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LQD: Roubini predicts the worst financial crisis

by Melanchthon Fri Jul 18th, 2008 at 06:51:53 AM EST

Just received this from the Roubini Global Economics Monitor Newsletter:

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:

Promoted by afew


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 2008.

Display:
But he always does.

Anyone got a calibration of his past performance?

by Colman (colman at eurotrib.com) on Tue Jul 15th, 2008 at 04:50:45 PM EST
Well, he clearly predicted what is happening now, when others were saying this crisis would be a short one...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Jul 15th, 2008 at 05:29:44 PM EST
[ Parent ]
What he doesn't seem to say clearly enough is that the bailout of the big banks (but not the small) represents a massive further transfer of wealth from the poor and middle classes to the super-rich which will exacerbate the wealth inequality which is at the heart of the crisis in the first place.  Looks like Marx could be right after all!

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 15th, 2008 at 06:04:35 PM EST
[ Parent ]
He says it:

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.


"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Jul 15th, 2008 at 06:09:08 PM EST
[ Parent ]
Yes but if the consequence of how the crisis is tackled is to make the original cause of the crisis even worse, what is the basis for the eventual recovery he seems to expect?  He doesn't seem to share the "anglo-disease" analysis that the root cause of the crisis is 30 years of ever greater transfer of resources and power from the poor to the super-rich.

If the chosen solution to the fire is to pour oil onto it, surely we can expect an ever greater conflagration?

How can "consumer sentiment" recover if consumers are even more impoverished by inflation and a net transfer of resources to Oil producers?

How can the US recover if the escalating costs of Iraq are compounded by increased oil prices.

I don't see the basis for recovery in his analysis...

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jul 15th, 2008 at 06:23:05 PM EST
[ Parent ]
The current administration in Washington sees their job as protecting and building the assets of the rich. The very fact that the rich are rich is justification for their protection.  Like saving the King at all costs. Perhaps many in Congress have bought into the frame that this is a heroic rescue of society for the benefit of all. Most think they are doing their job as well as they can.  The rest of society is just a PR problem.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 15th, 2008 at 09:18:37 PM EST
[ Parent ]
I think he sees a drop in commodity prices as a global slowdown to be ineluctable. He has a few articles on Bretton Woods II, the system of pegged rates to the dollar from russia, GCC countries and Asia, and as that system fails the recession for those economies is likely to be huge too.

But I agree that he does not acknowledge that the recession from Japan had pretty much the same origins and was a real catastrophy. He does acknowledge it however in what he thinks the correct solutions are: no bail outs.

Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine

by UnEstranAvecVueSurMer (holopherne ahem gmail) on Wed Jul 16th, 2008 at 05:28:33 AM EST
[ Parent ]
and how long will the taxpayers stand it?

they're bailing out the richer at the cost of inflation, which punishes the poor.

whose patience and capacity for submission is finite.


'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Jul 16th, 2008 at 06:31:08 AM EST
[ Parent ]
The problem is that inflation can be presented as a problem for everybody, and caused by those nasty Arabs, Chinese and foreign commodity producers.  The fact that it is also caused by US policy choices and the devaluation of the dollar will be obscured by partisan politics.  Pretty soon it will all be Obama's fault.

The real problem with Paddy O'Bama's anodyne centrist campaign is that it contains no analysis of the roots of the problem and thus it will all be his fault as soon as he takes office.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jul 16th, 2008 at 06:45:06 AM EST
[ Parent ]
What's this? We have a Black Muslim who's now of Irish descent?

Hey, Grandma Moses started late!
by LEP on Wed Jul 16th, 2008 at 07:13:58 AM EST
[ Parent ]
The Irish were the blacks of the modern western world before the Muslims ever were

Obama's Irish roots found to be Protestant - Telegraph

New research has traced Mr Obama's maternal family tree back to his great-great-great-great grandfather Joseph Kearney, a well-to-do shoemaker from Moneygall, Co Offaly, who lived from 1794 to 1861. Mr Obama's roots were uncovered by Canon Stephen Neill, a Church of Ireland rector, who found baptismal and marriage records in the house of a late parishioner, Elizabeth Short.


"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jul 16th, 2008 at 07:54:29 AM EST
[ Parent ]
Shit, now you tell me Obama is Scots-Irish?

How the hell am I supposed to be able to vote for him now?

