New York Times Article on Nouriel Roubini as “Dr. Doom”
The New York Times has published a long article/profile about me – available online here – that appears in print on their glossy Sunday Magazine.
The article is a very friendly and sympathetic portrait of my views. I would take issue only with the characterization of myself as being a “perma-bear” or “perpetual pessimist”. For one thing I ended up a realist rather than a pessimist about the current economic and financial crisis; things are turning out even worse than I initially predicted.
Also, while very pessimistic about the U.S. and global financial outlook in the short run, I expect that the global economy can grow at a sustained rate in the medium term and that the integration of China, India and other emerging market economies in the global economy is a very important and positive trend over time. So, yes there is doom and gloom over the short term; but the medium term horizon will be brighter for the global economy if and when the mess of the current financial and economic crisis is fixed. Still, as i have recently argued – and as reported at the end of the New York Times article – this U.S. crisis may be the sign of the beginning of the long run decline of the American Empire.
Here is the text of the New York Times profile of me:
Dr. Doom
Two years ago, Nouriel Roubini predicted the current economic crisis. Now he sees things becoming far worse.
BY STEPHEN MIHM
Published: August 15, 2008, New York Times Sunday Magazine
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”
Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism. In February, when the conventional wisdom held that the venerable investment firms of Wall Street would weather the crisis, Roubini warned that one or more of them would go “belly up” — and six weeks later, Bear Stearns collapsed. Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience.
As a result, Roubini, a respected but formerly obscure academic, has become a major figure in the public debate about the economy: the seer who saw it coming. He has been summoned to speak before Congress, the Council on Foreign Relations and the World Economic Forum at Davos. He is now a sought-after adviser, spending much of his time shuttling between meetings with central bank governors and finance ministers in Europe and Asia. Though he continues to issue colorful doomsday prophecies of a decidedly nonmainstream sort — especially on his popular and polemical blog, where he offers visions of “equity market slaughter” and the “Coming Systemic Bust of the U.S. Banking System” — the mainstream economic establishment appears to be moving closer, however fitfully, to his way of seeing things. “I have in the last few months become more pessimistic than the consensus,” the former Treasury secretary Lawrence Summers told me earlier this year. “Certainly, Nouriel’s writings have been a contributor to that.”
On a cold and dreary day last winter, I met Roubini over lunch in the TriBeCa neighborhood of New York City. “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.
When I pressed him on his claim that he wasn’t pessimistic, he paused for a moment and then relented a little. “I have more concerns about potential risks and vulnerabilities than most people,” he said, with glum understatement. But these concerns, he argued, make him more of a realist than a pessimist and put him in the role of the cleareyed outsider — unsettling complacency and puncturing pieties.
Roubini, who is 50, has been an outsider his entire life. He was born in Istanbul, the child of Iranian Jews, and his family moved to Tehran when he was 2, then to Tel Aviv and finally to Italy, where he grew up and attended college. He moved to the United States to pursue his doctorate in international economics at Harvard. Along the way he became fluent in Farsi, Hebrew, Italian and English. His accent, an inimitable polyglot growl, radiates a weariness that comes with being what he calls a “global nomad.”
As a graduate student at Harvard, Roubini was an unusual talent, according to his adviser, the Columbia economist Jeffrey Sachs. He was as comfortable in the world of arcane mathematics as he was studying political and economic institutions. “It’s a mix of skills that rarely comes packaged in one person,” Sachs told me. After completing his Ph.D. in 1988, Roubini joined the economics department at Yale, where he first met and began sharing ideas with Robert Shiller, the economist now known for his prescient warnings about the 1990s tech bubble.
The ’90s were an eventful time for an international economist like Roubini. Throughout the decade, one emerging economy after another was beset by crisis, beginning with Mexico’s in 1994. Panics swept Asia, including Thailand, Indonesia and Korea, in 1997 and 1998. The economies of Brazil and Russia imploded in 1998. Argentina’s followed in 2000. Roubini began studying these countries and soon identified what he saw as their common weaknesses. On the eve of the crises that befell them, he noticed, most had huge current-account deficits (meaning, basically, that they spent far more than they made), and they typically financed these deficits by borrowing from abroad in ways that exposed them to the national equivalent of bank runs. Most of these countries also had poorly regulated banking systems plagued by excessive borrowing and reckless lending. Corporate governance was often weak, with cronyism in abundance.
Roubini’s work was distinguished not only by his conclusions but also by his approach. By making extensive use of transnational comparisons and historical analogies, he was employing a subjective, nontechnical framework, the sort embraced by popular economists like the Times Op-Ed columnist Paul Krugman and Joseph Stiglitz in order to reach a nonacademic audience. Roubini takes pains to note that he remains a rigorous scholarly economist — “When I weigh evidence,” he told me, “I’m drawing on 20 years of accumulated experience using models” — but his approach is not the contemporary scholarly ideal in which an economist builds a model in order to constrain his subjective impressions and abide by a discrete set of data. As Shiller told me, “Nouriel has a different way of seeing things than most economists: he gets into everything.”
Roubini likens his style to that of a policy maker like Alan Greenspan, the former Fed chairman who was said (perhaps apocryphally) to pore over vast quantities of technical economic data while sitting in the bathtub, looking to sniff out where the economy was headed. Roubini also cites, as a more ideologically congenial example, the sweeping, cosmopolitan approach of the legendary economist John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.” The book that Roubini ultimately wrote (with the economist Brad Setser) on the emerging market crises, “Bailouts or Bail-Ins?” contains not a single equation in its 400-plus pages.
After analyzing the markets that collapsed in the ’90s, Roubini set out to determine which country’s economy would be the next to succumb to the same pressures. His surprising answer: the United States’. “The United States,” Roubini remembers thinking, “looked like the biggest emerging market of all.” Of course, the United States wasn’t an emerging market; it was (and still is) the largest economy in the world. But Roubini was unnerved by what he saw in the U.S. economy, in particular its 2004 current-account deficit of $600 billion. He began writing extensively about the dangers of that deficit and then branched out, researching the various effects of the credit boom — including the biggest housing bubble in the nation’s history — that began after the Federal Reserve cut rates to close to zero in 2003. Roubini became convinced that the housing bubble was going to pop.
By late 2004 he had started to write about a “nightmare hard landing scenario for the United States.” He predicted that foreign investors would stop financing the fiscal and current-account deficit and abandon the dollar, wreaking havoc on the economy. He said that these problems, which he called the “twin financial train wrecks,” might manifest themselves in 2005 or, at the latest, 2006. “You have been warned here first,” he wrote ominously on his blog. But by the end of 2006, the train wrecks hadn’t occurred.
Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.
The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have eve
n bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”
True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me. “The justification for his bearish call has evolved over the years,” Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”
Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini’s willingness to entertain possible situations that are far outside the consensus view of most economists. “If you’re sitting around at the European Central Bank,” he said, “and you’re asking what’s the worst thing that could happen, the first thing people will say is, ‘Let’s see what Nouriel says.’ ” But Rogoff cautioned against equating that skill with forecasting. Roubini, in other words, might be the kind of economist you want to consult about the possibility of the collapse of the municipal-bond market, but he is not necessarily the kind you ask to predict, say, the rise in global demand for paper clips.
His defenders contend that Roubini is not unduly pessimistic. Jeffrey Sachs, his former adviser, told me that “if the underlying conditions call for optimism, Nouriel would be optimistic.” And to be sure, Roubini is capable of being optimistic — or at least of steering clear of absolute worst-case prognostications. He agrees, for example, with the conventional economic wisdom that oil will drop below $100 a barrel in the coming months as global demand weakens. “I’m not comfortable saying that we’re going to end up in the Great Depression,” he told me. “I’m a reasonable person.”
What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the “worst since the Great Depression.” Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years.
Roubini has counseled various policy makers, including Federal Reserve governors and senior Treasury Department officials, to mount an aggressive response to the crisis. He applauded when the Federal Reserve cut interest rates to 2 percent from 5.25 percent beginning last summer. He also supported the Fed’s willingness to engineer a takeover of Bear Stearns. Roubini argues that the Fed’s actions averted catastrophe, though he says he believes that future bailouts should focus on mortgage owners, not investors. Accordingly, he sees the choice facing the United States as stark but simple: either the government backs up a trillion-plus dollars’ worth of high-risk mortgages (in exchange for the lenders’ agreement to reduce monthly mortgage payments), or the banks and other institutions holding those mortgages — or the complex securities derived from them — go under. “You either nationalize the banks or you nationalize the mortgages,” he said. “Otherwise, they’re all toast.”
For months Roubini has been arguing that the true cost of the housing crisis will not be a mere $300 billion — the amount allowed for by the housing legislation sponsored by Representative Barney Frank and Senator Christopher Dodd — but something between a trillion and a trillion and a half dollars. But most important, in Roubini’s opinion, is to realize that the problem is deeper than the housing crisis. “Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”
The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”
Stephen Mihm, an assistant professor of economic history at the University of Georgia, is the author of “A Nation of Counterfeiters: Capitalists, Con Men and the Making of the United States.” His last feature article for the magazine was about North Korean counterfeiting.
257 Responses to “New York Times Article on Nouriel Roubini as “Dr. Doom””
Guest • August 15th, 2008 at 6:17 pm
UNO!
Anonymous • August 15th, 2008 at 6:22 pm
Prof, congrats for the NYT article. Finally a well deserved recognition of your wise and thoughtful views.
AfA • August 15th, 2008 at 7:06 pm
Nice call Gloomy!!
AfA • August 15th, 2008 at 7:34 pm
That’s getting boring.Two Fridays without a bank having failed and being taken by the FDIC?
PhilT • August 15th, 2008 at 7:44 pm
“I met Roubini over lunch in the TriBeCa neighborhood of New York City. “I’m not a pessimist by nature,” he insisted. “I’m not someone who sees things in a bleak way.” Just looking at him, I found the assertion hard to credit. With a dour manner and an aura of gloom about him, Roubini gives the impression of being permanently pained, as if the burden of what he knows is almost too much for him to bear. He rarely smiles, and when he does, his face, topped by an unruly mop of brown hair, contorts into something more closely resembling a grimace.”Professor, Dr. Roubini,This is a nice PR piece, but I think that it would have had much greater journalistic integrity and general value had Stephen. Mihm omitted the above paragraph as well as the one following it.But from another perspective, Mr. Mihm may have created an opportunity from which all of us might benefit. Please indulge this observation. Perhaps one of the core challenges that our society/culture faces, is to develop genuine cognitive skills of more precise differentiation, discernment, clarification and validation.How is it that we have allowed ourselves to be blind to the difference between pessimism and realism or to label a realistic assessment as cynical and thereby vilifying the assessor as such? Could it be that these cognitive defects are the tools that usher in denial on an individual level and then extrapolate and exponentially magnify that denial on a large scale?I am sure that social scientists can have a field day with these notions, but I do believe that it is incumbent upon each of us and all of us at every level to work towards continued development and evolution of the aforementioned cognitive skills in order that we may face the greatest challenges of this time and overcome the obstacles in order to restore the common good.Respectfully,
Anonymous • August 15th, 2008 at 8:21 pm
Nouriel isn’t unduly pessimistic because his conclusions follow from his premises.I noticed that he did not rule out a GD-level outcome. Didn’t give a reason for that optimism though, maybe he couldn’t think of one.
Guest • August 15th, 2008 at 8:47 pm
I posted this on a old thread a few minutes ago, so please forgive the re-post here:”Who will save us and the USA?”@ Guest on 2008-08-15 20:21:42My position is that the World is in the mid-pangs of a global economic collapse and that the USA has led this rush since the days of Mr Greenspan, who actively promoted the invasion of Iraq – due to the obviously then; the systemic collapse of the US economy.The situation in every (demographically speaking) aspect of human socio-economic activity is now in decline and the time comes when every seemingly honest men and women and children will act dishonestly in order to survive: survival.Desperation is rapidly permeating society and this “cause” is to be found in the depravity of “leadership” and the ruling elite, which includes, politics, bureaucrats, science, the priesthood, the body corporate, finance and the media; etc.The lesson: Wake up to “leadership” or pay the piper.The fact that the USA and then Europe and then Asia, led by China, and then the rest of the World, will plunge into the abyss is now indisputable.I have to admit my seething prejudice; it is applied stupidity! We will get that which we deserve.Save yourself as no one else is interested or will have time to be interested! It is a time for survival and opportunity.Ho humPeterJB
Anonymous • August 15th, 2008 at 10:21 pm
Lakshman Achuthan says USA is in a mild recession:http://www.businesscycle.com/news/press/1642/
Guest • August 15th, 2008 at 10:38 pm
To build domestic support for its aspirations for a “U.S. empire,” America’s War Party needs a new Cold War. Now it is spreading the line that former Soviet Union satellite countries, from the Baltic to the Caucacuses, are increasingly worried about Russia’s intentions, following the Georgia war.Yesterday’s missile agreement with Poland seems to fit War Party aims that the U.S. must stand firm against Russian aggression.But rather than portray that Russia is an increasingly dangerous protagonist, the Polish deal only demonstrates the reality of the Georgia war — that being an ally of the War Party is not the same as being an ally of the U.S. as a superpower which has to deliver.Georgia was to be an extension of War Party “democracy”: heavy U.S. aid, U.S. and Israeli military support, personal assistance for political leaders and use of the new “democracy” as an ally in the “coalition of the willing” in Iraq.Negotiations concerning the U.S. Polish agreement on missiles have dragged on for nearly two years. Yesterday’s sudden agreement seems to be not so much based on Polish fears as on greatly enhanced offers from U.S. negotiators.Today’s New York Times described some of the “unusual aspects of the final deal.” They include U.S. commitments to a faster response than provided in N.A.T.O. agreements to any attack, staffing of defense sites “at least temporarily” by U.S. soldiers, and the movement from Germany to Poland of a “top-of-the-line” Patriot air defense system.”The War Party propaganda, keynoted by John McCain, says Russia is a belligerent. Who’s the belligerent, lining Russia’s western border with missiles manned by U.S. soldiers and persuading a surrogate army to break a peace treaty and roll into Russian speaking villages at night bombing and killing civilians by the hundreds?
