Aug. 19 (Bloomberg) -- Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.
``The worst is yet to come in the U.S.,'' Rogoff, a Harvard University professor of economics, said in an interview in Singapore today. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''
The U.S. housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Rogoff, 55, said the government should nationalize Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance companies, which have lost more than 80 percent of market value this year.
Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''
Last month, President George W. Bush signed into law a housing bill that provides Treasury Secretary Henry Paulson the power to make equity purchases in Fannie Mae and Freddie Mac. Paulson asked for the authority July 13 after the shares of the firms, which own or guarantee almost half of the $12 trillion of U.S. mortgages, slid to the lowest level in more than 17 years.
Shares Slump
The mortgage lenders have been battered by record delinquencies and rising losses. Fannie Mae fell to its lowest level in 19 years yesterday amid concern the government- chartered companies will fail to raise the capital they need to offset losses. Freddie Mac slid 25 percent yesterday to the lowest since January 1991.
Banks repossessed almost three times as many U.S. homes in July as a year earlier and the number of properties at risk of foreclosure jumped 55 percent, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. U.S. builders broke ground on the fewest houses in 17 years last month, according to a Bloomberg News survey.
Rogoff told a conference in Singapore today that the credit crisis is likely to worsen and a large bank may fail, Reuters reported earlier. He was the IMF's chief economist from August 2001 to September 2003.
``Like any shrinking industries, we are going to see the exit of some major players,'' Rogoff told Bloomberg, declining to name the banks he expects to fail. ``We're really going to see a consolidation even among the major investment banks.''
IndyMac Bancorp
IndyMac Bancorp Inc., once the second-largest U.S. independent mortgage lender, filed for bankruptcy protection Aug. 1, three weeks after it was taken over by the Federal Deposit Insurance Corp. amid a run by depositors that left it strapped for cash. Bear Stearns collapsed in March and sold itself to JPMorgan Chase & Co. for $10 a share.
``The only way to put discipline into the system is to allow some companies to go bust,'' Rogoff said. ``You can't just have an industry where they make giant profits or they get bailed out.''
The world's largest economy is already in a recession, and the housing market will continue to deteriorate, Rogoff said. The U.S. slowdown will last into the second half of next year, he said, predicting a faster recovery in Europe and Asia.
The Federal Reserve, which has left its key interest rate at 2 percent after the most aggressive series of rate reductions in two decades, risks raising inflationary pressures, he said.
``Rates are too low,'' Rogoff said. ``They must realize we're going to get inflation if things stay where they are. They need to raise rates but I don't think they are going to because they're way too nervous.''
Aug. 19 (Bloomberg) -- U.S. stocks declined for a second day after wholesale prices rose twice as fast as economists estimated, housing starts fell and concern grew that the nation's biggest financial firms will post more losses.
American International Group Inc., the largest insurer, and Lehman Brothers Holdings Inc., the biggest mortgage-bond underwriter, retreated more than 6 percent as analysts warned of more writedowns. Centex Corp. and Pulte Homes Inc. sent homebuilder shares to a three-week low on a government report that builders broke ground on the fewest houses in 17 years. Staples Inc. decreased the most since 2006 and Saks Inc. dropped as much as 13 percent after saying results will miss forecasts.
The Standard & Poor's 500 Index lost 10.30 points, or 0.8 percent, to 1,268.30 at 10:32 a.m. in New York. The Dow Jones Industrial Average declined 108.94, or 1 percent, to 11,370.45. The Nasdaq Composite Index slipped 20.82, or 0.9 percent, to 2,396.16. Four stocks dropped for each that rose on the New York Stock Exchange.
``With the continued bad news from the financial sector, some retail information that was disappointing and no sign of improvement in housing, everything is bumping along the bottom,'' said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees about $300 billion. ``Every sensible person should be at the beach today.''
`Spooked Investors'
A government report before the market opened that said prices paid to U.S. producers in July rose 1.2 percent ``spooked people a bit,'' Carey added. So-called core producer prices that exclude fuel and food climbed 0.7 percent. Economists estimated a 0.2 percent increase.
Almost 207 million shares traded on the NYSE, or 14 percent less than the same time a week ago. Trading was the slowest for a full session since Dec. 27 yesterday.
The S&P 500 is down 19 percent from an October record after the biggest U.S. housing slump since the Great Depression slowed consumer spending and spurred turmoil in credit markets. Signs that economies in Asia and Europe are deteriorating also weighed on global equities today, sending the MSCI World Index to a 1.3 percent drop.
AIG fell the most in the Dow average, decreasing $1.33, or 6.2 percent, to $20.27. Goldman Sachs Group Inc. said it's ``increasingly likely'' the insurer will have to raise more capital. AIG may have to pay $20 billion on credit-default swaps that the company sold to protect fixed-income investors against losses, resulting in rating-firm downgrades and a ``large scale'' capital raise, analyst Thomas Cholnoky said in a note today.
Lehman slumped 95 cents to $14.08. The fourth-biggest U.S. securities firm may write down about $4 billion in credit-related investments and other assets when it reports fiscal third-quarter earnings, JPMorgan Chase & Co. analysts said.
Still `Difficult'
``The credit environment continues to be difficult,'' New York-based analysts led by Kenneth Worthington wrote in a report yesterday. ``It will be another difficult quarter for Lehman.''
The S&P 500 Financials Index lost 2.2 percent, the most among 10 industries.
Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.
