Economic stutter steps?

Roubini sees weeds amid green shoots

Excerpt:

The U.S. economy will not recover until the end of this year, and even then growth will remain meek and vulnerable to higher interest rates and commodity prices, economist Nouriel Roubini said on Tuesday.

Roubini, who rose to prominence for predicting the global credit crisis, tore down the "green shoots" theory that a rebound is imminent, saying there was a significant risk of a "double-dip" recession where the economy expands slightly only to begin contracting again.

"In addition to green shoots there are also yellow weeds," he told the Reuters Investment Outlook Summit in New York.

He pointed to the growing divergence between business sentiment surveys, which have been improving in recent months, and industrial production, which is down sharply and receded another 1.1 percent in May.

Roubini, the head of economics research firm RGE Global Monitor, said the U.S. jobless rate, already at a 26-year high of 9.4 percent, would reach 11 percent before it begins to ease. He added that he saw few engines for growth given that U.S. consumers are tapped out

As a result, Federal Reserve policy-makers, whom Roubini says completely missed the magnitude of the crisis at its inception, face an unenviable set of policy choices.

He said weak growth would allow the U.S. central bank to leave interest rates near the current rock-bottom levels for the foreseeable future. Eventually, however, trillions of dollars of unprecedented emergency measures to heal the financial system will need to be mopped back up to prevent an upsurge in inflation.

Rampant inflation could lead to negative economic cycles like the ones that plagued much of the industrialized world in the 1970s.

Comment: As I recollect 6 months or so ago they were talking about an economic recovery mid-2009. Well we missed that! Compare previous posts:

11.17.2008: Recession half way over?

the U.S. economy entered a recession in April and that it will last 14 months

10.20.2008: Cusp of harsh recession?

Many experts expect unemployment will soar from its current level of 6.1 per cent and worry it could go above 8 per cent. The Fed now thinks that unemployment will rise above 7 per cent and is likely to peak at about 7.5 per cent

Reality: NYTimes 06.05.2009: "The unemployment rate rose to 9.4 percent in May, the government says"

Recession half way over?

Forecasters: U.S. in 14 month recession

Excerpt:

... the U.S. economy entered a recession in April and that it will last 14 months, which would make it one of the longest recessions since the Great Depression of the 1930s.

Comment: Doesn't sound too bad!

"It's a recession when your neighbor loses his job; it's a depression when you lose your own." Harry S Truman

"Recession is when your neighbor loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter loses his." Ronald Reagan

Another Reagan quote (that would apply it seems to GM, Ford and Chrysler): "Government's view of the economy could be summed up in a few short phrases If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it"

Yet another that would apply to President-Elect Obama's plans (for large government): "Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other."

"moral hazard", unwise risks, spiralling deficits

Ignoring Reality Has a Price

Excerpts:

... today’s ever-expanding bailouts do create some dangers. You’ve probably heard the term moral hazard, which is shorthand for the idea that government rescues may lead investors to take new, unwise risks — and ultimately require yet more rescues.

The Fed is also setting itself up for tough decisions about when to end its various emergency programs. If it waits too long, it could leave so much money sloshing around the economy that inflation will take off. Fed officials have suggested they understand that they made precisely this mistake after the 2001 recession, when they kept interest rates low and added to the mania in the housing market.

Finally, there is the net cost of the bailouts, which may well be bigger than Mr. Bernanke has acknowledged. Under the new program announced Tuesday, the Fed will own the commercial paper that serves as short-term loans for companies. If some of those companies go bankrupt, the Fed could suffer some losses.

The Treasury’s $700 billion bailout fund, meanwhile, is based on the premise that investors are collectively undervaluing assets and that the government can pay above current market prices without losing much money. “One has to be at least a bit skeptical,” the economist Greg Mankiw says, “about the idea that government policy makers gambling with other people’s money are better at judging the value of complex financial instruments than are private investors gambling with their own.”

