By John Parry
NEW YORK, July 17 (Reuters) - The globalcredit crisis will usher in lasting changes in interest rates and attitudes to debt and savings and alter the shape of the financial landscape for good, according to prominent Wall Street economist Henry Kaufman.
The rebound in Treasury bond yields from multidecade or record lows in December likely marks the end of the greatest long-term bull market for government bonds in U.S. history, Kaufman writes in his book "The Road to Financial Reformation", to be published in early August by John Wiley & Sons, Inc.
As chief economist with Salomon Brothers in the 1970s and 1980s, Kaufman was known as "Dr. Doom" for correctly forecasting higher inflation and borrowing costs.
"It is very likely the long secular decline in interest rates is over," as U.S. government debt issuance explodes, forcing longer maturity yields higher, he writes.
In 2010, the 30-year Treasury bond's yield will rise to between 5.5 percent and 6 percent, up from around 4.5 percent currently, Kaufman, president of Henry Kaufman & Company, Inc. in New York, said in a telephone interview this week.
Short-term U.S. interest rates, however, will remain near their current low levels until the Federal Reserve abandons its quantitative easing measures. These will remain in place until the mortgage market begins to improve -- sometime in 2010 at the earliest, he said.
ENDURING LEGACY
The legacy of the global financial crisis will endure, making companies and individuals more reluctant to borrow for many years to come, Kaufman argues.
"The current crisis has brought an end to a decades-long period of private sector debt growth," and "this slowdown is unlikely to reverse any time soon, in part because it is being compounded by troubling trends in unemployment," he writes.
"Securitization", or packaging of financial assets for sale to investors, which helped swell the huge debt bubble and stoke the crisis, will come under closer scrutiny, constraining debt creation in future, Kaufman writes.
For years, households and companies recklessly piled up debt as regulators mostly turned a blind eye. Corporate America must now pay a heavy price for their excesses, writes Kaufman.
American companies are carrying too much debt during the worst recession in decades. The U.S. corporate bond market has rallied back since hitting extreme low prices in the panic of December 2008 but will continue to reflect the struggle of overly indebted companies in a feeble economy.
"The constraints on corporate borrowing include a weak profit picture, a sharp reduction in capital spending and corporate debt overload," which will become increasingly apparent over the next year as credit rating agencies lower debt ratings at an accelerating pace, the author writes.
Catalysts of financial crises include excessive debt creation, securitization, deteriorating credit quality of lower grade corporate bonds, high leverage and passive regulators, Kaufman writes.
By early 2008, U.S. nonfinancial debt exceeded nominal gross domestic product by nearly $19 trillion, up from $8 trillion in 1999 and $500 billion in 1979.
"If the savings rate is to return to healthy levels, we must put an end to the reckless creation of debt," he argues.
But while companies and households may now strive to save more and borrow less, there is still a high risk of major financial meltdowns unless regulators take bold steps to keep big financial institutions in check, Kaufman warns.
"During and after the current crisis, financial concentration will gain even greater momentum and influence unless it is restrained by legislation," he writes.
More than half of all nonfinancial debt is held by the top 15 U.S. institutions, he notes. "These were the very firms that played a central role in creating debt on an unprecedented scale through a process of massive securitization via complex new credit instruments."
If these financial behemoths operate too freely they may operate like a cartel and also destabilize the financial system, he writes.
"These sprawling firms will transmit financial contagion even more quickly than it spread in the current credit crisis."
Longer term, "the pricing power of these huge financial conglomerates will grow significantly, at the expense of borrowers and investors," he cautions. (Editing by Kenneth Barry)
