A homeowners' bailout by U.S. Congress is a "surefire thing", according to George Magnus, UBS senior economic advisor, and the first bailout package is likely to be implemented by October. Speaking in a video interview with Gillian Tett, global markets editor, Financial Times, Magnus also estimated that the total likely losses from the credit crisis could reach as high as a trillion dollars. The following are excerpts from that interview:
FT: Do you have a back-of-an-envelope calculation as to how big the total hit could be in the credit world?
GM: Well, looking at the losses in subprime and collateralised debt obligations and related instruments, including the spillover into leveraged loans, for example, certainly colleagues and I think that it's something of the order of about $500 or $600 billion, which would make it on a scale of the banking crisis of Japan between 1990 and 1994. But I'm afraid we're still counting, because on top of all of these problems that we've had, of course, the US economy is in or close to being in a recession and the European economy is clearly slowing down very significantly... If you want to take a sort of a round number, something close to $1,000 billion at the end of the day is not an impossible number.
FT: So if, indeed, we are facing a potential or possible trillion dollar meltdown, what should the central banks be doing about it?
GM: Well, I think the central banks are, or at least the Federal Reserve, I think, has taken out a very, very extreme form of insurance against this sort of meltdown. And, clearly, the speed and the rapidity with which interest rates have come down is indicative of that, and most people agree that that's not the end of the story that the Federal Reserve will carry on cutting interest rates maybe at least another 100 basis points... But, actually, it's only a part of the solution
FT: So, if monetary policy is not going to solve this by itself, what else can governments do? Are we going to basically end up with a situation where taxpayers will be footing the bill for the credit excesses?
GM: I think it's inevitable. Of course, here in the United Kingdom, the saga about Northern Rock, of course, is now, I think, kind of reaching, or has reached, a conclusion, and, clearly, to the extent that we have some form of nationalisation or public intervention, there is a bill for taxpayers. This is pretty small beer, I think, compared with the kind of activities which I think are going to take place in the United States. And I think that a bailout for homeowners in the United States is as close to a surefire thing as I can imagine. The losses on mortgages are so high and the stories and estimates which, perhaps, more significantly, people make about repossessions and delinquencies in the housing market are so high that, especially in a presidential election year, I think it's just inevitable that there will be very strong action from the Congress. The chairman of the Senate banking committee, Senator Christopher Dodd, is already on record as having indicated the way in which he personally would prefer the situation to be dealt with. And I think we have something of a time limit too because, of course, in October the US Congress goes into recess and the new Congress won't reconvene, I suppose, until after the State of the Union message in late January 2009. So by the time they get round to action it might actually be quite late in the day, so I think the first bailout package, to be honest, I think is going to happen between now and the end of October.
See here for the full transcript 25/2/08 of the video interview.