EconoMonitor

Nouriel Roubini's Global EconoMonitor

The Coming Housing and Economic Crash: My Interview Today with New York Magazine

New York Magazine published today an interview with me where I present my view on the coming US (and even NYC) housing crash. Today’s figures on existing home sales and their dropping prices are fully consistent with my views (expressed in many occasions here) that the housing market will have its biggest bust in decades and that this bust will trigger an economy-wide recession in 2007. Expect even worse news from new home sales later this week. As I have recently argued, the only thing soft and orderly about the comatose states of the housing market will soon be the untertaker carrying the coffin.

But here is the New York magazine interview:

The Descent:One extreme view of how long this market will last.

By S.Jhoanna Robledo New York Magazine, Monday September 25th, 2006

Nouriel Roubini is a professor of economics at the Stern School of Business at NYU and chairman of Roubini Global Economics, an economic consultant group.

You follow housing markets nationwide. What do you see happening?
When supply increases, prices fall: That’s been the trend for 110 years, since 1890. But since 1997, real home prices have increased by about 90 percent. There is no economic fundamental—real income, migration, interest rates, demographics—that can explain this. It means there was a speculative bubble. And now that bubble is bursting. 

So the New York market is poised for a fall?
I’m bearish on the city. I live in Tribeca in a nice loft, and in four years, it’s increased 150 percent in value. That price appreciation doesn’t make sense. Now there are maybe twenty developments under construction in my neighborhood that are going to come to market in the next year. There’s going to be a huge glut. I see demand falling and supply going sharply up. So you’re going to see some pretty nasty price action.

But some people say that New York is not like the rest of the country.
I don’t agree. New York might be different, in part because of zoning and other regulations, but in the last few years, there has been a major change here: a huge increase in the supply of housing. When there is speculative demand, when prices go up, you want to buy and have a capital gain. But that speculative demand is going to disappear now because prices are flattening and falling.

What about foreign buyers?
The U.S. economy is slowing down, and the dollar is weakening relative to the euro and other currencies. If you’re a foreigner and buying in dollars, you’re going to have a capital loss on the currency. So why would you want to buy today and get a capital loss of 20 or 30 percent? You can wait six months or a year and buy the bargain.

Does it matter that co-ops make up a large majority of the housing stock in Manhattan?
There’s a glut of new condos, and it’s getting worse. This will affect both condo and co-op prices. A home is a home, and excess supply leads to prices falling.

What about Wall Street bonuses? There are rumors that they’ll be sizable again, and brokers say bankers, traders, and hedge funders like to use their bonuses to buy real estate.
Wall Street will not rescue the housing market in New York for two reasons: First, there is a limited number of investment bankers and Wall Streeters. They already own homes, and their demand is constant—if they sell a property and buy another one, the net demand is unchanged. Second, Wall Street has been doing well, in part, because we have been living in a bubble, and it is bursting. We’re going to have a national recession in early 2007, and Wall Street profits and bonuses will sharply drop, limiting the wealth of these Wall Street bankers and traders. Also, hedge funds are doing lousy this year; returns for many hedge funds are below safe Treasury bills.

Some people say that there is so much wealth here that there will always be buyers for high-end properties.
That’s nonsense. It’s not as if there’s infinite wealth. There are thousands of new luxury units coming on the market, and the question is, who will buy them? If people start losing jobs, who can afford to pay 2, 3, 4, 5 million dollars? Do you know 10,000 new investment bankers on Wall Street?

Are brokers spinning when they say, “Oh it was just crazy before—it’s still going up, but it’s just more realistic now.”
That’s wishful thinking. We don’t have hard data yet on what exactly is happening in the market, but we know that prices of homes are sluggish. Some of the price action is going to come in the next few months when the supply increases, demand falls, and the national economy slows down.

What about people like you who bought years ago?
The increase in the value of their home is not making people richer. If I were to sell today and buy a property that has the same amenities, I would have to pay the same price. So I’m not wealthier, even though my home has gone up in value. What has happened in the past four years is that the real price of my housing service has doubled. I’m paying more to live in that home.

Will there be a fire sale in the city?
I’d expect prices to be 5 to 10 percent lower a year from now, on average. On the national level, real home prices may fall 20 to 30 percent.

What would you advise buyers and sellers to do?
If you’re a buyer, wait, or at least don’t be buying based on an expectation of increasing values. If you’re a seller, rushing won’t make any difference, because it’s very hard to sell. If everybody rushes to sell, the glut is going to become worse.

So the ride is over?
Not only is it over, it’s going to be a nasty fall.

———–

PS: one of my views on housing prices is incorrectly reported in this interview; i have argued recently (see http://www.rgemonitor.com/blog/roubini/145489/) that real home prices will fall 20 to 30% over the next three years or so, not over the next year as incorrectly reported in this interview. So, do not worry: the housing price bust will be in slow motion, not all in one year.

 

111 Responses to “The Coming Housing and Economic Crash: My Interview Today with New York Magazine”

CornhuskerSeptember 25th, 2006 at 2:59 pm

Okay, one last item and then I’m not checking this blog until Saturday night. I’ve resisted, but being the competitive guy I am…    Dr. Roubini, I’m calling you out,    Your current economic outlook and prognostications are SO mainstream that I’m surprised you haven’t gone back to the drawing board. THERE WILL NOT BE a recession next year. You, sir, are wrong…armed with too-little information, you are leading people down the wrong path. You lack access to the data you need to make an accurate assessment of the financial markets & economy as a whole, but you push forward anyway…I’ll be you know this deep-down, as I know you’re not a stupid man, but you have your pride, don’t you? So, you’ll go forth with these dire predictions of doom ‘n gloom, but deep-down inside, you have doubts; yet you don’t share these doubts with your followers…which is quite dissappointing to me. Dr. Roubini, be a man…if you have doubts about what you’ve predicted, share them with us all now…OR stand-pat and be proven utterly wrong and insignificant in a couple of business quarters…your choice.    Ok, I’ll chat with y’all this coming weekend.  

GuestSeptember 25th, 2006 at 3:31 pm

Dr. Roubini has always put a probability on his recession call (70% right now). What probably do you assign to a recession? Is it zero? Do you have any doubts about your blue-sky future for the economy, stock market and housing?  I’m also curious as to the data you use to make your predictions? Do you have access to more data that Dr. Roubini (who seems to be missing some data)? What data do you have that Dr. Roubini lacks?

CornhuskerSeptember 25th, 2006 at 3:35 pm

Guest,  Fine, I put the probability of a recession over the next 24 months at 10%. Additionally, I put the probability of a DOW jump of 20% next calendar year at 75%. I am basing these guesstimations on the business I am engaged in, of which I’ve written extensively about on http://www.bullnotbull.com & in Roubini’s previous comment section.  I believe Roubini is out-thinking himself…plain & simple.

J.GuSeptember 25th, 2006 at 3:45 pm

It doesn’t take a serious economist like Prof. Nouriel to know that the housing bubble will burst. People just can’t afford the kind of house price we are seeing now. Clowns like David Lereah are spinning all they can because they have their own interest in doing that. I’m sure when the price drops 30%, David “soft landing” Lereah will still call it a “soft landing”. It’s a tragedy this kind of folks even have a job in this great country, one guy even sits on the position of being the US president. The nation is falling down, and some serious people need to get control.   

GuestSeptember 25th, 2006 at 3:57 pm

Nouriel, could you comment on this Bloomberg article stating that the rest of the world is weaning themselves off the US? They say, ” The share of global exports purchased by U.S. consumers and businesses fell to 17.9 percent in 2005 from 21.8 percent in 2000 as demand increased in the European Union, Japan and emerging markets in Asia and Eastern Europe.” The European Union said Sept. 9 it will seek bilateral trade deals with China and South Korea. In August, Japan proposed a 16- nation economic bloc, including 10 Southeast Asian nations, China, Japan, South Korea, India, Australia and New Zealand.”   Although the US economy is slowing, with Q4 2006 GDP expected at 2.6%, the rest of the world is picking up steam. ” The euro region is on track this year for the fastest growth since 2000, led by Germany, Europe’s largest economy. Domestic demand in Japan is reviving after seven years of deflation, and China’s economy grew in the second quarter at the fastest rate in more than a decade.”  ” The so-called BRICs economies, Brazil, Russia, India and China, account for about 30 percent of world growth in the past five years, says O’Neill of Goldman Sachs.  “Domestic demand in so many parts of the world is picking up, and that’s the biggest driver of world trade,” O’Neill says. “As the BRICS become bigger, the world’s exporters export more to them and less to the U.S.” “ End quotation  Do you think this change is too slow in coming to prevent the 2007 recession?  Cornhusker, real men don’t hide behind their anonymity. Your cheap shots are detracting from the high caliber of this blog. I vote that you are banned until you can learn some manners.

KBSeptember 25th, 2006 at 3:59 pm

Dr. Roubini-  This one will look obvious to everyone in the rear view mirror. Bonds are screaming recession right now, as stocks continue to spike higher on window dressing and short covering. Rates have been falling for several months now, but housing continues to implode at an alarming rate, now with falling prices across most of the country. The massive fiscal and trade deficits are putting the US dollar at major risk, as we depend on the investment of our foreign friends to finance our deficits, homeland security and the ever-growing wars on terror. No borrowing from the people, as our US personal savings rate is now negative, and growing deeper everyday. Think about it…if the tech (dotcom) bubble could induce a mild recession in 2001-2, what will the bursting of the greatest housing (lending) bubble of all-time produce? Sorry, but falling oil prices won’t save your day. Oil is still double what it was priced at in 2001-2. Still up over 100% from just four years ago! As for housing and lending, everybody is in…and many are and will continue to try to run for the exits…  October 2006 has the potential for a historic sell-off that could put the US economy in a moderate to severe recession within days if not hours. The negative wealth effect of an imploding housing and lending bubble, coupled with selling in the public stock markets, will put the consumer (~70% of GDP) and our banks and lending institutions on ice for some time.   Lastly, history tells us that soft landings rarely happen, inverted yield curves often lead to recession, the “end” of a rate hike cycle often precludes a significant decline in stock indices, and that sooner rather than later, the US equity and risk markets will begin the process of pricing in all of the above.  Buckle up folks.

ManhattaniteSeptember 25th, 2006 at 4:03 pm

Frankly I am disappointed in the projection that prices will be “lower by 5 to 10 percent” in the next year in NYC (btw, is that Manhattan alone or all five boroughs, and if so, can there be a projection by borough?). After rising 150% in the past 4 years (as personally seen in Tribecca), to go down by only 5 or 10% is not exactly a bust. After that, do you expect it to continue rising again? Is NYC simply impervious? 

PatriotSeptember 25th, 2006 at 4:12 pm

Mr/Mrs. Cornhusker  Why do you come along with this piece of crap day after a day? You don’t come up with real arguments against Mr. Roubini, this is barely shouting.  What I can tell you, is that, Mr. Roubini’s blog is excellent, although for myself it did not provide much extra information that I did not know already early this year – there will be a recession in 2007. I predict that to begin 1-2 months later than Roubini, being in my original forecast of 18 months since 2006-02.  I base my findings on the very same things mentioned in this blog, but it is becoming ever more clearer, that more and more people are finding the same evidence.  What we have got at hand, very shortly is -  a) Overdebted government and private household sector b) Overvalued houseprice nationwide, including Europeans, Kanadians and Australians - c) Stagflationary shocks from oil-, and commodityprices, leading to higher inflation d) Weak, even negative savings rate, in U.S. and Europe e) Overpriced stock valuations, according to average P/E numbers, given the coming situation. Again, being true globally f) A long range of rate hikes behind. A typical preceeding event before a recession g) Bond markets are have been inverted. A scenario typical before a recession  We’ve got IMF’s study on falling houseprices – 19/20 cases ended with a recession after homeprices fell 28% or more in real terms nationwide. This scenario has more than 50% chance of occurring in U.S.  The rest of the world, including emerging giant China, are much dependent on the U.S. economy. Plus that many big European countries are not in a better position – who’s going to drive the consumption and leadership if/when U.S. consumption falls?

LloydSeptember 25th, 2006 at 4:52 pm

Of course the market was up today on the hope/view/prayer that the Fed will cut rates early next year to save the stock market. No matter how bad the data or how dark the storm clouds on the horizon, investors keep dreaming everything will be ok. I don’t get it and I don’t buy it. This reminds me of the sentiment before the dot.com bust minus the crazy valuations and concept stock IPOs.

James BlundenSeptember 25th, 2006 at 6:36 pm

Mr. Roubini:   The coming recession will be the result of Federal Reserve tightening policies over the last year. Yes, housing is slumping badly, but it is not the cause of the coming recession. If the Fed had started to lower interest rates in January of this year, we could have avoided the coming recession entirely and had the soft landing everyone was hoping for. The sharp drop in bond yields over the past several weeks is giving investors notice that the bond market sees a recession approaching. If the GDP report for the third quarter is as low as you now predict, the stock market will finally come to the same conclusion as the bond market and a major sell-off will commence shortly after the GDP report.

wawawaSeptember 25th, 2006 at 6:57 pm

Mr./Mrs. Cornhusker:  OK, fair is fair.   I believe Dr. R. has provided enough empirical data/reasoning for his belief and conclusion about the economy.  What are yours which would refute Dr. R’s points of view? I think you are the one who is falling short of empirical data/reasoning.  No disrespect is intended. 

