Posted on 07/15/2008 9:07:59 PM PDT by Freedom_Is_Not_Free
RGE Monitor MEDIA ALERT: Nouriel Roubini predicts the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades.
New York, July 15, 2008- In a series of recent writings on the RGE Monitor Nouriel Roubini - Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business - has argued that the U.S. is experiencing its worst financial crisis since the Great Depression and will undergo its worst recession in the last few decades. His analysis leads to the following conclusions:
This is by far the worst financial crisis since the Great Depression
* Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust
* Dozens of large regional/national banks (a' la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust
* Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly.
* In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
* The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression
* Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
* This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.
* This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk - and the collapse of many counterparties - will lead to a systemic collapse of this market.
* This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.
* Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.
* The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.
* The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries - U.K., Spain, Ireland, Italy, Portugal, etc. - leading to a risk of a hard landing in these economies.
* But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 20-30% will further reduce inflationary pressure. The Fed will have to cut the Fed Funds rate much more - as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.
* The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel - as the first Bretton Woods regimes did in the early 1970s - as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for it existence.
Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 200
I know the articles conclusion is inflammatory, calling for the worst recession since the Great Depression. It is not my aim to stir that pot. I am hoping that people will just read and absorb all of the financial reasons he gives to support his conclusion. I'm just trying to convey the extent of the futures losses and logjams in the financials and the economy.
Please try to keep an open mind despite the extreme conclusion the author is lead to by the data. I just want you to know the data and think for yourself what could come from it.
I know... I'm just a RAY of SUNSHINE!
Can we be like Houdini and get out of it?
BUT, if leadership would make the case for a 'moonshot' style drive for energy independence, the development of our resources --including of course the brilliant American citizen lead technology to exploit-- would drop price for oil immediately and become the means to end out debtor status and make us not only independent but the provider for the rest of the world seeking answers!
I think voters care more about what is happening here in the U.S. than they do what is happening in Iraq.
And your point?
Well, of course. We all know that the houses we live in are worthless, that land is free, that the current infrastructure of the country has no value whatsoever — so of course everything everybody owns is actually worthless.
On the other hand, I don’t I’ll mourn the death of the broker-dealers who did little more than interject themselves in the middle of the process and siphon off quick bucks while leaving others holding the bag.
Ping
But there is also a possibility that it could get significantly worse, for all the reasons Roubini cites. There are a lot of negative factors in this particular perfect storm, and what I find MOST troubling is: it is not at all clear to me whether our leadership is looking to rip off or outright destroy the last bits of flesh of this country or to actually perform some constructive, corrective action.
Maybe we have to hit a hard bottom, "AA style" before this country can get on its feet again. If that's the case, then we do. Maybe this generation needs to have its "generational challenge" to separate the prevailing brain dead jerkball culture we have going.
I can't say. It's easy to get overwhelmed, we have some very serious stuff going on.
"Devaluation" is inflation, just a less loaded word. That "devaluation" is ongoing with two upticks in the rate in the last 6 years. Real inflation right now is very high and at Carter levels. The official numbers are less onerous because periodically those who report the official rate remove the the most rapidly rising prices from the "basket" of prices used to compute the official rate. The proffered rate is not the inflation rate. It does not measure the actual inflation rate but measures, instead, the rate of increase of a few selected prices. Other prices, like oil, are not included because there are other reasons that can be cited for oil's rise.
If there were not inflation, the drastic rise in oil MUST cause a FALL in the average level of all other prices. That is manifestly not the case. The main clue that inflation is Policy is the nonpublication of the M3 measurement of money. That ceased to be published when it began to be obvious that the money numbers therein showed higher inflation rates than advertised by the government.
Lots of generalities in the article.
Brinker has touted total market mutuals for ever. I don't listen much to him anymore. Has anyone heard him give a sell sign yet?
It is important to be equity specific, IMO.
Anyone heard from "professional" lately.
I can agree with the 28% pullback. When did Roubini write this, after the US market was already down 20% across the board?
Emphasis has been on financials and real estate for more than a year now. Don't invest in them. Don't put new money in equities. Sell financial mutuals or any that have more than 10% in financials.
