ALEX BRUMMER COMMENT: Recession too tough to call

By ALEX BRUMMER, CITY EDITOR
Updated: 16:28 EST, 24 April 2009

Dominique Strauss-Kahn says keeping up to speed with forecasting is proving difficult

Among the scariest aspects of the current global recession is how weak the tried and tested forecasting models are proving. 

The Treasury growth projections in this week's Budget of a downturn of 3.5 per cent a year, followed by a mild 1.25 per cent bounce back next year and robust output in 2011 have been widely challenged.

This is not surprising given the scale of the slump in the first three months of 2009, when Britain's gross domestic product shrank by 1.9 per cent - the largest quarter-on-quarter fall in three decades. But it is not just the UK that is struggling with projections. 

Here in Washington, at the spring meetings of leading finance ministers, the managing director of the International Monetary Fund, Dominique Strauss Kahn, found himself making excuses for the IMF's forecasting.

It is not that the forecasts are 'not accurate enough', he declared, it is the fact the data is changing so rapidly that the forecasts have to be rapidly updated. And these monthly revisions have been ever more gloomy. Among the reasons that the IMF and governments have found it so hard to come to grips with the crisis is the difficulty in cleaning up the banking and financial system where all this began.

As Strauss Kahn depressingly noted here, all the experience of past slumps tells you is 'you never recover before you have completed the cleaning up of the balance sheet of the financial sector'.

In particular he cited the United States, European Union (including Britain) and Japan as being behind the curve. 

Clearly, the IMF is feeling bruised by its unusual clash with Chancellor Alistair Darling over the scale of the banking writedowns Britain needs. IMF officials here now concede that the data which placed Britain at the top of the injured league, with some 13 per cent of GDP possibly impaired, failed to take full account of the ring-fenced toxic debt in Darling's asset protection scheme.

Despite the great optimism stemming from first-quarter banking results in the US, which looked better than anyone hoped, no one is kidding themselves that American banking is out of the hole. Far from it.

The much trumpeted plan outlined by Treasury Secretary Tim Geithner to involve the private sector - hedge funds, private equity - in buying up toxic debt in an auction with loans provided by the government is taking a great amount of time to leaving the starting stalls.

Among Darling's aims here, in his capacity as co-chair of the London G20 finance ministers group, is to see if this can be moved on as the 'stress testing' of US bank balance sheets is concluded.

Ken Lewis has testified to say he was forced to keep details of Merrill's losses under wraps

The American way of letting it all hang out, a culture of openness and inquiry, is not making matters any easier. The big scandal here at present is one we cannot imagine taking place in Britain, where we know so little about the side deals made between Government and banks (other than Sir Fred Goodwin's pension) at the height of saving the world.

Inquiries by the New York Attorney General Andrew Cuomo into the rushed takeover of Bank of America by Merrill Lynch last September (engineered on the same weekend that Lehman failed) have moved to Capitol Hill and could prove enormously damaging to Hank Paulson, the former Treasury Secretary, and more importantly the Federal Reserve chairman Ben Bernanke.

Bank of American boss Ken Lewis (who incidentally is facing a vicious assault from dissident shareholders) has testified under oath that he was asked by the authorities (Paulson and Bernanke) to keep details of Merrill's fourth-quarter losses of $15.84billion from shareholders until after the deal was completed.

As late as December, when he learned of the scale of Merrill's troubles Lewis tried to back away from the merger, but was bullied into it because of the 'risk to the financial system'.

At least in the United States there are sufficiently robust checks and balances which allow full discussion and disclosure of the backroom deals made between government and bankers at the height of the crisis.

It may not help President Obama to bury the shocking financial losses at the core of the current global slump, but at least taxpayers are gaining an insight into how their savings were ruined and the public finances debased.

We have never, for instance, been told the true story of how Lloyds TSB was locked into a rescue deal for Halifax Bank of Scotland which has proved every bit as ruinous as Bank of America/Merrill.

Keeping secrets might seem the right thing to do. But if there is to be real clean-up of the banks and a restoration of economic confidence then investors and taxpayers are entitled to know a great deal more.