ColtSeptember 25th, 2006 at 7:39 pm

Mr. Roubini,  You failed to mention the structural changes that have occured in the housing market…The “Piggy Back Loan”. This invention made a 5to1 market 10to1. And I think it was a good thing. There are many people who have the income, but dont have the savings, to buy a new home. It was only a matter of time before “20% down payment” went the way of powdered whigs. It was the financial exotica that turned a booming real estate market of 100k earners with 50k in the bank buying 400k homes to 50k earners with no money in the bank buying 800k homes. We may see retracement, but dont expect a return to the mean…

Rev. TomSeptember 25th, 2006 at 8:34 pm

Re Cornhusker,   I agree with Patriot and Dr. Roubini in their economic analyses, but would caution against any move to ban Cornhusker. In regard to Patriot’s analysis, I would add two things to his list: a) corporate over-indebtedness that is every bit as bad as consumer and government over-indebtedness, especially in the resurgent LBO/private-equity sector, and b) destructive feedback loops. The feedback loop between housing and the economy has long been noted, but there are other dangerous feedback loops waiting to be sprung in regard to:   1. The impact of falling profits on over-indebted corporations. 2. The inherently stagflationary effects of a falling US dollar. 3. The impact of declining US consumption on the global economy. 4. The impact of the new bankruptcy law on bankrupt consumers.   Beyond this, I’ve been doing a study of “monetary thermodynamics” that characterizes the entropic forces that degrade monetary velocity. This study makes a careful distinction between the “real monetary velocity” that occurs in the productive economy, and the “virtual monetary velocity” that occurs when investors shift their investments from one asset class to another. The upshot of this “monetary thermodynamics” is an analysis that 100% affirms the conclusions of Dr. Roubini, except that I put the probability of an ugly recession at 99.9+%. This analysis also leads me to predict that: a) the safeguards instituted in the 1930s are not adequate for the current challenges, and b) a full-fledged depression is likely to occur in 2008-2010 unless major political changes occur.   Since Cornhusker is a recruiter for the banking industry, he has done us an immense favor by highlighting the extent to which “the lemmings are headed for the cliff” (as further exemplified by Colt’s “10 to 1″ housing market in the face of an eviscerated working class labor market). And since the FOMC committee comes (for the most part) from the banking industry, we should note that we are dangerously close to a suicidal hyper-inflation. In this regard, I posit that the best scenario that has any real probability of occurring is for the crash of 2006-2007 to act as a wake-up call for the banking industry — and for said industry to partner with visionary futurists in 2007 to begin instituting the political changes that will be needed to secure a pattern of true long-term health. I’ll begin sharing the results of my “monetary thermodynamics” with Drs. Roubini and Setser in a more formal way in the next few days. The details of what needs to occur are far beyond the scope of a simple blog, but suffice to say that the aforementioned futurists will need to secure two critical changes if we are to prevent a total system failure in the range of 2010-2012:    1. The first is the emergence of a holistic libertarianism that will guarantee a win-win deal between the rich and poor by: a) assuring that new wealth is produced faster than existing wealth concentrates to the rich, b) cultivating the art of visionary philanthropy, c) forever renouncing the coercive redistribution of justly earned wealth, and d) championing the political changes that will allow confidence in the following item to be generated in a timely way.   2. The second is the establishment of an energy-based monetary-standard in which the many trillions of outstanding US dollars will be recycled into the construction of energy facilities, and be repaid WITH INTEREST over a period of decades. This would occur via the development of an exponentially growing supply of electricity and liquid hydrocarbon fuels that would coincide perfectly with the mounting crises inherent to “peak oil” and surging global energy demand.   There are obviously hordes of issues to be addressed in regard to either requirement, but neither is in any way optional. The first requirement relates to the distinction between a sane civilization and an insane civilization, with the Cornhusker dialog offering the perfect example of the sheer insanity that we face. The second relates to the fact that civilization must physically secure the capacity for wholesale ocean and space colonization or die by one means or another. An incipient futurist network will handle the first issue, and anyone who is interested in participating can contact me by emailing ManticHolographic@Earthlink.net. The second will require a chain of subsidies to pass from the Fed to the banking industry, to the energy industry, and thence to the world in the form of low stable energy prices. There are monetary, ideological, and geopolitical issues related to the creation of an energy-based monetary-standard, but they are all easily resolved. Likewise there are technical, ecological, ideological, and geopolitical issues related to the ultra-large-scale use of nuclear-power, the ultra-large-scale emission of CO2, and the construction of an efficient global electrical grid, but they too are all easily resolved.   Hard core materialists may not like my final point, but “intelligent design” applies every bit as much to cultural/technological/finan

Rev. TomSeptember 25th, 2006 at 8:34 pm

Re Cornhusker,   I agree with Patriot and Dr. Roubini in their economic analyses, but would caution against any move to ban Cornhusker. In regard to Patriot’s analysis, I would add two things to his list: a) corporate over-indebtedness that is every bit as bad as consumer and government over-indebtedness, especially in the resurgent LBO/private-equity sector, and b) destructive feedback loops. The feedback loop between housing and the economy has long been noted, but there are other dangerous feedback loops waiting to be sprung in regard to:   1. The impact of falling profits on over-indebted corporations. 2. The inherently stagflationary effects of a falling US dollar. 3. The impact of declining US consumption on the global economy. 4. The impact of the new bankruptcy law on bankrupt consumers.   Beyond this, I’ve been doing a study of “monetary thermodynamics” that characterizes the entropic forces that degrade monetary velocity. This study makes a careful distinction between the “real monetary velocity” that occurs in the productive economy, and the “virtual monetary velocity” that occurs when investors shift their investments from one asset class to another. The upshot of this “monetary thermodynamics” is an analysis that 100% affirms the conclusions of Dr. Roubini, except that I put the probability of an ugly recession at 99.9+%. This analysis also leads me to predict that: a) the safeguards instituted in the 1930s are not adequate for the current challenges, and b) a full-fledged depression is likely to occur in 2008-2010 unless major political changes occur.   Since Cornhusker is a recruiter for the banking industry, he has done us an immense favor by highlighting the extent to which “the lemmings are headed for the cliff” (as further exemplified by Colt’s “10 to 1″ housing market in the face of an eviscerated working class labor market). And since the FOMC committee comes (for the most part) from the banking industry, we should note that we are dangerously close to a suicidal hyper-inflation. In this regard, I posit that the best scenario that has any real probability of occurring is for the crash of 2006-2007 to act as a wake-up call for the banking industry — and for said industry to partner with visionary futurists in 2007 to begin instituting the political changes that will be needed to secure a pattern of true long-term health. I’ll begin sharing the results of my “monetary thermodynamics” with Drs. Roubini and Setser in a more formal way in the next few days. The details of what needs to occur are far beyond the scope of a simple blog, but suffice to say that the aforementioned futurists will need to secure two critical changes if we are to prevent a total system failure in the range of 2010-2012:    1. The first is the emergence of a holistic libertarianism that will guarantee a win-win deal between the rich and poor by: a) assuring that new wealth is produced faster than existing wealth concentrates to the rich, b) cultivating the art of visionary philanthropy, c) forever renouncing the coercive redistribution of justly earned wealth, and d) championing the political changes that will allow confidence in the following item to be generated in a timely way.   2. The second is the establishment of an energy-based monetary-standard in which the many trillions of outstanding US dollars will be recycled into the construction of energy facilities, and be repaid WITH INTEREST over a period of decades. This would occur via the development of an exponentially growing supply of electricity and liquid hydrocarbon fuels that would coincide perfectly with the mounting crises inherent to “peak oil” and surging global energy demand.   There are obviously hordes of issues to be addressed in regard to either requirement, but neither is in any way optional. The first requirement relates to the distinction between a sane civilization and an insane civilization, with the Cornhusker dialog offering the perfect example of the sheer insanity that we face. The second relates to the fact that civilization must physically secure the capacity for wholesale ocean and space colonization or die by one means or another. An incipient futurist network will handle the first issue, and anyone who is interested in participating can contact me by emailing ManticHolographic@Earthlink.net. The second will require a chain of subsidies to pass from the Fed to the banking industry, to the energy industry, and thence to the world in the form of low stable energy prices. There are monetary, ideological, and geopolitical issues related to the creation of an energy-based monetary-standard, but they are all easily resolved. Likewise there are technical, ecological, ideological, and geopolitical issues related to the ultra-large-scale use of nuclear-power, the ultra-large-scale emission of CO2, and the construction of an efficient global electrical grid, but they too are all easily resolved.   Hard core materialists may not like my final point, but “intelligent design” applies every bit as much to cultural/technological/financial evolution as it does to biological evolution, and I am prepared to defend this by documenting the workablity of the above two changes in excruciating detail (and then describing the underlying theory). And as far as fractional reserve banking is concerned, an intelligent solution along these lines is what will spell the difference between life or death.  Sincerely,

mrktMavenSeptember 25th, 2006 at 9:30 pm

KB,  I echo everything you say; you are on the money, particularly about the bond market screaming recession, short covering rally, and at some point the market has to re-price the bleak future ahead.

PatriotSeptember 26th, 2006 at 3:56 am

Colt writes:  > was only a matter of time before “20% down payment” went the way of powdered whigs. > It was the financial exotica that turned a booming real > estate market of 100k earners with 50k in the bank buying 400k homes to 50k earners > with no money in the bank buying 800k homes. We > may see retracement, but dont expect a return to the mean… “  This is a bad thing, not a good thing. Now the lenders carry a higher risk on bad loans than before. And that easy lending, not only lower interest rates, but easier conditions, made the bubble possible.  In the long run, however, the price of a house comes down basically into two things -  a) What it costs to build one. Raw-materials, energy and equipment used, the actual work and profits for the builder  b) What a house yields back as an investment

AnonymousSeptember 26th, 2006 at 4:21 am

I don’t think Cornhusker should be banned either but I, as opposed to one or two others, do not find his/her posts enlightening in the least. Is it a piece of anectdotal evidence? Yes. But that’s about its worth. Not much. The rest seems to be some cry for help and attention. I think he/she has some psychological issues that won’t be solved by this board.

VikasSeptember 26th, 2006 at 5:12 am

Well, though I am bearish, I think that time is running out for this forecast. If there is going to be a recession in 2007, the market should be anticipating it now or very soon. If October passes without a slide, I’ll probably switch to the Cornhusker view.  ”I change my opinion when the facts change”

MichaelSeptember 26th, 2006 at 6:26 am

Ernst :  ”Supply creates its own demand”, in theroy it is workable. But even in China, we (i am a Chinese in Hong Kong)have to stimulate consumer spending.Japan is doing the same. 

MichaelSeptember 26th, 2006 at 6:52 am

Cornhusker: I think we better refer to the busines forecast made by the bankers i/o looking at how many staff they employ. Example: in the last few years, as I know,hedge fund houses have been increasing their workforce… But I dont think they will have good profits for 06/07.

RickSeptember 26th, 2006 at 6:52 am

Interesting isn’t it, Dr. Roubini, that they chose to title you “extreme”?  Since they’re trying to marginalize you in the media, I’m betting you’re getting closer to the truth…  I hope things work out, but I fear it will be much worse than even you predict.

CornhuskerSeptember 26th, 2006 at 8:44 am

Farewell all,  I just wanted to say “adios” to you all as I shan’t be writing on this blog again. It is my opinion that the owner(s) of these articles have an agenda that has very little to do with quality research & thoughtful DEBATE. If any of you would like to give it a try, I highly recommend http://www.bullnotbull.com. The blogger (Nystrom) is an amazing writer and in my opinion is a true “deep thinker” with an open, sincere attitude. I believe BNB is a thousand times more insightful and engaging than this board…again, just one man’s opinion.   Good luck, all.  - Cornhusker

GuestSeptember 26th, 2006 at 9:39 am

It’s too bad that every single writer here has the same exact view, other than Cornhusker (although this latter doesn’t back it up with data). I would prefer more diverse comments, Both sides (hard landing vs soft landing, or the Roubini/Roach/Merrill view vs the Barclays/JPmorgan/Goldman view) are internally consistent and well argued so it is not as clear cut as some suggest that ‘global’ hard landing is coming. I do believe in decoupling. Therefore you should invest in emerging markets, esp currencies; less so in stocks.

Rev. TomSeptember 26th, 2006 at 11:10 am

I would agree that the Roubini/Roach/Merrill view is likely to be internally consistent. By contrast, the consistency of the Barclays/JPmorgan/Goldman view is likely to evaporate faster than a snowflake on a hot July tarmac the moment people begin considering the monetary equivalent of entropy.  Adios to Cornhusker. Sorry to see him leave, he was doing a valuable service by communicating the hiring frenzy in the banking industry. To convey the macroeconomic situation in simple terms:  1. Bubble = Credit + Mania. We know that a technical credit bubble exists. Cornhusker confirmed that mania is still widespread in the banking industry. If a solution to society’s economic woes is to be had, we need to consider not just the technical issues, but also the mania, as this is a huge factor.  2. Mania = The possibility of a catastrophic system failure. If humans were highly rational creatures we could discount this possibility. Alas, the “irrationality” of the marketplace and the political realm has long been a scourge to society, and despite the multi-decade to multi-century timescale for economic evolution, we have no certainty that the overall system is truly stable.  3. New physical wealth must be produced faster than existing wealth concentrates to the rich or it is guaranteed that the fractional reserve banking system will suffer a catastrophic failure. Since this system is now global, this implies a global calamity, with my study of “monetary thermodynamics” indicating that the point of catastrophic failure is only a few years away. Worse yet, the situation is greatly aggravated by the immense quantities of money squandered by the social/ecological fanatics of the left and by the moral/religious fanatics of the right, for these too are forms of political mania.  4. Exponentially increasing supplies of industrial energy (i.e. electricity and liquid hydrocarbon fuels) must be available at low stable prices or it is guaranteed that the system will fail on the above count for purely economic reasons (as has been slowly but surely happening for the last 30+ years). The creation of paper wealth may compensate for a while, but will eventually lead to inflation/forex crises, deflation/run away debts, or the stagflationary combination of the two that we have now.   [ Increased energy efficiency can compensate somewhat, but this is of low significance — due to the fact that: a) thermodynamic limits constrain overall improvements to a onetime 10x gain, b) the choice and timing of what to improve must be further constrained by capital cost considerations if the efficiency improvements are to be of any real help to the economy, and c) humanity has an exponentially increasing energy need that is right and proper at this point in cultural evolution. ]  5. Items three and four are inherently unsolvable unless a political force emerges that can reconcile left-wing and right-wing passion without compromise — via a combination of visionary futurism and holistic community-oriented libertarianism. I suspect the reason so many people reject the  Roubini/Roach/Merrill view (and call them “eeyores”) is because full consideration of this view will force people to look death in the face, and many won’t want to do that until a solution is at hand.  6. Lastly, I claim that all problems are solvable by the above combination of forces, for this is the solution prearranged by “God”/ “universal intelligence,” whatever you want to call it. I’m not saying that anything is preordained, but that: a) the current economic challenge is essentially the “final exam” of historic civilization, and b) we must create a global economy that supports wholesale ocean and space colonization or we will be facing geopolitical/ecological/financial/Malthusian crisis of the worst sort.  Sincerely,

GuestSeptember 26th, 2006 at 11:29 am

Rev. Tom, Interesting piece. And interested in your study of ‘monetary thermodynamics’. What exactly is it? Exactly because of entropy, which basically says that all natural/physical/social (and hence economic) systems tend to become more and more complex, not the other way around, risks will ALWAYS point to severe crisis, making the other argument(Barclays/JPM/Goldman) less acceptable to academics and rational people. But that doesn’t make that argument internally inconsistent. It is in fact perfectly consistent. At the end of the day it’s all about the initial assumptions and sentiment.