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

by r------ on Wed Jul 16th, 2008 at 12:42:31 PM EST
[ Parent ]
He's an Irish-Scottish Black Muslim Christian Working Class Yankee from Hawaii who has been to Harvard.

It's tragic that he's not also gay and a former fighter pilot, but I suppose you can't have everything.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Jul 16th, 2008 at 02:47:38 PM EST
[ Parent ]
I don't know where the Scots bit is coming from - and why isn't Indonesia mentioned?

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jul 16th, 2008 at 06:03:24 PM EST
[ Parent ]
Because Indonesia are One of the Good Guys? Suharto was Our SOB, IIRC...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 16th, 2008 at 06:07:57 PM EST
[ Parent ]
...whose half-sister is Indonesian-American, and whose brother-in-law is a Chinese-Canadian.

As Maher pointed out one night: "Oh, Congress looks like America -- we've got blacks, Asians, Hispanics, and whatever else is in Barack Obama."

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

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Jul 18th, 2008 at 07:33:39 AM EST
[ Parent ]
funniest comment evah!

you forgot he has a grandmother in kenya living in a mud hut!

roots, baby!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun Jul 20th, 2008 at 04:35:25 AM EST
[ Parent ]
The Irish were the blacks of the modern western world before the Muslims ever were.

Oh, quit your whining.  We gave you Boston, didn't we? ;)

Actually, one of my family members has an old (very old) sign that used to hang over a pub somewhere.  It reads "No Dogs or Irish".  It's hanging in his garage somewhere.  Being partly of Irish descent, he gets a kick out of it.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Jul 18th, 2008 at 07:43:03 AM EST
[ Parent ]
This jus a bit too much doom-friendly for me.

I don't mind bringing bad news (in the energy or financial fields), but I really can't be moved by the feeling of glee that some may have when reporting bad news.

I personally much prefer the alternative project attitude, like underlining the progress in wind energy (thanks to Jérôme) for example.

Isn't there any good perspectives to emphasise? Actions taken in front of the finance crisis that may be efficient? That's one of the drawbacks of bringing only bad news: you risk turning up as a prophet of doom.

by Xavier in Paris on Fri Jul 18th, 2008 at 09:08:13 AM EST
[ Parent ]
IMHO, the most valuable thing that can be done now is to spread an understanding of the damage that the current set of ideologies and policies have wrought, how self-serving they are for those who promote them, and how essential it is for them to be replaced to ameliorate the damage that remains to be done and put us in a position to begin rebuilding.

We are being hit by a financial hurricane.  The response is like that towards Katrina.  Turning away from the ugly truths on display only gives the shock capitalist boys and girls more scope to operate.  Paralysis by revulsion only abets those to whom revulsion is not possible--the sociopaths who have been in charge.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 18th, 2008 at 02:53:17 PM EST
[ Parent ]
I agree on the "make the information available" bit anyway. What gives me afterthought is the "it's going to be hell" bit...

What I'm feeling more comfortable is: what's happening is  due to washington consensus policies during the last thirty years, now, if you don't want it to continue the same way, costing money to everyone, it's regulation time, and let's keep at it.

by Xavier in Paris on Fri Jul 18th, 2008 at 05:51:26 PM EST
[ Parent ]
I think that, at best, there is an OPPORTUNITY to begin discrediting their anti-regulatory, "free market," "freedom of the individual" rhetoric.  My concern is that there will not be a sufficient response to that opportunity to carry the day in many or any of our countries.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jul 18th, 2008 at 07:23:15 PM EST
[ Parent ]
more pooties?

but it's therapeutic!

doom porn i mean...

kidding aside, i love the mix here. we don't ignore the worst, and we use vicious, nasty, black humour to try and cushion the shock, lashing out at shadows...

i agree about the positive stuff tho, it's great to see how and when things change for the better. i try to do this with solar, and jerome's successes with wind are welcome fodder after our tireless deconstructions of what's wrong with the world.

Yes We Can!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun Jul 20th, 2008 at 04:47:33 AM EST
[ Parent ]
I am NOT a historian; my knowledge of American/world history comes from high school courses in the late '60s and paying attention in life since then.

People look back on FDR and his New Deal, and applaud.  I always thought that FDR did what he did in order to save the collective asses of the wealthy in the US from suffering the same fate as the Czar and his family in Russia prior to Lenin.  

