Roubini sends out emergency alert-Global Depression

Discussion in 'Wall St. News' started by cgtrader, Oct 10, 2008.

  1. I received it at 7:30pm PST and promptly agreed with good ol' Roubo!

    RGE Monitor's Newsletter


    RGE Monitor

    October 9, 2008

    On Thursday, October 09, 2008, Nouriel Roubini – Chairman of RGE Monitor and Professor of Economics at the NYU Stern School of Business – lays out his latest views on the global economic and financial crisis and the urgent necessary actions that need to be undertaken globally.

    Nouriel Roubini: The world is at severe risk of a global systemic financial meltdown and a severe global depression

    The U.S. and advanced economies’ financial systems are 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.

    On the real economic side, all the advanced economies representing 55% of global GDP (U.S., Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.

    There was no decoupling among advanced economies and there is no decoupling but rather recoupling of the emerging market economies with the severe crisis of the advanced economies. By the third quarter of this year global economic growth will be in negative territory signaling a global recession. The recoupling of emerging markets was initially limited to stock markets that fell even more than those of advanced economies as foreign investors pulled out of these markets; but then it spread to credit markets and money markets and currency markets bringing to the surface the vulnerabilities of many financial systems and corporate sectors that had experienced credit booms and that had borrowed short and in foreign currencies. Countries with large current account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis.

    The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

    At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the U.S. and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

    And in a world where there is a glut and excess capacity of goods while aggregate demand is falling, soon enough we will start to worry about deflation, debt deflation, liquidity traps and what monetary policy makers should do to fight deflation when policy rates get dangerously close to zero.

    At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in U.S. stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

    This disconnect between more and more aggressive policy actions and easings, and greater and greater strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March, the rally in equity, money and credit markets lasted eight weeks; when in July the U.S. Treasury announced legislation to bail out the mortgage giants Fannie and Freddie, the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the U.S. government, the rally lasted one day, and by the next day the panic had moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion, the market did not even rally for a day and instead fell 5%. Next when the $700 billion U.S. rescue package was passed by the U.S. Senate and House, markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities. Next, as authorities in the U.S. and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.), the stock markets and the credit markets and the money markets fell further and further and at accelerated rates day after day all week, including another 7% fall in U.S. equities today.

    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 crash and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, and 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. 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.

  2. its funny how everyone agrees with the guy now, but thought he was a nutcase a year ago. I got grilled here on ET several times supporting the guy back then. Amazing how the human mind works.
  3. vv111y


    Yep, saw that too
  4. Same thing with Alex Jones from ....... I mean come on, Alex "called" 9/11 two weeks before it even happened (in amazing detail). He was and has been ABSOLUTELY right on the entire play out of the financial grid takedown!

    Betting with the "calls" made by Alex Jones over the years has worked exceptionally well!!! Thanks Alex!!! :)
  5. sub0


    Ok I can see how the guy is right about the markets taking a hit and how he predicted it...however I disagree with him here on a "global depression".

    Contrary to what he believes, the entire world does not revolve around the stock markets. 100% of the world currency isn't in the stock market. And last time I checked, in the U.S. a majority of the stocks are owned by a small few known by some as the super rich. Yes the super rich do lose money and would like for YOU to believe that them losing lots of money means the world is going to end.

    However most people..
    1. don't know how to invest / are in cash bank accounts
    2. have bills and a family and don't invest at all
    3. the only investing they do is in their small 401k
    4. are in blue chip mutual funds and have been selling at 10-50% losses not 100% losses. And near all time highs on the DOW.
    5. are more worried about finding a job than they are about their portfolio that they don't have

    So I think that guy and others like him are wrong on calling a global depression. First off how does he even know what the numbers are? Has he been granted access to their books? Second of all this is primarily a U.S. crisis. The global market is effected but not nearly as severly.

    Just because banks fail in the U.S. doesn't mean they will fail in England, China and Japan. If so, how come they aren't proposing 700 billion dollar bailout plans?
  6. AK100


    Anyone who buys things in shops right now should ask for a 20% discount (ok, you're not going to get that on a can of beans).

    If the shop doesn't play ball, don't buy (unless you really have to).

    But don't worry, if they don't play today, just give it time and they'll be begging for your business at 20% discount in the future. Probably won't even have to ask for it by xmas.

    This strategy has been working well at present in the UK, especially for electrical goods like TVs, PCs, home hifi systems etc.

    And as for buying a new car, well I think the world is your oyster. Not always nice to take advantage of people but these are often mega corps who often specialise in taking advantage of us.

    Well, in he UK anyway. In the US I think the business people are a little bit more switched on in how they deal with their customers.
  7. Where does he say the world resolves around just the stock market:

    "an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression."
  8. Cutten


    So how long has this guy been advocating full reserve banking? Someone who tacitly or overtly supports 10:1+ leverage in the banking system can't really whine when the instability displays itself and the chickens come home to roost.

    His suggestion of public works is idiotic. White elephant projects reduce, not increase wealth, as was learned in the 1930s and Japan in the 1990s. Where does he think the funding for this will come from - the tooth fairy? It will be charged against the already hard-pressed taxpayer.

    Also why does he assume that these interventions are necessary? The losses will still be taken - transferring them from reckless individuals and institutions to responsible savers via involuntary inflation and taxation is immoral. People who saved wisely and conservatively did just fine in the Great Depression.

    The only intervention needed is lender of last resort to solvent but illiquid financial and business institutions. That's the whole point of a central bank in a fractional reserve system, and is uncontroversial. But spare us the Keynesian socialism tax & spend that has already failed twice in the 1930s and Japan 1990s. Let bust companies stay bust, and the stronger and better-managed survivors will fill the gap, providing a superior and more robust service to their customers. Getting the government more involved than necessary will just result in years of drag on the economic system.
  9. Cutten


    I'm interested in why he thinks cheap assets are a bad thing. Humanity is better off when input costs are low than high. It's better for society if goods and services cost $1 than $1 million.

    What is his proposed alternative to rectifying these "bubble"? The only way bubbles can stop is by the price going down a lot. He should be glad it's happening - surely a return to allegedly more rational pricing is to be desired? Yet he's talking as though this move to equilibrium prices is a disaster, and wants to take steps to prevent it running its full course. It reminds me of the FDR administrations decision to burn huge amounts of perfectly good agricultural crops in an attempt to stop prices falling. Yeah, great idea - let's reduce the supply of a necessary product and make it more expensive for people! This guy wants to forcibly confiscate money from responsible free citizens to prop up what he admits are inflated asset prices. Typical socialist scum.
  10. Cutten


    Agree. You'll get even better deals on 2nd hand luxury cars. Next few weeks/months will be a great time to go shopping for a Mercedes, Porsche or Ferrari. You may have to put up with being pelted with eggs and jeered at in the street though.
    #10     Oct 10, 2008