Max Keiser speaking before the UN Security Council about disarming bankers

Leading economist fears decade of weakness in US

Suzy Jagger in New York

One of the world's leading economists has given warning that the United States is facing a decade of financial misery, with the number of unemployed Americans set to continue to rise for years.

Robert Shiller, Professor of Economics at Yale University, who predicted the end of the internet bubble seven years ago, said: “We could have many years of a very weak economy. Big recessions are followed by years of weakness and typically unemployment keeps rising.

“To say that this will last years is not a dramatic statement. What is happening now is much worse than 1990. We could be facing a decade of real weakness.

“This is no ordinary recession. There are signs that people see this as a different story. People are talking about a depression, something that we haven't seen previously.”

• Huge rise expected in US unemployment figures

• ‘Terrible’ US job losses reach 34-year high

Professor Shiller's comments come as the unemployment rate in America is rising astonishingly fast.

Last week official figures showed that the US lost 524,000 jobs in December, with the overall unemployment rate rising to 7.2 per cent — the highest level for 16 years.

With about 11.1 million people out of a job, the total number of unemployed is about 50 per cent higher than a year ago.

Some economists, such as Kenneth Rogoff, the former chief economist at the International Monetary Fund and now a Professor of Economics at Harvard University, believe that America will be lucky if unemployment peaks at 9 per cent of the workforce and that there is a high chance that it will reach at least 10 per cent.

Professor Shiller, who said that he has talked to the incoming Obama Administration about possible solutions to the housing crisis in the US, took a swipe at the Federal Reserve.

He said: “This recession is by no means mechanical. People have lost a sense of confidence, a sense of trust in institutions and in each other. It is very hard for a central bank to address that by just cutting interest rates.”

Professor Shiller, who has recently published The Subprime Solution — How Today's Global Financial Crisis Happened, and What to Do About It, also warned that plans to try to limit foreclosures had met with resistance from those who felt “they had paid their mortgages, they had done everything right, but that they are now being taxed for those who did not”.

The housing market in the United States is widely seen as one of the main causes of its economic troubles.

Spurred by low interest rates and initiatives to promote home ownership, residential real estate boomed for a decade.

Professor Shiller, who co-founded the authoritative S&P Case/Shiller home price index, was one of the first to predict that the housing market would slump and that this could bring down financial institutions.

He said: “So far the Government isn't doing much. [President-elect Barack] Obama has not made any announcement. They do not have anything going. I would have thought that Obama would be receptive [to a rescue plan to stem the rate of foreclosures].”

Recession means brisk business for pawnbroker H&T

• Graeme Wearden
• guardian.co.uk, Monday 12 January 2009 18.32 GMT
• Article history

Britain's biggest pawnbroker has cheered the City by predicting it will comfortably beat profit expectations after enjoying a surge in business last year.

H&T Group reported this morning that its chain of 105 UK stores experienced strong growth during the last six months of 2008, a time when many families began to suffer from the downturn in the economy.

With like-for-like sales up by 3% in December, H&T is confident that its pre-tax profits for the year will beat consensus forecasts of £10m by at least 10%.

H&T, whose website's slogan reads "Helping you get your hands on cash", opened 16 new stores last year. Much of its business involves making loans guaranteed against personal possessions such as gold jewellery, though the company, founded in 1897, also provides cheque-cashing services.

Chief executive John Nichols said H&T was planning to open more stores and hire more staff in 2009. So far, H&T has not seen an increase in the number of customers failing to repay their loans. Nichols said this could change, though, if consumers were hit by rising prices and bills this year.

The average loan made by H&T is £120, typically repaid after three months. H&T reported last summer that gross profit in its pawnbroking business grew by almost 36% in the first half of the year. The soaring gold price has also helped the company, as it buys broken jewellery which is sold on as for scrap metal.

Analysts at Daniel Stewart tipped pawnbrokers as likely winners of the financial crisis.

Shares in H&T jumped by 13%, gaining 19.5p to close at 172p.

Warning that house prices may fall by 80%

LAURA SLATTERY

HOUSING MARKET: IRELAND WILL see more demolition than construction of houses over the next decade, as the economy struggles to recover from the collapse of the housing market and the emergence of “zombie” banks, UCD economist Morgan Kelly told the conference.

In a presentation that drew several collective intakes of breath, Mr Kelly predicted that house prices would fall by 80 per cent from peak to trough in real terms.

“Construction, but not demolition, of residential and commercial property will fall to zero for the foreseeable future,” he said.

Low levels of education among those employed in construction – where worker numbers peaked at about 280,000 – meant retraining would not be straightforward.

Recovery will be slow: “It has taken us 10 years to get into this situation – it will in all likelihood take us 10 years to get out of it.”

Mr Kelly said he had been hailed as being extremely prescient as a result of his warnings in relation to the property bubble, when in fact he and a handful of other “amateurs” were merely stating what was obvious.

Sparing no blushes, he said professional economists in the Central Bank and the Economic and Social Research Institute “need to look very closely at their analyses of the Irish economy and figure out what went wrong”.

Mr Kelly said Ireland’s “reputational capital” had been damaged by “chancers” such as ex-Anglo Irish Bank chairman Seán FitzPatrick, who had been abetted by “buffoons” such as former financial regulator Patrick Neary, Minister for Finance Brian Lenihan and the Taoiseach.

In discussing the €110 billion given in loans to developers, Mr Kelly said a typical regional housing collapse in the US saw banks sustain a 20 per cent loss on these loans, but the narrowness of the Irish market increased the risk of “substantially larger losses” for Irish banks.

“The guarantees of Anglo and [Irish] Nationwide liabilities have a strong chance of being called in over the next 21 months,” he said. Extending the Government guarantee to these two financial institutions was “extraordinarily unwise” and could produce losses that the State cannot afford to repay.

The global financial crisis may have been positive for the Irish economy as it “stopped us dragging ourselves even deeper into our hole,” he said. “If it had taken another year or two, we would have ended up in an Icelandic-shaped hole, which is not to say that we won’t end up in one.”

Mr Kelly said the Government should abolish stamp duty on property, compile proper price and quantity statistics and restore competitiveness through a public sector pay cut of 10 per cent.

A paper by TCD economist Patrick Honohan on the banking crisis argued that capital injections in the banks were a prerequisite for recovery. The financial regulator needed to decide now which banks had systemic importance to the economy – in other words, are “too big to fail”, and which are “zombie” banks.

“The goal is to avoid the continued operation of an undercapitalised, error-prone bank with a flawed business model and administrative practices, a problematic customer base and a compromised management facing distorted incentives,” the paper stated.