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LQD: Roubini alert on global financial meltdown

by Melanchthon Fri Oct 10th, 2008 at 02:02:57 AM EST

From RoubiniGlobal Economics newsletter:

RGE - The world is at severe risk of a global systemic financial meltdown and a severe global depression

The US and advanced economies' financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

Thursday midnite update: A few hours after I had written this note the market crash that I warned about is underway in Asia: the Nikkei index in Japan is down 11% and all other Asian markets are sharply down. This reinforces the urgency of credible and rapid policy actions by the G7 financial officials who are meeting in a few hours in Washington and the need to also involve in such global policy coordination the systemically important emergent market economies.


...

When in markets that are clearly way oversold even the most radical policy actions don't provide rallies or relief to market participants you know that you are one step away from a market crack and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, cascading falls in asset prices well below falling fundamentals and panic is now underway.

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

- another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;

- a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;

- a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;

- massive and unlimited provision of liquidity to solvent financial institutions;

- public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;

- a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;

- a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;

- an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

At this point anything short of these radical and coordinated actions may lead to a market crash, a global systemic financial meltdown and to a global depression. At this stage central banks that are usually supposed to be the "lenders of last resort" need to become the "lenders of first and only resort" as, under conditions of panic and total loss of confidence, no one in the private sector is lending to anyone else since counterparty risk is extreme. And fiscal authorities that usually are spenders and insurers of last resort need to temporarily become the spenders and insurers of first resort. The fiscal costs of these actions will be large but the economic and fiscal costs of inaction would be of a much larger and severe magnitude. Thus, the time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.

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I was about to post this.

Question: Is Dr Doom overdooming it?

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Oct 10th, 2008 at 02:27:01 AM EST
afew: Question: Is Dr Doom overdooming it?

Does anyone really know?  Reading what ATinNM's father-in-law had to say wasn't much of a picker-upper though.

I'm off to travel in the Sichuan countryside for a week -- probably completely cut off from the rest of the world for eight days.  Will be fun to see what civilization looks like when I come back.

Truth unfolds in time through a communal process.

by marco on Fri Oct 10th, 2008 at 03:22:41 AM EST
[ Parent ]
I hope you will post a travel diary...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Oct 10th, 2008 at 03:28:02 AM EST
[ Parent ]
ATinNM's father in law was past retirement age when Friedmanomics got the upper hand in 1979. For the last 39 years, nobody in a position to affect the way the markets are run remembered 1929.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 03:43:29 AM EST
[ Parent ]
... of our fathers, the gross blunders of our grandfathers and the catastrophes of our great grandfathers.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Oct 11th, 2008 at 10:44:48 AM EST
[ Parent ]
I'm reading Hard Times now. The recollections of Terkel's respondents mingling with recent macroeconomic reconstructions of the period by James Hamilton ("What is real about the business cycle?") and Eggertsson ("Optimizing household behavior implies necessary conditions for a rational-expectations equilibrium") is disconcerting. I can't say who is embellishing, except that at least Hamilton, being the non-linear aesthete of these paired economists, studies market failure with appropriate insensitivity to FRB agent's monetary high-jinks.

Here are excerpts from two of the one-percenter's cohort. Robertson and Weinberg were brokers at the time. Contributions to Hard Times by young adults in the '70s, regardless of class, demonstrate how quickly, how firmly most parents had suppressed the financial trauma and politics of their own youth.

Arthur A. Robertson: In 1929, it was strictly a gambling casino with loaded dice. The few sharks taking advantage of the multitude of suckers. It was exchanging expensive dogs for expensive cats. There had been a recession in 1921. We came ourt of it about 1924. The began the climb, the spurt, with no limit stakes. Frenzied finance that made Ponzi look like an amateur. I saw shoeshine boys buying $40,000 worth of stock with $500 down. Everything was bought on hope. ... A cigar stock a the time was selling for $115 a share. The market collapsed. I got a call from the company president. Could I loan him $200 million. I refused, because at the time I had to protect my own fences, including those of my closest friends. ... The banks were in the same position, except the government came to their aid and saved them. Suddenly they became holier than thou, and took over the businesses of the companies that owed them money. They discharged the experts, who had built the businesses, and put in their own men. I bought one of these companies from the banks. They sold it to me in order to stop their losses. ...In the early Thirties, I was known as a scavenger. I used to buy broken-down businesses that banks took over. That was one of my best eras of prosperity. The whole period was characterized by men who were legends. When you talked about $1 million you were talking about loose change. Three or four of these men would get together, run up a stock to ridiculous prices and unload it on the unsuspecting public. The minute you heard of a man like Durant or Jesse Livermore buying stock, everybody followed. They knew it was going to go up. The only problem was to get out before they dumped it. ...Many brokers did not lose money. They made fortunes on commissions while their customers went broke. ...Banks used to get eighteen percent for call money --money with which to buy stock that paid perhaps one or two percent dividends. They figured the price would continue to rise. Everybody was banking on it. I used to receive as much as twenty-two percent from brokers who borrowed from me. ...About eight weeks before the bank closings, we decided to take every dollar out of the banks. We must have take out close to a million dollars. In Clyde, Ohio, where I had a porcelain enamel plant, they used my signature for money. I used to com in every Saturday and Sunday and deliver the cash. I would go around the department stores that I knew in Milwaukee and give them thirty-day IOU's of $1.05 for a dollar if they would give me cash. ...In 1933, the night Jake Factor, "The Barber," was kidnapped, an associate of mine, his wife, and a niece from Wyoming were dancing in a nightclub. Each of us had $25,000 cash in our socks. We were leaving the following morning for Clyde, and I was supposed to bring in $100,000 to meet bills and the payroll.