Walter Moreno • August 15th, 2008 at 11:09 pm
Only the jealousy of your colleagues, Americans or not, can portrait you very unfairly as a chronic pessimist. Due to their culture of the eternal-stupid optimism most of the American economist are much more incline to miss reality. Nature is so smart and selective that does not create unique people in abundance. Congratulations for your unique economic vision of the realities facing the world.
ihateyeats • August 15th, 2008 at 11:21 pm
Turning and turning in the widening gyreThe falcon cannot hear the falconer;Things fall apart; the center cannot hold;Mere anarchy is loosed upon the world,The blood-dimmed tide is loosed, and everywhereThe ceremony of innocence is drowned;The best lack all conviction, while the worstAre full of passionate intensity.Surely some revelation is at hand;Surely the Second Coming is at hand.The Second Coming! Hardly are those words outWhen a vast image out of Spiritus MundiTroubles my sight: somewhere in sands of the desertA shape with lion body and the head of a man,A gaze blank and pitiless as the sun,Is moving its slow thighs, while all about itReel shadows of the indignant desert birds.The darkness drops again; but now I knowThat twenty centuries of stony sleepWere vexed to nightmare by a rocking cradle,And what rough beast, its hour come round at last,Slouches towards Bethlehem to be born?
Gary Alan • August 15th, 2008 at 11:50 pm
Dr. Roubini,You would only be a pessimist, if you had been wrong about your warnings. I am glad to see that you have gotten the recognition that is deserved. Too many times individuals who have the ability to see things clearly are dismissed as being too negative. I guess it is human nature to discount bad news. It is quite obvious now that all along you have had a very through understanding of the global economic model.
Anonymous • August 16th, 2008 at 12:06 am
In fairness, I’m not sure Ken Rogoff is likely to be jealous. But he might possibly be portraying a professional optimism, whether or not he believes it deeply. In fact he’s put out some pretty pessimistic stuff himself.
Guest • August 16th, 2008 at 12:18 am
In today’s post “Insider Dealing or Insiders Scheming,” London Banker mentions a time in the early 1990s when Britain’s new Chairman of the Securities and Investments Board started a crusade against insider dealings such as Goldman Sachs’ rigging of the FTSE 100 options expiry, which GS found to its cost. However, as “London’s market share collapsed as trading fragmented to smaller, more opaque markets elsewhere and to derivatives” Goldman’s profitability soared.With “this week’s announcement that the SEC will remove insider dealing enforcement from exchanges and concentrate it in two mega systems policed by NYSE and FINRA,” London Banker says he would not be surprised if once again the police powers of regulatory authorities are used “to rig the market in favour of preferred models of interaction and preferred intermediaries.”I hope many here will debate this issue with LB, either to assuage my concerns or shine some additional light on this market dark matter:http://www.rgemonitor.com/financemarkets monitor/253351/insider_dealing_or_insiders_scheming
Guest • August 16th, 2008 at 12:38 am
Living Costs Rising Fast, and Wages Are Trailing — The New York TimesAugust 15, 2008 — The cost of living, led by the soaring cost of gasoline and food, is rising at the fastest rate since the recession of the early 1990s, the government said on Thursday, handing a de facto pay cut to the American worker.The report, from the Labor Department, offered quantitative proof of what Americans have been feeling for months: almost everything costs more, even as they have less money to pay for it.Prices of a wide range of common products in the Consumer Price Index were 5.6 percent higher last month than they were in July 2007, the sharpest annual increase since January 1991.Much of the increase has been driven by the immense run-up in gasoline prices. But food, beverage and transportation costs are also significantly higher than they were a year ago.The higher prices have made many workers’ wages effectively worth less.In July, rank-and-file workers — those in production or nonsupervisory roles — earned 3.1 percent less than they did a year ago, after adjusting for the rising cost of living.“Any way you slice it, incomes aren’t keeping up with the inflation rate,” said Michael T. Darda, chief economist at the trading and research firm MKM Partners.It was the 10th consecutive month that the weekly average salary had failed to keep pace with inflation, according to statistics from the Labor Department…http://www.nytimes.com/2008/08/15/business/economy/15econ.html?_r=1&bl=&ei=5087&en=1bd6be8f0fed5637&ex=1219032000&pagewanted=print&oref=slogin
Little Saver • August 16th, 2008 at 2:48 am
Realism often isn’t welcomed by the average Joe who sees it as threatening his rosy prospects. Perhaps one of the reasons why most do their best to ignore it and to oppose it. I hope that the emerging field of neuroeconomics may soon clarify these hidden forces, active in the human mind. Perhaps, we do not only have a subprime financial system, but also a subprime valuation system to begin with.The atomists already 2400 years ago gave us a realistic explanation of the world and its appearances. Unfortunately, they were oppressed by the idealists that constructed happy ending stories and situated themselves high above nature, not in it. We’re still accumulating evidence deconstructing the results of the rosy addicts, confirming the atomists’ realistic views.Apparent rari nantes in gurgite vastoI think that Nouriel Roubini is one of those rare clear thinkers appearing in the vast flood of whishful believers.
