IMF Puts Cost of Crisis Near $1 Trillion
Problems 'Metastasized' To Threaten Economy Worldwide, Report Says

By Neil Irwin
Washington Post Staff Writer
Wednesday, April 9, 2008

Worldwide losses from the credit crisis could near $1 trillion, the International Monetary Fund said yesterday, reflecting the massive cost of the breakdown in markets for home mortgages and other kinds of debt.

The IMF, which is holding its semiannual meeting in Washington this week, urged banks to disclose losses quickly, raise extra cash if necessary, improve their techniques for dealing with risk and reconsider how top managers are paid so that they have better long-term incentives.

The IMF estimated that banks, insurance companies, pension funds, and other kinds of investors will suffer huge losses: $565 billion on U.S. home mortgages, $240 billion on debt backed by commercial real estate such as office buildings and shopping centers, $120 billion on corporate loans such as those used to acquire businesses, and $20 billions on consumer loans such as credit cards.

Those figures add up to $945 billion in losses expected within two years. That would be about $143 for every person on Earth, or $3,100 for every U.S. resident.

"What began as a fairly contained deterioration in portions of the U.S. subprime market has metastasized into severe dislocations in broader credit and funding markets that now pose risks to the macroeconomic outlook in the United States and globally," the IMF said in its Global Financial Stability Report.

The IMF emphasized that the numbers are estimates. But they are similar to those of a growing number of private analysts, such as those at Moody's Economy.com and Goldman Sachs, who have also estimated losses in the trillion-dollar range. The IMF report shows that predictions of such losses, which were extreme outliers a few months ago, have become mainstream.

Already, banks and other financial institutions that report publicly have marked down the value of their assets by about $200 billion. Hedge funds and other investment vehicles that do not have to disclose their losses have probably also recognized significant losses.

The report indicated that by mid-March, U.S. banks had reported "most of their estimated losses," with European banks now catching up. But institutions other than banks, such as insurance companies, "may yet also report sizable additional writedowns."

The ultimate scale of losses could end up to be more manageable; estimates such as those prepared by the IMF can swing wildly depending on assumptions such as where home prices will settle and how many people will walk away from mortgages they cannot afford.

"We have all to be a little bit humble on the analysis of the crisis, because it has been a very, very complex crisis," Jaime Caruana, the IMF's director of monetary and capital markets, said at a briefing.

Mickey D. Levy, chief economist at Bank of America, noted that during the savings-and-loan crisis of the late 1980s and early 1990s, analysts routinely predicted huge losses -- estimates that turned out to be too pessimistic.

Also yesterday, the Federal Reserve released minutes of the March meeting at which it cut the interest rate it controls by three-quarters of a percentage point -- showing that members of the central bank's policymaking committee feared a recession.

"Many participants thought some contraction in economic activity in the first half of 2008 now appeared likely," the minutes said. Negative economic growth over six months would indicate a recession.

Chairman Ben S. Bernanke basically endorsed that view last week in congressional testimony, as he acknowledged the possibility of recession and said that the economy may not grow much "if at all" in the first half of the year.

Fed leaders consider the possibility of something even worse than that, according to the minutes. "Some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than is currently anticipated," the minutes said.

Many at the Fed say the nationwide drop in home prices could put the economy in uncharted territory, as there are no clear precedents for how consumers will respond.

But the minutes also show worry about inflation, and two members of the Federal Open Market Committee, Philadelphia Fed President Charles I. Plosser and Dallas Fed President Richard W. Fisher, dissented from the decision.

"Fisher and Plosser were concerned that inflation expectations could potentially become unhinged should the Committee continue to lower the funds rate in this environment," the minutes said. Plosser argued that if the Fed waited for clearer evidence of rising inflation expectations, it could be too late.

Also yesterday, former Fed chairman Paul A. Volcker discussed the unusual intervention by the central bank in the workings of Wall Street last month, including the rescue of investment bank Bear Stearns.

The Fed took actions "that extended to the very edge of its lawful and implied power, transcending certain long embedded central banking principles and practices," Volcker said in a speech to the Economic Club of New York.

And Alan Greenspan, in an interview on CNBC, said the nation is "in the throes of a recession," as he defended the decisions he made when he was Fed chairman.

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