World faces a second wave, top analyst says

Bloomberg

"The economic setback is still in its early stages," Koyo Ozeki, head of Asia-Pacific credit research at Pimco’s Tokyo office, wrote in a report on the firm’s Web site. "Any further decline in housing prices could accelerate the downturn, intensifying the pernicious feedback loop and possibly leading to a second wave in the financial crisis in the next six to 12 months."

"To overcome that second wave, governments worldwide would have to spend vast quantities," Ozeki wrote. "The resulting erosion in their finances would increase the risk of dangerous side effects."

Pimco, based in Newport Beach, California, is a unit of Munich-based Allianz, Europe’s largest insurer.

Blaming the Fed

Meanwhile, Nobel economics laureate Robert Mundell said the U.S. Federal Reserve should have stopped an appreciation of the dollar in the second half of last year to avoid the deepening global financial crisis.

The U.S. and Europe should peg their currencies to a range of between $1.20 and $1.40, and use that as a basis for establishing "a new world currency," Mundell said in a speech at the Hong Kong Monetary Authority. He also said that Asia should look into creating a regional currency.

"The soaring dollar and falling gold price were symptoms of a shortage of dollar liquidity," said Mundell, who won the Nobel prize in 1999 for research that helped lay the foundation for Europe’s single currency. "Had the Fed recognized this shortage and bought foreign exchange to prevent the appreciation, there would probably have been no financial crisis in the fall."

"The dollar appreciation overvalued U.S. dollar assets, including all fixed-income securities and mortgages, tipping Lehman Brothers and other banks over the edge," he said.