Guest • August 16th, 2008 at 4:41 am
“Today we are witnessing an almost uncontained hyper-use of force – military force – in international relations, force that is plunging the world into an abyss of permanent conflicts. “V. Putinhttp://www.marketoracle.co.uk/Article5882.htmlOf course, true.The question is: Why?The alternatives:1. Is George W Bush the Chief Administrator of a superior mental force of almost infinite intellect?or,2. Is George W Bush the chief administrator of the largest group of intellectual morons the World has ever witnessed?Take 3 seconds to answer.ho humPeterJB
fedwatcher • August 16th, 2008 at 5:01 am
Dear Dr. Doom,I have always seen you as a cockeyed optimist, believing that Bernanke and Paulson could get it right, rather than they were doomed to failure. Are you going to join the taking heads on Yahoo Finance such as Henry Blodget or are you going to play the Cassandra who will be dashed to oblivion by the ‘powers-that-be’?There be the rub, for truth is not a commodity you can cash in. While, lies have value and will be paid for.Dr. Roubini, your long term legacy is in conflict with your short term success. The Nobel Prize went to the creators of ‘Long Term Capital Management’. Yet, we are seeing that this was an error. Although the Nobel committee has not taken back any medals, Dr. Doom, do not change your stripes.Hold fast, history will prove you right, Do not fold to the politically correct. Ignore the entities of either political party to get you in their camp (the biggest mistake you can make is to take a post in the next administration as this administration is doomed t failure).Remain outside the frey, for the next administration is doomed.And all who join it will fail.Regards,fedwathcherBorn in NYC and proud of it.
Guest • August 16th, 2008 at 6:15 am
“Born in NYC and proud of it.”@ fedwatcher on 2008-08-16 05:01:48″Where?” … George W. BushHo humPeterJB
RichR • August 16th, 2008 at 6:52 am
Congratulations, Sir!I’ve enjoyed seeing you speak and have been following this blog for almost two years. Your analysis is based on both macro and micro facts which are available to all. It is the conclusions that I find most of interest and I have enjoyed reading them.That said, the conclusions have made for many pretty serious and scary reads.Keep up the good work.
genedio • August 16th, 2008 at 6:55 am
Mihm’s generally positive article on Roubini manages to misunderstand both his blog–where anti-Federal Reservists and pessimists hold sway–and some of Roubini’s own positions. Thus, while the article mentioned that R was supportive of Bernanke’s bailout of Bear Stearns (technically a bailout of JP Morgan), R vehemently opposed Paulson’s bailout of Fannie and Freddie. This shows Roubini’s discrimination and integrity (he knows when intervention is justified or seems to be the lesser evil of a Hobson’s choice), and is a key reason for his wide following.
kilgores • August 16th, 2008 at 7:02 am
@ Guest on 2008-08-16 00:38:31Yeah, but…(From the Wall Street Journal)Dollar’s Rise Could Damp InflationBy JON HILSENRATH, GREGORY ZUCKERMAN and CRAIG KARMINAugust 16, 2008; Page A1The dollar marched higher again, continuing a development that could ease inflationary pressures but also could slow an export boom. The rally is a sign of weakness in other economies and closely tied to declines in commodity prices….”The markets now recognize that commodity-linked price inflation due to a weak dollar and a strong global economy is yesterday’s worry,” says Robert Barbera, chief economist of Investment Technology Group Inc.The development has wide-ranging implications for financial markets and the global economy. It is generally good news for central bankers worried about the upward drift of inflation, particularly in the U.S….___Wonder if this is the turning point for the onset of more noticeable deflation in the U.S.?SWK
kilgores • August 16th, 2008 at 7:03 am
@ genedio on 2008-08-16 06:55:23Point well taken, and well said.SWK
genedio • August 16th, 2008 at 7:56 am
There is probably a “sweet spot” where the dollar can rise just enough to tame commodity prices more than it hurts American exports. In any event, a slowing Europe probably wouldn’t be buying more American made goods. But the authorities might get concerned if the dollar strengthens too much.As for deflation, there is deflation in asset prices but little deflation in consumer goods. The CPI over the last year was 5.6%, highest in 17 years. The CPI for the past three months was almost 10% annualized. Even core was up 0.3% last month.
Guest • August 16th, 2008 at 11:46 am
I could go on and on with a discussion on deteriorating fundamentals. The economy is rapidly sinking into what will prove a deep and protracted downturn. Mortgage problems are broadening and worsening, ushering in another leg of financial system and housing market tumult. Financial sector spreads widened meaningfully again this week, and it is worth noting that American Express issued 5-year debt this afternoon at an eye-opening 425 bps above Treasuries. Fannie and Freddie debt spreads also widened significantly this week, as did benchmark agency MBS spreads. A severe Credit crunch is now tightening its noose around much of the real economy.http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10095
Guest • August 16th, 2008 at 12:20 pm
@Guest: I could go on and on with a discussion on deteriorating fundamentals.”Thank you for that synopsis; that’s how I see it.According to today’s San Francisco Chronicle, “There were 1,352,000 unemployed people in California last month – 70,000 more than in June and up by 374,000 compared with July 2007.http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/08/16/BUFM12BUDC.DTL&type=printableThe business article, “State unemployment hits 7.3% in July,” says: California’s economic slide gained momentum in July when the unemployment rate reached 7.3 percent, up from 7 percent in June and nearly two percentage points greater than it was one year ago, the state Employment Development Department reported Friday.“Unemployment combined with the rate of inflation creates what economist Stephen Levy calls the Misery Index. That index topped 12 percent in July, the highest level in 15 years.”’Residents are feeling even more pain than suggested by the unemployment numbers,’ said Levy, director of the Center for the Continuing Study of the California Economy, in Palo Alto.”’These numbers show the economy in total collapse,’ added Christopher Thornberg, a principal at Beacon Economics in Los Angeles.”From July 2007 to last month, nonfarm payroll in California decreased by 75,900 jobs, or 0.5 percent.”Said Thornberg, “It is abundantly clear that the state’s economy is sagging in a dramatic way with little sign of stabilization.” He does not anticipate any semblance of recovery until mid to late 2009.
Anonymous • August 16th, 2008 at 12:31 pm
Sir,As a faithful reader of your blog for the last year or two, I felt a sense of personal pride to find you in my paper today. However, I must point out to your online readers that the picture is much more flattering in the glossy version. 
meli
Kafkatoo • August 16th, 2008 at 1:11 pm
Congratulation Dr Roubini on another fine piece of recognition. I just want to say the in the spring of 2006, I found your blog and had plenty of time to read it as my job was eliminated at the end of 2005. I heeded your warnings about the housing bubble bursting, sold my house in 7/06, and took out $175K in equity all of which went into the bank. I am fortunately employed again but had to move to another city and now I am a happy renter relieved that your prescience saved/made me a ton of money. Thanks Dr Roubini.
