.

Anonymous said...

Na, JC, Uncle Milton said setting interest rates has "long and variable lags" in affecting the volume of money, and that's why you should target the volume directly rather than use indirect instruments such as interest rate targets.

But there were in his schema, IIRC, no such long lags between the actual volume of money (ie M1, M2) and real activity.

Anonymous said...

Agree on the St George takeover.

Where are the benefits for the consumer?

rogoff is inconsistent. If the US is experiencing a financial crisis, which I agree they are, then lower interest rates will not be inflationary as the economy will take some time to get to capacity