Wednesday, August 20, 2008

— 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.,” Mr. Rogoff, a Harvard University professor of economics, said in an interview here Tuesday. “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 about $500 billion in credit-market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Bonds of regional banks such as National City Corp. and Keycorp are under pressure on expectations of more fallout. Mr. Rogoff said the government should nationalize Fannie Mae and Freddie Mac, the nation’s biggest mortgage-finance firms.

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 Bush signed into law a housing bill that provides Treasury Secretary Henry M. Paulson Jr. the power to make equity purchases in Fannie Mae and Freddie Mac. Mr. 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.

The mortgage lenders have been battered by record delinquencies and rising losses.

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, Calif., seller of foreclosure data.

“Like any shrinking industries, we are going to see the exit of some major players,” Mr. Rogoff said, declining to name the banks he expects to fail. “We’re really going to see a consolidation, even among the major investment banks.”

Mr. Rogoff was the IMF’s chief economist from August 2001 to September 2003.

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