Rev. TomSeptember 26th, 2006 at 11:35 am

BTW, the coming downturn will squash the emerging markets.   China will get hammmered because of how overbuilt it is, but may compensate by aggressive currency moves. But not all emerging markets have a big pile of US reserves. Those that don’t will get hit by a double dollar squeeze. First via the loss of dollars from decreased imports, and secondly by the devaluation of the dollar when the Fed loosens the spigots.  If commodities continue their big blowout, there may be a degree of decoupling. None the less, there is a simple conundrum, the more dollars the Fed prints, the more oil etc. will cost emerging markets in terms of dollars; the fewer dollars the Fed prints, the more the exports of the emerging markets will drop. It is a dangerous situation.

ErnstSeptember 26th, 2006 at 11:39 am

Adios Cornhusker. Pity you had to leave. I threw you a lifevest to support your position, even if I disgree with you. But you didn’t pick it up to give the data your detractors were demanding of you. I think different points of view are healthy in a serious discussion. I offer the two articles mentioned in my previous post to anyone who wants to look at differing views. The problem is people tend to read blogs of people who share their same beliefs and disregard or ignore the others.

AnonymousSeptember 26th, 2006 at 12:21 pm

Ernst-  You are very gracious. You pick him up (Cornhusker)even when he can’t muster the energy (decency?) to give data other than the anecdotal tidbit he threw out.   I visited the site he claims is the greatest and reviewed his posts to see if I could glean what he is all about. Guess what? Over the past week he has gone from uber-bear to ultra-bull! Seriously! Ten days ago he had a string of posts about the coming meltdown and how anyone who was not all in T Bills and gold was an idiot and now his posts say he has flipped to 87% long and the coming rally will run til 2009! I kid you not! I had a former business partner who was like this. First he took medication and then finally spent a seriously long time in analysis. Why is anyone paying even a smidge of attention to this guy?

NOR CAL WOMANSeptember 26th, 2006 at 12:25 pm

My Free subscription is up today so i will keep this brief. I am just an average middle income american, born and raised in Nor Cal. I make $60.k a yr working for the state and I am 37 yrs old single mom of two infants.  I was the lucky one that sold last year 5/05 but, I was also the smart one. I knew that the value/money in my home was no good to me unless i pulled it out. I knew that those new ARM loans were all Risk and no satisfaction. I also knew that a Equity loan was not “FREE” money. It’s more debt!!!!! How can anyone not see that?? Sure I am renting now but, Look how things have turned around. My friends who are house poor and about to loose their houses due to this risky financing are wishing they were in my position.  Anyway, I have been reading up on as much as I can about the possible recession and I too believe we will have one. No one knows how bad or how long it will be…not even the experts.  Everyone should know that the housing market always slows down at the end of the year due to holidays and bad weather. Of course things will get worse this year…it always does. Please remember that. If the market does go in a positive direction it won’t be until next spring and we all know, it’s not likely to even happen then.  Thanks for listening!  

NOR CAL WOMANSeptember 26th, 2006 at 12:25 pm

My Free subscription is up today so i will keep this brief. I am just an average middle income american, born and raised in Nor Cal. I make $60.k a yr working for the state and I am 37 yrs old single mom of two infants.  I was the lucky one that sold last year 5/05 but, I was also the smart one. I knew that the value/money in my home was no good to me unless i pulled it out. I knew that those new ARM loans were all Risk and no satisfaction. I also knew that a Equity loan was not “FREE” money. It’s more debt!!!!! How can anyone not see that?? Sure I am renting now but, Look how things have turned around. My friends who are house poor and about to loose their houses due to this risky financing are wishing they were in my position.  Anyway, I have been reading up on as much as I can about the possible recession and I too believe we will have one. No one knows how bad or how long it will be…not even the experts.  Everyone should know that the housing market always slows down at the end of the year due to holidays and bad weather. Of course things will get worse this year…it always does. Please remember that. If the market does go in a positive direction it won’t be until next spring and we all know, it’s not likely to even happen then.  Thanks for listening!  

Rev. TomSeptember 26th, 2006 at 12:30 pm

Thank You Guest for your comment.  You are totally right that thermodynamic processes lead toward complexity. This is actually good. The problem has to do with the thermodynamic equivalent of “available energy.” In short there has to be a sufficient quantity and velocity of money for the poor and the working class, or the bottom will fall out of the physical/productive economy. Indeed, this is exactly what’s happening in the housing market, with the housing market being worse on the low end, and median prices upheld by the skewing of actual sales toward the high end which is not yet as depressed.   The complex interlinkages of the modern economy are a good thing, because they are a critical step in the economy switching from being of a mechanistic nature to being of a living nature. The caveat is that complexity can not compensate “energy starvation” vis a vis the need for an adequate level of monetary velocity in the physical/productive economy. In this regard, the steady concentration of wealth from 1980 onward is the sign of a “monetary energy starvation” that is close to being terminal.  In the end, these complex inter-linkages are what will force a strict bifurcation of destiny. If monetary thermodynamics is ignored, we are looking at a catastrophic system failure, with the exact scenario depending on whether the left-wing or right-wing is in power. If monetary thermodynamics is embraced by the banking industry and promoted by a visionary political force, we get a living economy and a cosmic destiny.   As far as the details of monetary thermodynamics, that is a huge subject that would take an entire high-level blog in and of itself, for there is no way to properly address the subject without also addressing the intimate connection between macro-economics and politics/religion. If Dr. Roubini is interested enough to add another blog to his home page I’ll discuss it here. Otherwise, send me an email, and I’ll include you in some email discussions that I am beginning on the subject.  Sincerely,

GuestSeptember 26th, 2006 at 12:53 pm

It’s interesting to read the controversy regarding Cornhusker’s comments. I think it’s all good for discussion.  BTW, I’d like to add a personal observation about corporate hiring practices. In the summer of 2005, Intel was hiring like crazy, posting and hiring for thousands of jobs. I know, as I interviewed for several. Thankfully, I was hired by another company as only a year later, mass layoffs were announced. It didn’t make sense to me then as I knew the health of the business and still doesn’t to this day why they went on a hiring binge only to purge a year later.  I would not gauge the future health of the banking sector on today’s hiring plans if Intel’s example can serve as a guide.

Schahrzad BerklandSeptember 26th, 2006 at 1:21 pm

I was at a job fair in San Diego in October 2005, when the lenders were hiring like gangbusters. About 1/4 of the tables were lenders, and one of the recruiters told me they were going all out and really ramping up. Another recruiter said the lady at the table with him was earning $20K/month as a mortgage officer. So at the peak of the housing bubble, they were ramping up, instead of cutting back. I wonder if the builders started their largest projects late last year.  I have no problem with Cornhusker other than his tone of voice. He criticizes people, instead of debating the arguments. I merely suggseted he clean up his act or go away, and was hoping for the former. I put to rest his bullish stance on Omaha real estate, and he was open minded enough to accept it. I’m a regular poster on another blog, piggington.com (San Diego housing market news and analysis), and I get attacked for my views too. I wish people would attack my arguments instead of me personally, and if they are really smarter than I, show it with their better logic.   I like to hear the bulls’ views, and appreciate the links. Anyone who has a different view, bring your facts, your data, your analysis, your conclusions. Just please refrain from getting personal.  Patriot, housing is overpriced due to the speculative pricing on land. Housing prices need to drop below what the builder paid, because the builder overpaid for the land. In addition, building materials and labor were temporarily high due the supply/demand imbalance; I’ve told my neighbor to wait another year for her kitchen remodel, because the bids will be significantly lower.   The link about the stock market/homebuilder index is valid. It was poor sportsmanship to make a chart fitting the timelines that makes the point. However, Ed Leamer has shown that usually when the housing market drops, a recession follows. The only exceptions occured when the government spending made up for the lack in consumer spending, i.e. the Korean and Vietnam wars. So that is the reason the IMF is warning about a global recession due to the US housing market slowdown. Now, I would love to see an argument against the IMF viewpoint.  

Fran DillonSeptember 26th, 2006 at 1:55 pm

I’m an underwriter for a sub-prime mortgage brokerage in the San Diego area. The last two quarters have been very rough as our company has laid-off 25% of our staff since March of this year.  The past three weeks have been confusing, interesting, and refreshing for us. Mortgage applications (both new & re-fi’s) are up over 30% for the month as compared to last month; while only down 3% vs. this time last year. I’m not sure what’s going on, but we’ve been putting in extra hours this entire month due to our small staff size! The witch who runs our office has been told by her boss that if we have another month in October like we did this month that we would immediately hire back 1/2 the people we laid off. I’m not a finance whiz; I am just happy to have a job.  I enjoy reading this blog, thanks for the great content.  - Franny

AnonymousSeptember 26th, 2006 at 3:03 pm

October has a tendency to be very very rough in this area. Your “refreshing” news is based on ignorence of Mortgage cycles.

AnonymousSeptember 26th, 2006 at 3:03 pm

October has a tendency to be very very rough in this area. Your “refreshing” news is based on ignorence of Mortgage cycles.

wetzelSeptember 26th, 2006 at 3:22 pm

Rev. Tom, Your writing is very compelling, although I think you just might want to develop a terminology to express your ideas that is independent of thermodynamics. Thermodynamics is physics not economics.   Entropy is a number that is always increasing, but this applies to the universe as a whole, or to an isolated system, but in pure physical terms, increase in entropy does not necessarilly apply to the Earth as a system, because it is not isolated from the sun, which is always adding input.  Entropy has a very precise definition in physics, which is the logarithm of the statistical multiplicity of a system. How does that apply to money? If you have a rigorous approach, then it would be interesting indeed, but you might want to detach the terminology from physics unless the meanings are exactly the same. Otherwise, you are talking impressionistically, which can be of value, but your ideas aren’t so quantitative.  I am not saying that Thermodynamic ideas aren’t useful in economics. One reads arguments everyday that are a variation of Le Chatelier’s principle (to reestablish equilibrium, a system under stress responds in a way to oppose the stress). But these discussions often wasel around because nobody is sure of all the inputs and possible states.  I apologize if I am misunderstanding you. My misunderstanding, though, may be an advertisement for careful definitions using other terminology than those terms which have established meanings in hard science. The reason is that it immediately rouses a strong skepticism, more than your arguments ultimately may deserve I think. Cheers.  

ewulfSeptember 26th, 2006 at 4:19 pm

 Professor Roubini´s analysis about housing sector fall has two tier: Tier Nº 1.As the housing sector fall, effectively it might impact GDP,taking into account the fact that from the year 2000 up to the year 2005,housing sector meant a 15% of the gdp growth in American economy,and a 15% of employment growth .(Economic Policy Institute).The current downward adjustment is expected to reducing Gdp by 1,5 points (year by year basis),and 0.4 point each quarter,which means the american economy might get closer to at least a depression in economic activity, just in case the last quarter gdp growth is below 2%.Therefore ,Professor Roubini´s analysis is not far from real possibility,in the sense that because of housing sector falling, there is a probability the economy might enter the “red zone”,in the first quarter of the year 2007.  Tier Nº2.As component of the nontradable sector ,it is expected that as long as housing consumption fall ,so it will housing production.In fact from the beginning of this year ,employment on housing sector has been decreasing,such that its share on total employment growth this year, is about 5%.(Goldman Sasch). The key point in the analysis though ,is how flexible is the economy to absorb the employment losses from housing sector. If the economy is flexible enough ,the final impact of the housing fall do not necessarily would imply a recession. Employment losses from housing sector,would moves to another one, (exporting sector for instance)moderating the impact on gdp,(assuming the foreign demand keeps its pace in Europe and Asia) . It has been usual to say that the American economy has among its strengh ,its flexibility,specially in labour markets . So,even though the reasoning is correct,it should be interesting to wait the next data,before drawing definitive conclusions.

