Housing woes may topple 200 US banks: Nobel winner

The moribund US housing market will need another two to three years before it recovers, and 100 to 200 banks in the country may collapse in the next year, a Nobel economics laureate said.
Michael Spence said an oversupply of houses and weak demand from consumers combined with turbulent financial markets and high inflation will drag on the US housing market, which is in its worst slump since the Great Depression in the 1930s.
"It's going to take awhile to work that out of the system, probably a couple of years," said Spence, who won the Nobel Prize in 2001. Spence said he expects "100, 200" banks to collapse in the United States in the next year because a number are not well capitalised, and the US government will let the smaller ones fail without intervening.
"If you take a reasonable guess as to the value of the assets that they have, it's less than the liabilities, so they are bankrupt," he said. Global financial markets have tumbled after defaults on US mortgages surged to record levels. Many of those loans were repackaged and resold, which has sapped liquidity from markets world-wide.
In the latest debacle in the bust, US government on Sunday seized control of the two largest US mortgage finance firms Fannie Mae and Freddie Mac, which have suffered combined losses of nearly $14 billion in the last four quarters. Spence said the government was right to take over the two companies, whose debt is held by central banks, because it reduced the risk of further credit tightening in markets, but it now needs to put money into the firms quickly so they can buy mortgages again.
However, he said the firms and the government should not engage in "irresponsible" purchases of overpriced houses just so they can prop up the property market. "What we really need is financing for house purchases that are legitimate, and businesses that want to borrow money," he said. Eleven US banks have failed this year, and the Federal Deposit Insurance Corp said the number of troubled US banks rose 30 percent to 117 in the second quarter.