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George Magnus: the man who predicted the sub-prime crisis would lead to recession

Author: Josephine Moulds
First published: The Daily Telegraph, 03/11/2008

Last March, when US Treasury Secretary Henry Paulson was busy reassuring the world that he for one was not concerned about global market gyrations, Magnus wrote a paper that now seems eerily prescient. As senior economic adviser to UBS, he suggested that the US sub-prime mortgage crisis could cause the end of the credit cycle “with potentially systemic economic consequences”.

Liquidity could dry up, exposing the stratospheric levels of debt in the system, with knock-on reactions in complex financial asset structures and prices. Financial institutions, he wrote, could put a freeze on lending, prompting a recession that would give rise to more defaults, a downturn in the credit cycle and a negative feedback loop with the economy.

So, how does it feel to forecast the biggest financial crisis since the 1930s? “I’d like to have predicted something really nice,” laughs Magnus, who at 59 has the air of a University lecturer rather than an investment banker.

Leaning back in a comfortable, if not smart, terraced Edwardian house on a sunny day in North London, he says: “There are a lot of things I’ve tried to analyse and predict in the past which haven’t worked out as I would have thought. This is obviously quite a big prediction that did work out and it’s always nice to be right, just from the professional kudos point of view, but …more