Guest • August 16th, 2008 at 1:30 pm
As the long-term value of the dollar weakens into worthless paper, so will weaken the power of the neocon War Party to make war and seize the resources and sovereignty of weaker governments.As the market takes over to do the job the American people would or could not do to destroy these financial dictators and warlords, there will be no means left for them to fund their global warfare. It is the value behind the dollar that enables them to make war, not the amount of paper it is printed on.The Fed, IMO, is printing itself into self-destruction.As quoted earlier on this blog, Lew Rockwell of the Ludwig von Mises Institute, said: With the innovation of the Federal Reserve, “the fiscal restraint on the state came to an end. All the talk about congressional authorization of spending and the constitutional restraint on the state became white noise or a tissue of lies… It is the one sacrosanct institution because it is the most necessary institution to modern statecraft. Without it, we wouldn’t fund both welfare and warfare. We wouldn’t dream of a world empire and debate policy the way we debate art, as merely a matter of preference. There would be strict, physical limits on what the state could and could not do.“Most all our debates about politics would come to an end. The point of the legislature and the executive would be to administer and oversee the state that exists, not dream up ever more far-flung excuses for attempting the impossible. No politician would plausibly claim the capacity to “lead us into the future” because their power to do much at all would be so limited…”The market can be a cruel master but a true market can also be a source of liberation.
London Banker • August 16th, 2008 at 2:39 pm
@ Professor RoubiniYou have quite a pleasant smile and a charming sense of the absurd as it relates to economic reality. Perhaps you should have met the journalist over wine instead of coffee?
edward allen • August 16th, 2008 at 4:13 pm
Dr Roubini,Since you have correctly diagnosed what has gone wrong, I am curious if you have suggestions for how to correct the problem. Would you increase tarriffs to battle the trade deficit, one of the two deficits that worry you? Or how would you deal with the trade deficit in both the short term, and long term? On the federal deficit, would you favor increasing federal taxes which, I believe, would only worsen the economic downturn, or would you increase the federal estate taxes, or the gasoline taxes (now gasoline is going down, people would not notice it as much)? Is the long-term solution to return to the gold standard? Or is it a Ronald Reagan prescription of lowering taxes even more in order to get more economic growth? We are maintaining a huge military structure, so would you favor cutting back on Pentagon spending at this point and, if so, how would you deal with terrorism? Do you embrace any program that might bring this ship back on course, or are the decisions we have made irreversible at this point? Thank you.
Guest • August 16th, 2008 at 4:42 pm
Dr. Doom? Nothing wrong with that. You need something like that to hang your hat on. Roubini brings drama to the financial stage: heaven knows it needs something besides farcical comedy.Bruce Gilden is to be commended – his Roubini photo is a first class movie poster — with 5-star drawing power.
Guest • August 16th, 2008 at 6:53 pm
A corrupt government will take money from its taxpayers and give it to its friends. So what do you have, if, to the injustice of this picture, you add direction from international investment bankers and empire-building pirates?Answer: The World Bank!Now comes a detailed look at the wickedness of this New Deal monster, from international financier and American ex-pat Jacob Steelman. Basing part of his piece on an interview with the World Bank’s former head of its anti-corruption department, Steve Berkman, Steelman paints a frightening scenario of theft and mismanagement. Here are excerpts from Steelman’s piece, “Corruption, Mismanagement and Malinvestment at the World Bank”:The current President of the Bank as well as President of the IFC and the Bank’s affiliates is Robert B. Zoellick who was elected by the Bank’s Board of Governors July 1, 2007 following the resignation of Paul Wolfowitz. Before taking on these roles with the World Bank Group Zoellick was an investment banker (of Iraq war fame) with Goldman Sachs, worked in the US State Department, was the US Trade Representative, was an Executive Vice President of Fannie Mae and worked in the Treasury Department…It is not surprising with so much money being thrown at politicians and bureaucrats that there is corruption – it would be surprising if there were not. As Berkman says the Bank enriches the government elites of the Third World while creating massive amounts of debt which cannot be repaid. “[T]he Bank pretends it is lending for noble purposes, while the borrowers pretend they will put the money to good use,” says Berkman. Instead the money is put into the hands of government officials and leaders who historically have looted their national treasuries. Ten percent of the $20 billion disbursed by the Bank each year is lost to corruption and it is estimated that 25 to 35% of total lending is lost to corruption. While the corruption takes many forms of course here are just a few examples:· Shell companies paid for goods and services that were never delivered· Tainted pharmaceuticals bought by the Bank for distribution to the public· Faulty AIDS testing kits bought by the Bank· Bank benchmark certification achievement for a hospital built with Bank funds when in fact all that existed was a hole in the ground· Bribes and kickbacks being paid to senior government officials while suppliers go unpaid· Farmers aid programs billed for hundreds of thousands of dollars for office furniture, vehicles, lodging, air conditioners, fencing, household furniture rather than aid to the farmers.As important as it is to weed out corruption it is equally important to understand the inherent mismanagement and malinvestment (along with corruption) which occurs in the Bank’s funding process. I say inherent because the basic premise for the Bank’s existence – to invest in projects the private sector would not touch – is flawed and thus with $20 billion of someone else’s money (taxpayers money or central-bank-created fiat money) to be distributed annually by a large political bureaucracy in countries around the world for allocation to projects which are inherently malinvestments (not investments seeking a market financial return) there can be no other result than corruption, mismanagement and malinvestment…http://www.lewrockwell.com/orig9/steelman3.html
Dano • August 16th, 2008 at 6:54 pm
@ The Good Professor(any maybe others here wish to comment as well???)What is the prognosis in your opinion(s) — inflation or deflation? And Ian talking over the next several years, not the next several months. I seedeflation in assets such as houses, cars & boats, but inflation in foodstuffsand (despite the pullback) gold and raw materials/Comments?