Peter BoltonSeptember 26th, 2006 at 9:35 pm

Rev Tom ” that thermodynamic processes lead toward complexity” – Wetzel “Thermodynamics is physics not economics.”  I add:  1. Complexity leads to simplicity (“Stability leads to Instability” – H. Minski)   2. Economics is a physical force and therefore acts as the same Principles as energy (thermodynamic-is).  3. Entropy is merely an effect which indicates within a dynamic evolving and closed system is approaching coherency.  4. Basic Scienific Maxim: Theory must allow for prediction through demonstration.   Comment: Economics as “Weather Theory” (meteorology) – neither so-called bastions of excellence, have ever brought to the table any prediction based integrity despite the prolific emergence of economists and meteorologist “experts”…. and an abundance of time and research investment. Neither.  Conclusion: While economics is viewed as a specialized phenomena for only economists to dabble – - economics is damned to failure. Institutional Economics (the bunggling ignorance) has a greater effect on the lives of people than does Meteorology.  As a point, I state clearly, that despite all the nescience (theory and misunderstood and manipluated statistics) utilized by the Fed and the IMF and the World Bank, etc., all final critical decisions will always be made by a politician with no economic or scientific understandings, but will rely a priori personal agenda.  A Point of Interest: In Physics, the ‘Theoretical Mathematician’ Cult which is in control of the Science of Physics, believe and have indeed stated, that only mathematicians will ever be able to understand the Universe and it has been suggested that only theoretical mathematicians would even be able to understand God – of course, merely despotic hierarchial fear imposition through priestly craft..  Regarding Cornhusker: I am always amazed how men at any level – No, at all levels, still act out crude tribal protectionisms and school boy establishment bullying. Oh, just how quickly one can post “if you don’t agree or like it then leave” ‘ism…..(or the making of Loud Noises with the Intention of being Politically superior, to be seen as smart and whatever) -  Sounds like George Bush – Is George Bush – Is immature school boy antics trying to impress leader and group – is dog pissing on tree. Cornhusker was the recipient of disrespect from those on this list – he was shat on by collective adolescences – and those 3 points are all that are immediately important are:  Rule number #1 – if you don’t like the conversation, ignore the comments you don’t like, or try to give the matter some deep consideration – try to make a decision yourself – think and try to be constructive.  Rule Number #2 – Lock your penis up in a sealed padded and sound proofed room when your mind is directing your talking or typing.  Rule Number #3 – The owner of this list or blog is the Moderator – stay out of the Moderator’s face.  Life is about the full diversity of people; not just you alone. 

RNSeptember 26th, 2006 at 10:53 pm

Give it a break, Peter “Aren’t I the Moral One” Bolton. All anyone wanted from cornhusker was a little backup data and reasoning behind his arguments.     

AnonymousSeptember 27th, 2006 at 12:39 am

Rev Tom- Statistical Mechanics and Thermodynamics is most useful in describing macroscopic systems where individual ensemble in questions can typically be treated to be identitical and (often) non-interacting systems. It most cases, it is mere fact that the systems are identitical and non-interacting that allows many problems in this area be treated in a tractable and often close-formed manner. Some classical examples are the treatments with the ideal-gas law, as well as boson/fermion statistics. Fundamentally, the science rests upon the ability to compute a quantity (Grand Canonical Ensemble) which is a summation of all possible energy states and through a series of mathematical relations (mostly partial derivatives) to extract various measurable physical quantities, such as heat capacity, enthalpy, entropy, etc.. The fundamental assumptions is that you know all possible states apriori.  While I am by no means an economist (actually a physicist), my limited understanding in economics leads to to think that much of the forces we are discussing have significant coupling between them, where the total possible “states” for these entities may not even be known. I can see trying to extend these physical principals into economics as an interesting but a difficult problem. one thing to keep in mind that in stat mech/thermo, most of the derived quantities are time-independent quantities… the problems in this class tend not to be of a time-dependent variety. I’m curious to see how these things are dealt with in the proposed framework.   

Peter BoltonSeptember 27th, 2006 at 1:00 am

RN: LOL  With respect -  Morality is merely a fashionable and ever changing political-correct type behaviour and statement and this is definitely the first time that I stand so accused and it is amusing (I am not sure if I should laugh or cry), even if invalid; although I concede that my comments may have been superficially perceived as such (moral).  Money has no morality and God is said to be a non-interventionist (amoral) and Principles of the forces (universal); thermodynamic, electric, plasma, electromagnetic, etc., could be said to share similar analogous characteristics and similarities and as such, such a position suggests that economics should be included in the science of physics and not left to casting dice (misunderstood and fabricated statistics or the packaged quantities of effects) onto the “phase space” table so as to determine where to place tomorrow’s bet. I support and advocate this heretical position (see http://verbewarp.blogspot.com)in all matters. Heretics is my a priori Modus Operandi (MO).  However, and more to the point, not knowing all the facts – which are only detectable through all points-of-view, er all opinions (expressed cognitive behaviours or phenomenal temporal signatures), weakens one’s intellectual efforts in arriving at risk weighted analysis and thereby weakens the data input and as a consequence, information output. I acknowledge that we will never have or get all the facts but the more we get, the better the analysis.  Cornhusker may have eventually exposed some more clues to his radical and contraversial and deficient stance albeit in time and perhaps with some patience and a little coercion but even if he had remained, and continued to refrain from disclosure, recalcitantly, one still could have weighted his input within the milieux of this blog. Obviously one can move to bulltobull.com to see how he contributes there in a different and to him a more favourable environment but where a diffferent thread of logic is being played out.  Not withstanding, it was suggested (by some) that he go elsewhere (driven from the tribe) and as such counter-productive except in the instance where the Moderator/Owner feels that such commentary detracts from the theme of the discussions and is seen by me as being a lack of respect (where respect is not a moral position); then of course, we also have the advantage of then inputing the Moderator’s actions into our analysis.  So be it, but my point is that mutual respect brings its rewards, where disrespect brings cost. 

TranceSeptember 27th, 2006 at 1:27 am

Monetary thermodynamics may be just economics. An economy is defined by people and the network of interactions between them. The increasing complexity of this network allows for more possible states (people owning different things, exchanging different things) hence equivalent to a thermodynamic increase in entropy. Beware that thermodyanics is equilibrium which in living systems means death. I think the more appropriate analysis would be that of non-equilibrium thermodynamics. While I agree with economy being a living thing, I don’t think too highly of “cosmic destinies”. Ultimately any economy as well as any living system exists because of availability of resources that sustain the level of complexity (as in a food chain). Such resources are limited by whatever Earth has available and the human ingenuity to bring unconventional resources in a form that can be used to sustain the level of complexity aforementioned.  ”Complexity leads to simplicity”…I agree. That’s why money was invented and people do not barter anymore.

AlexLSeptember 27th, 2006 at 5:49 am

I am rather surprised at Cornhusker’s bullish comments. Just check his writings on the site he recommends: bullnotbull.com there he is very pessimistic, just read this “We are right now in the midst of a recession. the data from 12 month will confirm this”. at 19th sept he wrote: I’m 100% cash!! and here he was writing somthing abt his dow engagement. apart from Mr. Cornhusker – what worries me is the overall concensus on falling market, whereas the market is growing. actually this is the best sign for bulls. although i myself think this is “succres rally” but..

AlexLSeptember 27th, 2006 at 5:49 am

I am rather surprised at Cornhusker’s bullish comments. Just check his writings on the site he recommends: bullnotbull.com there he is very pessimistic, just read this “We are right now in the midst of a recession. the data from 12 month will confirm this”. at 19th sept he wrote: I’m 100% cash!! and here he was writing somthing abt his dow engagement. apart from Mr. Cornhusker – what worries me is the overall concensus on falling market, whereas the market is growing. actually this is the best sign for bulls. although i myself think this is “succres rally” but..

JackSeptember 27th, 2006 at 9:09 am

From the WSJ – 10:00am Wendesday, 9/27  Sales of new single-family homes increased by 4.1% to 1.050 million last month. July sales were revised lower. Full article coming soon.  

JackSeptember 27th, 2006 at 9:20 am

From the WSJ…  New-Home Sales Rise Unexpectedly As Durable-Goods Orders Decline By JEFF BATER September 27, 2006 10:17 a.m.  WASHINGTON — New-home sales unexpectedly climbed during August, breaking a string of three declines as the median price for a house compared to a year earlier was lower.  Meanwhile, demand for durable goods unexpectedly fell during August in a fairly broad-based decline, and an indicator of business equipment investment dipped.  Sales of single-family homes increased by 4.1% to a seasonally adjusted annual rate of 1.050 million, the Commerce Department said Wednesday. July sales fell 7.5% to 1.009 million, revised from a previously estimated 4.3% decline to 1.072 million. Sales dropped 0.9% in June and 1.8% in May. Demand was flat in April.  Wall Street expected slightly lower sales in August. The median estimate of 25 economists surveyed by Dow Jones Newswires was a 2.5% decline to a 1.045 million annual rate.  Sales might get a boost from easing home prices. The average price of a new home decreased to $304,400 in August, down from a revised $314,200 in July — yet above $295,000 in August 2005, according to Commerce. The median price rose to $237,000 from a revised $236,200 in July; the price in August 2005, however, was higher, at $240,100.  Year-to-year, sales were down 17.4% since August 2005 as the housing market softens. The National Association of Realtors reported Monday sales of previously owned homes fell a fifth month in a row during August even as the median price sank year-over-year for the first time since April 1995.  Financing costs are higher than a year ago. The average rate on a 30-year mortgage in August was 6.52%, which, while below July’s 6.76%, was above August 2005′s 5.82%.  Declining prices can make homeowners feel less wealthy and chill their spending on goods and services — worrisome for the economy. On the other hand, falling prices can help the housing market by making homes more affordable and reducing the rising tide of unsold homes.  There were an estimated 568,000 homes for sale at the end of August, the Commerce data Wednesday showed. That represented a 6.6 months’ supply at the current sales rate. An estimated 570,000 homes were for sale at the end of July, a 7.0 months’ inventory. The August 2005 supply was 4.6. Growing supply gives buyers the power to wait for an acceptable price, analysts say.  By region, new-home sales in August rose 11.1% in the South, 12.2% in the Midwest and 21.7% in the Northeast. Sales fell 17.7% in the West. Based on figures unadjusted for seasonal factors, an estimated 91,000 homes were actually sold last month in the U.S., up from 85,000 in July.

GuestSeptember 27th, 2006 at 11:24 am

Since I started reading this web site the following has occured: The Dow is at an ALL TIME HIGH. Retail,consumer, and tech stocks are leading the advance. Mortgage rates are down from the recent highs (15 yr. 5.91%). Gasoline is down from $3.29 to $2.41. Oil is down from $75 to $61 a barrel. The housing market is holding up +4.1% new home sales. The inverted yield curve has narrowed and only shows less than 30% chance of recession. I agree we’ve had a big run-up in the stock and housing market. That doesn’t mean there will be a crash. OK, so maybe the housing market might go down 20% and fools who purchased exotic loans mights get hurt (but most will now have a chance to refinance at a still historical very low levels).  Housing: Why should I sell my house that I bought 8 years ago (I have a 15 year fixed mortgage that I can afford) that is up, agreeably on paper, over 130%? I wasn’t looking for those type of gains. I just knew that real estate is a GREAT investment and more inportantly, my family and I need a place to live. I have a nice backyard with a pool and a patio with a BBQ. Why should I give that up to rent an apartment? To try and time a potential 20% savings? So in the short to mid term housing goes down. When I look to sell in 20 years and retire to Florida, I’m sure that it will look back and see a great investment. Why do the people on this site advise people to try and time this market? OK, maybe hold off for a year if you are going to own a home for the first time and don’t speculate buying 5 prperties with no money down, but if someone is staying in their home for the longer term, 5+ years, there is NO REASON TO SELL.  Stocks: The stock market usually sells off 6 months prior to a recession. Does anyone see something I don’t? I don’t buy stocks on margin, I use stop losses on my positions, and I invest my new funds every 2 to 3 months so I don’t buy too high or too low. This strategy has helped me make money in good times and bad. If investors had sold their stocks and started shorting (as this site would suggest) they would have been crushed.   Dr. Roubini, your articles are extremely well written and I am impressed with all the statistics and information that you provide. But, trying to predict a recession (or its length)is very difficult. I appreciate that you are trying to warn investors on your interpretation of the data you’ve collected, but you should also warn them of the financial consequences if you are incorrect. Even if there is a housing recession, that doesn’t mean that it’s prudent for all homeowners to sell their houses! Please tell investors if you no longer see a recession in 4th or 1st qtr.   I want to let all of the readers on this site know this is the first time I’ve ever written on a blog. The only reason that I decided to write this (I’m just an average investor, not an economist, just a person who observes and has my own opinions)was because I’ve been reading this column for a few months and then I saw Dr. Roubini on CNBC’s Larry Kudlow show. I thought you would really let that perma-bull Kudlow have it!! A small criticism, you were a little too quiet… not that I could do any better. John Maudlin also seemed to be not as negative as his articles usually are.  Again, although I currently disagree with your conclusions, I do enjoy reading your articles and the research you provide. All investors need to be aware of all sides of an issue.  Laura M. 

JackSeptember 27th, 2006 at 11:34 am

I don’t recall Dr. Roubini telling anyone to sell their homes. I think he said to not count on your paper gains right now. Please someone correct me if I’m wrong here.  That said, I converted my paper gains into cold hard cash when I sold my home earlier this year (for 3X what I paid in 2000). I am currently renting a similar-sized home for about 1/3 of the cost of my previous mortgage, taxes, insurance and maintenance. I’m also sitting on a huge cap gain that I plan to put back into the housing market once I get someone to take me up on my offer to buy their home for a 40% discount.

VikasSeptember 27th, 2006 at 12:05 pm

Laura M,  I’m beginning to agree with you. As I said before, though no one responded, if there is a recession coming in 2007, we ought to be seeing it anticipated in the stock market, and we’re not. If we get through Oct ( I know that’s a real if) , I’m going to have to recalibrate my expectations.   Dr Roubini?