Question: Is a similar "situation" needed in the US before the wealthy who run everything realize that they are in  danger of ... (fill in the blank), and change things before you get a lot of USers feeling like they have nothing to lose?  Or is America so wimpy,cowed, and under-informed that they will simply slip into a state of Dickensian poverty/slavery?  And what about Europe?  Are we seeing the final stages of China ruling the globe with the help of the fascist corporations?  Have the bad guys won, and did they earn their victory so why not?

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Tue Jul 15th, 2008 at 07:23:46 PM EST
IMHO, you're right on the money. The New Deal wasn't a response to the Crash, but to the looming reality of the Soviet example. DoDo stated this 3 years ago here, in an article about the Russian Revolution:

...the European welfare state, and the US New Deal, came to be because most of the elites agreed to an armistice in the class war - and that not the least because they were scared of a communist revolution at home, scared because of the apparent indestructibility of the Soviet Union.

Thus, it seems to me, to put it drastically: the well-being of many of yours was made only possible with the deaths of millions of Russians (& other subjects of the Empire)

In order for the power elites to concede another New Deal, one has to construct a similarly threatening bogey-man, albeit (one would hope) one somewhat less monstrous.

Note also that the reaction of a large part of the European elites to similar circumstances at the time, was the endorsement of fascism and national socialism. I don't mean to imply anything much by this, but given the circumstances, the fingerprinting and targeting of gypsies in Italy, is not too far from the Brown Stars, now, is it?

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Wed Jul 16th, 2008 at 07:52:07 AM EST
[ Parent ]
Eh, forgot: DoDo's article.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Wed Jul 16th, 2008 at 07:53:34 AM EST
[ Parent ]
It is now official:

WE ARE IN SERIOUS SHIT!

The day someone starts agreeing with me is a DEFINITE sign of the End Times.  Drinks on Me!

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Wed Jul 16th, 2008 at 11:30:43 AM EST
[ Parent ]
In a similar vein, the Cuban revolution was responsible for US instigated land reform (albeit timid and limited) in parts of Latin America.  Does anyone remember the prophetic words of Herbert Matthews?:

One might say Fidel Castro was like Pandora.  The box was there and all the troubles were in it - and he opened the box.  Latin America is moving fast, and not necessarily with us or toward us.  The social and economic pressures have revolutionary possibilities.  Our policies to date have not been successful.  They have been too negative, too little, too closely tied to dictators and to small ruling classes who will become victims of the new social pressures if they do not move quickly and make necessary reforms.  Stability and the status quo are dreams of the past.  We have lost the Cuba we knew and dominated, or influenced so greatly.  Our relations with Cuba will never be the same , even when they become friendly again, as they must. (Herbert L. Matthews, The Cuban Story, New York: Braziller, 1961, p. 273)


"Beware of the man who does not talk, and the dog that does not bark." Cheyenne
by maracatu on Wed Jul 16th, 2008 at 06:33:40 PM EST
[ Parent ]
The logic of this argument (which I largely agree with) is that the demise of the Soviet Union and defeat of "Marxism" also meant that the ruling elite could end the Truce in the class war and start taking on the working classes again without fear of revolution.  Hence the Reagan/Thatcher counter-revolution and 30 years of impoverishing the working classes - otherwise known as the Anglo disease.

The French Revolution has a similar effect - emboldening American revolutionaries and encouraging the British imperial elite to make some democratic concessions to the masses - for fear of revolution at home.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Jul 16th, 2008 at 08:06:18 PM EST
[ Parent ]
Erm, I think that places a little too much weight behind the New Deal.  America was never, in my opinion, in danger of a communist revolution.  Fascism has always been, and will always be, the greater internal threat, as I think the last eight years have demonstrated, and as was demonstrated even in Roosevelt's time.

Europe was more balanced.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Jul 18th, 2008 at 07:51:46 AM EST
[ Parent ]
... explicit that they were acting to save American Capitalism, not to bury it. I am not sure why that is not a straightforward observation ... perhaps that's a side-effect of the constant drum-beat of radical reactionary ideological raving about "creeping socialism", that the reality of the target of the New Deal economic program is obscured.

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 Wed Jul 16th, 2008 at 08:19:19 PM EST
[ Parent ]
Rubini gave an interview for Bloomberg TV.

By the way, congratulations ET, for an appearance at nutland Free Rep!

by das monde on Wed Jul 16th, 2008 at 12:39:14 AM EST
On Point: Where Is the Economy Heading?