Guest • August 16th, 2008 at 7:09 pm
“Now Greenspan doesn’t like bailouts? The former Fed chief’s criticism of the rescues of Bear Stearns, Freddie and Fannie is infuriating because he created the mess that led to them.” By Bill Fleckenstein Excerpt:The sorry state that we find ourselves in is a function of the Fed’s interest-rate-targeting policies. More specifically, it was caused by the policies of Alan Greenspan, the Fed chief from 1987 to 2006. Just as this column was being filed, he graced the front page of The Wall Street Journal with some, shall we say, interesting observations.In an article headlined “Greenspan sees bottom in housing, criticizes bailout,” he said, “Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009.” (He did leave himself some wiggle room, as he also noted that “prices could continue to drift lower through 2009 and beyond.”)Of course, we shouldn’t forget that this is the same man who in October 2006 opined, “I think the worst of this (housing problem) may well be over.” As I also note in the book [Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve"], while Greenspan was in office he went to great lengths to suggest that housing couldn’t experience a bubble. And, as The Journal pointed out, he also tried to make the case in 2004, when many of us were already certain a disastrous bubble was in full bloom, that “a national severe price distortion seems most unlikely in the United States, given its size and diversity.”This illustrates my strongly held (and well-documented) view that when it comes to matters of economics, Greenspan is utterly clueless and unable to learn from his mistakes.However, what really sent my blood boiling was his criticism of the government bailouts of Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs). Now, you might wonder why I’d be angry that he said something I agree with, especially: “They should have wiped out the shareholders (instead),” referring to the bailout of Bear Stearns as well as that of Fannie and Freddie.The reason I’m so angry is his logic, which The Journal paraphrased as follows: “The Fed-financed takeover of investment bank Bear Stearns also made government backing of Fannie and Freddie debt ‘inevitable’” (his adjective, my emphasis). Then Greenspan went on to tell the newspaper: “There’s no credible argument for bailing out Bear Stearns and not the GSEs (government-sponsored enterprises).”The problem with that line of logic: Greenspan made the Bear Stearns bailout inevitable when he set the precedent of rescuing Wall Street during the collapse of hedge fund Long-Term Capital Management in 1998.Of course, those actions led to the massive blowoff to the stock bubble, the response to which led to the real-estate bubble. Thus, had he not bailed out Wall Street, I don’t believe we would ever have been in a situation in which a Bear Stearns bailout would have been required or even considered…Fleckenstein also discusses the “delusions of infallibility” regarding quantitative trading:http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NowGreenspanDoesntLikeBailouts.aspx?page=all
Guest • August 16th, 2008 at 8:22 pm
“Ten percent of the $20 billion disbursed by the Bank each year is lost to corruption and it is estimated that 25 to 35% of total lending is lost to corruption.”@ Guest on 2008-08-16 18:53:04This is an outright lie.The amount lost to corruption was originally computed at ~60%. It was thought too high for even political consumption, so it was then adjusted downward to ~40% and reported accordingly. I was there when the study was carried out.And, a maximum amount of ~5% always reaches the recipients ‘in-country’ but not often to those targeted under the WB programs.This corruption is consistent throughout ALL international aid institutions but it is the World Bank that is the pace maker and the idol of the bureaucratic thieves that feed from the public trough. You have no idea as to just how sick, vile and corrupted these cockroaches who see themselves as semi-gods actually are and they are capable of murder and far worse if threatened.Ho humPeterJB
Guest • August 16th, 2008 at 8:28 pm
Talking of Moral Hazard (again):”As an adjunct to the Bear Stearns financial assassination someone wagered $1.7 million that Bear Stearns’ shares would suffer an unprecedented decline within days. Now options specialists believe in retrospect that the buyer, or buyers, made a concentrated effort to drive the 5th biggest securities firm out of business, just as we predicted, while the events were in progress. The buyers reaped a profit of $270 million.Who were the buyers who bought puts 50% below the price with just a week to exploration? “http://www.theinternationalforecaster.com/International_Forecaster_Weekly/Billions_In_Lossess_Will_Become_Trillions_In_LossesHo humPeterJB
Guest • August 16th, 2008 at 9:43 pm
@Dano: “What is the prognosis in your opinion(s) — inflation or deflation? And Ian talking over the next several years, not the next several months. I seedeflation in assets such as houses, cars & boats, but inflation in foodstuffsand (despite the pullback) gold and raw materials.”John Bogle, founder of the Vanguard mutual fund giant, predicted recently on National Public Radio, as reported here, that this country would see a “fairly extended period” of downturn with the present crisis in the financial system spreading out into the general economy with housing taking a long time to recover, and the consumer finding it hard to maintain his present level of spending. As for the stock market, he was reasonably but not highly confident that companies in the S&P 500 would make a lot of money in the next 10 years, but with “severe bumps” in the road.Why? Because, as Bogle says, this bear market is different from the first nine that were caused by the financial markets overdoing themselves. In this bear, he said, the financial system itself has taken a huge role in society – with the faults of its system spilling into the real economy, affecting the manufacturing and the consumer sectors.It wasn’t a market built on investment in business, he said, but on speculation. In 1929, he said, “stocks were turning over at a rate of about 130% a year; in my first 20 years in the market between 20 to 30%; now they’re turning over at about 280% a year.” At the same time, Congress has privatized the staggering high-risk gains for the financial sector and socialized their massive losses, designating the banks too big to fail and the man in the street too small to save.And it was too politicized to command changes in the financial system that would control the high-risk leveraging and costs.So, IMO, there is no answer to your question. It’s like picking you way through the rubble of Dresden while the Fed’s still carpet bombing – who knows what will be hit next or found, deflation or inflation, or both. Very few financial pundits even admit there’s extensive economic damage – even though thousands of Americans are suffering the reality — now — of a Great Depression as they are discarded as financial collateral damage. Would you smile in derision if I predicted that the people’s hardship would last 10 years or more?As Bogle says, this time it’s different.
Guest • August 16th, 2008 at 9:56 pm
@PeterJB: “This is an outright lie… The amount lost to corruption was originally computed at ~60%… I was there when the study was carried out.”Thanks for the correction, I suspected as much. I hope your incredible post becomes official information. I shall consider it as such.
Anonymous • August 16th, 2008 at 10:31 pm
Unfortunately, Bernanke’s policy of Keynesian inflation, his implementation of that old saw that you can spend your way out of depression, is systemically taking the economy into Zimbabwe Hell. Even though Keynes’ “General Theory” was thoroughly discredited by analysts and experience years ago, the inflationists at the Fed continue to increase the quantity of money to the breaking point, knowing full well it leads to increased commodity prices. People cannot collectively buy twice as much goods as before unless twice as much goods are produced.There is no Santa Claus.