IMO - The U.S. economy will not see a recession this year. More like 3% GDP growth.
yitbos
It is entitled:
The Current U.S. Recession and the Risks of a Systemic Financial Crisis
by
Nouriel Roubini
Professor of Economics at the Stern School of Business,
New York University
and
Chairman of RGE Monitor
(www.rgemonitor.com)
Written Testimony for
the House of Representatives’ Financial Services Committee
Hearing on February 26th, 2008
Inflation is the result of how we are paying for the war. We aren’t paying additional taxes to cover the expense, we are borrowing. Congress is authorizing increases in the national debt, which increases the money supply. And that’s inflationary.
If we don’t curtail government spending and reduce the trade deficit the dollar will continue to fall.
The U.S.A. economy has been growing nicely for more than 6 years now. GW's tax cuts have added immensly to the federal coffers. U.S. deficit spending is down vis a vis total spending for several years.
yitbos
IMO, you're wrong. We shall see.
Yep.
If we can get Greenspan to keep knitting booties, and if Benranke would just shut the hell up.
Then there’s (maybe) the debt thing (which nobody wanted to hear in January of this year).
SO yes. The problem CAN be fixed (it won’t take Houdini to do it either).
But that’s ONLY if.
bump
Will the Democrats really lead us over the edge out of spite, or are they just stupid?
Inflation is not the result of paying for the war. It is the method by which we are paying for the war. It is the government welshing on its debts by paying back dollar denominated debt in smaller dollars, smaller value. All governments indulge from time to time. It has ended some governments. Think of Weimar Germany.
What percentage of homes are owned outright? Where will the taxes come from for the towns and municipalities come from to pay the future obligations?
It's easy to call the equity in a home wealth - it's another thing to feed your family with it.
Airlines are toast for the next year. Energy prices are absolutely un-democratizing travel to the point that only the very rich will be able to fly soon. EVEN if we start drilling now (and we should), we won't see the benefits for a few years. (Not 10 like the Dems say, but it would take a couple of years from permission/leasing to actual gas at the pump).
The fact that GM is actually in the zone of bankruptcy is seriously troubling---and of course it's not all the cost of energy, but bad management, union pressures, and above all, the contracts years ago that bloated their labor exposure on health care and retirement.
Couple all this with the political situation, which is terrible no matter who wins. McCain might want to balance the budget---but with a Dem Congress and Senate, can he? I seriously doubt it. Will he fight to do so? Are you kidding? Against his "friends" across the aisle?
Obama, on the other hand, wouldn't even try to fix anything, but would try to socialize everything, ballooning our deficits and killing the dollar.
I don't see a lot of sunshine here.
The problem is, even a President McCain will have to FIGHT for these: will he? Has he ever indicated a willingness to FIGHT THE DAMN DEMOCRATS on anything? No. He has only fought his own people.
Voinovich is calling for a ‘Manhattan Project’ energy policy. I would think calling for a Kennedyesque ‘Moon Shot’ is more along the lines of what is called for, given the secrecy history of the Manhattan Project. But then the Pubbies aren’t known for publicity savvy or sound leadership since RWR left the scene.
I guess it would depend on what Voino has in mind. If it’s DRILLING as well as all sorts of other technologies, fine. If it excludes drilling, forget it.
DOOOMED!!! Dogs and Cats living together, TOTAL ANARCHY!
This article is dead on, and so are we. There is nothing you can do, preparing is futile, it’s over /not sarcasm
If you see an iceberg ahead, the moral thing to do is shout the warning. Not let the passengers sleep until impact.
It is just a matter of knowing what to expect. I’m not a perma-bear. I don’t think the USA is toast, but I do want people to know that it truly is differnt this time, and that this is NOT a normal downturn or a mild recession. That’s all. I’m not predicting the Great Depression, the Sequel. I just want more Freepers to question their own defensive measures to weather a serious economic downturn.
Cash. Lose debt. Stay safe. No big purchases. Don’t be seduced into big, illiquid investments with a lot of downside risk. You think anybody’s listening? I’m howling at the moon. I’m preaching to the choir. Those who are really bearish because they know what a liquidity crisis means, and because they know the magnitude of losses in the financial sector and what it means for real estate values to plunge as far as they have with no bottom yet in sight.