``The worst is yet to come in the U.S.,'' Rogoff said in an interview in Singapore. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''
The U.S. housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm.
17-Year Low
Centex lost 15 cents to $14.56. Pulte retreated 22 cents to $12.31. The S&P 500 Homebuilders Index declined 1.7 percent.
Builders in the U.S. broke ground on the fewest houses in 17 years in July, signaling the residential-construction slump will continue to hurt economic growth. The 11 percent decrease to an annual rate of 965,000, the lowest since March 1991, followed a 1.084 million pace the prior month, the Commerce Department said. July's level was higher than economists anticipated. Building permits, a sign of future construction, also fell.
Saks tumbled 9.9 percent, the most since March, to $10.11. The U.S. luxury chain reported its biggest quarterly loss in two years on discounts for women's apparel and said second-half sales will be lower than it forecast earlier.
Staples fell 5.2 percent, the most since May 2006, to $23.30. The world's largest office-supplies retailer said full- year profit may rise less than it thought.
Aug. 19 (Bloomberg) -- U.S. builders broke ground on the fewest new homes in 17 years and producer prices climbed the most since 1981, providing no sign of an economic recovery or easing inflation.
Housing starts fell 11 percent in July to an annual rate of 965,000, the Commerce Department said today in Washington. The Labor Department reported the producer price index jumped 9.8 percent from a year before.
``There's no doubt we're in a period of stagflation now,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York who formerly worked at both the Federal Reserve Bank of New York and the Fed Board in Washington.
Stock indexes headed for their biggest two-day loss in more than a month. The Standard & Poor's 500 Stock Index dropped 0.7 percent to 1,269.11 at 10:40 a.m. in New York, with the S&P Supercomposite Homebuilding Index down 1.7 percent. Treasuries were little changed, with 10-year notes yielding 3.82 percent.
Compared with July 2007, work began on 30 percent fewer homes. Building permits, a sign of future construction, also fell in July, the Commerce Department reported. They were down 18 percent to a 937,000 annual pace.
Starts were projected to fall to a 960,000 annual pace, according to the median forecast of 77 economists polled by Bloomberg News. The median estimate for permits was 970,000.
`Pull Back'
``A recovery will not happen this year,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``Not only are mortgage rates creeping up, but financing is becoming more difficult for a lot of people. Builders will continue to pull back.''
The 1.2 percent increase in producer prices from the previous month followed a 1.8 percent increase in June, the Labor Department said. So-called core prices that exclude fuel and food rose 0.7 percent after a 0.2 percent gain in June.
Prices paid to factories, farmers and other producers were forecast to rise 0.6 percent, according to the median of 77 forecasts. The core index was projected to advance 0.2 percent.
``The recent burst of cost-push inflation is giving the beast digestion problems that might manifest themselves in the form of a lingering inflationary fever,'' Dallas Fed President Richard Fisher said in a speech in Aspen, Colorado, today.
Fed Chairman Ben S. Bernanke told U.S. lawmakers last month that officials ``continue to expect inflation to moderate in 2009 and 2010, as slower global growth leads to a cooling of commodity markets,'' while viewing the outlook ``as unusually uncertain.''
Commodity Costs
The jump in the producer price index reflected a surge in commodity costs that has since waned. At the same time, the acceleration in costs excluding food and fuel raises concern about a pass-through to consumer prices.
Producer prices are one of three monthly inflation gauges reported by the Labor Department. Import prices rose 1.7 percent in July and consumer prices increased 0.8 percent for the same period, the Labor Department said last week. Both figures were higher than estimated.
Construction of single-family homes fell 2.9 percent to a 641,000 rate, the fewest since January 1991, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 24 percent from the prior month to an annual rate of 324,000.
``The news ahead for housing remains bad,'' Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a Bloomberg Radio interview. ``There's a corrective process we have to get through here.''
Northeast Sales
The decrease in starts was led by a 30 percent decline in the Northeast. Construction fell 8.2 percent in both the South and West. Starts in the West slumped to a 26-year low. The Midwest showed a 10 percent gain.
The magnitude of the July drop in the Northeast reflected, in part, a payback from an unexpected surge the prior month. Starts and permits jumped in June as builders hurried to break ground ahead of new regulations in New York City's building code that took effect July 1.
Underneath the gyrations, demand is weakening. Sales of existing homes fell to a 10-year low in the second quarter, according to the National Association of Realtors. A third of all sales were foreclosures or ``short sales,'' in which lenders take a loss on a property.
Financing is also becoming tougher, a quarterly survey of banks by the Federal Reserve showed. Compared with the April survey, more of the loan officers polled reported they tightened standards on prime mortgage loans and on non-traditional loans.
Toll on Retailers
The slumping U.S. economy is taking its toll on retailers from luxury chain Saks Inc. to discounter Target Corp., reports showed today. Saks reported its largest quarterly loss in two years, while profit dropped for a fourth straight quarter at Target. Home Depot Inc., the biggest home improvement chain, posted its seventh sales decline in eight quarters.
Falling retailer earnings may signal that the U.S. economy will deteriorate further as consumers rein in spending to cope with rising unemployment and inflation. Home Depot Chief Executive Officer Frank Blake told analysts today he was ``cautious'' about consumer spending through mid-2009.
The five largest U.S. homebuilders reported a combined $1.08 billion in losses in their most recent quarters.
Builders are pessimistic as losses mount. The National Association of Home Builders/Wells Fargo's sentiment index yesterday showed optimism held at a record low in August for a second month.
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