SPEAKING at a finance conference in Singapore yesterday, former IMF chief economist Ken Rogoff woke up slumbering listeners when he predicted: ‘We are going to see a whopper go bust in the next few months.’
Rogoff’s comments coincided with a crash in the shares of the US’ largest mortgage lenders Fannie Mae and Freddie Mac, when it came out that these companies may have to be nationalised by the US government.
Rogoff said: ‘In the next few months, we’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks go.’
Rogoff, now a Harvard economics professor, warned there would have to be more consolidation in the financial sector before the crisis was over.
He forecast that Fannie Mae and Freddie Mac would ‘probably’ not exist in their present form beyond a few weeks.
Shares of Fannie Mae have fallen more than 22%, or $1.76, to close at $6.15, and Freddie Mac shares fell nearly 25%, or $1.46, to $4.39.
Earlier, the US government had to take radical steps to ease the panic over fears Freddie and Fannie would run out of money to fund their business.
All US lenders rely on them to buy their mortgages in order to access the funds to lend to consumers.
As mortgage guarantors, they must pay out when homeowners default on their loans. The scale of the mortgage defaults is so great their finances are crumbling.
Rogoff said the Federal Reserve had made a big mistake in dramatically cutting interest rates because this ‘is going to lead to a lot of inflation in the next few years in the United States’.
• Tim Besley, a member of the Bank of England’s rate setting Monetary Policy Committee (MPC) warned yesterday that inflation could get out of control as it had done in the mid-1970s without an increase in interest rates to ‘nip price rises in the bud’.
Then inflation breached 20%, now it is currently at 4.4%, more than double the MPC target of 2%, due to rising food, petrol and energy costs.
The Bank of England voted at the start of August, to hold interest rates at 5% for the fourth month in a row.
