Wednesday, January 28, 2009

Bad News and Bad Banks

The IMF has issued a Global Financial Stability Report today. It is much less upbeat than the stock market's response to the news of the day. This report is more than sober. It is describing a potential Depression, or at least a Great Recession.

There is also criticism of the good/bad bank idea from a variety of sources. George Soros is one who feels it is insufficient, and argues for a new "good bank". He is interviewed both on CNBC and video.

On Naked Capitalism, there is a superb review of the issue drawing on an article today by Jeffrey Sachs and the broader issue of the thoughtfulness with with Team Obama and Congress are (not) addressing the economic and financial crisis. They are being accused of "short-term-ism".

Also from NC is a link to an even more troubling article titled "Global Banking Organization Predicts Worldwide GDP Fall for 2009":

"The Institute of International Finance, the global organisation of major banks, predicted an almost unprecedented collapse in world economic growth and capital flows.It became the first major global institution to forecast a full-scale global contraction in 2009, predicting that the economy would shrink by 1.1%

"IIF chief economist Philip Suttle said: "This is the worst period since the interwar years..."He also expects rich economies to contract by 2.1pc – the worst peacetime output since the 1930s.Private flows of capital into the emerging world are set nearly to dry up in the next year, the IIF predicted, dropping from $928.6bn in 2007 down to $465.8bn in 2008 and then to $165.3bn the following year.As a result the current account deficits in emerging Europe will more than treble in the coming year, from $30bn in 2008 to $117bn next year...Asia is likely to suffer a worse downturn than during the Asian financial crisis, the report indicated.The IIF was meeting ahead of the World Economic Forum in Davos, and Mr Rhodes warned that the growing concern this year was the rise in protectionism. He said: "There is a tremendous need to keep trade lines open. If you start seeing – with everything else we're talking about – the reduction of trade lines on top of that, then you really have a problem.'"

Please read the IMF writeup carefully. It does not use the language it uses lightly. I would have to guess that this could well be the single gloomiest report it has ever issued.

The IIF writeup (a Jan. 27 press release) is available directly at

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