Sydney J. Weinberg: I remember the day very intimately. I stayed in the office a week without going home. The tape was running, I've forgotten how long that night. ...Prominent people were making statements. John D. Rockefeller, Jr., announce on the steps of J.P. Morgan, I think, that he and his sons were buying common stock. Immediately, the market went down again. Pools combined to support the market, to no avail. The public got scared and sold. It was a very trying period for me. Our investment company [Goldman Sachs] went up to two, three hundred, and then went down to practically nothing. As all investment companies did. ...The Street was against Roosevelt. Only me and Joe Kennedy, of those I know, were for Roosevelt in 1932. I was Assistant Treasurer of the Democratic National Committee. I did not support him after the first two terms. I had a great argument with him. I didn't think any man should serve any more than two terms. I was getting a little tired, too, of all the New Deal things. When I was asked to work with the War Production Board in 1940, he delayed initialing my employment paper. Later on, we had a rapprochement and were friendly again. ...Confidence ended the Depression in 1934. We had a recession in 1937. People got a little too gay on the way up, and youu had to have a little leveling off. The war had a great deal of stimulus in 1939.


Diversity is the key to economic and political evolution.
by Cat on Fri Oct 10th, 2008 at 12:58:32 PM EST
[ Parent ]
we had the biggest bubble ever, it is inevitable we'll have the biggest crash ever too.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Oct 10th, 2008 at 03:37:11 AM EST
[ Parent ]
Oh, I don't think he's overdoing it.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Oct 10th, 2008 at 03:51:47 AM EST
[ Parent ]
Roubini has difficulty to be wrong.
by das monde on Fri Oct 10th, 2008 at 04:46:03 AM EST
[ Parent ]
Given his record over the last few years, I wouldn't bet money against Roubini.

I think the world is finally starting to see what's coming.  I think people -- even typically corrupt and/or stupid people like Paulson and Bush -- are starting to understand that the banking system may collapse and send us into a second Great Depression, and that more radical action has to be taken.

The headline over at MSNBC right now is downright Jeromeian: "Is this the end of American capitalism?"  Replace "American" with "Anglo," and you could've ripped that headline straight off a blog.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Oct 10th, 2008 at 07:37:24 AM EST
[ Parent ]
I read a headline on a Danish newspaper saying that even crony-capitalism cheerleader Fukoyama says that this is the end for laissez-faire.

It would appear that the news of History's death has been greatly exaggerated.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Oct 11th, 2008 at 02:04:23 PM EST
[ Parent ]
It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster.

That has been clear for a while. As long as the diagnostic doesn't identify global financial capitalism, unrestricted capital flows and market fundamentalism as the root causes, the actions taken will be too little, too late and, at best, address the symptoms.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 03:31:45 AM EST
I'll believe we're back on the path to sanity when the wittering about Buffet being Treas Sec is replaced by rumours about someone like Roubini getting the job.

The idea that someone should be Treas Sec because they have a good investment record and have made a few throw-away populist comments doesn't exactly inspire me, given what's happening at the moment.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Oct 10th, 2008 at 04:27:50 AM EST
[ Parent ]
Care to cross-post this comment on the Buffet thread?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 04:30:11 AM EST
[ Parent ]
Buffett would never want it anyway.  Roubini would be a great one.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Oct 10th, 2008 at 07:38:50 AM EST
[ Parent ]
You want to be greedy when others are fearful and you want to be fearful when others are greedy. In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are right now.

- Warren Buffet, ten days ago, after he invested in Goldman Sachs and General Electric.

