The first birthday of the credit crunch is 17 days away and if two warnings at the weekend are any guide, it looks like we’ll be celebrating its second birthday in a year’s time.

The crunch erupted on August 9/10 around the world when a French bank announced that it wasn’t supporting two off balance sheet funds with $US2 billion in assets because liquidity had evaporated. The impact spread around the world in less than a day and by the end of that week in August central banks in the US, Europe, Japan, Switzerland, Canada and Australia had pumped hundreds of billions of dollars into financial markets to try and keep the credit system afloat.

That battle has intensified and banks, investment funds, hedge funds and a host of other companies and players have gone bust, stopped doing business, suffered huge and continuing losses, the economies of the US, Europe, the UK, have slowed, growth has dropped and inflation has intruded, thanks to soaring oil prices. We’ve seen unprecedented action by the US Federal Reserve to save investment banks and the US mortgage industry from collapse.

Now the chairman of Citigroup, English investment banker, Sir Win Bischoff, and the US Treasury Secretary, Hank Paulson (a former Goldman Sachs investment banker) have gone further in weekend interviews.

Sir Win told the BBC that house prices in the UK and the US are likely to fall for another two years. That’s a gloomy forecast because plunging US house prices remain at the centre of the whole mess. He told the BBC that he expects it will take two years for the markets to “stabilise” with the credit crunch — fraught conditions in financial markets — to continue through 2009.

Citigroup lost $US2.5 billion, less than expected, but another batch of asset write-downs took the banks’ losses from falling asset values to a massive $US55 billion (which is around the market cap of the ANZ Bank).

The figures were less than analysts had been expecting. The Citigroup chief also said his bank would be cutting staff in the UK, with compulsory retrenchments happening. Citigroup is selling assets around the world to try and ease the pressure.

Figures on retail sales and several other indicators this week will confirm the extent of the malaise in the UK economy: problems which made the country’s Chancellor of the Exchequer tell a newspaper in an interview that there was no more spare money to boost public spending to offset the impact of the slump. That’s why the UK Government is changing its own rules on borrowing limits to give it the ability to spend more next year in the run up to an election.

The other warning came from US Treasury Secretary Henry Paulson. He said in TV interviews in the US yesterday that “it’s going to be months that we’re working our way through this period — clearly months.”

Paulson said the number of troubled US banks will increase as they struggle to cope with big losses on bad mortgages. The government this month took over IndyMac after a run led it to become the largest regulated thrift to fail.

“Of course the list is going to grow longer given the stresses we have in the marketplace, given the housing correction. But again, it’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation,” he said in broadcast interviews.

“We’re going through a challenging time with our economy. This is a tough time. The three big issues we’re facing right now are, first, the housing correction which is at the heart of the slowdown; secondly, turmoil of the capital markets; and thirdly, the high oil prices, which are going to prolong the slowdown,” he said.

The US House of Representatives plans a vote midweek on legislation that is expected to include a rescue for troubled mortgage groups, Fannie Mae and Freddie Mac. Failure to approve the Paulson plan to assist the mortgage groups, would plunge markets back into crisis, as they were 10 days ago.