After talking with budget analysts, I think it’s reasonable to assume that the bailouts will end up costing several hundred billion dollars, spread over several years. Perhaps $100 billion of that cost may come next year. Add in another $100 billion or so for the weakening economy — specifically the fall in tax revenue, increases in spending on social programs and the possibility of another stimulus package.

Even before the crisis, the Bush administration was set to bequeath a $550 billion deficit to its successor. Now, a better estimate appears to be $750 billion — or 5 percent of gross domestic product. The only years since the 1960s that the deficit has been nearly so large were the early 1990s (almost 4.5 percent of G.D.P.) and the mid-1980s (with a peak of 6 percent in 1983).

Obviously, next year’s deficit is a problem. And if you assume the credit crisis isn’t about to lift — which seems smart at this point — the ultimate cost of the bailouts could conceivably go higher. Whatever the final figure, it should still be put in some context.

Despite everything, the biggest fiscal problem remains, far and away, health care. Based on the rate that medical spending has been rising, the Congressional Budget Office forecasts that Medicare and Medicaid will take up 10 percent of G.D.P. within two decades, up from about 4 percent now. In today’s terms, that would be the equivalent of adding at least $900 billion to the deficit every single year, in perpetuity. It makes the cost of the bailouts look like a rounding error.

Comment: I talked to my 88 year old Mother last night. I asked her about "the depression". Her Mother was a schoolteacher and worked without pay. Her Dad ran a Standard Oil rural distribution route (HQ in Alto Michigan). His customers bought on credit and were persistently behind in payments. They survived and we will too!

But politicians have over-promised and we must not rely upon government for every need!

The failed stimulus package

The Simple Math of a Failed Stimulus

A new report, released yesterday, says that real growth in gross domestic product (GDP) -- otherwise known as "the economy" -- was 1.9% during the second quarter. Trouble is, this data comes with two giant caveats:

1. Growth was lower than the 2.3% economists had expected.
2. Gross domestic purchases -- a measure of demand -- fell for the second time in the last three quarters.

Translated, this means that the much-ballyhooed stimulus package likely had some effect, but not as much as the experts thought it might. Me? I'm not surprised at all.

I'm not a number-cruncher or a brilliant prognosticator. I just know what I read in my credit card and home equity statements, and in my paycheck. I'm making less, I'm paying interest on borrowings, and my savings options aren't thrilling. The average five-year CD from credit-crunched financiers such as Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and Wachovia (NYSE: WB) is just 4.13%, Bankrate reports.

Economy: Nobody's found Goldilocks' body yet

Goldilocks is dead, CSI looking for the body, says Wells economist

Excerpt:

With crude oil hitting $145 a barrel and jobless numbers looking recessionary, the so-called Goldilocks economy that was neither too slow to throw people out of work nor too strong to fuel inflation is over, according to a report issued Thursday by a Wells Fargo economist.

"It's starting to feel like a CSI episode out there. Nobody's found Goldilocks' body yet, but investigators are on the case looking for someone to blame," said Scott Anderson, senior economist at the San Francisco bank (NYSE: WFC).

Anderson says he was debating whether to issue his gloomy report before the Fourth of July holiday or after. He decided his analysis might go down better after a few beers at the barbecue.

"If you haven't been out looking for a job lately, you might be surprised by the increasingly sparse pickings of new employment opportunities and the amount of competition there is for the few job openings that are available," Anderson said in his report.



Comment: Pretty bleak!

A "fear-session"

Wells Fargo Economist: Current crisis showing signs of easing

Excerpt:

The current economic crisis is being driven more by fear than facts and should begin to ease in the second half of 2008, an economic forecaster told a group of executives in Houston on Thursday.

Jim Paulsen, chief investment strategist for Wells Fargo Capital Management, offered a new word to describe the current state of affairs in the country. Rather than a recession, Paulsen suggests the country is in a "fear-session" that is not supported by underlying positive signs beginning to bubble up to the surface.

"If we're in a recession, it's the most widely anticipated recession ever," Paulsen said, in an address to oil industry executives sponsored by the Houston-based Wells Fargo Energy Group. "Everyone bought into (a recession) long before it happened, and it really still hasn't happened. This is more a crisis of confidence than a crisis of credit."

