Bill Gross, chief investment officer at Pimco, said the effects of the subprime crisis have yet to be felt—and they will be devastating, the Financial Times reports.
“We haven’t faced a downturn like this since the Depression,” he said. “[The] effect on consumption, its effect on future lending attitudes, could bring [America] close to the zero line in terms of economic growth. It does keep me up at night.”
And Gross is not alone. Other bankers are echoing the sentiment that the subprime crisis could dampen the economy for years, and investor confidence is beginning to show its cracks.
The subprime crisis has created four key problems, the first of which is escalating estimates of losses. Originally, Federal Reserve Chairman Ben Bernake said losses would be $50 billion, but this month, he increased that to $150 billion—but some experts say it could be even double that, or more.
As a result, investors could default on as much as $300 billion in other types of debt. “Investors are now starting to worry that the subprime crisis will broaden out into other forms of consumer and real estate lending,” Goldman Sachs, which estimates subprime losses will top $445 billion, said in a recent report.
The third problem is uncertainty about how this will affect the financial services industry as a whole, due to the fact that many types of assets have been securitized. “Grenades keep going off in the system, and nobody quite knows what to think or expect,” said a policymaker.
Lastly, banks are expected to cut back on lending, which will definitely slow economic growth.
“Three months ago, it was reasonable to expect that the subprime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth,” said Lawrence Summers, former U.S. Treasury secretary. But now it appears very likely there will be a “U.S. recession that slows growth significantly on a global basis.”
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.