JLC • August 16th, 2008 at 11:57 pm
Mish has a good post about gold and silver deleveraging:http://globaleconomicanalysis.blogspot.com/2008/08/gold-silver-and-great-unwind.html
Guest • August 17th, 2008 at 2:13 am
an article by another person also sometimes referred to as “Dr Doom”The Strong Dollar Illusionhttp://www.europac.net/externalframeset.asp?from=home&id=13732Economists who now see American troubles spreading around the world are predicting that foreign central banks will ignore the gathering inflation threat and follow the Fed down the rate cutting path. Similarly, they argue that since the downturn began here, the U.S. recovery will likely be underway while the rest of world is still decelerating. These assumptions have prompted a rally in the dollar, a sell-off in gold, commodities and foreign stocks, and have cast doubts on the ability of foreign economies to “decouple” from the United States. Investors should not take the bait.America does indeed pose a global threat, but not for the reasons these economists suppose. Foreign economies are suffering not because Americans have slowed their voracious spending, but because they are defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world.The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion.… …
Anonymous • August 17th, 2008 at 5:23 am
Roubini is an optimist. Now after the the US housebubble bust it is time for the European housebubble to deflate and the effects on the financial markets will be similar.Eventually debt must be paid.(I cannot understand how Roubini is in favor of low interestrates = bubbelmaker)
Medic • August 17th, 2008 at 6:15 am
I am starting to see the US and our current crisis as similar to the old story of the developer who defaults on a loan: If he loses 1 million dollars of the investor’s money, the developer has a problem – if he loses 1 billion of the investor’s money, now they both have a problem.That’s where we stand at the moment. The loses are too interconnected and massive for individual banks, corporations and even nations to have a problem – the whole international system has a problem. Leadership, statesmanship, diplomacy, discussion and cooperation need to be the bedrock of any solution – if only we had anything that resembled any of this in our current government, we could work towards a realistic and sensible solution.For the moment we all still have a big problem………..PS: Nouriel,I enjoyed the piece in the NYT. Your writings and blog have been a wonderful addition to my daily readings. Thanks for sharing both.Medic
Guest • August 17th, 2008 at 6:36 am
Level3 summary:http://econompicdata.blogspot.com/2008/08/level-three-asset-analysis.htmlWow!
JLC • August 17th, 2008 at 9:21 am
Im going to play connect the dots here and venture a guess that the recent plunge in gold & silver is strongly correlated with the Merrill Lynch CDO sale last month. On July 28th, Merrill sold super senior CDOs to Lone Star Funds for pennies on the dollar (between 5 and 22 cents, depending on who you ask). At the time gold was steady around 920 and silver around 17.50. Over the next two weeks gold and silver began their precipitous declines.I’m not saying this is the only factor involved, but think about it. Many hedge funds had invested in CDOs, and had entered the game of buying up distressed debt. Maybe they got their distressed debt at 50-75c on the dollar. Now they find out they are worth much less than that. At the same time they are highly leveraged, and when their bankers start marking the hedgies’ portfolios to market it triggers margin calls. To meet the margin calls, the hedgies have to sell their profitable trades. The profitable and popular trades were short dollar, long oil, long gold & silver, etc. Hence a massive unwind in these positions. As the liquidation progresses, momentum traders jump on the bandwagon, stops are hit, technical traders jump in, etc. A perfect storm.
Guest • August 17th, 2008 at 9:54 am
But why is no physical Silver available?Seehttp://silverstockreport.com/2008/shortagesmean.html
OuterBeltway • August 17th, 2008 at 11:55 am
@All who espouse “Fed is printing money”.I was doubtful that money was being printed. I went to the Federal Reserve’s website to see the official story.Take a look for yourself.http://www.federalreserve.gov/releases/h6/current/To put it into perspective, here’s another view of M1, M2, and also the M3 numbers that the government decided to no longer provide. This is from John Williams’ ShadowStats:http://www.shadowstats.com/alternate_dataWhat I focus on is that the M3 (credit-component) money supply figures expanded astronomically in the past 5 years. This is a well-known phenomena, nothing new here – that’s the WStreet-GSE-Fed pump-n-dump phalanx in action. What’s interesting is to see what happens as the credit-bubble (expansion of M3) pops.While the Feds no longer wish to provide the M3 data, they still do provide M1 and M2, and the story on M1 and M2 is similar, even coming from two “adversarial viewpoints”, e.g. Fed and ShadowStats.The cheap-money Fed policy is ended, and China’s vendor-financing policy is slowing, and will shortly end (no U.S. consumer buying power). Credit is contracting rapidly. ShadowStats and other resurrected-M3 metrics providers agree that M3, the credit component of the money supply, is shrinking fast.Too fast a reduction of money supply versus GDP brings deflation. To stabilize the money supply (prevent deflation) the government (not just the Fed, but the government) has to somehow get money into the money supply. The credit injector mechanism is broken. That leaves M1 (money about to be spent), or M2 (savings account money, less likely to get spent) as the controllable money supply factors. The gov’ts choices seem to be:a. Print currency (increase M1)b. Deficit spend (borrow internationally, inject proceeds into checking accounts (increase M1) via war spending or rebate checksc. Get people to move money from M2 (savings) into the economy (M1), and then spend it. If only they had savings to move.Economic activity (GDP) is not just dependent upon the money supply, it’s also based on the number of times that money is changing hands (velocity). M2 (savings accounts) is not high-velocity money.Looking at both the Fed’s and ShadowStat’s data, we see M1 expanding at about the same pace that M3 is contracting. This doesn’t seem accidental.It seems logical to me that policy makers know that as M3 continues to contract, so must M1 be expanded. If the M1 increase doesn’t keep pace with M3 contraction, then deflation will occur, assuming constant GDP. Even if M1 does keep pace, if the velocity of M1 is less than the velocity of M3, deflation will still occur.The government must keep money supply x velocity constant, so long as GDP remains constant, otherwise deflation happens. If the money supply falls and/or velocity falls, and deflation doesn’t happen, it must be because the GDP has contracted.So, we know M3, and we know M1 and M2. What I don’t know so well is “velocity of money”. Does anyone know of a reliable source for these figures?Velocity of money may turn out to be the most decisive, most accurate indicator of actual economic activity.
Gloomy • August 17th, 2008 at 12:16 pm
BATMAN AND THE SHEOPLELast night I went to see the new Batman movie, Dark Knight, hoping to escape reality for a few hours. Instead I was left deeply upset at the conclusion of the movie as TPTB (Comissioner Gordon and Batman) conspire to keep the truth from the people, in order to give the people what TPTB think they need. This was blatant propaganda advocating that government secrecy and alteration of the facts is “good for the people”. I wonder if some investment bank underwrote this film at the request of the Federal Government.
PhilT • August 17th, 2008 at 12:30 pm
@ OuterBeltway on 2008-08-17 11:55:09Very insightful, thank you!