But so many others are acting like we have already bottomed and the economy isn’t going to get worse. That’s a mistaken assumption. A painfully mistaken, false assumption. Yet understandable. An entire generation has never seen bad economic times, so they are clueless, quite literally. Their parents thought the 70s was a one-time event that our brilliant government has learned from and will avoid in the future. Little do they know...
I’m not trying to hook the membership on anti-depressants. I’m just trying to raise the alarm and I suspect my attempt is in vain. I should shut up and save the forum the grief. Stupidly, I don’t know when to quit.
I’ll say this much. You don’t hear much anymore from Freepers who were touting Dow 16,000 and “its the best time to buy, ever!”
I agree that the FED is trying to inflate. We’ll see if deflation wins overall. What I’m reading now makes me suspect that the US government doesn’t have enough ink in the presses to inflate fast enough to head off eventual catastrophic deflation (I’m not talking Great Depression II, but more 1990s like Japanese deflation).
I don’t think they are really inflating, try as they might. No doubt they have crushed the dollar so some inflation has occurred but it seems to be offset at least by deflation in areas other than food and energy. The FED is not really pumping yet, just robbing peter to pay paul. Lee Adler of www.capitalstool.com continues to demonstrate that every time the Fed pumps the economy, they turn right around and take it back. They seem to be tightening as much as loosening.
http://acheson.wordpress.com/2008/06/06/fed-drained-week-ending-662008/
I’m not sure that Bernanke has really started to run the Xerox yet. It only feels like it because we are getting inflation from a weak dollar. I think the national debt and continuing trade deficit have more to do with that, than the recent plunge in the FFR, since there is not any appreciable lending going on to stimulate inflation.
Not really. I agree with you and it helps me to hear an informed person give their view.
I posted this the day Nouriel Roubini wrote it. Yes, the markets were already down 20% from peak. By late 2006 he was already predicting a bear market by the end of 2007. His prediction was a few months early. Now that he is seeing the depth of the losses and the extent of the liquidity crisis, he has revised his estimate to 40% off peak.
I find his prediction very plausible given the unique severity of the bank losses, lack of transparency, lack of willingness to lend, increasing difficulty of Joe6Pack to qualify for a mortgage, and forecasted foreclosure rates.
I’m becoming a broken record buy I honestly believe we are in a recession, the government numbers notwithstanding. More financial analysts seem to be coming to the same conclusion. I may end up eating crow, but I’m standing firm to my belief we are in a recession. I have been officially completely wrong so far, and we will see if that remains the case looking back.
I read that without knowing he prepared it for Congressional Testimony. That’s an interesting context. Thank you.
If the financial sector was the only one swimming in debt, I would be scared but not alarmed. My fear is, the financials are way deep in debt, but so is the government, so are corporations, so are the average people. Debt is overwhelming on every level in every sector.
This time it is different, and I can’t see who is going to be available to backstop who. Everybody is going to be looking to be looking elsewhere to bail out their debt. The bulls are now talking about the Sovereign Funds piling on so we can kite our catastrophic personal/corporate/banking/governmental debt even further. It is not going to happen. This is a global liquidity/insolvency crisis, period.
Another positive, real estate, going back to the 1830s, always comes back. Sometimes it takes 5 years, but it always comes back.
As for the backstop, you are right. The backstop has to be confidence. This can change on a dime, esp. over energy (no, home prices per se don't have anything to do with energy, but they do affect people's overall view of the economy.) It's amazing, but two numbers that really don't mean all that much necessarily for the economy--the DOW JONES and the price of gas at the pump---greatly shape people's view of how the "economy" is doing.
One other ray of sunshine: property values always come back. Maybe not to double what they were worth, but always back to at least what they were worth. Unfortunately, this can take about five years (as it did from 1837-1842.)
Since you are a banking historian, how about some predictions? I realize you can know as you say these can change on a dime. Yet, as a banking historian, you must be among the most knowledgeable of Freepers about this credit crunch, the severity, the scale of losses, the effect of MBS and other derivatives, the complete lack of transparency, the huge portion of securities held to Level 3 where we are absolutely blind to their value, the humongous levels of corporate, personal and governmental debt.
