Tags: credit | crisis

Credit Mess: We're Only Halfway Done

Thursday, 28 Aug 2008 10:32 AM

Another prominent economics professor has said that total losses from the credit crunch will easily exceed the International Monetary Fund's early predictions of nearly $1 trillion.

Hyun Song Shin, a leading economics professor at Princeton University, said the financial crisis has entered a second stage and will likely bring total credit losses above $1 trillion.

The subprime mortgage crisis, which characterized the first phase, has already cost financial institutions more than $500 billion, Shin told MarketWatch.

The problem has now spread to the real economy, said Shin. Losses on credit cards, consumer and business debt should match or exceed those from subprime mortgages.

"We'll see as much as the subprime losses again on the other side, at the very least," Shin said.

"We are probably half way (through the financial turmoil). The first stage is done, we're at the second stage … The real issue is how much of the prime mortgage portfolio is going to be affected. That is going to depend on how far house prices will fall."

That is something nobody really knows, Shin emphasized.

The Standard & Poor's/Case-Shiller U.S. National Home Price Index released on Aug. 21 fell a record 15.4 percent during the quarter from the same period a year ago.

The monthly indices also clocked in record declines. The 20-city index fell by 15.9 percent in June compared with a year ago, the largest drop since its inception in 2000.

The 10-city index plunged 17 percent, its biggest decline in its 21-year history.

"This is something we don't have a really good handle on. The IMF figures seem credible, but if you believe others, it could be a lot worse."

The International Monetary Fund already has estimated that financial institutions will suffer a total $945 billion in credit losses.

Shin said that was still a credible number, but it was still probably on the low side.

Earlier this year, Shin co-authored a study with other prominent economists who concluded that the economic impact of the mortgage crisis and credit crunch would be huge.

They estimated that unless financial markets can quickly recapitalize, banks are likely to cut back their lending to consumers and businesses by nearly $1 trillion.

The authors forecast that, should that happen, it would cut economic growth by more than a percentage point over the next 12 months.

The paper estimated that total mortgage credit losses would cost $400 billion. That was up from initial estimates in August 2007 of $150 billion. About half of that will be on the books of U.S. banks and securities firms.

This will result in an estimated contraction in lending of $1.13 trillion, the study concluded.

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Another prominent economics professor has said that total losses from the credit crunch will easily exceed the International Monetary Fund's early predictions of nearly $1 trillion. Hyun Song Shin, a leading economics professor at Princeton University, said the financial...
credit,crisis
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2008-32-28
Thursday, 28 Aug 2008 10:32 AM
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