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Banking System "a Long Way from Healthy," Ken Rogoff Says

Posted Dec 09, 2009 01:00pm EST by Aaron Task in Newsmakers, Banking
Related: XLF, SKF, C, BAC, JPM, WFC, FAS
The Obama Administration is going to extend the TARP program into 2010, Treasury Secretary Tim Geithner told Congress Wednesday. But the focus is going to be on aiding consumers vs. financial institutions, amid a sense the banking system is back on its feet after its near-death experience in 2008.

"We didn't have a [second] Great Depression, we could have. You have to give them a lot of points for averting that," says Harvard professor Kenneth Rogoff, co-author of This Time Is Different.

But that doesn't mean the danger is over.

The system is "a long way from healthy," Rogoff says, noting the banks have only profited this year thanks to various and sundry government programs and the Fed's easy money policies. "If I told you, you could borrow almost 30 times what your house is worth at almost zero percent and lend around to anyone you wanted, I'd bet you'd make money too," he says.

The big reason banks aren't lending aggressively is they're bracing for a lot more write-downs in the years ahead, as defaults in consumer loans and commercial real estate mount, Rogoff says. In that regard the banks are acting rationally.

But Rogoff fears onerous regulations will be the ultimate payment for the massive taxpayer subsidized bailouts the banks received in 2008 - and the moral hazard they engendered.

"If bondholders think they can lend to financial institutions at no risk we're going to get into trouble in another 10 years or less if we don't do something," he says.

Unfortunately, that "something" probably means tighter regulations, which could contribute to slower growth going forward, he says.

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