Federal Reserve Bank of New York President William J. McDonough said Monday that the global economy is suffering its "most serious financial crisis since World War II" and warned the turmoil may become more severe in the coming months.
"It has the propensity to get worse," Mr. McDonough told the Institute of International Bankers. "We are living in an extraordinarily difficult time in our financial markets."
Bankers may overreact to financial unrest and restrict international lending, he said. That could cause a credit crunch, which would exacerbate the global crisis and could damage the U.S. economy, he said. If this occurs, "we will have a worldwide mess," he predicted.
Regulators should stop harping about deteriorating underwriting standards and encourage lending to creditworthy borrowers, he said. "Bank supervisors should be working to avoid a credit crunch," he said.
Foreign bankers at the conference said a credit crunch was the "talk of the town" during this weekend's annual International Monetary Fund-World Bank meeting here. "It has become the worry," said Mads Jacobsen, senior executive vice president at Den Danske Bank, Copenhagen. "We all know we have to stay cool."
Robert E. Hand, general counsel at Bank of Tokyo-Mitsubishi's North American headquarters, said some parts of the world already suffer from a credit crunch. "There isn't a credit crunch in the United States, and it is my sense that there isn't one in Europe," he said. "But there certainly is one is Asia."
Speaking to reporters after the breakfast meeting, House Banking Committee Chairman Jim Leach said he is worried that the global "crisis of confidence" could result in a credit crunch that affects every country. "It absolutely could spread to the domestic economy with great rapidity," the Iowa Republican said.
Mr. McDonough said government officials in developing Asian countries should not try to influence credit decisions. These countries also need bank supervisors skilled in detecting poor underwriting standards, he said.
Seeking to prevent the financial turmoil from spreading further, Mr. McDonough said the economies of Mexico, Brazil, and other Latin American countries are fundamentally sound.
In earlier remarks to the group, Rep. Leach said it is "likely" that Congress will approve the administration's $18 billion International Monetary Fund financing request before adjourning. Objections from some Republican and Democratic lawmakers have held up the appropriation for nearly a year.