... all progress depends on the unreasonable mensch.
(apologies to G.B. Shaw)
by marco on Wed Jul 16th, 2008 at 09:09:30 AM EST
marco: On Point: Where Is the Economy Heading?

Tom Ashbrook (Host): Have you ever seen a time of challenge like this in your long and storied career as an economist, Martin Feldstein?

Martin Feldstein: I have not.  I think the combination of problems that we're facing is unprecedented, and the extent to which our financial markets are dysfunctional is also unprecedented in my experience of about three decades of being a careful observer and a participant in those markets.

Tom Ashbrook: It scares the daylights out of me to hear you say that.  Does it scare the daylights out of you?

Martin Feldstein: It does.  It does.  I think it is a very serious problem.  And although the Fed has tried to do what it can, lowering interest rates dramatically, the Congress and the administration did what I and others advised, a substantial tax cut to try to get people spending some more... um, it hasn't worked.  And the danger is that the house price shrinking will continue to pull us down, and pull down the financial institution.



... all progress depends on the unreasonable mensch.
(apologies to G.B. Shaw)
by marco on Wed Jul 16th, 2008 at 09:21:53 AM EST
[ Parent ]
It would be unrealistic to expect Marty to bring up the problem of the concentration of the vast majority of the wealth into the hands of a small and increasingly mobile elite.  Saying anything about that, let alone doing anything about it, is left to "cranks and alarmists" such as yours truly, who can be dismissed.  At least he is not parroting the "All is well" meme.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 16th, 2008 at 12:52:16 PM EST
[ Parent ]
That's quite a statement coming from Feldstein, though.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Jul 18th, 2008 at 07:54:08 AM EST
[ Parent ]

 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.

I'd say that's wildly optimistic given his predictions for the meltdown of large swathes of the banking market, and collapsing consumption. I'm not sure it's goin g to be U- or V-shaped, but it's going to last a lot longer than this. There's just too much cleanup needed, and the way down always destroys more than would be purely needed just to eliminate the accumulated imbalances: there's an overshoot on the way down too.


 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.

That's similarly optimstic. I still expect the Dow Jones to go down to 4,000.


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.

I'm still not convinced of that, but time will tell. Many economies, especially in Europe, were not really pulled up by the US during the "boom" times, and I think they will be similarly insensitive to the US and UK crunch. And emerging economies are linked to the EU as much as they are to the US (witness Chinese exports, for instance) - notto speak of their own growing spending. Note that the Middle East and Russian oil exporters mostly spend their money in Europe.


Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.

What "bubbly" peaks? But given that whatever the level of oil prices, people predict that it's a "bubble" and that prices should go, or will go 20% lower, this is an essentially meaningless prediction. I'm happy to stipulate that we'll regularly see oil prices 20% below a recent peak at various times...

Available exports of oil are shrinking as producers burn more and more of the stuff at home.


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.

It's called (as per Keynes) pushing on a string. I tend to agree with him that the US will choose inflation and currency devaluation as the most discreet way to default on their burdensome debt, but the risk is indeed that of a continued drop in the dollar, and the corresponding rising long term rates (those not set by the Fed) once this goes too far.

But his points flaggin the risk to the regional bank system, the unsustainability of the big US investment bank models, and the risk of an overall financial meltdown are quite in line with what I epxect too,yes.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jul 16th, 2008 at 10:55:50 AM EST
description. Roubini is one of the few who has predicted the current symptomatic stages (along with John Williams), but his analysis is now reaching areas where the Common Wisdom of capitalist-oriented economics experts is failing/will fail. Shock doctrine and all, you know.

Karl Rove is correct about at least one thing - his group acted, while the experts studied the results. They changed the parameters to such an extent that your 'Anglo Disease' is more explanatory and predictive than any of their bromides and rules-of-thumb.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Jul 16th, 2008 at 11:56:56 AM EST
[ Parent ]
All that Karl Rove, Greenspan and the rest have done is hasten the inevitable IMHO....

If the Anglo Disease had not broken out the result would have been the same, except we may have had ten to twenty years longer.

Maybe, in a strange way, they might even have done everyone a favour by precipating and intensifying the crisis.

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

by ChrisCook (cojockathotmaildotcom) on Wed Jul 16th, 2008 at 12:36:04 PM EST
[ Parent ]
here we are, and it's not ten or twenty years later.

I quietly agree with you that the precipitation and intensification of the crisis is a favor to the world in that it will bring an intense struggle sooner, but it's difficult to look into the barrels of guns and not feel some anxiety for both oneself and all of the other potential victims - not to mention for the shape and content of the next outcome in our never-ending cycle of cause-and-effect.