Instead, Paulsen suggested that the country is in a "mid-cycle economic slowdown" and sees positive trends beginning to emerge, despite the continued woes of the automobile and housing sectors. The current situation is a normal evolution in a capitalistic society, he added.

Paulsen pointed out that profit margins among non-financial sector U.S. corporations are running at near post-World War II highs, with double-digit profit growth in the fourth quarter of 2007 and first quarter of 2008.

"Yes, things are pretty nasty in housing and the automobile sector," Paulsen said. "But look at what contributes the other 93 percent of the gross domestic product -- and it's up 4 percent this quarter."

In the next 12 months, Paulsen predicts oil prices could slip as the U.S. dollar gains strength against the euro and Canadian dollar.


Comment: Interesting read.

Credit: a collective loss of self-control

The Great Shopping Spree, R.I.P.

Excerpts:

Transfixed by turmoil in the financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree. For the past quarter century, Americans have gone on an unprecedented consumption binge—for cars, TVs, longer vacations and just about anything. The consequences have been profound for both the United States and the rest of the world, and the passage to something different and unknown may not be an improvement.

It was the ever-expanding stream of consumer spending that pulled the U.S. economy forward and, to a lesser extent, did the same for the global economy (the reason: imports satisfied much of Americans' frenzied buying). How big was the consumption shove? Consider. In 1980, Americans spent 63 percent of national income (gross domestic product) on consumer goods and services. For the past five years, consumer spending equaled 70 percent of GDP. At today's income levels, the difference amounts to an extra $1 trillion annually of higher spending.

...
In a new book, "Going Broke," psychologist Stuart Vyse of Connecticut College argues that there has been a collective loss of self-control, abetted by new technologies and business practices that make it easier to indulge our impulses. Virtually ubiquitous credit cards (1.4 billion at last count) separate the pleasure of buying from the pain of paying. Toll-free catalog buying, cable shopping channels and Internet purchases don't even require a trip to the store. Pervasive "discounting" creates the impression of perpetual bargains.

There's something to this. In 1976, L.L. Bean began accepting credit cards over its toll-free lines; in a few years, sales soared. But the recent consumption binge probably has more immediate causes. One was the "wealth effect." Declining inflation in the early 1980s (in 1979, prices rose 13 percent) led to lower interest rates—and they led to higher stock prices and, later, higher home values. More Americans got into stocks; the number of customer accounts at brokers went from 9.7 million in 1980 to 97.6 million in 2000. People regarded their newfound wealth as a substitute for annual savings, so they spent more of their annual income or borrowed more, especially against higher home values.


Reminder: Luke 12:15, “Take heed and beware of covetousness, for one’s life does not consist in the abundance of the things he possesses.”

In a recession, prices should be falling

An Inflation Indicator Leaves the Fed in a Tough Spot

Excerpt:

A gauge of prices paid by American producers jumped 1.1 percent in March, the Labor Department said on Tuesday, sharply accelerating from a 0.3 percent increase in February.

The increase, led by a surge in gasoline and home heating oil prices, was twice what economists had expected.

The higher prices put pressure on businesses to pass on costs to consumers, though some economists said the housing slump and weakening job market could discourage businesses from raising their prices.

“Given the weak nature of domestic demand now and going forward, it is unlikely that businesses will have as much success raising prices at the consumer level as they did in the not too distant past,” Joshua Shapiro, an economist at the research firm MFR, wrote in a note to clients.

The increases did not spread to popular products like automobiles and clothing. The closely watched core measure of the Producer Price Index, which excludes volatile costs of food and energy, rose 0.2 percent in March, falling back from an unexpected 0.5 percent rise in February.

The low core rate could take some pressure off the Fed as it tries to balance rising inflation with the overall slowdown in growth. Fed officials have acknowledged that inflation remains a serious concern, but they have signaled they will continue to focus on staving off a prolonged recession.


Comment: Prices are going up because the dollar is going down! Thus all that we import goes up.

