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crunch time at Citigroup « Previous | |Next »
January 16, 2008

The New York Times reports that Citigroup is writing down $22.2 billion because of soured mortgage-related investments and bad loans. The bank is also cutting its dividend by 41 percent, obtaining a $12.5 billion cash infusion to strengthen its balance sheet, and cutting 20,000 jobs.

Citigroup’s capital levels have been severely depleted in the fallout from the continuing credit crisis and worsening downturn in the housing market. Even with the $12.5 billion capital injection, analysts think that the bank may need even more money to shore up its balance sheet if economic conditions worsen.

On his Global EconoMonitor blog Nouriel Roubini makes the following points in a presentation that provides his views on the US and global economic outlook for 2008 and the implications of this outlook for all the major financial markets and asset classes:

• The US will experience a hard landing (recession) that will be severe and protracted rather than mild

• The liquidity and credit crunch will get worse and the risk of a systemic financial crisis is rising

• The Fed easing will be “too little too late” and it will not prevent a recession

• The rest of the world will not decouple; it will rather recouple with the US hard landing leading to a global economic slowdown

That is not good news for Australia, facing strong inflationary pressures.

| Posted by Gary Sauer-Thompson at 4:52 AM | | Comments (2)


Paul Krugman's op-ed in the New York Times--Responding to Recession explores the responses of the presidential candidates to the recession. He says:

Since this is an election year, the debate over how to stimulate the economy is inevitably tied up with politics. And here’s a modest suggestion for political reporters. Instead of trying to divine the candidates’ characters by scrutinizing their tone of voice and facial expressions, why not pay attention to what they say about economic policy? In fact, recent statements by the candidates and their surrogates about the economy are quite revealing.

He then analysizes them.

I don't think that the Rudd Government is serious about inflation. Prices rose by 3.7 per cent last year, which is above the RBA safety band.

Rudd and Swan are going to give income tax cuts of $31billion in income tax cuts that they promised during the election campaign in order to get elected. The Rudd Government says that it will counter the effect of the tax cuts by cutting spending: it has identified $10 billion plus in savings over four years.

Taking $10 billion out of the economy while putting $30 billion back in does not look like a serious attack on inflation. So it is going to be addressed through higher interest rate by the Reserve Bank.

Wasn't Labor's political rhetoric during the election one of railing against interest rate rises which were all the fault of the big bad Howard government. Will this mantra continue ad nauseum with the finger always pointed at John Howard and Peter Costello?

Still monetary policy is deemed to be very good at slowing down an overheated economy---to cool things down---even if it is not always so good at stimulating a lagging economy. Thats more the task of fiscal policy.