[Marxism] IMF: "largest financial shock since the Great Depression"

["Fred Feldman" <ffeldman@xxxxxxxxxxxxxxxx>]

We are in the worst financial crisis since Depression, says IMF
Governments will have to pay for more bailouts, says Fund as it slashes
growth forecasts and warns of global recession

http://www.guardian.co.uk/business/2008/apr/10/useconomy.subprimecrisis

Heather Stewart 
The Guardian, 
Thursday April 10 2008 
This article appeared in the Guardian on Thursday April 10 2008 on p28 of
the Financial section. 

The US mortgage crisis has spiralled into "the largest financial shock since
the Great Depression" and there is a one-in-four chance that it will cause a
full-blown global recession, the International Monetary Fund warned
yesterday.

As finance ministers and central bankers arrived in Washington to discuss
ways of tackling the crisis, the IMF warned, in its twice-yearly World
Economic Outlook, that governments might be forced to step in with more
public bailouts of troubled banks and cash-strapped homeowners before the
crisis was over.

"The financial market crisis that erupted in August 2007 has developed into
the largest financial shock since the Great Depression, inflicting heavy
damage on markets and institutions at the core of the financial system," it
said. 

After warning this week that the world's financial firms could end up
shouldering $1trn (£500bn) of losses from the credit crunch, the IMF said it
expected the US to experience a "mild recession", notching up GDP growth of
0.5% in 2008 and 0.6% in 2009. It expects house prices to fall by up to a
further 10% before the downturn is over.

With the US sliding into such a recession, there is mounting pessimism about
the ability of the rest of the world to escape unscathed. The IMF shaved its
forecast for growth in the global economy by half a percentage point, to
3.7% for this year, and by 0.6% - to 3.8% - for 2009. 

Although the Washington-based body expects most emerging economies to
continue to grow strongly over the next two years, it admits that efforts to
tackle the knock-on effects of the credit crunch could be hampered by
fast-growing commodity prices. "Inflation has picked up around the globe,
mainly reflecting sharp increases in food and energy prices," it said.

In the US, President Bush has already signed off a $150bn tax rebate package
to kick-start the US economy, and the Federal Reserve last month backed an
extraordinary emergency buyout of the investment bank Bear Stearns. 

However, the IMF said more taxpayers' cash may still need to be spent to
unblock the markets. "Given the serious risks coming from sustained
financial market dislocations, the recent legislation to provide additional
fiscal support for an economy under stress is fully justified, and room may
need to be found for some additional support for housing and financial
markets."

Simon Johnson, IMF research director, presenting the report in Washington,
described such bailouts as an essential "third line of defence", after
interest rate and tax cuts, for governments struggling to prevent a deep
recession. 

He said the main risk to the global economy over the next year was the
emergence of a vicious circle, as house prices continued to fall, dealing a
fresh blow to the world's banks, and creating a damaging feedback loop. 

"Sentiment in financial markets has improved in recent weeks since the
Federal Reserve's strong actions with regard to investment banks. But we
have seen how strains in markets can quickly become reinforcing, and the
possibility of a negative spiral or 'financial decelerator' remains a
possibility," he warned.

The IMF's downbeat analysis creates a gloomy backdrop for policymakers
arriving in Washington to discuss ways of easing the credit squeeze. Such is
the concern about problems in the financial markets that a range of radical
options is on the table. These include greater disclosure of losses on
sub-prime assets by banks; firmer regulation of credit-rating agencies, and
- more controversially - plans for taking some of the risky mortgage-backed
assets at the heart of the crisis on to government balance sheets. Alistair
Darling, the chancellor, is calling for a detailed plan to be agreed over
the weekend.

The IMF backed more comprehensive disclosure by banks. "We fully support the
move towards greater disclosure," Johnson said. "We think that marking to
market [rating assets on current market values, not book values] and
continuing to recognise losses is an important part of how the financial
system operates."

The US Federal Reserve has cut US interest rates by a hefty 3 percentage
points to 2.25% since the crisis began, in an attempt to restore confidence
and turn the credit taps back on. The IMF welcomed the Fed's approach but
said it would not be enough to prevent recession. 

"Adverse financial conditions are likely to have a continuing negative
impact on activity in the United States, notwithstanding the Federal
Reserve's strong response," it said. "The United States remains plagued by
profound errors in risk management."

The value of the dollar has plunged to record lows in the past year as the
outlook for the US economy has darkened, but the IMF said the greenback
still "remains somewhat on the strong side".

No bounce after the hard landing
Alistair Darling's forecast that Britain will bounce back from the credit
crunch by next year now looks hopelessly optimistic, according to an
authoritative assessment by the International Monetary Fund.

Just a month ago, in the budget, the Treasury had pencilled in 2% GDP growth
this year and 2.5% in 2009 as the economy recovers, but yesterday the
Washington-based IMF predicted far weaker growth of 1.6% both years.

The chancellor has said repeatedly that Britain is "better placed" to
weather the storm because of its low unemployment and flexible labour
market, but the IMF calculates that the housing market is overvalued by up
to 30% and faces a damaging correction. 


"The housing market is going to be a drag on the economy," said Charles
Collyns, a senior IMF economist. "We do see house prices softening already,
and we see potential that the housing correction will continue, with an
impact on consumption. We also see the UK being affected by the tightening
of the financial constraints related to the turmoil in the financial
markets." 

He added that the knock-on effects of weak growth in the US and the eurozone
would also depress growth.

House prices fell 2.5% last month, Halifax said, and the IMF says the wider
economy will be hit hard as overstretched banks repair balance sheets and
borrowers face tighter loan conditions and higher interest rates. In
January, when it last updated forecasts, the IMF was expecting expansion of
2.4% in 2009, but the longer the credit crunch continues, the more
threatened the UK economy has become. Darling said yesterday that the
downgrade was "not surprising" and the economy was "extremely strong". 
Heather Stewart


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