GuestSeptember 27th, 2006 at 12:17 pm

“The housing market is holding up +4.1% new home sales.”  Laura, before following this as a stat, realize that home sales are still down YOY, and this “increase” comes from a number that was significantly revised downward in July. In other words, it’s spin. Don’t forget that prices fell and many sales resulted from insane incentives. You need to examine the numbers before quoting it as gospel.  And as for your own home, you bought it 8 years ago, pretty much at the end of a down cycle. The whole “sell and rent” thing might not apply to someone like you. Everyone needs to make their own decision, and maybe you didn’t depend on paper gains. More so, you got lucky as to timing, but to say you say there thinking it was a brilliant investment is just not true. You probably bought it as a place to live, because that’s what your needs called for at the time. Did it cost you 50-70% of your monthly income? I doubt it. But that’s what housing costs are for many people who face buying today. Think about this – a starter home in the NYC suburbs – regular 3 bed, 1.5 bath, in a town with decent schools – is over 500K. In fact, in many towns, we’re talking 600-700K, with 5 figure property taxes. So, with assuming 10% down (a compromise between the normal 20% and the more recently popular 0%), we’re talking about 5K a month in payments. NY’ers do well, but not that well – imagine those costs for your STARTER home.  It’s just really irritating to hear people say “It’s fine for me, I don’t get what the fuss is all about” when their perspective is completely out of touch with what’s going on in the world of first time buyers and recent (generally young) homeowners. But then again, that’s the problem with the US – if it doesn’t affect me, why should I care?

Ethan JacobsSeptember 27th, 2006 at 12:18 pm

Thanks, everyone, for your comments on morality and civility, but back to the economics and finance…  When I bought my first home in 1968 the (more or less inflexible) rule from the banks for residential mortgages was at least 20% down (at least 25% down if it was not owner occupied). At the same time the (more or less flexible) rule from relators was: “Look for a home priced between 2 1/2 and 3 times your annual salary/income.”  What have been the corresponding flexible/inflexible rules for mortgage lending and home shopping in the last few years?  Have any of these changes led us to the pickle we seem to be in today?  Ethan

RealityCheckSeptember 27th, 2006 at 12:42 pm

I have to comment that even a 10-20% correction in house prices is nothing, when seen in context of the 100-200% gains in the past 4 years. Please donot scare people into gloom and doom.   I am quite sure that a number of people on this board have lost money in the recent months due to betting on the market’s capitulation or in missed opportunities. The DOW is at an all-time high, S&P is at 52-week highs etc.  Actually as a guest correctly pointed out, such sceptical investors provide a good environment for a strong rally in the markets. Mr. Roubini says there is a 70% chance of Recession (and that comes along with a 28% fall in market), but what about the rest 30% ?   30% chance that markets goes into a supercharged rally? Or even if recession happens the market will be up more than 30% from current levels, so that the downturn would not make a net negative if you buy stocks now? These are all possibilities an investor needs to factor in while making a judgement about the recession call. At the end you can’t ‘eat’ recession, you ‘eat’ returns.  The market is clearly not pricing in a recession yet. And anything milder than a ‘hard’ landing would skyrocket the markets to new highs (as it would be a positive surprise).     

GuestSeptember 27th, 2006 at 1:13 pm

Ethan, Your comparison is not relevant. It is perfectly normal for rules (‘mortage rules’ in this case) to change, adapting to a new world. My parents used to walk to go to school, my grandparents used to walk miles to go to work. My great grand parents used to travel in horses… So what? does that mean the the fact that most of us drive to go anywhere is wrong and should go back to old times? I don’t think so. Yes, there may be excesses and as usual there are overshooting and undershooting periods (that’s what business cycles are after all), but that doesn’t mean we have to go back to previous rules. In this case, the 3x your salary/home ratio.  On investing, buy a basket of currencies against the dollar and euro. Why? No ‘global’ crash coming.

KBSeptember 27th, 2006 at 1:30 pm

Mark this post –   Between now and one month from today, you will witness a complete reversal in psychology, and market talk of a impending recession will be commonplace. The setup to a significant correction is a near mirror image to the setup in 1987, when large cap indices reapproached all-time highs in late September.  The economic backdrop right now is dismal at best, with the bond market (falling rates), record complacency and historically low risk premiums (VIX, VXN, junk spreads) and the economic indicators (home and lending mkts) flashing bright “recessionary” red. Has the geopolitical backdrop improved? I don’t think so. North Korea building nukes, Iran attempting to build nukes, Iraq in chaos, Israel on pins and needles, Venezuela holding an “oil card”, Somalia, Thailand coup, bird flu, global warming, etc. etc. etc….  The markets will begin to price in this weakening environment into the equity and risk markets. When and what will be the catalyst? It may just be the turning of the calendar and the historic seasonality of investment returns. The hunt for “red” October is setting up to be a blockbuster.  Do your own due diligence. IMHO  KB

Give_me_deflation_or_give_me_dSeptember 27th, 2006 at 2:01 pm

Anon 2006-09-27 00:39:40,  Mathematical models to markets? I have one. Treat the market as a variational pb. The optimal solution is always obtained from the largest possible set of solutions. This why free markets are more efficient and yield better extrema. They permit the largest number of solutions to be attempted. Conversely, this is why central planning is forever doomed to fail. It greatly restricts the set of possible solutions.  This central result from the calculus of variations fits nicely with the teachings of the Austrian school. Now, how to define the functional? If I could do that, I’d be on my way to that dynamite thingy.  Enjoy.

AnonymousSeptember 27th, 2006 at 4:17 pm

New Home Sales did not rise. The CB has been WAY off with “intial’ New Homes Sales, they will be revised lower, below 1.000. That the media did not pick this up, describes the denial they are in.

AnonymousSeptember 27th, 2006 at 4:17 pm

New Home Sales did not rise. The CB has been WAY off with “intial’ New Homes Sales, they will be revised lower, below 1.000. That the media did not pick this up, describes the denial they are in.

AnonymousSeptember 28th, 2006 at 4:50 am

Ah, the infantile Cornhusker could not resist coming back to taunt. Apparently he likes the spin put on those dismal housing numbers by MSM as it supports his new position on the markets. How many times has Cornhusker said he is going away? “No I really mean it this time guys! No, this time really! I am going away for good if you do not acknowledge my brilliance! I MEAN IT THIS TIME!” So pathetic.

AnonymousSeptember 28th, 2006 at 6:08 am

CORNHUSKER WATCH  Because many of you were sympathetic to this lumatic’s “Constitutional Right to Post”, here are some of his latest “deep thoughts” from his enabler BullNotBull.com:  ”Cornhusker Says: September 26th, 2006 at 5:54 am  As of this moment the DOW is up 13 points at 11,589.  I’m calling my shot right now; the DOW will close up today by at least 120 points and will in total, tack on 300 or more points total between this morning and Friday’s close; which will place the DOW at a new record in the 11,900 range going into next week. DO YOUR OWN DUE DILIGENCE BEFORE COMMITING ANY MONEY TO A TRADE AS THE PRECEEDING FORECAST IS JUST MY OPINION AND I AM NOT ADVISING YOU TO TAKE ACTION BASED ON MY FORECASTS; however, I have just taken action via a couple more ETF’s…I am now 98% in U.S. stocks, 2% cash…I even made money on a brokered CD I just sold!  The bull has risen…today it begins.”   And how about this psychotic post:  ”Cornhusker Says: September 26th, 2006 at 6:48 am  I won’t be posting here again until a few days before January 1, ‘07. If anyone else assumes my identity in a post prior to December 26th, IT WILL NOT BE ME.  In the meantime, I will be working on a research project; with the goal being to show the correlation between gov’t/fed/corp. actions (public & otherwise) and public perception/”collective focus”. It’s all smoke ‘n mirrors, guys…hopefully, if I can find the time to carefully put my thoughts down in writing, you all can get a clearer picture as to what my mind’s-eye sees.  Also, I won’t be checking this blog before then, as I’ll be too tempted to share unrefined thoughts with you, which is what I wish to stop doing.  Chat wit’ ya’ in a few months. GO HUSKERS!”  OOOOOKAAAAAAY NOW. Put down the crack pipe and step away from the window.    

NineuSeptember 28th, 2006 at 6:47 am

The DOW could make all time highs and go up next months, spanish bourse IBEX35 made an all time record yesterday and european bourses are very bullish. But Cornhusker would be right only apparently, i.e. on the surface, because the economy is very ill in my view, and the bullish tumultuous stage will only live a short life. But the DOW up an 20 % next year could become true, only to implode all the credit bubble afterwards. The real problem is the huge credit bubble and the foolish hope of the markets’ participants they can ride the liquidity wave and earn a lot of money in shallow bull markets , being now the Fed “done” and even speculating interest rates will be lower tomorrow. Dr. Roubini could be wrong in timing, recession might not be true until 2008, but he is right , eventually a recession would be unavoidable, and there are not many months left before we will suffer this ugly recession or , who knows, even a depression.  The markets will play the inflationary card to the end, only to make things worse. Don´t blame on Dr. Roubini if the recession (a much uglier one) starts one year later because nobody can predict the follies of speculation making the things a lot worse than what they “should” be.

GuestSeptember 28th, 2006 at 8:15 am

Well, in my book, timing is everything. Of course imbalances will make a slowdown/recession inevitable at some point, but if your timing is off, you’re wrong. Particularly when it comes to investing.

GuestSeptember 28th, 2006 at 8:32 am

The alltime high in the Dow is in my opinion an illusion, since the usdollar index has lost around 30% since 2000. The rest of the world are making real alltime highs the US indexes are not.  The Dane

GuestSeptember 28th, 2006 at 9:18 am

When calling for a recession, of course timing is everything. There are always going to be periodic recessions. It’s part of the normal business cycle. But if you tell investors there is going to be a recession at a certain time period (and they have to prepare for that at least 6 months in advance) and it doesn’t occur, that’s real money that investors are losing! Like I wrote in my previous post, I’m just an observer. In terms of the housing market, let me share some basic observations. My grandparents made money owning their own home. My parents made money owning their own home. My uncles, cousins, and friends who have bought homes have made money. In fact I don’t personally know anyone who owned their own home, for living not speculation, who has ever lost money on it. These are people that have lived in their home for 15 or more years. I don’t understand why people in this room are trying to scare people out of their homes?! Instead explain to individuals looking to buy a home: Don’t buy a home for speculation. Make sure you can put at least 20% down Have a fixed 15 or 30 year mortgage (the market is still at extremely low rates) Make sure you have a job and buy a house you can afford based on your income  Of course there will be a recession “some day”. I’m sure the housing market after having a 6 year monsterous run up in prices will sell off 10%-20%,but the vast majority of actual owners, not the speculators, have massive 100-200% paper gains. If you are living in the home for the long term (15+ years) who cares? Why live in a small rental for possible 20%. Don’t forget closing and moving costs. Owning a home is the largest financial transaction that most people will make, and should be made very seriously, but it comes along with having a more enjoyable livestyle. Isn’t that worth more than trying to time a moderate % savings on already amazing gains?  Thank you again Dr. Roubini for your extremely interesting analysis and projections on the markets. Investors need to hear bullish and bearish projections and then make their own decisions.  Laura M

GuestSeptember 28th, 2006 at 9:38 am

That one was to anonymous about the stokmarket moving higher. The stock market believes that the FED will save it I guess.

GuestSeptember 28th, 2006 at 9:44 am

The Dow Jones is not a good representative for the market. The SP 500 is better and it has not reached its former high. It is rather close, however. More important, the GDP figures bear out Roubini’s idea that the economy is slowing rapidly. The next quarter will be crucial.

Rev. TomSeptember 28th, 2006 at 11:28 am

Re: Peter’s comments about discussion groups and points of view.   I agree with Peter that widely divergent points of view are valuable and that as such it’s best to let the moderator handle ejections. There is however, a catch-22 in all this in that there is no guarantee that one’s viewpoint might consider another’s to be insane. In this regard, it is likely that Cornhusker claimed to have left the list as a result of my coming right out and saying that his viewpoint was a reflection of mass insanity. Some might consider my viewpoint insane, but since the marketplace and the political realm are dominated by “irrational” phenomena there is no way we can avoid the subject of insanity. My opinion is that the next big breakthrough in economics will result from walking a tightrope between broadness of viewpoint and insanity.  Re: Fractional reserve banking and Trance’s ideas about resource limits.  Trance, we are in total agreement that a living system requires non-equilibrium thermodynamics. Unfortunately, you have regurgitated one of the worst dogmas of modern eco-fanaticism by reflexively rejecting the idea of a cosmic destiny, and suggesting that we confine ourself to Earth-based resources. It is a hard, incontestable fact that the resource base of this solar system can support an ecosystem one trillion (i.e. 10^12) times larger than the entire current ecosystem of the Earth. I know this because I have a background in hard science (math, chemistry, and physics) and spent years as a futurist. So by what stretch of logic do you claim should we confine ourselves to the resources of the Earth and ignore the “unconventional” resources of the solar system? Is this a moral choice, or the result of erroneous facts?  Ecological passion is a good thing, and your post reflects this, but I would caution that ecological concern is not properly integrated into the overall body of human concerns. Worse yet, ecological fanaticism is every bit as dangerous as religious fanaticism, and it is responsible for an indirect but very significant part of the upcoming economic debacle. Dr. Roubini has done a superb analysis, and his prediction of an ugly recession is extremely accurate (notwithstanding the temporary uptick in housing sales or momentarily secure position of Laura as a long- term homeowner). In short, the stability of an economy based on fractional reserve banking is utterly dependent on the manifestation of sustainable exponential growth (since the charging of interest is itself an exponential function), and when misguided ecological sentiment intrudes into the economy, it creates a life or death challenge.  Sustainable exponential growth is possible at all stages between here and something akin to a “Dyson Sphere.” Alas, misguided ecological sentiment has fostered: a) the high, unstable energy prices that depress the global economy, b) the nimbyism that aggravates the loss of jobs to China, and c) a panic on the part of many that has turned them toward the hard-right. As a result, we now have a visionless leader who gives lip service to growth while preparing for a Malthusian crunch that is easily avoided, and who self-consistently pursues the old delusion that war stimulates the economy. As such, I would I posit that ecological passion is best honored not by delusions of long-term sustainability on Earth, but by viewing the Earth as akin to an acorn. And just as an acorn grows, burns, rots, or gets eaten — so too will the Earth as a whole either: a) grow into its cosmic destiny, b) burn up in a nuclear and biological war, c) rot via an eco-fanatic deindustrialization, or d) get eaten by a power-hungry elite via a global police state.   And since I’ve gone on record proposing an energy-based monetary-standard, let me further note that eco-fanatics have repeatedly lied about the EROEI of nuclear power. Indeed, you can find hordes of web-sites that will tell you that the energy ratio for nuclear power is 10 or less, and negative with low grade ore. For reference we should note that a chunk of U-235 the size of a dime (i.e. 4.57 grams) has as much available energy as 15 metric TONS of coal. The current generation of nuclear power plants has an energy ratio of 58 (assuming centrifuge enrichment) even though they only burn 1% of the available actinides. The next generation of passively-safe meltdown-proof reactors will likely have an energy ratio >100. And when fast neutron reactors come online that can burn depleted uranium, thorium, and any and all actinide waste, the only real question will be if they have an EROEI above 500. Eco-fanatics have also greatly distorted the issues of nuclear waste and carbon emissions, problems that are real but easily resolved. There are a great many issues to be resolved vis a vis the energy-based monetary-standard that I am proposing, but a shortage of ecologically safe resources is not one of them. 

