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Large US-based Financial Institututions Remain Weak and Under Pressure

Big US banks face an uncertain future until the direction of government policy under the new Obama administration is revealed. Financial market are not yet functioning normally and banks remain under pressure.

To help them absorb huge losses from bad housing-related loans, U.S. taxpayers have already extended hundreds of billions of dollars to the biggest US banks. But that cash injection is apparently not enough. In the next few days the Obama administration will reveal its plan for the financial sector.

The stock prices of two of the biggest banks--Citigroup and Bank of America--have declined 80 percent over the past year. The US government has taken minority ownership shares in both Citi and Bank of America.

California money manager Bill Gross, who runs the world's biggest bond fund, says the health of the banking system must be restored for credit markets and the economy to function normally. In an interview on Bloomberg Television, Gross said the economy is in the midst of a painful paying down of excessive corporate and consumer debt. He says the government must inject huge volumes of money into the economy.

"There has been trillions of dollars of credit--bank capital and spending power--extracted from this economy over the past six to 12 months. You can look at from the standpoint of wealth effect (changes in the capital stock), you can look at from the standpoint of lending from banks and the shadow system (other financial institutions), or all of that in combination. But the point is that this economy requires support from the government, a check from the government in some form in the trillions of dollars, as opposed to the hundreds of billions," he said.

Gross says that the sharp run-up in housing prices earlier this decade created an asset bubble that was largely financed with debt. Debt is currently being unwound, a process Gross calls debt deflation. He says as asset prices decline the goverment must provide a cushion so that prices don't fall precipitously.

At an international investment forum in Moscow Thursday, respected financial author Nassim Taleb, said global deflation of asset prices is underway. Speaking on Bloomberg Television, Taleb said the deleveraging process is only beginning and that the economic effects will be painful.

"Things are going to break. What's going to break? I think private equity (financial entitities that use debt to finance investment). I think (also) we have to do something with the banking system," he said. Taleb is a critic of big banks and opposes a further injection of taxpayer money.

At the same conference, Singapore-based investor Jim Rogers, predicted that an exchange rate crisis will occur this year. "One of the next problems is probably going to start in the currency markets. We're going to have some currency crises this year. Whether it starts with the pound sterling, the dollar, or some other currency--the ruble--who knows? But we're going to have many, many more currency problems," he said.

Rogers says the financial crisis has led to sharp volatility on currency markets. He says the dollar is only temporarilly strong and that its decline that ended in mid-2008 will soon resume.