The Fed: "between a rock and a hard place"

Higher inflation makes Fed’s job a lot tougher

Excerpt:

With the economy slowing and the housing market stuck in reverse, Wednesday’s surprise pop in the government's monthly inflation data was not good news for the Federal Reserve.

The problem: Central bankers now find themselves between a rock and a hard place in trying to meet their dual goal of setting interest rates low enough to get the economy moving again while keeping rates high enough to keep prices in check.

The Fed can’t do both. But given the ongoing turmoil in the capital markets — and the risk of a credit crunch that could do even more damage to the fragile economy — Fed watchers say inflation-fighting is taking a back seat.

Comment: Add this: The need to avoid Stagflation

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Funny thing at work today:

The three rules of public speaking: know your audience, your your limitations, and keep it simple.

I was in a meeting today that was over Net-Meeting. I was in a conference room with the presenter and a guy from finance. The presentation was via PowerPoint and had over 30 slides. Midway through the meeting, my eyes were growing dim but I fought to stay awake. The finance guy to my left dozed off completely. At one time he had his head on the conference table. The humor of this kept me alert.

Wells Fargo: U.S. will 'skirt recession'

Wells Fargo: U.S. will 'skirt recession'

Excerpt:

Wells Fargo Private Bank economists believe the United States will avoid recession in 2008, a pair of investment strategists told a Denver audience on Tuesday.

"Wells Fargo believes the United States will skirt a recession," which is defined as two consecutive quarters of negative economic growth, said Erik Davidson, senior director of investments for Wells Fargo Private Bank's Mountain Midwest region, which includes Colorado.

Comment: Encouraging financial perspective.

Housing: a daisy chain of delays

Sorting Out the New Housing Market

Excerpt:

A year ago, having a home that had appreciated in value meant that an owner could trade up to a more expensive home. Now it means that the homeowner cannot move until the old home is sold, and that is getting more difficult.

First, the seller has to find a buyer who can get a mortgage. Second, the price has to be high enough to pay off the old mortgage and leave enough cash for the down payment on a new home. Both were taken for granted a year ago. In many markets, neither is a sure thing now.

That has created a daisy chain of delays and cancellations that has frustrated builders, homeowners and real estate agents.

Selling one house depends on the buyer’s selling another house, and that deal in turn depends on yet another sale, and so on and so on.

A failure to get a mortgage approved at any stop along the way can halt the sales of an entire series of homes.

The loss of mobility stems from the fact that homeowners with houses worth less than they owe can find themselves unable to move to accept a job in a different city.

Comment: Not owning a home is actually a good position in some cases: allows greater mobility!

No simple solution for housing "excesses"

Paulson: No simple solution to housing crisis

Excerpt:

Paulson, in remarks prepared for a New York speech, said that the country was facing an unprecedented wave of 1.8 million subprime mortgages which are scheduled to reset to sharply higher rates over the next two years. He said this raised the possibility of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain subprime mortgage rates for five years to allow the housing market to recover.

"By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy," Paulson said in excerpts of his speech released by Treasury. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years."

Paulson said that the deal the administration brokered with the industry to freeze certain subprime mortgage rates for five years did not involve the use of any taxpayer money. Conservative critics have complained that the administration's plan represented government intrusion in the operation of markets that would end up rewarding some people who had taken out risky mortgages.


Comment: The market will correct itself but it will be painful for home sellers!

Wells Fargo Economists: 2008 forecast

Wells Fargo Economists: Economy Continues to Slow, Recession Unlikely in '08

Excerpts:

"Healthy export growth and continued business spending will help the economy steer clear of an outright recession, but I believe that won't be significant enough to prevent an economic slowdown in 2008," said Dr. Scott Anderson, senior economist for Wells Fargo & Company. "Rapidly cooling earnings growth and rising economic uncertainty will make U.S. companies reluctant to undertake ambitious expansion plans in 2008."