Rev. TomSeptember 28th, 2006 at 11:51 am

Re: Wetzel, Anonymous on the subject of Monetary Thermodynamics  I come from a background in hard science, so I am aware of how precisely things are defined therein. I admit I am speaking a bit impressionistically, but much less so than you might think. I am using the term “entropy” to refer to a phenomena that is crucial to economic theory, but completely neglected. And since I have found a meaningful analog between physics and economics, I feel justified in using this terminology even if it does force the various terms to have a somewhat different meaning in the area of economics.   Both comments suggested or implied that for a monetary thermodynamics to be meaningful, it must offer something rigorous, and for this to be the case it must have a handle on the various inputs, and have an a priori awareness of the possible resulting states. Anonymous further clarified that the inputs are going to be clouded by the coupling between economic forces, and that thermodynamics does not yield the time-dependent quantities that are the “bread and butter” of a useful economic theory.  The coupling between economic inputs is overcome by non-local analysis. Modern science has long established that quantum-level phenomena do not normally have localized macroscopic effects, but has mostly ignored the possibility that quantum-level phenomena might have huge synchronistic effects, and that culture might be powerfully influenced by such. In this regard, the possibility of a workable theory depends more on one’s starting assumptions than anything else. A quasi-rigorous set of time-dependent phenomena can be modeled by noting that the dynamically evolving global economy maps in a surprisingly efficient way to the statically evolving process of a supergiant star, right down to the esoterica of electron/positron pair-production and thermal losses via neutrino emission.  Using stellar dynamics to model the global economy might seem absurd, but again it all depends on your starting assumptions. If one assumes that quantum-level reality is constrained by a unidirectional thermodynamics, and that life and culture evolve by random Darwinian means, then such a model would be utterly absurd. If one assumes that quantum-level reality is embedded in a deeper time-symmetric reality, and that life and culture evolve via quantum-computational processes, then the economic model follows quite naturally. People can be skeptical all they want, but the mapping is uncanny, and in the end it all boils down to the following two issues:  1. The reality of time-symmetric thermodynamics at the foundation of this theory is both logically and empirically verifiable, and as such, the skeptics are the ones who will have to defend the extraordinary claim that the overall set of processes therein does not affect human culture.   2. Peter says economics must do better than meteorology, and that the theories therein must yield useful predictions. Not only does this model make macro-economic predictions, but it also maps the political and religious phenomena that impact the economy and makes additional predictions in that area.   My model is unambiguous in stating that the government can no longer paper over the evisceration of the working class via credit bubbles and phony labor & CPI statistics, and that given the current political arrangement, the economy is most analogous to an exhausted supergiant star. In this regard, it predicts that the Fed’s only freedom is to induce a suicidal hyper-inflation or surrender to a situation that is out of its control. As a quasi-rigorous theory it does not given an exact timing as to when events will turn ugly, but it does make unambiguous predictions about what will happen. In particular, it predicts that barring major political changes, society is bound to a sequence in which: a) 2007 brings the ugly recession predicted by Dr. Roubini and a temporary lull in religious and ecological fanaticism, b) 2008 brings resurgent fanaticism and a stagflationary depression in which deflationary forces and a declining US dollar whipsaw the economy, and c) 2009 will worsen in all regards and be close to apocalyptic.  To understand how we might escape from the above sequence and secure the cosmic destiny that is easily within our reach, we need to consider Peter’s point about the cult of theoretical mathematics. This will be in my next post.   

Rev. TomSeptember 28th, 2006 at 12:09 pm

Re: Peter’s comments about the “cult of mathematics.”  I can attest to the fact that mathematics can help one understand the universe and bring one closer to the mind of God, but I know some Pagans, “New Agers,” and Christians who would all take strong exception to claims of a mathematical monopoly. You are totally right Peter in saying that claims of a mathematical monopoly show that yet another despotic priestcraft is seeking to impose itself on culture. We need mathematics, but not narrow-minded bigots. And if we are going to escape the impending economic calamity, we are going to need several other perspectives too.  In trying to understand the irrationality of human culture (especially in regard to religious and ecological fanaticism) I took my quantum-thermodynamic theories and applied it the study of religion. What I found is that scientific materialism, religious monotheism, mystical pantheism, and paganism/environmentalism each offer a coequally valid viewpoint into the overall nature of reality, and that each is coequally burdened by narrow-minded superstitions. Since “reality” per se is so far beyond human comprehension, it was inevitable that the four cardinal religions just outlined would evolve as “idiot savants,” for it takes an entire culture to master any one area. Now that all four areas have been mastered, it is critical that we take a broad fourfold viewpoint, for the economic challenge we face can not be resolved any other way.  I said in an earlier post that this challenge is the “final exam” of historic civilization. To put this in context, we need an insight from the “holographic evolutionary theory” that “monetary thermodynamics” is a part of. Simply put, God’s plan is for humans (and other races) to be dismantling stars in the distant future pursuant to the wholesale upliftment of the universe, but to prevent barbarians from emerging into the cosmos, He/She requires an enlightened politics that can dismantle the exhausted supergiant star that has been holographically wired into the economy. An enlightened politics is the only force that can overcome the social, ecological, and financial problems pursuant to the catalysis of sustainable exponential growth, and in the absence of said exponential growth, it is guaranteed that the entire fractional reserve banking system will implode. The enlightened politics springs directly from the above fourfold viewpoint.  In the end, the cult of mathematics will gain some humility. Ideally they will accede to logic and experiment and honor the incontestable reality of time-symmetric causation. Almost as good would be if the bankers repudiate them to save their own hides. This would happen by the bankers empowering a holistic community-oriented libertarianism that would force this cult to share its social power more equitably. If not, humility can be gained when civilization crashes and burns.

AnonymousSeptember 28th, 2006 at 3:46 pm

Why doesn’t Roubini come out during this rally in the stcok market. No, rather he waits in the dark until there’s a dip, upon which he will re-ignite his doom/gloom prophecies. He’s just hoping and hoping is not a plan or strategy for succeeding in the markets. Come on Roubini! – Come out when the sun is shining and still tell us how bad it really is in here.

Larry NusbaumSeptember 28th, 2006 at 3:54 pm

I’m also sitting on a huge cap gain that I plan to put back into the housing market once I get someone to take me up on my offer to buy their home for a 40% discount.  Written by Jack on 2006-09-27 11:34:26  40%? WHEN PIGS FLY, JACK.

AnonymousSeptember 28th, 2006 at 4:12 pm

Ah, Larry’s back. In between cutting and pasting articles at his psuedo-blog. Betcha the How to Make a Million in Real Estate “book” is much the same.

GuestSeptember 28th, 2006 at 4:46 pm

From anonymous:  ”Why doesn’t Roubini come out during this rally in the stcok market. No, rather he waits in the dark until there’s a dip, upon which he will re-ignite his doom/gloom prophecies. He’s just hoping and hoping is not a plan or strategy for succeeding in the markets. Come on Roubini! – Come out when the sun is shining and still tell us how bad it really is in here.”  It seems you havent read allot of the earlier posts. If so you would have noticed that the call for a recession is not quarter three. Second the stockmarket believes that the FED will save the day by cutting rates aggressive wich did not help last time.   You have to admit a miracle has happened just before midterm elections, inflation is “under control”, oil prices have come of their highs and stocks are moving higher, but as mentioned before the dow is only up to its 2000 high in dollar terms.   The Dane

AnonymousSeptember 28th, 2006 at 6:29 pm

The Stock Market is behaving similiar to the 1973 rally that fell flat on its face for the next 9 years. The fact is, layoffs are starting, the economy is contracting and doom/gloom has “arrived”, but it takes a few months for the “details” to slip into numbers, then the recession has been long started.   

AnonymousSeptember 28th, 2006 at 6:29 pm

The Stock Market is behaving similiar to the 1973 rally that fell flat on its face for the next 9 years. The fact is, layoffs are starting, the economy is contracting and doom/gloom has “arrived”, but it takes a few months for the “details” to slip into numbers, then the recession has been long started.   

NineuSeptember 28th, 2006 at 8:07 pm

Timing is everything? Maybe, but I don´t want to play with my money when fundamentals are very ugly, but most people think otherwise, so bubbles will be blown up to their inflationary extreme!. I don´t want to be riding tsunami waves, playing with matches in a gunpowder warehouse.  In september 1928 almost everybody was thinking that timing is everything.  So if timing is everything and the Dow can be 20 % higher in a year and I am in that case VERY VERY bullish (hahaha) and Cornhusker is a genious! (hahaha). By the way, I think living and investing to one´s extreme can be very dangerous so I prefer not to be a potential financial or physical corpse.

JackSeptember 28th, 2006 at 8:12 pm

Larry, a 40% discount is offering 1.4mm for a home where they are trying to get 2.4mm. Guess what Larry, I’ve already had the broker tell me that a buyer would take 1.8mm for his 2.4mm home… That tells me I could get it for 1.6mm… 1.4 is right around the corner, bro. I’m not saying that the whole market is like this, but opportunities abound.  And yes, Lauren even with closing costs I made the right move. It’s going to be a bloodbath for housing. All you have to look at is the disconnect between rental and purchase prices.  

NineuSeptember 28th, 2006 at 8:14 pm

Dr. Roubini is absolutely right, is only a matter of months and maybe another 20-30 % of bullish propaganda and Dow’s all time records euphoria. I hope everybody could earn a lot of money in bull markets next years, but I KNOW (absolutely) this is impossible, so I only hope that the next recession will be mild and not a depression (more and more likely in my view after all the present inflationary excess).

Rev. TomSeptember 28th, 2006 at 9:06 pm

Anon. is worried about Dr. Roubini’s message of doom and gloom. Others are worried about timing the stock market. In the mean time the US economy is hemmoraging in the war on terror, we’re running record credit-bubbles, and the Calif. Gov. is about to Sign a major Global Warming Bill. How can people even think about this stuff when hundreds of billions are being routinely squandered, and the fundamentals of a healthy economy are so out of whack.  And if this carbon emission control lunacy gets out of hand and the US gets esnared in Kyoto-like protocols, Dr. Roubini is going to wind up having to recalculate an even worse picture of doom and gloom. Where are our priorities?

Peter BoltonSeptember 29th, 2006 at 1:22 am

Doom & Gloom is a state of mind: helplessness, brought on by ignorance and the art of not thinking.  Roubini’s Blog is about his interpretation of the effects seen in the marketplace and should have nothing to do with Doom & Gloom but just another opinion on the play of monetary-financial economics, albeit to come.  The prediction of the timing of events is neigh impossible.  I, on the other hand (OTOH), have predicted coupled or total global collapse and also that it has begun.  I have also stated that this collapse is impossible to avoid, now, on the basis that the policies that have driven the current trend, will not be dramatically shifted as necessary, due to the USA current Administration’s preference to its agenda which has not changed since Roosevelt.  Carbon emission controls are not lunacy; they are pathetic applications of mainstream ignorance er criminalized stupidity – however, conceeding that this could be could be interpreted as “lunacy”. ;-) >  Mainstream economics, like physics and astronomy and just about everything else has become a cult; just as religions, politics, fellowship, corporations, Law, oil, science, mathematics, bureaucracy, archeology, geology, etc., etc. You name it and it is a cult dominated by despotic hierachy as has been for around 3000 years or so.  The policies and practises of this current US Administration are consistent and intensive and have not altered or deviated one iota since achieving office and will not deflect from its intended course as its ideological paradigm is ubiquitously engendered within the whole of the US ruling elite. Or, no shift (dramatic) no change in the trending or direction of the collective economic forces.  There has been predicted an upward surge prior to the final collapse and this is to be expected.  As Caesar said “Our beloved Republic is in the hands of Madmen” or words to that effect.  Of course, collective economic behaviours are the resultant effects of thermodynamic energies ’caused’ by man and as such will obey the Laws (principles) of Thermodynamics and as such and as aforesaid, he who does not understand the measure (a qualitative term) of the effects in play, is condemned to emotionally react in concordance with the spreads of the energy spectrum that will result in hard fate.  The message is that subjective thinking and reason and not speculative objective reactions need to be applied to that mass behind the eyes before intellectual perspection can be achieved.  And, that the current global fiscal-financial-monetary economic infrastructural system of the day, is about to die;end; it has been outweighed by number; outsourced to manipulation and agenda; excesses have now reached unsustainable levels. the system is now reaching the waterfall, having been captured by non-intellectual ideologists that are doomed to failure and intent on hegonomally imposing despotic fascist corporatism on the world under the flag of a New World Order (NWO). Nevermind the name, the fact is, that periods of applied ignorance always ends abruptly.  The good news is that the toxic drivers of the policies and practises of the forces in play will not have their day, a priori, and that we can (should) all expect from this imminent global collapse, optimistically; new emerging markets and opportunities that will bring a much higher quality of life, hopefully to all mankind, in the dawning of a new epoch without cults.   

