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‘Grey hair and good advice matter’

Economic growth, Financial Events, Leverage
By Paul Hodges on 10-Aug-2008

The credit crunch began a year ago. At that time, the blog was very much in a minority when worrying that it might turn into something big enough to impact ‘the real economy’. A year later, it is fascinating to review the crunch’s impact so far, and how people’s attitudes have changed:• Banks have so far lost $493bn in subprime loans, and raised only $337bn in new capital. US banks have lost $250bn and raised $177bn; European banks have lost $221bn and raised $160bn. A year ago, Ben Bernanke of the US Fed said total losses would be no more than $100bn. Now, the IMF forecasts they will be at least $1000bn.

• A year ago, Chuck Prince, then CEO of CitiGroup, famously dismissed the crisis, saying ‘we are still dancing’. On Friday, Sir Fred Goodwin, CEO of RBS, the UK’s 2nd largest bank, said ‘we are nearer the beginning than the end of this crisis’

Wal-Mart and Tesco get full marks for calling it right from the start. The blog noted Wal-Mart saying last August that ‘consumers continue to be challenged financially’, whilst Tesco’s commercial director said clearly ‘coming down the road is a tougher time’.

• In this context, the latest comment from the Head of Wal-Mart’s US operations is very worrying. He told investors last week that ‘we know consumers are spending more cautiously, and we continue to see a pronounced pay-check cycle at the end of the month’.

Reviewing the past year, the Financial Times notes that the financial world is moving back to ‘old fashioned banking’ where there is a ‘welcome premium on know-how and experience’. More generally, it concludes, ‘grey hair and good advice matter once again’.