Large US banks may fail amid recession

“The worst is yet to come in the US,” Rogoff said
in an interview in Singapore. “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 US housing slump has triggered more than $ 500
billion of credit market losses for banks globally and led to the collapse and
sale of Bear Stearns Cos, the fifth-largest US securities firm. Rogoff said the
government should nationalise Fannie Mae and Freddie Mac, the nation’s biggest
mortgage-finance companies, which have lost more than 80% of market value this
year.

US Treasury Secretary Henry Paulson asked Congress
on July 13 for emergency powers to inject “unspecified” amounts of government
funds into the companies if necessary.

Banks repossessed almost three times as many US
homes in July as a year earlier and the number of properties at risk of
foreclosure jumped 55%, according to RealtyTrac Inc, an Irvine, California-based
seller of foreclosure data. US builders probably broke ground on the fewest
houses in 17 years last month, according to a Bloomberg News survey.

Rogoff told a conference in Singapore that the
credit crisis is likely to worsen and a large bank may fail, Reuters reported
earlier. Rogoff, 55, is a professor of economics at Harvard University. He was
the IMF’s chief economist from August 2001 to September 2003.

The world’s largest economy is already in a
recession, and the housing market will continue to deteriorate, Rogoff said. The
US slowdown will last into the second half of next year, he said, predicting a
faster recovery in Europe and Asia.

The Federal Reserve, which has left its key
interest rate at 2% after the most aggressive series of rate reductions in two
decades, risks raising inflationary pressures, he said.