Knowing as you do all of the above, what is your prediction regarding a recession, housing, the stock market, inflation, deflation and the economy?
Thanks!
“Inflation is not the result of paying for the war. It is the method by which we are paying for the war.”
Since that was the point of my post, I thank you for the support.
That having been said, this whole topic began last fall with the quant failures. That is. their models couldn't account for three deviations from the standard. That is, IMO, today's market is too much of a deviation from the historical to which Roubini refers.
yitbos
“The U.S.A. economy has been growing nicely for more than 6 years now. GW’s tax cuts have added immensly to the federal coffers. U.S. deficit spending is down vis a vis total spending for several years.”
Reducing deficit spending still means that you have been adding to the debt each year, albeit at a declining rate. Dubya has greatly increased the national debt on his watch. It’s no trick to gun the economy with deficit spending. That is standard Keynesian practiice. Perhaps you are commending Dubya for being a Keynesian, but I doubt it.
“W’s tax cuts have added immensly to the federal coffers”
This indicates to me that you have likely taken your economic education from famed economists Rush and Hannity. If you would prefer to learn from Reagan’s own economists you would find that this would be an historic first.
Reagan’s tax cuts didn’t increase the take to the Treasury, and it’s extremely unlikely that Dubya’s did either. But Reagan’s cuts did do exactly what he intended it to do - to grow the economy without losing as much revenue to the Treasury as static analysis predicted.
Reagan’s economic team forecast that the tax cuts would cause enough growth to recoup some 60 cents of each dollar lost through rate cutes. They came within pennies of their forecast, the revenue recouped was over 60 cents. But in no fashion did the rate cuts generate more revenue than they lost.
If you would care to research this on your own find yourself a copy of Martin Anderson’s “Revolution”. Anderson spends considerable time debunking what he calls “the myth of the supply-siders” and explicating what he and the rest of Reagan’s team were actually doing. Anderson was one of Ronald Reagan’s principle advisors going back to his days as Governor.
Separating out the effects of tax cuts versus all the other inputs affecting Treasury receipts is a complex business. Lawrence Lindsey, Dubya’s first economic advisor, did exactly that when he was a Harvard prof. The study is published as “The Growth Experiment” . The only tax cut that paid for itself was the capital gains tax cut, which ironically was signed by Carter. The Reagan cuts behaved as Reagan’s team predicted they would.
I’m not as financially astute as you are. Could you please put explain that again in layman’s terms? Thanks.
Are you saying that the market is so different from history that Roubini’s prediction is reasonable, or are you sayind that we just can’t possibly know since we have nothing like this to compare to, or what? I am not clear on your meaning. Thanks.
Flawed logic to start with. Tax cuts don't pay for anything. They are a negative. A tax cut is just that.
Taxes were cut. For whatever reason federal revenue went up.
yitbos
Baloney. If you don't already have a place way out in the country then find a friend who does.
You are perceptive. I disagree with his conclusions. We are in uncharted territory. I don't like it. I am glad you are sounding an alarm. More people should pay attention to finances. I am not as pessimistic as most anonymous agitators on these economic threads.
The United States of America hasn't done too bad for herself these last 232 years.
yitbos
The average of prices tends to rise in an inflation but that is not, itself, inflation. It is a result of inflation and is not uniform. Some prices even fall as buying patterns change. There is high inflation in the economy and has been for 6 years.
Oil has soaked up quite a bit of it but it is not reflected in the official CPI numbers because it is not "counted" due to it having an identifiable "cause." If there were no inflation, the rising price of oil must cause the average of all other prices to fall because the ratio of dollars to available goods would not have changed. That is not what has happened.
The average of all prices is rising inexorably. Those prices that had been falling steadily due to advances in materials and production are holding steady in nominal dollars or even going up. Of major components only housing is falling and in an inflation some prices do fall but the average rises. The FED is complicating it and making it worse and much more difficult to cope by keeping interest rates artificially low- below the rate of inflation so that the real interest is often negative.
