bank run blog

Fed chief Ben Bernanke conceded that bank failures are inevitable in the months ahead, during testimony before a congressional committee this week. Bernanke, who dismissed the idea that the US was headed for a period of stagflation, assured the panel that the wave of failures would be confined to small and midsize independent institutions, according to the Financial Times :

“Some small US banks are likely to fail as a result of the housing crisis, Ben Bernanke said
yesterday, warning that his country faced a more difficult situation than in the aftermath of the dotcom bust in 2001.

He said the banks at risk were ‘small and in many cases de novo [new] banks that are heavily invested in real estate in localities where prices have fallen’.”

Reuters noted that Bernanke’s downbeat remarks had the effect of bolstering the bond market :

“In an environment of growing mistrust about which banks are best positioned to weather the crisis, his statement struck a nerve, sending benchmark 10-year notes up 1-13/32 in price for a yield of 3.68 percent. Yields were down 18 basis points, the biggest one-day decline since December.”

A CNN feature offered a handy consumer guide to bank failure :

“Bad news about the banking industry may have you wondering about the safety of your hard earned cash at your own bank.”

But the forecasters CNN spoke to were slightly more pessimistic than Bernanke :

“’Regulators are bracing for 100-200 bank failures over the next 12-24 months,’ says Jaret Seiberg, an analyst with the financial services firm the Stanford Group.”

Financial Times : Bernanke predicts bank failures

Reuters : Bonds surge as Bernanke warns of bank failures

CNN : What bad banking news means to you

Former Fed Chairman Alan Greenspan is currently in Saudi Arabia where his prescription for the rising inflation that has beset the Gulf States is for them to decouple their currencies from the US dollar. AlJazeera reported that Greenspan told a conference in Jedda, “in the short term free floating…will not fully dissipate inflationary pressure, although it would significantly do so.”

Of the Gulf States, Qatar is most interested in de-pegging from the dollar. The Prime Minister said, “It’s now time for the Gulf to have its own currency…Like the Japanese yen or other currencies.”
see story

The Fed’s signal of future interest rate cuts sent the dollar tumbling to trade at near record lows against the euro. The dollar has seen two months in a row of loss against the euro and, trading at $1.5144 per euro, the dollar was the weakest it has been against the currency since its introduction in 1999.

The dollar dropped to 106.32 yen (a three year low) and the Austrailian dollar traded at 95.57 US cents (the highest it has been since 1984).

see stories:
Associated Press: Dollar Falls Again, Euro Zone Divided
Guardian, UK: Dollar hits 3-yr low versus yen, rate view stings
Bloomberg.com: Dollar Falls to Record; Jobless Claims Rise, GDP Lags Forecast

The AP covered the Fed chief’s appearance on Capitol Hill this morning :

“Federal Reserve Chairman Ben Bernanke told Congress Thursday that the nation isn’t ‘anywhere near’ the dangerous stagflation situation of the 1970s.

With the economy slowing and inflation rising, fears have grown that the country could be headed for the dreaded twin evils of stagnant growth and rising prices known as ‘stagflation.’

‘I don’t anticipate stagflation,” Bernanke told the Senate Banking Committee. “I don’t think we’re anywhere near the situation that prevailed in the 1970s.’”

It didn’t receive much media attention, but in testimony before the same committee two days ago Prof. Nouriel Roubini was considering a different model, from the ‘30s :

“What will be the consequence of losses of over $1 trillion and, possibly, as high as $2 trillion? That would wipe out most of the capital of most of the US banking system and lead most US banks and mortgage lenders—that are massively exposed to real estate—to go belly up. You would then have a systemic banking crisis of proportions that would be several orders of magnitude larger than the S&L crisis, a crisis that ended up with a fiscal bailout cost of over $120 billion. And the worrisome part of this scenario is that—with home prices likely to fall by 20 percent or more—this scenario of systemic banking crisis is becoming increasingly likely.”

Associated Press : Bernanke Doesn’t See Return of ’70s Woes

Testimony of Professor Nouriel Roubini before the US House of Representatives Financial Services Committee : The Current US Recession and the Risks of a Systemic Financial Crisis

Fannie Mae and Freddie Mac both booked huge losses for the fourth quarter, according to the Associated Press :

“Fannie, the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. Freddie is expected Thursday to report a $1.5 billion fourth-quarter loss, according to Wall Street estimates.”

The markets took the news in stride :

“Shares of Washington-based Fannie, the largest U.S. buyer and backer of home loans, swung widely after the report was released, initially falling by more than 5 percent and later rising by roughly 15 percent. Shares of Fannie climbed 30 cents, or 1.1 percent, to close at $27.27.” full story

The solution to this problem is, of course, to raise the companies’ credit limits. Reuters reports:

“The government on Wednesday lifted limits on the amount the two largest mortgage finance companies can invest in home loans, a move that could unleash billions more dollars to stabilize the housing market and fend off a possible recession.” full story