Page 33 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

of their savings into fixed-income assets. Not surprisingly, these
savings found their way (directly or indirectly) into the U.S. hous-
ing market, which was the rare market large enough to absorb the
tsunami of retirement dollars and provided duration and risk-
return characteristics suitable for these investors.

■ THE BANKING SECTOR WILL ■
TAKE YEARS TO RECOVER

The latest estimate by the IMF puts total losses in mature credit
markets worldwide—primarily in Europe and the United
States—at $3.4 trillion between 2007 and 2010. In the United
States alone, write-offs of $2.0 trillion are expected—equal to
about 17 percent of GDP in 2007. This damage is greater than
the losses of the Japanese banks from 1990 to 1999, which
amounted to $750 billion (in 2007 prices), or 15 percent of
Japanese GDP—and has occurred in a shorter time frame and
on a global scale. Of the total write-downs that the IMF fore-
casts will be incurred by banks, only 60 percent have been taken
thus far in the United States and only 40 percent in Europe.
As a result, banks have been scrambling to raise capital in
order to meet minimum requirements for equity. Despite the
substantial amount of capital already raised ($760 billion in the
United States alone since early 2007), it seems inevitable that
additional capital will be required to keep the banks alive. Even
more will be needed if (as the consensus of the G-20 group of
largest economies indicates) higher equity rates are imple-
mented as part of new regulations. Estimates by the IMF are
grim for 2009–2010: after additional write-offs, U.S. banks will
have a net loss of $110 billion, and banks in euro zone countries

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