Good of them, too, to be so audacious and rapacious that they may have bankrupt their brand. Now all we need is a program (that's all - just a good program). Roubini, no matter the salience of his analysis, will not provide it. Guess we'll have to do it.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Jul 16th, 2008 at 03:28:32 PM EST
[ Parent ]
Well, the program is pretty obvious. That is both the encouraging and frustrating feature of all this. Frustrating because it's not being done.

-A massive, government-managed, program of infrastructure investment with the target of reducing environmental impact of our activities. Take no prisoners there: any tax spent that way will be repaid tenfold in reduced costs later on. And by all means tax the externalities -then redistribute some so that the poors are not negatively affected unless they worsen their environmental impact). Invest all of what's left.

-Healthcare for all in the USA.

-Tax the revenue from money at least as much as the revenue from work.

-Get rid of all the exemptions from regulation (hedge funds may complain that their business model would be jeopardised if they had to be transparent about their transactions, but hey, armed robbers similarly may complain that their business model is jeopardised by thievery being illegal. If you can't do your business within the law, the first reaction ought to be changing your business, not the law).

I could add other chapters of course. But anyway, the first is the main one to get us out of the big mess. It would have such a positive impact that many, many other things would stem out from it.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Jul 17th, 2008 at 03:35:04 AM EST
[ Parent ]
I think we need to redefine the term "bubble" relative to commodities, in particular energy commodities, and further note that spot oil is up 65% in euro terms since the beginning of 2006, as opposed to 125% in USD terms, which is a currency issue more than a commodity price issue.

When we price commodities in Euros, I agree with Roubini we see a "bubble" of maybe 10-20% (who the hell knows - but demand decline expectations will almost necessarily prompt a decline in futures prices) in euro terms, down to maybe EUR70/barrel, which itself represents still 35% unit price growth in a relatively short period of time, indicative of rising fears of peak oil filtering into market expectations. And that will, in the long run, continue to rise as peak oil expectations are increasingly priced by markets. But, I am still pretty convinced that this is more an underly USD issue than a commodities price issue, and since we see everything priced in USD, we get these constant "holy shit" moments when in fact all that's happening is the US economy is starting to be valued, like the average Argentine eventually, at what it's  worth rather than what it thinks it is worth.

So, we may get some oil price relief in the short and even perhaps medium run, but not the Americans. The continuing dollar decline due to inflationary fed policies to bail out the wealthy shareholders of US financial institutions will ensure that the dollar continues to go nowhere but down.

100% with you on decoupling. Some economies have made great strides to integrate, at their peril, into the US economy, in the name of globalisation, headlined by the 51st state outre-manche and their junior "no voting" partners to their geographic left. But not all. There will be demand strains of course, but considering these have already been priced into EUR-denominated exports via a tanking dollar over the past 2-3 years, it's hard to imagine those strains getting worse, especially if you consider the dual economy in the US, that high SES americans act differently than low SES americans, that they exhibit, generally speaking, demand inelasticity for the types of consumer products they tend to buy, and that we are in no risk that the us will figure out how to change its income distribution to an extent where that inelasticity is impact anytime soon. The upper-middles may stop buying Louis Vuitton in increasing measure though as the second and third income deciles in the US get hit by the coming long )I'm thinking Japan-style) recession. Still, markets for those same goods are growing rapidly, in Russia, in the PRC and now, given commodities prices, even sub-saharan Africa.

Imho, we are not going towards a global economic recession so much as we are entering a global economic pivot. How we position ourselves relative to the shift in economic power, away from North America and towards the developing world (Brazil, Argentina, PRC, India, Viet nam, Sub-saharan Africa) and the commodity producers in the middle east will determine our future economic prosperity.

Personally speaking, as far as France goes, as well as most (but not all, noting Spain, Portugal and Ireland in particular as being at risk) the EA-15 economies, I am not exactly confident, but definitely cautiously optimistic.

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

by r------ on Wed Jul 16th, 2008 at 12:38:45 PM EST
[ Parent ]
Along with the Economic Pivot we are facing Peak Oil, Peak Water, Peak Food, and Global Warming.  Together these are the necessary conditions for the collapse of 'Normal' into a new Fitness Landscape with its own Emergent Properties and Attributes.

Think Easter Island or Chaco Canyon writ large.