---

Jim Peet's Forecast for 2008

Comment: I'm not much about forecasting (so this is probably near worthless) but I thought I would take my own stab at forecasting and then check back a year from now and see how badly I did:

Sports: Green Bay and New England in the Super Bowl ... Green Bay wins! (If I really had any "faith" I would say the Vikes and New England ... but I am a realist!

Politics: Hillary vs. McCain. McCain wins the Presidency! (Frankly I don't really have a clue ... but I am putting my stake in the ground and will wait to see what happens)

Stocks:

Stock	12/20/07	Forecast 12/20/08
Dow	13,180	14,200
NASDAQ	2,617	2,800
S&P 500	1,451	1,525
WFC	30	36
MMM	84	97

Gasoline: Today in Plymouth = $ 2.799 ... in a year = $ 3.290 Plymouth gasoline prices

Fourth Baptist Church: Our Senior Pastor will be installed on March 2nd, 2008 (please know I have no inside track! Don't take this as anything other than a guess!)

Nightmare Economic Scenario?

Mortgage Failures Could Create Nightmare

Excerpt:

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

Kiplinger: Mortgage crisis forecast

Mortgages: How Long Till Daylight?

Excerpt:

The subprime mortgage crisis is going to take most of 2008 to clear up. Hardly a day goes by without a major lender announcing a multibillion-dollar write-down on the value of mortgages and mortgage-backed securities in its possession. The cascade of bad news spells big trouble for banks' earnings in coming quarters as well as a continuing drag on the stock market and the economy in general.

In the meantime, a huge chunk of the mortgage market -- namely, subprime and other higher-risk loans -- will be frozen, sapping demand for housing and imposing continued downward pressure on the pace of construction and sales. The risky loan category rose from only 7% of outstanding mortgage debt in 2000 to almost 25% this year.

Comment: Others think it will take 2 years to clear!

Subprime macroeconomic shock

Goldman Sees Subprime Cutting $2 Trillion in Lending

Excerpts:

The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a ``substantial recession'' in the U.S., according to Goldman Sachs Group Inc.

Losses related to record home foreclosures using a ``back- of-the-envelope'' calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief U.S. economist at Goldman in New York wrote in a report dated yesterday. The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.

``The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,'' Hatzius wrote. ``It is easy to see how such a shock could produce a substantial recession'' or ``a long period of very sluggish growth,'' he wrote.

Goldman's forecast reduction in lending is equivalent to 7 percent of total U.S. household, corporate and government debt, hurting an economy already beset by the slowing housing market. Wells Fargo & Co. Chief Executive Officer John Stumpf said yesterday that the property market is the worst since the Great Depression.

....

Hatzius said his report is based on a ``conservative estimate'' of financial companies cutting lending by 10 times the loss to their capital. Investors realizing half of the potential losses, at $200 billion, would have to scale back lending by $2 trillion, he said.

....

Goldman's outlook matches forecasts by Joseph Stiglitz, the Nobel-prize winning former World Bank economist, who said in an interview today that the U.S. faces a ``very major slowdown, maybe recession'' because of a ``consumption binge'' fueled by household borrowing.

``What it all comes down to is that Joe Six-Pack has been taking equity out of his house and supporting the U.S. economy,'' said Simon Ballard, global credit strategist at ABN Amro Asset Management in London. ``Now house prices are correcting, the bubble is deflating. You're going to see the engine of global growth significantly weaker.''

Comments: I feel like I am living out my degree in Economics watching this unfold!

Oracle Of Omaha speaks

Buffett says mortgage ills might linger

Excerpt:

DAEGU, South Korea (AP) — American billionaire investor Warren Buffett said Thursday that problems in the U.S. subprime mortgage market will likely weigh on consumers for up to two years but that the U.S. economy will weather the storm.

The subprime problem "is having an impact," Buffett said on his first visit to South Korea. "It will have more of an impact."

Rising default rates among U.S. mortgage holders with poor credit histories have rattled global credit, stock and currency markets since August and raised concerns about a possible recession in the U.S. economy, a major export market for Asian companies.

