Tags: us | economy | Gretchen | Morgenson | Joshua | Rosner | meltdown

‘Reckless’ Authors: Meltdown ‘Risks Are Enormous’

Tuesday, 31 May 2011 01:26 PM

The United States has still not addressed the problem of dealing with financial institutions deemed too-big-to-fail, leaving the country at risk to another meltdown like in 2008 or worse, say Gretchen Morgenson and Joshua Rosner, co-authors of the book “Reckless Endangerment.”

Since the crisis, big banks have gotten only bigger, and due to their complexity, size and international reach, analyzing them is a tough task.

“We have more too-big-to-fail institutions, more politically inter-connected, very deep and wide institutions that could create another system event like we had,” says Morgenson, a New York Times journalist.

“We have not solved that problem, so it’s almost as though the situation that brought us to Fannie Mae and Freddie Mac having to be bailed out has now been squared or quadrupled, so it has really become worse, not better.”

Plus a crisis doesn’t have to occur in the United States to spark a crisis.

It could happen anywhere the bank operates.

“They’ve got far flung operations around the world that we don’t really have information on. This is problematic,” says Rosner, an analyst at Graham Fisher.

“They are all functionally impossible to analyze, and the risks are enormous.”

Any banking crisis would pose a serious problem to the country, considering the fragile shape of the economy.

The Federal Reserve is printing more and more money in an effort to spur economic recovery but in actuality is creating an asset bubble, says Rosner.

“We have a Fed that is still under the assumption that all they have to do to revive the economy is blow a new bubble, and so the housing bubble really took off as the Internet bubble collapsed and now they have blown so much money into the system that we’ve got a commodity bubble, we’ve got emerging market bubbles, and that seems to be the answer.”

Consumer demand, the engine of the U.S. economy, is not really revving up thanks to the Federal Reserve’s monetary policy.

Weak demand coupled with loose monetary policy could spell disaster when the Federal Reserves does raise rates in order to keep inflation rates in the comfort zone.

“We’re creating a new problem with the banks because there is a lot of interest rate risk there. As interest rates finally rise, we’ll see which banks end up in trouble.”

Some Federal Reserve officials say higher interest rates are just what the country needs in order to encourage more savings and prevent bubbles from forming in the first place.

The Fed cut its benchmark rate to zero to 0.25 percent in 2008 to boost economic growth and will keep it unchanged until the first quarter of 2012, according to a Bloomberg survey of economists and analysts.

“I’m not advocating for tight monetary policy, but I do think we have to get off of zero if we want to avoid repeating some of the mistakes of the past with a very easy credit environment,” Hoenig said in an interview on CNN’s “Fareed Zakaria GPS” show scheduled for broadcast Sunday, Bloomberg is reporting.

“We kept the interest rates too low,” says Hoenig.

“It’s not that I want to point blame to myself or anyone else, but I do have to say this is what happened, what were the consequences and what have I learned from it and — and adjust policy the next time going forward.”

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The United States has still not addressed the problem of dealing with financial institutions deemed too-big-to-fail, leaving the country at risk to another meltdown like in 2008 or worse, say Gretchen Morgenson and Joshua Rosner, co-authors of the book Reckless...
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2011-26-31
Tuesday, 31 May 2011 01:26 PM
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