Interview With Ex-IMF Chief Economist Banks Won't Be as Profitable in Future

In a SPIEGEL interview, Harvard academic and former International Monetary Fund chief economist Kenneth Rogoff, 55, discusses Wall Street's never-ending crisis.

The New York Stock Exchange: "You just can't make money out of think air like this."

The New York Stock Exchange: "You just can't make money out of think air like this."

SPIEGEL: Last week, the United States government rescued mortgage finance companies Fannie Mae and Freddie Mac, and only a few days later investment bank Lehman Brothers was forced to file for bankruptcy protection. Is there any end to this debacle on Wall Street?

Kenneth Rogoff: It's the worst financial crisis since World War II -- there's really no hyperbole anymore. At the same time, it had to happen. The US financial system was bloated and overgrown and reckless to some extent. Now it is being reigned in.

SPIEGEL: What went wrong?

Rogoff: In 2006, the financial sector accounted for a third of corporate profits in the US, although it only represents 2 or 3 percent of total gross domestic product. Goldman Sachs alone distributed $16.5 billion in bonuses to its 26,000 employees. I'm sorry, I think it's unbelievable. You can't just make money out of thin air like this, and underlaying this there were enormous risks being taken.

SPIEGEL: What do you think willl happen now?

Rogoff: What we're seeing is a shrinking industry -- perhaps by 20 or 25 percent and in some segments perhaps as much as 50 percent. But these finance products based on fancy rocket science and derivatives just aren't coming back, and that's very painful. The industry is not going to make the same profits in the future as it did in the past. And this isn't just about subprime and mortgage losses. Investors are starting to realize that the profit model these investment banks were running on has been trimmed.

Former IMF chief economist Rogoff: "There are so many people to blame for what happened."

Former IMF chief economist Rogoff: "There are so many people to blame for what happened."

SPIEGEL: The US Federal Reserve Bank is intervening ever more often and ever more massively.

Rogoff: If the system just continues to implode, it's going to be very difficult for the Fed to step back and let all the banks go under. They're clearly going to have to throw taxpayer dollars in -- even if there's long been a debate about the fairness of that. I wouldn't be surprised if, at the end of the day, we see the US taypayer out $1 trillion.

SPIEGEL: What would that mean for the US economy as a whole?

Rogoff: All the evidence shows that when you have a recession accompanied by a financial crisis, it takes much longer to dig your way out of it. The economy is going to grow very slowly in 2009, perhaps by only 1 percent.

SPIEGEL: At the end of the day, who bears responsibility for the debacle?

Rogoff: There are so many people to blame for what happened. It would be like the title credits at the end of a movie if you were to name them all. But the people most to blame are President George W. Bush and the US Congress. The political system has willfully ignored this problem and at many points pressed the regulators to do nothing.

Interview conducted by Frank Hornig.


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