It has been sometime since the 1930's since the United States has had a serious economic house cleaning. Since then, we have had wave upon wave, bubble upon bubble, where the worst we saw caused five or ten years of muddling through with any collapses confined to one or a few sectors of the economy. We are coming off one of the most stunning asset bubbles in human history.
We have no savings, we have little of our previous manufacturing capability left, we are deeper in debt than any nation in human history by a factor of a hundred, deeper in debt and toxic paper than we were even a decade ago by a factor of ten, we have a populace that majority of which is ruined by public education and leftist media, we have a government (legislature, courts, bureaucracy and if Obama wins, the White House) that is corrupt beyond recall with leftist lies and greed, the money center banks own us (and they're in deep yogurt), we have a media that will soon be working overtime to take down Rush, Mark Levin and the Free Republic, ...
That Great Depression is starting to look pretty good to me.
And don’t pay attention to the government and MSM “economists.” Kudlow and Williams and Sowel know what they are talking about. Krugman and Bernanke and Paulson may but they are in the business of politics, not economics and what they may know is irrelevant to their prescriptions. Samuelson, like Bush, himself, is a “conservative” Keynesian. That means he desires more or less conservative ends but believes that government oversight and action are necessary to achieve economic ends. The methods are incompatible with the ends.
The dislocation of assets from high risk investments and non-essential goods to basic essentials like food and energy is putting up a nice little smoke screen (though it looks like the oil price bubble just broke this week.) But the total value of assets in this country (ask each person and corporation "what are you worth" and add it up) is collapsing massively.
Prices even for essential commodities are now beginning to fall, reflecting this. Wages for many jobs have gone world wide; I compete with equally capable computer programmers from other countries who are paid a fifth or a tenth of what I'm paid. That inequality will not last much longer. I expect soon to be living on a fifth or a tenth of what I had been living on.
Only later in this crash, much later, when the total economy is a small fraction of what it is now, will the Fed have the ability to seriously inflate our monetary supply.
I expect the falling prices of real estate and stocks to ripple through the rest of the economy, with low interest rates on Treasuries, for the next year or two. Perhaps then we will see seriously rising prices and interest rates.
I wish I was not so pessimistic on the economy. I just don’t know how this will come out.
Sometimes I fear the worst. I thought Y2K was going to be bad and it turned out I completely over reacted. No, I didn’t go find a bomb shelter to occupy, but I pulled out lots of cash, stocked up on food and water and sat tight on New Years Eve. Turned out it was nothing. I was badly fooled and I over reacted.
Maybe I’m badly fooled with the economy. Maybe I’m over reacting. I just don’t know. No, I don’t expect a depression but at age 49, I expect to see a deeper and longer recession with more personal suffering from economic tightening than anything I’ve seen in my lifetime. I guess the 70s were the worst I’ve seen so far, although I graduated college in 1982 and I remember how hard it was to find a job. A grad from the University of California at Davis, in an industry with a shortage of workers, and it still took me 2 years to find a job. Two years. Over one hundred job applications. Over 30 job interviews. I expect this downturn to be worse.
I wish I wasn’t so pessimistic, but I’ve never seen a situation in my lifetime where debt was at such an all time high in every sector and where there was such distrust and outright fear among bankers.
I’ll be glad when this is over and it’s just a mild recession and I can get out and play again. I just want all this over with.
It remains to be seen if we can inflate. It is very obvious we are under inflation pressures from huge debt and a weak dollar. I’m not blind. But can it continue?
Can US inflation continue without wage inflation? I see no signs of wage inflation. Wages are stagnant. What I see is a leap of short term inflation that could be strangled without wage inflation. People aren’t going to have more dollars to chase these same goods, they are just going to redirect discretionary dollars to necessary goods. We may have inflation in staples offset by deflation in luxuries.
I am rapidly coming around to the deflation camp, and thinking inflation is going to be short term, snuffed out by a suddenly weakened economy.
I keep hearing people claim that inflation is the obvious end game but I’m far from convinced. I don’t see where it will come from without wage inflation and with deflation coming on so quickly from collapsed housing prices and deflated corporate earnings.
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