Fed Says the Credit Crisis Is Not Over

From The Times
April 14, 2008

US Federal Reserve says that credit crisis is not over yet
Suzy Jagger in Washington

The credit crisis engulfing the banking system on both sides of the Atlantic has further to run, said the vice-chairman of the US Federal Reserve. As the US Treasury Secretary and central bankers gave warning that proposed financial reforms would not prevent a repeat of the biggest shock to the world economy since the Great Depression, Donald Kohn, of the Fed, said of the present trouble: “It is not over yet.”

His gloomy forecast about the duration of the credit crisis, delivered at the annual spring meeting in Washington of the Group of Seven leading economies, came after the International Monetary Fund had estimated that the market turmoil would trigger losses of almost $1 trillion (£507 billion) among banks, hedge funds and pension groups since last summer. Mr Kohn said: “The market is still adjusting. The turmoil has not settled down yet. It is still a very fragile situation.”

Finance ministers from the United States, Britain, Canada, Japan, France, Germany and Italy endorsed a set of wide-ranging financial reforms to address the credit crisis, but they also said that none of the measures would prevent a similar crisis in the future.

Among the ideas being considered are changes to the way that banks reward staff with huge annual bonuses. Officials are concerned that bonuses encourage risk taking and have proposed an alternative remuneration system that would pay out over a longer time period. Henry Paulson, the US Treasury Secretary, said: “No silver bullet exists to prevent the excesses of the past from re-occurring. It took time to build up recent excesses and it will take time to work through the consequences. We must expect more bumps in the road: 2008 will be a more difficult year.”

Mr Kohn said: “All we can do is to try to make the system more resilient. To make the effects more muted, absorbed by liquidity. Enhanced information and transparency will be greater and will, hopefully, make markets and economies more resilient.”

Mr Kohn was speaking as part of the executive team running the Financial Stability Forum, whose recommendations have been endorsed by the G7 group of nations in a bid to strengthen regulation. The G7 wants to force banks to adopt new crisis prevention measures, such as eventually raising the amount of capital that they hold on their books to act as a cash cushion during difficult market conditions. (The banks do everything they can to circumvent this, as in SIVs in response to the Basel II requirements. So what will change? This is a bandaid on an infected wound. - Jesse)

They have also issued more immediate demands for financial institutions to quickly declare their losses from the crisis. They want to make banks increase the level of transparency to shareholders and regulators about the strength of assets on their balance sheets and to urge regulatory bodies to co-operate better and to share information. They also threatened to introduce legislation that would compel credit rating agencies to admit to conflicts of interest when they rate securities. (Oooooh. Everything they do is a conflicted under the current system. - Jesse)

The G7 finance ministers and bankers agreed to implement reforms within a 100-day timetable, which would make banks set out “fully and promptly” losses and exposures to illiquid mortgage-backed securities blamed for the seizure of credit markets.

However, the policymakers were also keen to say that it was unrealistic to expect regulators to devise an early warning system that would identify the start of a financial crisis or a banking institution that was in difficulties. (Bring back Glass-Steagall. Firewall the guaranteed banking system from reckless speculation and conflicts of interest - Jesse)

Timothy Geithner, of the Federal Reserve Bank of New York, said: “If we could figure out a way to have on our desks a screen with the capacity to predict financial crises it would be terrific, but it is very hard to do. What we can do is make the system more resilient.”

(What we need to do is make the system accountable, credible, and honest. Bring back Glass-Steagall and close the loopholes as we saw with the S&L's. The banks spent hundreds of millions of dollars lobbying to repeal it. Firewall the banking system while they try to reform the speculative arenas. Let them steal from each other and not dip into the public's pockets. - Jesse)