The central principle of investment is to go contrary to the general opinion, on the grounds that if everyone agreed about its merit, the investment is inevitably too dear and therefore unattractive.

- John Maynard Keynes, a long time ago.



Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Oct 11th, 2008 at 09:24:25 AM EST
[ Parent ]
The problem is a massive and systemic shortage of Capital to underpin the pyramid of credit created, since the opaque pool of investor capital to whom the banks "outsourced" most of the credit risk - the "shadow banking system" - is finished.

The financial claims which have been manufactured and imposed upon US businesses and individuals (particularly through mortgage loans) exceeded the capability of the US's productive capacity to meet them in or around August last year - the point of "Peak Credit".

While the Fed can provide infinite liquidity, the US cannot recapitalise their banking system without outside assistance ie a Bretton Woods II.

These financial claims constitute debt repayments and interest payments on the debt.

It seems to me that there are two choices for the creditors of the US.

(a) Conventional - reduce the number of claims, by writing off a large part of the debt and converting some of the rest to conventional equity in existing and new US credit institutions;

(b) Unconventional - convert the debt by a networked process of "Unitisation" into a new generation of "Public equity" within a partnership and trust based (rather than Company) legal framework.

If I were a creditor of the US, I would opt for the latter, if I were aware of the possibility.

It is my hope that Iran - if they understand, accept and assimilate my analysis and proposals this week - may promote these ideas in the region because:

(a) their fellow regional OPEC members have more to lose from the conventional approach than anyone else;

(b) the proposals are islamically sound at a fundamental level.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Oct 10th, 2008 at 08:08:38 AM EST
[ Parent ]
Comparison of various crashes interesting common patterns:

Here the horizontal scale is time in weeks, the vertical scale is logarithmic (+1 is 100% gain). The graphs follow the crashe of 1930's (red), Japanese crisis on the 1990s (blue), and the IT buble (green).

by das monde on Fri Oct 10th, 2008 at 05:34:06 AM EST
so looking at that, if we follow that pattern there ahould be a roughly 120 week slide in stock prices abfore things start to recover?

so when did the current troubles really start?

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 10th, 2008 at 05:37:40 AM EST
[ Parent ]
IIRC, the DJIA peaked around October 10, 2007. If it follws the same pattern, it should go down for around 70 more weeks...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Oct 10th, 2008 at 05:53:49 AM EST
[ Parent ]
The prediction has a big chance to be self-fulfilling.
by das monde on Fri Oct 10th, 2008 at 06:40:46 AM EST
[ Parent ]
so it peaked around 1400, and is currently around 8600, that would mean it bottoming out at about......

1040  

[ceeb's Crystal Ball of Doom™ Technology]

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 10th, 2008 at 08:06:17 AM EST
[ Parent ]
Difficult to say. If you look at the three crisis mentioned, the duration of the slide is more or less the same, but the depth is not.

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Fri Oct 10th, 2008 at 08:15:36 AM EST
[ Parent ]
I was working on slides appear to last 120 weeks, in 50 weeks we've lost x ammount, so how much would we lose in 120. OK it's not even vaguely scientific, but then again I havent seen anybody 'serious' provide any scientific figures either.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Fri Oct 10th, 2008 at 08:28:08 AM EST
[ Parent ]
Color me skeptical.

It seems to me that chart is saying:

  1.  A dramatic run-up is followed by a dramatic bust-up.

  2.  You can cherry pick 3 dramatic Up/Down stock movements that, more-or-less match along the time axis.

If the analyst had overlaid all Boom/Busts on record - and the records go back hundreds of years - then we might be able to see if the Time match is significant.  For example, does the Tulip Bulb craze in the Netherlands follow the same pattern?  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Oct 11th, 2008 at 02:56:03 AM EST
[ Parent ]
being right about everything is really getting tiresome.

And...we should be careful in our criticisms of what is going on...Roubini's perspetive is really a Vienna School perspective. It aligns with ours, but it is not fundamentally ours in how policy prescriptions necessarily would follow.

Or, as Pat Buchanan from their side, in America, might say, we share the same diagnosis...it's just that the cure we set out for the patient is quite different.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Fri Oct 10th, 2008 at 06:34:56 PM EST
Getting a prescription most of us around here would wish is past hoping for.

In the US, at least.

The best I can foresee is a "Newer Deal" being instituted IF the Democrats can get a large enough majority in Congress in the upcoming election.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Oct 11th, 2008 at 03:03:33 AM EST
[ Parent ]
We are all in for the 'Raw Deal' methinks...

You can't be me, I'm taken
by Sven Triloqvist on Sat Oct 11th, 2008 at 04:06:08 AM EST
[ Parent ]


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