FED CONTINUES TO REASSURE PUBLIC

 

Banking house issues R-alert

 

Morgan Stanley issues full US recession alert
The Daily Telegraph, London Wednesday 12 December 2007, 12:37am GMT

NEW YORK — Morgan Stanley has issued a full recession alert
for the US economy, warning of a sharp slowdown in business
investment and a "perfect storm" for consumers as the housing
slump spreads.

Fed Chairman Ben Bernanke
continues to reassure public

In a report "Recession Coming" released today, the bank's US
team said the credit crunch had started to inflict serious damage
on US companies.

"Slipping sales and tightening credit are pushing companies into
liquidation mode, especially in motor vehicles," it said.

"Three-month dollar Libor spreads have jumped by 60 to 80 basis
points over the last month. High yield spreads have widened even
more significantly. The absolute cost of borrowing is higher than
in June."

"As delinquencies and defaults soar, lenders are tightening credit
for commercial, credit card and auto lending, as well as for all
mortgage borrowers," said the report, written by the bank's
chief US economist Dick Berner. He said the foreclosure rate on
residential mortgages had reached a 19-year high of 5.59 percent
in the third quarter while the glut of unsold properties would lead
to a 40-percent crash in housing construction.

"We think overall housing starts will run below one million units
in each of the next two years -- a level not seen in the history
of the modern data since 1959," he said.

Wall Street cheerleader &
Israel booster Dick Berner

Although the US job market has apparently held up well, an average
monthly fall of 138,000 in the number of self-employed workers over
the last quarter suggests it may now be buckling. "Consumers face
what could be a perfect storm," said Mr. Berner.

The partial freeze on subprime mortgage rates announced last week
by US treasury secretary Hank Paulson may help cushion the blow
for some banks, but it could equally backfire by adding a "risk
premium" that drives even more lenders out of the mortgage market.

Like Goldman Sachs, and Lehman Brothers, the bank no longer
believes Asia and Europe will come to the rescue as America slows.

It has slashed its 2008 growth forecast for Japan from 1.9 percent
to 0.9 percent, and warned that credit stress will weigh heavily
on the eurozone.

Mr. Berner said US demand is likely to contract by 1 percent each
quarter for the first nine months of 2008, but the picture could be
far worse if the Federal Reserve fails to slash rates fast enough.
It is betting on a quarter point cut this week, with three more cuts
by the middle of next year. "We expect the Fed to insure against
the worst outcome," he said.

Assisting Ben Bernanke at the
Fed is Vice Chairman Don Kohn

Morgan Stanley is the first major Wall Street bank to warn that it
may now be too late to stop a recession, though most have shifted
to an ultra-cautious stance in recent weeks.

The bank at first treated the August crunch as a "mid-cycle
correction", much like the financial storm after Russia's default in
1998. But the collapse of the US commercial paper market has now
continued for 17 weeks, suggesting a "fundamental deleveraging
of the banking system."

Mr. Berner — known at Morgan Stanley as the "resident bull" —
is one of the most closely watched analysts on Wall Street. While
he began to turn bearish last April as the credit markets turned
nasty, the latest report is written in tones that may is rattle the
fast-diminishing band of optimists.