GuestSeptember 29th, 2006 at 10:48 am

Guest:  You miss the point of my earlier post. My question is whether the current (flexible/inflexible) “rules” for mortgage financing and house hunting have contributed to the apparent bubble.  Just because current ideas or rules are new or different doesn’t mean they inherently better. Sure, zero down, interest only mortgages allow some people to buy homes they otherwise couldn’t — first homes, vacation homes, bigger homes, whatever. But are they really better off for it?  In economics/finance/politics it is often necessary to look beyond the first level of effect. So I ask again, retorically this time: Have any of the changes in the rules or rules of thumb led us to the pickle we seem to be in today?  BTW when I bought that house in 1968 my parents were SHOCKED really SHOCKED that I had to pay 5% interest on a 30 year mortgage. Nevertheless, I did and it worked out well.  Ethan

GuestSeptember 29th, 2006 at 10:48 am

Guest:  You miss the point of my earlier post. My question is whether the current (flexible/inflexible) “rules” for mortgage financing and house hunting have contributed to the apparent bubble.  Just because current ideas or rules are new or different doesn’t mean they inherently better. Sure, zero down, interest only mortgages allow some people to buy homes they otherwise couldn’t — first homes, vacation homes, bigger homes, whatever. But are they really better off for it?  In economics/finance/politics it is often necessary to look beyond the first level of effect. So I ask again, retorically this time: Have any of the changes in the rules or rules of thumb led us to the pickle we seem to be in today?  BTW when I bought that house in 1968 my parents were SHOCKED really SHOCKED that I had to pay 5% interest on a 30 year mortgage. Nevertheless, I did and it worked out well.  Ethan

GuestSeptember 29th, 2006 at 10:58 am

Suppose oil price fall exogenously (oil supply boom >> the 7-years-old oil cycle coming to an end). Would this event offset the bursting of the housing bubble, sustain S consumption, bolster US (world) growth), send WallStreet to bananas (Dow at 12500)? Would your “hard landing senario” be headed for a … hard landing? Gheorghius

GuestSeptember 29th, 2006 at 1:17 pm

Gheorg:  I think you can count on Bush to keep things stirred up enough in the Middle East to prevent oil prices from coming down very much. More likely they will go up as he renews his threats vs. Iran. And Saudi Arabia can always cut production.

GuestSeptember 29th, 2006 at 2:23 pm

Guest: you take a pessimist view on international politics and oil prices in the next two years. A Bush war against Iran is out of question (he spoiled his army in Iraq). Sanctions & the blocus of the Persian Gulf? Could be! But it seems too clever for Bush to do it: he’s the man of the wrong wars, spectacular and easy, not a man to do the real hard work. And Iran (unlike saddam) is serious stuff. But I accept your point: it could happen.  But if it does not happen, I see oil prices fall gradually, offsetting the negative impact on consumers of the housing slump. Then I’d better stay long on WS!  G.

VikasSeptember 29th, 2006 at 7:05 pm

Currently on Bloomberg web video “Howard Davidowitz sees Holiday sales HALF last year”  He gives the full bearish case we are all talking about.

AnonymousSeptember 29th, 2006 at 9:26 pm

“Guest”, you also overrate what lower Oil prices mean, weak weak economy. They didn’t have much of a impact on the economy going up, they won’t going down. Move on and figure it out, our get burned.

AnonymousSeptember 29th, 2006 at 9:27 pm

Guest, you also overrate what lower Oil prices mean. They didn’t have much of a impact on the economy going up, they won’t going down. Move on and figure it out. More important things than Oil, unless we get a “real” Oil shock and 130b Oil in 6 months……………

AnonymousSeptember 29th, 2006 at 9:28 pm

Guest, you also overrate what lower Oil prices mean. They didn’t have much of a impact on the economy going up, they won’t going down. Move on and figure it out. More important things than Oil, unless we get a real Oil shock and 130b Oil in 6 months……………

AnonymousSeptember 29th, 2006 at 9:28 pm

Guest, you also overrate what lower Oil prices mean. They didn’t have much of a impact on the economy going up, they won’t going down. Move on and figure it out. More important things than Oil, unless we get a real Oil shock and 130b Oil in 6 months……………

GheorghiusSeptember 30th, 2006 at 6:12 am

Anonymous  I dont think I overstate the possible impact of lower oil prices, for the following reason  In recent years the increase of oil prices was demand driven. OPEC did not engineer an artificial supply restriction (as it did in 1973 and 79). So oil prices were a consequence of strong economic growth in the world, and could only limit a bit the rate of growth of GDP.  Now, if the world economy slows, oil prices will fall, but again this would not have a great impact ; it can only limit a bit the forthcoming recession. This is the scenario you (and Nouriel) have in mind. This is fine.  But my idea is different. I believe that years of high oil prices have generated a strong increase of investment projects in the oil sector, all along the supply chain (from exploration to drilling to refinement capacity), and that these investments are now being completed. This is expanding the supply of oil independently from the growth rate of the world economy, and cannot be stopped now whatever happens to the world economy (because there are great time lags: once you start a project you have to complete it!). This positive supply oil shock has the capacity of greatly influencing the rate of growth of the world economy.  Does it make sense to you?   Gheorghius    

AnonymousSeptember 30th, 2006 at 10:37 am

Anyone paying close attention can see that this stock market rally was contrived for election purposes. Of course, they will trot out the experts to tell you that your suspicions are just plain looney. I don’t think they desire a rally into the election. They simply want the markets to be high in comparison to the recent past. They can go into the election stating how wonderful everything is. I don’t believe gasoline prices will continue to come down. They have achieved their miracle price. Oil and gasoline will now move sideways until the election. Yes, the masses will fall for it. Rove is a master of dusguise. Just look at some of the postings here. I believe the end of year rally in the stock markets will fail to materialize this year. We go down from here. But not to fast. Markets will still look okay til after the election. It is just the reverse of what one expects. And they intended this to occur.

Schahrzad BerklandOctober 1st, 2006 at 5:22 pm

Nouriel, could you comment on some theories I came up with? 1) Is the Fed increasing the money supply? On the one hand, they raise interest rates and go along with the OCC’s lending guidelines to slow housing and the economy, but on the other hand they could print money like mad to keep liquidity in the stock market and keep the economy going. We don’t know what the money supply is, and the stock market is going gangbusters. This leads to #2:  2) With so much global liquidity, where will the investors put their money once they realize the economy is slowing? Emerging markets? Commodities, PMs? Other currencies? Treasuries? MBS and real estate? If no good candidate emerges, and investors keep their money in equities, the stock market can keep rising. We’ve got hundreds of billions of dollars from foreigners looking for a home in the US, and what can they buy? Only MBS, treasuries, bonds, equities? Perhaps all this liquidity will prevent the price of stocks from going down? I’ve been out of the market since this spring in anticipation of a recession, but now I wonder if we’ve got a stock market conundrum!

GuestOctober 1st, 2006 at 6:38 pm

Yes good questions Schahrzad. After some reading on the internet this weekend I have realised some things that I know but actually did not think so much about. One thing is what most market participants think. If they believe in the soft landing they will buy the market even if you are right that stocks are overvalued compared to future earnings. So if you go against the trend, even if you are right, you will loose money.  Your question about money-supply is something that also is very interesting, because I have tried to find out how these markets can continue moving up to higher levels. Theres no doubt, in my opinion, that central banks have helped the markets against higher interest rates and commodity prices, by inflating assets like stocks, bonds and housing. But it seems that another very important factor is the increase in credit. “Credit cycles” are words that I try to find more information about at the moment.   I found this today:  http://economics.sbs.ohio-state.edu/jmcb/jmcb/02262/02262.pdf#search=%22credit%20cycle%22  I am no expert in macroeconomics so I do not understand everything in the article, but it seems that an increase in the credit standard ca

GuestOctober 1st, 2006 at 6:38 pm

Yes good questions Schahrzad. After some reading on the internet this weekend I have realised some things that I know but actually did not think so much about. One thing is what most market participants think. If they believe in the soft landing they will buy the market even if you are right that stocks are overvalued compared to future earnings. So if you go against the trend, even if you are right, you will loose money.  Your question about money-supply is something that also is very interesting, because I have tried to find out how these markets can continue moving up to higher levels. Theres no doubt, in my opinion, that central banks have helped the markets against higher interest rates and commodity prices, by inflating assets like stocks, bonds and housing. But it seems that another very important factor is the increase in credit. “Credit cycles” are words that I try to find more information about at the moment.   I found this today:  http://economics.sbs.ohio-state.edu/jmcb/jmcb/02262/02262.pdf#search=%22credit%20cycle%22  I am no expert in macroeconomics so I do not understand everything in the article, but it seems that an increase in the credit standard causes recessions to happen with a timelag(see page 28 chart 1).   For the last couple of years creadit standards seem to have been very low fueling borrowing and asset inflation but maybee this is about to change. Is this what ends in the credit crunch? Hope Roubini or someone else can give some more insight about this.  If we are going to have a recession I do not think that investors are moving into risky assets like you mention but in to save assets like treasuries. Maybee not US treasuries if the markets expect a collapse in the dollar.   Hope you can use some of it, The Dane.  P.S: sorry for my english. 

