Tuesday, November 6, 2007

The Experts Speak About Housing, the Economy, Lending, Etc.

The excerpts below from an article in Market Watch, gives a broad brush summary of comments from a variety of experts like Alan Greenspan, George Soros, etc. Basically, they all see plenty of bumps ahead. Text in bold is my emphasis.

Central bankers past and present warned on Tuesday of more pain to come for the U.S. economy and that banks worldwide could take several months yet to reveal their full losses from U.S. subprime mortgage lending.

Former Federal Reserve Chairman Alan Greenspan and billionaire investor George Soros said the downturn in the U.S. housing market had yet to take its full toll on growth.

Bank of England Governor Mervyn King said banks would take some considerable time to flush out total losses related to mass defaults on U.S. mortgages leant to people ill-equipped to pay.

"We have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we're going in the right direction," King told the BBC.

Banks, particularly in the United States, have come clean about huge losses tied to the subprime mortgage sector.

The head of U.S. banking giant Citigroup quit on Sunday, taking the blame for expected losses of $8-11 billion before taxes, that on top of $6.5 billion it wrote off three weeks ago.

Banks in Europe have been hit too and Britain suffered its first full-blown bank run since the 19th century in September when the Bank of England had to step in to offer Northern Rock (NRK.L) funding as "lender of last resort."

Greenspan told a forum in Tokyo that high inventories of unsold homes presented a major risk to the U.S. economy and that he was not sanguine about how quickly the glut could be reduced.

"We still need to accelerate the rate of inventory liquidation, and that will mean bringing housing starts down and sales up. We have a long way to go," said Greenspan, who was answering questions via video link from Washington.

Soros said in a lecture at New York University that the U.S. economy was on the verge of a serious correction and that the Federal Reserve may be underestimating the potential slowdown. "I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing," Soros said.

Bill Gross, chief investment officer at the world's No. 1 bond fund PIMCO, told CNBC Television the Fed could not afford to let U.S. housing prices fall sharply and would need to cut rates aggressively, perhaps to 3.5 percent.

The Fed has already slashed rates by 75 basis points to 4.5 percent in an effort to limit damage to the broader economy from the housing market slide and resulting liquidity crunch.

JPMorgan (JPM.N) thinks the financial services industry is sitting on $60 billion in undisclosed losses. PIMCO's Gross, characterizes the subprime crisis as a "$1 trillion problem."

Greenspan said about $900 billion of subprime mortgages had been securitized into fixed-income instruments, and the excess level of unsold homes was driving price declines that are eroding the value of the securities backed by those mortgages.

"The critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States," he said.

And the threat to the wider economy remains very real -- if banks tighten up on lending in the wake of their losses, consumer spending and business investment could be choked off.

"Financial institutions' marked write-downs suggest that corporate lending activity has potential to tighten significantly in the coming months," BNP Paribas said.

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