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

by ATinNM on Wed Jul 16th, 2008 at 01:48:36 PM EST
[ Parent ]
could up and leave. Perhaps they did.  

But what happens when there is no where to go?  That's the Easter Island scenerio, the one that we are--incredibly, for whatever reason, consciously or unconsciously--striving with all our effort to bring about.  

It is now the most likely--though far from sure!  

The Fates are kind.

by Gaianne on Fri Jul 18th, 2008 at 01:25:13 AM EST
[ Parent ]
Both areas depopulated when the carrying capacity of the land collapsed.  Easter Island seems to have depopulated through starvation and war; there may have been some people who got off in the last canoes -- nobody knows.  Chaco Canyon depopulated by internal warfare, as there are instances of Chaco-like structures on easily defended buttes and mesas, but it seems most of the people scattered over thousands of square miles.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Jul 18th, 2008 at 03:03:47 PM EST
[ Parent ]
The Easter Islanders seem to have been isolated from other human societies, but did range hundreds of miles to the nearest (uninhabited) atoll.  

there may have been some people who got off in the last canoes  

THERE is the makings of a story.  They would have been adventuring into the (for them) unknown.  Say, a team of dolphin hunters out on the ocean thinks about what they are going back to, and what is bound to happen, how their catch is really not going to make any difference . . . and decide not to return . . . Brings to mind Kim Stanley Robinson's "Icehenge."  

The Fates are kind.

by Gaianne on Sun Jul 20th, 2008 at 10:25:11 PM EST
[ Parent ]
Nothing will begin to change long term until the pain is so acute; we demand the cleanup of the corruption in both government and business and make social justice the highest priority of our society. Free enterprise is fine as long as it is not detrimental to the basic needs of most of the society. In order for this to be fathomable; we will need a completely new reulatory structure.

The corruption is so entrenched there has been no quid pro quo reregulations in exchange for the bailout of the insolvent finance system.

Until we are forced to make demands and 'man the barricades' ; nothing will happen structurally and all we will be doing is prolonging a very sick capitalistic system.

by An American in London on Fri Jul 18th, 2008 at 08:49:28 AM EST
[ Parent ]
All, not untrue. But the last 8 years have shown that this administration  has whored for those who listened to no one but the Viagra of their own greed as it shifted its Rapacious Express to plaid...and the last year has shown that the Democrats are both indentured to the system and/or too timid to call Bush's bluff. They haven't pushed for real change either.

Whether the dems will change patterns when they have control of both congressional houses and the presidency will have to be seen once they win it.  I tend to doubt it as too many of them come from pretty conservative "country right or wrong, dressed in the flag, we saved the Philippines and never had an empire" backgrounds.

Meanwhile, even conservative hedge-fund pushers like John Mauldin is calling for regulation of markets. I'll quote one part of this week's letter, but he made an earlier comment about regulator not enforcing rules.

He also points out that the numbers were being given are wrong, that employment is worse, housing starts are lower. And, something no one here has mentioned yet, that US imports are down, and exports are up. I suppose one would suspect this as the dollar drifts into 3rd world status.

The World Will Not End
And while we are on regulators, it is time for Bernanke and Paulson and SEC chairman Cox to force the credit default swap (CDS) market to move to a regulated exchange. If there is a major risk to my happy news scenario at the beginning of this e-letter, it is the credit default swap market collapsing. That is why Bear Stearns had to be rescued, and why other firms like them are too big to fail.

If the CDS markets were on an exchange like any futures contract, Bear could have been allowed to fail. It would have been a sad day, but the Fed would not have had to risk $30 billion. Greenspan was wrong when he said these derivatives did not need to be regulated. They are good for the markets, and I think they are necessary. But let's put them on an exchange where there is clear transparency and the entire economy of Western Civilization is not put at risk by some cowboys who decide to leverage up.



Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sat Jul 19th, 2008 at 05:31:43 AM EST
[ Parent ]
While US currency is still worth SOMETHING, it's time for China to redeem all of that US paper for US tangible assets.  Better to have Asian faces popping up everywhere, owning everything, than to have boarded up windows and assets going to hell.

Mao, if you're watching, CONGRATULATIONS, you WON!  But then again, you had American greed, laziness, stupidity, and arrogance on your side so the deck was already stacked.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Fri Jul 18th, 2008 at 07:20:09 AM EST
by Lupin on Sun Jul 20th, 2008 at 05:46:23 AM EST


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