"In the next 6 months, one year, two years, the problems in the mortgage market can cause a lot of problems with consumers and hurt buying power in the United States," he said at a press conference after arriving earlier in the day from China on his private jet.

However, the U.S. economy has often had to face various difficulties and the present is no exception, said the Omaha investor.

"Overall the economy will make progress," he said.

Wikipedi: Warren Buffett

Subprime financial toll

Reports Suggest Broader Losses From Mortgages

Business
Reports Suggest Broader Losses From Mortgages
By VIKAS BAJAJ and EDMUND L. ANDREWS
Published: October 25, 2007
Economists say mortgage market troubles could, all told, cost financial firms and investors up to $400 billion.

Excerpt:

At this juncture, economists say the troubles in the mortgage market could, all told, cost financial firms and investors up to $400 billion.

That is far more than the roughly $240 billion cost, adjusted for inflation, of the savings and loan crisis of the early 1990s, according to estimates of the combined financial toll of that crisis on both the federal government and private sector. The loss in total real estate wealth is expected to range from $2 trillion to $4 trillion, depending on how far home prices fall, according to several economists.

That would be significantly less than the losses suffered by investors in the stock market collapse earlier this decade, which erased more than $7 trillion, or about 40 percent, of market value.

Experts caution that these estimates are preliminary and the total costs could get bigger still. They also note that the loss of real estate wealth could prove more damaging for the general public than falling stock values because more American families own homes than own stock.


Comment: Consider earlier CFG posting: Subprime fallout!

What will the Fed do?

Fed will act as needed to protect economy from market turmoil, official says

"The Federal Reserve will continue to monitor developments in financial markets and act as needed to support the effective functioning of these markets and to foster sustainable economic growth and price stability," Kroszner said in a speech here to the Institute of International Bankers.

....

Some economists believe the Fed will lower an important interest rate at the end of a two-day meeting next Wednesday, to help bolster economic activity. But others, citing the economy's resiliency and worries about an inflation flareup, think the Fed will leave rates alone. Oil prices, which had surged to record highs in recent weeks, have eased a bit but are still hovering above $86 a barrel.

It's a delicate situation facing the Fed.

To prevent the ill effects of the credit crunch and housing troubles from sinking the economy, the Fed in September sliced a key interest rate by a bold one-half percentage point to 4.75 percent. It was the first rate cut in more than four years.

Before that aggressive move, the Fed had taken other actions to deal with the credit crises, which had taken a turn for the worse in August. The Fed pumped billions of dollars into the financial system to help banks and other institutions get over the credit hump. It also reduced its lending rate to banks.


Comments: I predict a .25% rate cute. Not a good time to be selling a house! Still a good time to be buying stocks! I don't see the housing market recovering for some time (perhaps more than a year!). Meanwhile ...

IMF chief warns dollar may suffer 'abrupt fall'

Excerpt:

The head of the International Monetary Fund, Rodrigo Rato, warned Monday there are risks of an "abrupt fall" in the dollar, linked to a loss of confidence in dollar assets.

"There are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets," Rato told the IMF board of governors.

He also appeared to suggest that Europe could take steps to temper the strong appreciation of the euro.

"There is a risk that exchange rate appreciation in countries with flexible exchange rates -- including the euro area -- could hurt their growth prospects, and that in these circumstances protectionist pressures could worsen," he said on the final day of the annual meetings of the IMF and the World Bank.

The outgoing IMF managing director spoke as the European single currency hit a new high of 1.4347 dollars and global equity markets tumbled amid growing fears a US housing-related credit crunch could pitch the world's biggest economy into recession.

"The uncertainty ... comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign economic environment of recent years for granted," he said.

"We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn."

A crisis in the risky US subprime mortgage sector, where loans are given to homebuyers with poor credit histories, erupted this year as borrowers defaulted on mortgages amid rising interest rates and a sharp slump in US housing prices.


The spillover of the US credit crunch into global financial markets roiled stock markets worldwide in August and although they have recovered somewhat, the uncertainties of the extent of the credit problems continues to weigh on investors.