ErnstOctober 2nd, 2006 at 12:01 am

Bush cannot get out of Iraq so the spending will not only continue but will also increase further increasing the fiscal deficit. It will be, though, a help to the defense sector which might probably partially offset the effects of the housing collapse, just like lower oil prices might. This could delay the onset of the severe economic slowdown. The following paper about the problem of why the US cannot get out of Iraq is from George Friedman of Stratfor.com from John Mauldin’s e-letter at JohnMauldin@InvestorInsight.com It is rather extensive but worthwhile. I hope it will make who read it want to subscribe to John Mauldin’s FREE e-letters and to Stratfor.com :   Iraq: The Policy Dilemma By George Friedman   U.S. President George W. Bush now has made it clear what his policy on Iraq will be for the immediate future, certainly until Election Day: He does not intend to change U.S. policy in any fundamental way. U.S. troops will continue to be deployed in Iraq, they will continue to carry out counterinsurgency operations, and they will continue to train Iraqi troops to eventually take over the operations. It is difficult to imagine that Bush believes there will be any military solution to the situation in Iraq; therefore, we must try to understand his reasoning in maintaining this position. Certainly, it is not simply a political decision. Opinion in the United States has turned against the war, and drawing down U.S. forces and abandoning combat operations would appear to be the politically expedient move. Thus, if it is not politics driving him — and assuming that the more lurid theories on the Internet concerning Bush’s motivations are as silly as they appear — then we have to figure out what he is doing.  Let’s consider the military situation first. Bush has said that there is no civil war in Iraq. This is in large measure a semantic debate. In our view, it would be inaccurate to call what is going on a “civil war” simply because that term implies a degree of coherence that simply does not exist. Calling it a free-for-all would be more accurate. It is not simply a conflict of Shi’i versus Sunni. The Sunnis and Shia are fighting each other, and all of them are fighting American forces. It is not altogether clear what the Americans are supposed to be doing.  Counterinsurgency is unlike other warfare. In other warfare, the goal is to defeat an enemy army, and civilian casualties as a result of military operations are expected and acceptable. With counterinsurgency operations in populated areas, however, the goal is to distinguish the insurgents from civilians and destroy them, with minimal civilian casualties. Counterinsurgency in populated areas is more akin to police operations than to military operations; U.S. troops are simultaneously engaging an enemy force while trying to protect the population from both that force and U.S. operations. Add to this the fact that the population is frequently friendly to the insurgents and hostile to the Americans, and the difficulty of the undertaking becomes clear.  Consider the following numbers. The New York Police Department (excluding transit and park police) counts one policeman for every 216 residents. In Iraq, there is one U.S. soldier (not counting other coalition troops) per about 185 people. Thus, numerically speaking, U.S. forces are in a mildly better position than New York City cops — but then, except for occasional Saturday nights, New York cops are not facing anything like the U.S. military is facing in Iraq. Given that the United States is facing not one enemy but a series of enemy organizations — many fighting each other as well as the Americans — and that the American goal is to defeat these while defending the populace, it is obvious even from these very simplistic numbers that the U.S. force simply isn’t there to impose a settlement.  Expectations and a Deal Unwound  A military solution to the U.S. dilemma has not been in the cards for several years. The purpose of military operations was to set the stage for political negotiations. But the Americans had entered Iraq with certain expectations. For one thing, they had believed they would simply be embraced by Iraq’s Shiite population. They also had expected the Sunnis to submit to what appeared to be overwhelming political force. What happened was very different. First, the Shia welcomed the fall of Saddam Hussein, but they hardly embraced the Americans — they sought instead to translate the U.S. victory over Hussein into a Shiite government. Second, the Sunnis, in view of the U.S.-Shiite coalition and the dismemberment of the Sunni-dominated Iraqi Army, saw that they were about to be squeezed out of the political system and potentially crushed by the Shia. They saw an insurgency — which had been planned by Hussein — as their only hope of forcing a redefinition of Iraqi politics. The Americans realized that their expectations had not been realistic.  Thus, the Americans went through a series of political cycles. First, they sided with the Shia as they sought to find their balance militarily facing the Sunnis. When they felt they had traction against the Sunnis, following the capture of Hussein — and fearing Shiite hegemony — they shifted toward a position between Sunnis and Shia. As military operations were waged in the background, complex repositioning occurred on all sides, with the Americans trying to hold the swing position between Sunnis and Shia.  The process of creating a government for Iraq was encapsulated in this multi-sided maneuvering. By spring 2006, the Sunnis appeared to have committed themselves to the political process. And in June, with the death of Abu Musab al-Zarqawi and the announcement that the United States would reduce its force in Iraq by two brigades, the stage seemed to be set for a political resolution that would create a Shiite-dominated coalition that included Sunnis and Kurds. It appeared to be a done deal — and then the deal completely collapsed.  The first sign of the collapse was a sudden outbreak of fighting among Shia in the Basra region. We assumed that this was political positioning among Shiite factions as they prepared for a political settlement. Then Abdel Aziz al-Hakim, the head of the Supreme Council for Islamic Revolution in Iraq (SCIRI), traveled to Tehran, and Muqtada al-Sadr’s Mehdi Army commenced an offensive. Shiite death squads struck out at Sunni populations, and Sunni insurgents struck back. From nearly having a political accommodation, the situation in Iraq fell completely apart.  The key was Iran. The Iranians had always wanted an Iraqi satellite state, as protection against another Iraq-Iran war. That was a basic national security concept for them. In order to have this, the Iranians needed an overwhelmingly Shiite-dominated government in Baghdad, and to have overwhelming control of the Shia. It seemed to us that there could be a Shiite-dominated government but not an overwhelmingly Shiite government. In other words, Iraq could be neutral toward, but not a satellite of, Iran. In our view, Iraq’s leading Shia — fearing a civil war and also being wary of domination by Iran — would accept this settlement.  We may have been correct on the sentiment of leading Shia, but we were wrong about Iran’s intentions. Tehran did not see a neutral Iraq as being either in Iran’s interests or necessary. Clearly, the Iranians did not trust a neutral Iraq still under American occupation to remain neutral. Second — and this is the most important — they saw the Americans as militarily weak and incapable of either containing a civil war in Iraq or of taking significant military action against Iran. In other words, the Iranians didn’t like the deal they had been offered, they felt that they could do better, and they felt that the time had come to strike.  A Two
-Pronged Offensive  When we look back through Iranian eyes, we can now see what they saw: a golden opportunity to deal the United States a blow, redefine the geopolitics of the Persian Gulf and reposition the Shia in the Muslim world. Iran had, for example, been revivifying Hezbollah in Lebanon for several months. We had seen this as a routine response to the withdrawal of Syrian troops from Lebanon. It is now apparent, however, that it was part of a two-pronged offensive.  First, in Iraq, the Iranians encouraged a variety of factions to both resist the newly formed government and to strike out against the Sunnis. This created an uncontainable cycle of violence that rendered the Iraqi government impotent and the Americans irrelevant. The tempo of operations was now in the hands of those Shiite groups among which the Iranians had extensive influence — and this included some of the leading Shiite parties, such as SCIRI.  Second, in Lebanon, Iran encouraged Hezbollah to launch an offensive. There is debate over whether the Israelis or Hezbollah ignited the conflict in Lebanon. Part of this is ideological gibberish, but part of it concerns intention. It is clear that Hezbollah was fully deployed for combat. Its positions were manned in the south, and its rockets were ready. The capture of two Israeli soldiers was intended to trigger Israeli airstrikes, which were as predictable as sunrise, and Hezbollah was ready to fire on Haifa. Once Haifa was hit, Israel floundered in trying to deploy troops (the Golani and Givati brigades were in the south, near Gaza). This would not have been the case if the Israelis had planned for war with Hezbollah. Now, this discussion has nothing to do with who to blame for what. It has everything to do with the fact that Hezbollah was ready to fight, triggered the fight, and came out ahead because it wasn’t defeated.  The end result is that, suddenly, the Iranians held the whip hand in Iraq, had dealt Israel a psychological blow, had repositioned themselves in the Muslim world and had generally redefined the dynamics of the region. Moreover, they had moved to the threshold of redefining the geopolitics to the Persian Gulf.  This was by far their most important achievement.  A New Look at the Region  At this point, except for the United States, Iran has by far the most powerful military force in the Persian Gulf. This has nothing to do with its nuclear capability, which is still years away from realization. Its ground forces are simply more numerous and more capable than all the forces of the Arabian Peninsula combined. There is another aspect to this: The countries of the Arabian Peninsula are governed by Sunnis, but many are home to substantial Shiite populations as well. Between the Iranian military and the possibility of unrest among Shia in the region, the situation in Saudi Arabia and the rest of the Peninsula is uneasy, to say the least. The rise of Hezbollah well might psychologically empower the generally quiescent Shia to become more assertive. This is one of the reasons that the Saudis were so angry at Hezbollah, and why they now are so anxious over events in Iraq.  If Iraq were to break into three regions, the southern region would be Shiite — and the Iranians clearly believe that they could dominate southern Iraq. This not only would give them control of the Basra oil fields, but also would theoretically open the road to Kuwait and Saudi Arabia. From a strictly military point of view, and not including the Shiite insurgencies at all, Iran could move far down the western littoral of the Persian Gulf if American forces were absent. Put another way, there would be a possibility that the Iranians could seize control of the bulk of the region’s oil reserves. They could do the same thing if Iraq were to be united as an Iranian satellite, but that would be far more difficult to achieve and would require active U.S. cooperation in withdrawing.  We can now see why Bush cannot begin withdrawing forces. If he did that, the entire region would destabilize. The countries of the Arabian Peninsula, seeing the withdrawal, would realize that the Iranians were now the dominant power. Shia in the Gulf region might act, or they might simply wait until the Americans had withdrawn and the Iranians arrived. Israel, shaken to the core by its fight with Hezbollah, would have neither the force nor the inclination to act. Therefore, the United States has little choice, from Bush’s perspective, but to remain in Iraq.  The Iranians undoubtedly anticipated this response. They have planned carefully. They are therefore shifting their rhetoric somewhat to be more accommodating. They understand that to get the United States out of Iraq — and out of Kuwait –they will have to engage in a complex set of negotiations. They will promise anything — but in the end, they will be the largest military force in the region, and nothing else matters. Ultimately, they are counting on the Americans to be sufficiently exhausted by their experience of Iraq to rationalize their withdrawal — leaving, as in Vietnam, a graceful interval for what follows.  Options  Iran will do everything it can, of course, to assure that the Americans are as exhausted as possible. The Iranians have no incentive to allow the chaos to wind down, until at least a political settlement with the United States is achieved. The United States cannot permit Iranian hegemony over the Persian Gulf, nor can it sustain its forces in Iraq indefinitely under these circumstances.  The United States has four choices, apart from the status quo:  1. Reach a political accommodation that cedes the status of regional hegemon to Iran, and withdraw from Iraq.  2. Withdraw forces from Iraq and maintain a presence in Kuwait and Saudi Arabia — something the Saudis would hate but would have little choice about — while remembering that an American military presence is highly offensive to many Muslims and was a significant factor in the rise of al Qaeda.  3. Halt counterinsurgency operations in Iraq and redeploy its forces in the south (west of Kuwait), to block any Iranian moves in the region.  4. Assume that Iran relies solely on its psychological pre-eminence to force a regional realignment and, thus, use Sunni proxies such as Saudi Arabia and Kuwait in attempts to outmaneuver Tehran.  None of these are attractive choices. Each cedes much of Iraq to Shiite and Iranian power and represents some degree of a psychological defeat for the United States, or else rests on a risky assumption. While No. 3 might be the most attractive, it would leave U.S. forces in highly exposed, dangerous and difficult-to-sustain postures.  Iran has set a clever trap, and the United States has walked into it. Rather than a functioning government in Iraq, it has chaos and a triumphant Shiite community. The Americans cannot contain the chaos, and they cannot simply withdraw. Therefore, we can understand why Bush insists on holding his position indefinitely. He has been maneuvered in such a manner that he — or a successor — has no real alternatives.  There is one counter to this: a massive American buildup, including a major buildup of ground forces that requires a large expansion of the Army, geared for the invasion of Iran and destruction of its military force. The idea that this could readily be done through air power has evaporated, we would think, with the Israeli air force’s failure in Lebanon. An invasion of Iran would be enormously expensive, take a very long time and create a problem of occupation that would dwarf the problem faced in Iraq. But it is the other option. It would stabilize the geopolitics of the Arabian Peninsula and drain American military power for a generati
on.  Sometimes there are no good choices. For the United States, the options are to negotiate a settlement that is acceptable to Iran and live with the consequences, raise a massive army and invade Iran, or live in the current twilight world between Iranian hegemony and war with Iran. Bush appears to be choosing an indecisive twilight. Given the options, it is understandable why.  Me again. So for the optimists like Cornhusker they may be just right if they put their money in defense stocks. Good luck to you all.

Peter BoltonOctober 2nd, 2006 at 3:42 am

Although I normally commend Friedman on his ability to discern the options; in this case, in the ME, from a tactical and logical point of view of a military strategist, I believe that he errs somewhat in his view of the US and White House positional projections; I speak from subjective analysis.  1. Firstly, we can indeed expect of Iran not only a thorough and impeccable understanding of all the complexities of events in this quarter of the World, we can also expect from them (Iran) high level strategies that are founded in technical integrity and the prime indiginous imperatives to have their region and neighboring states in accord with their interpretation of acceptable cultural balances thus leading to applications of both knowledge based strategies and culturally founded effective tactics; in both terms of diplomacy and warfare (symmetric and asymmetric). IOW, the Iranians know that asymmetric warfare on their patch will astoundingly defeat the US, a priori, symmetrically directed forces with ease, little effort and at little relative direct cost.  2. From the US White House however, we must accept that there is a general lack of any understanding of the ME political and demographic complexities and the knowledge of diplomatic and the resultant effects of hard impositions on foreign powers; er strategies and tactics that are needed to bring about some form of peaceful co-existence to the region in question and expected reactions to ill-fated errors. And, the apparent lack of any publically known presidential visions or objectives as to the real purpose of the US intentions, other that the published ideologically founded PNAC, New World Order (NWO)and US Imperial intents of maniacal egophrenic led regional hegenomic fundamentalism suggests strongly that demented dreams dominate He who would be King and His subjects.  3. Iran is lead by a veteran of war with years of hands-on experience over many years on the frontline where the US Military offensive (if it could be called that) is being directed by inept civilians and political deviates with no such military exposure, training or experience; au contraire. The warfare and skullduggery of the Washington DC Court, is a far different and deadlier environment from that of the sandy ME theater of operations.   4. The US push into Afghanistan and Iraq was founded in fundalmentalist ideology and US imperial hegemony as well as, without doubt, the extended Israeli lobbied zealotries of zionistic regional ambitions of dominance.  5. The USA’s White House occupations in the ME and its impostions on sovereign nations must be seen merely and firstly as irrational; a total lack of reasoning in directing military affairs which can only be viewed as first-degree incompetance and ill-advised fanaticism.  6. That the President of the USA is “divinely guided”, by admission, in these affairs,goes a long way towards a more rational prediction of future events which must be expected to fall outside of the linear normalcy that Friedman infers can be optionalized.  7. Yes, Friedman is partially correct, but he appears to apologetically hide the fact that the US will undoubtedly be driven by insanity, er irrationality in dealing with coming events and this position is supported by the fact that this expected behaviour has always and has consistently been the driving force of the past US policies and US military manipulations and interferences since this Administration achieved office.  8. In the event that there are no significant and major changes in the US Congress and Senate within the coming weeks, we should then normally expect a consistent linear trend of insanity to prevail unemcumbered through a devastating series of nuclear attacks on Iran and perhaps elsewhere – by the US directed military, followed by an enormous unified retaliation of Middle East solidification leading to utter global chaos and the end of the US era and perhaps the end to the United States of American Republic as we have known it since inception.  9. The only question remains is if Iranian Leadership believe’s that Bush is capable of such irrationality and if not, then they too are lost.  10. Iran does know that Iran can win any non-nuclear offensive by the US and allies (if they will then exist)just through strategies and technologies of asymmertic warfare however, we are now entering the extremly high probability of a new level of warfare which has never been in written history, considered or applied (Japan was already defeated before the two Fatboys were dropped on Japan’s civilians). Iran’s military is fresh and consists of civilians (patriots) and military trained personnel with its military fully prepared for most eventualities as well as being environmentally consordant; it is also fully provisioned and on its own territory. To win this war, the US must kill at least 50% of the total population and remain in place for at least 3 generations. The US must also quell all regional uprisings and all resistance and must also win over a continuity of assymetric guerilla warefare on numerous fronts. This is what the US needs to achieve in the coming; this impending round of applied regional ME occupation. The last days of Saigon and the US hasty disorganized withdrawal may appear a possibility, yet again; but not this time, methinks.  There are always good choices but it is more than unlikely that George W. Bush and his brothers-in-destiny have the ability and willingness to muster enough intellect, or intelligence, or collective resolve to recognise what is best for global humanity or globalization, by seeking sanity over his overwhelming desire for a personaly deluded destiny of a fictional biblical apocolypse. The vision of polical profits diminish by the day.  Go for hard gold and hard silver.      

MichaelOctober 2nd, 2006 at 8:59 pm

Prof. Roubini,  Your predictions have been so far so good, but we are happy to see your updates.

AnonymousOctober 11th, 2006 at 3:52 pm

Can anyone here tell me in laymen’s terms what impact the aging baby boomers will have on the economy in upcoming months and years? I haven’t seen any mention of the ever burgeoning health care crisis and entitlements pay out and how it will effect not only housing but our entire economy. Not too mention the huge effect on Social security and pensions and all that goes along with it. With the almost $9 trillion national debt, and no-one in politics willing to make it a campaign issue. I don’t see how we can possibly continue with a growing economy without a major event that puts us on a more equal level with the rest of the world’s economies. I admit my complete ignorance on the issues, but I know that something’s got to give, and I think “hard Fall” is an understatement!

AnonymousFebruary 27th, 2007 at 1:30 pm

There wont be a recession but a economic crash. time to stock up on massive ammounts of water, food, and bullets. i already have enough of these to supply a small army. ha they want to break into my house; my ak-47 just says bring it on!!!

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Emre Deliveli is a freelance consultant, part-time lecturer in economics and columnist. Previously, Emre worked as economist for Citi Istanbul, covering Turkey and the Balkans. He was previously Director of Economic Studies at the Economic Policy Research Foundation of Turkey in Ankara and has has also worked at the World Bank, OECD, McKinsey and the Central Bank of Turkey. Emre holds a B.A., summa cum laude, from Yale University and undertook his PhD studies at Harvard University, in Economics.

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