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Imf: Us Housing Slump At Centre Of Financial Crisis

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IMF: US housing slump at centre of financial crisis

By Edmund Conway, Economics Editor

Last Updated: 11:54pm BST 28/07/2008

The world economy is now trapped in a "vicious circle" as the financial crisis is worsened by slumping housing markets on both sides of the Atlantic, the International Monetary Fund has warned.

It said the greatly-feared "negative feedback loop" it warned of in previous reports had now materialised. It also cautioned that it remains far too early to call a bottom to the housing slump in the United States, which lies at the centre of the recent crisis.

In an update to its closely-watched Global Financial Stability Report - the definitive assessment of global markets - the IMF struck a highly downbeat tone and warned that there remains no end in sight for the crisis.

It warned that banks would have to continue raising more capital to shore up their balance sheets in the coming months - signalling that UK institutions may soon have to stomach further rights issues.

But most striking of all is the IMF's conclusion that one of its most feared scenarios had now occurred. Its head of financial stability, Jaime Caruana, said: "The risks we have been talking about [in previous reports] have materialised. There has been a negative feedback loop between the real economy and the financial markets... At the centre of this loop is the housing market in the US, and it is difficult to see at the moment the bottom of it."

In a negative feedback loop, banks curb the supply of credit to households and businesses as the economy weakens. With money harder to come by, this worsens the economic downturn, which causes another spiral in financial markets and banks tighten credit even further.

In a speech earlier in the crisis, the Bank of England's head of markets, Paul Tucker, said: "We must try to avoid a vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other."

The IMF's conclusion that this moment is now upon the global financial system will cause extreme consternation, as will its conclusion that the US housing market will continue to plunge for some time.

The report said: "Stemming the decline in the US housing market is necessary for market stabilisation as this would help both households and financial institutions to recover."

However, the IMF said one encouraging sign was that many of the expected losses from the sub-prime mortgage crisis in the US had now been "largely acknowledged" by banks and investors

The IMF said that banks and financial institutions have now written off more than $400bn in mortgage-related investments, and it reiterated its $1,000bn ultimate forecast.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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