Guest • August 17th, 2008 at 1:07 pm
Earlier Post: “But why is no physical silver available?”Very good question.Over the last few months I’ve watched as physical silver had been drying up in availability. And yet we keep getting various excuses …”Silver really is available, it’s just a delay in getting it to the mints”"Silver supply is fine … you just aren’t talking to the right dealers”"They’re still mining silver … si it must be available”Yeah, yeah, yeah.Well, the fact is that physical silver is mostly NOT available.And it’s getting LESS available every week !!!IMHO, that’s because all the investors who bought physical silver are SITTING on their supplies, and they are not re-circulating any of the physical silver back into the system. It’s being thrown into vaults. And kept there.Meanwhile, the paper market in silver is just a free-for-all for the leveraged trading community. The paper prices are disconnecting from the reality of the real silver market. The volatility in silver as traded in the markets is more of a reflection of various hedging strategies, panic’s in deleveraging with hedge funds etc.For some time I’ve been wondering where the “breaks” will start to happen in the global derivatives markets. This action in the silver market is starting to look like the beginnings of one of those kinds of disconnects. What happens when you allow a system of leveraged trading to vastly expand (by a factor of 80 or 100) over the real value of the actual commodity that’s being traded? You get STUPID PRICING … that’s what you get.In the mean time, my suggestion is … DON’T sell your physical silver.If the derivatives markets want to go through a bust-up, let them.[or alternatively, a major re-pricing when the reality of physical supply sets in].In gonna’ sit back and laugh … when investors who are LONG silver (in the futures markets)actually try to collect on real delivery of silver COMEX bars. Good luck!!!PeteCA
Gloomy • August 17th, 2008 at 1:43 pm
@PeteCaI just spoke to Monex and they have plenty of silver for sale, just not from the US Mint. The dealer said the US Mint periodically has had production problems over the years.It sounds more like government inefficiency to me than a rush on silver.
Guest • August 17th, 2008 at 1:53 pm
@Gloomy: “I wonder if some investment bank underwrote this film at the request of the Federal Government.The answer is in Erle Stanley Gardner’s “The D.A. Calls It Murder”. Here’s how the district of attorney of Madison County, California, Doug Selby, put it:“The motion picture industry is financed by banks controlled by men who have a lot of political influence…If I try to link Shirley Arden (a Hollywood star) with that murder, either directly or indirectly, I’ll be fighting the interests of some of the biggest bankers and financiers in the country. I’ll be bucking politicians who have not only a state but a national influence. And I’ll be advertising myself as a sucker. The thing’s got to be fought out by a slow, dogged, persistent campaign.” Copyright 1937
AfA • August 17th, 2008 at 1:56 pm
@ OuterBeltway,A Moroccan joke:A school kid having problems recognizing different colors has been advised by his teacher to go with is dad to work. The next morning, the kid went with his dad to his vegetables and fruit store.Then the kid asked: “Dad, what is the color of this tomato?”The father replied: “It is red, but it’s yellow because it’s green”————————————————————————————–If I can give you my version of how I see things, although it is nothing formal.The idea that inflation in money supply is purely monetary phenomenon is a fallacy in my opinion (except probably over a very long period of time) because it considerably distorts investment/ consumption/ saving/ lending decisions. On the other hand, although I acknowledge the theoretical “common-sense” behind the MEE on which I believe you are basing your analysis, it has yet to be demonstrated valid on a practical level (except on the long haul). Your question about the velocity of money is, in my opinion, the crux of the difficulty to (in)validate the MEE. It is a big unknown that cannot be calculated empirically and most economists derive it from the equation, by assuming it does hold. In addition, I agree with your tacit assumption that deflation does not always equate to recession.We falsely assume that monetary inflation (and GDP/capita and income) is normally, or worse, uniformly distributed [leave the accuracy of these measures aside] over demographic classes/ industries/ assets/ products/ regions/ Time. In fact, they are often highly skewed, if they do resemble to any ordinary inferable distribution. If new money supply was uniformly and fairly diffused into the economy, then maybe inflation and deflation would have been a purely monetary phenomenon with no implications on the real economy. The way that inflation (and deflation) distorts real (as opposed to nominal) economy and decisions made in the economy is the result of the distortion of relative prices (a non arbitrage environment) due to this nonuniformity of money diffusion. I believe that understanding this would explain the possibility to witness both deflation and inflation, and that in this environment, traditional statistics such as CPI or M’ become irrelevant. Because even if we assume that the 4-5% CPI is accurate, it does not necessarily mean we are not witnessing superinflation if we notice that on the other hand disposable income and credit is contracting, which could be easily comparable to a CPI in the 10’s when real income was stable or rising and credit available. And it is this nonuniformity that causes bubbles and hypes. For this matter we have to make a distinction between different types of “money” as well as different types of prices in order to determine the effect of inflation and deflation on the economy (you need to add to that the problem with currency: it is probably the only unit of measure that is not stable in space/time, complicating and distorting decisions)Now, I doubt that either the CPI (or any of its derivatives) or M’ (% change in any of the M’s) really reflect inflation (beyond any definition discrepancies) or captures this non-uniformity. The CPI tracks changes in prices of products and services and commodities we buy, but we do not know if the change is caused by the REAL inflation (money expansion) or by intrinsic, fundamental or other factors (supply/demand, technology …) OTOH, none of the money supply measures is broad and homogeneous enough to give a honest picture about changes in the money supply (the liquidity or cash-like status of some instruments do change over time: e.g. Auction Rates Securities).As I think, I believe that a more accurate measurement of the level of inflation (and detection of bubbles) would be to discount overall money supply (and prices) by the change in nominal disposable income. And to be more accurate, disposable income should be clustered into different relatively homogenous groups (by income percentiles for example) Because not all newly created money diffuse uniformly across the economy and citizens and it does not make sense to me that we discount earnings, prices, GDP by the CPI.In my opinion, the only legitimate money-creation-out of thin air is WORK (or any asset or capital to which work is applied – we can debate whether value is intrinsic to humans or to other forms of capital). As an economy produces more and generates more, it needs an increasing pool of circulating money in order to keep prices stable over time. Since people can create added value and profits (otherwise the whole economy would be a zero-sum game), it may be legitimate to consider a proportional increase (or decrease) in money supply. Therefore, the actual definition of inflation should be the one tied to how much incomes have grown (and to be more precise, by how much income for each cluster has grown). Money supply decisions have to be made accordingly.
Guest • August 17th, 2008 at 2:26 pm
Stores sell school items for pennies – and win (New York Times news service)August 17, 2008 — Parents shopping for back-to-school gear could be forgiven for walking into a store nowadays and thinking they have gone through a time warp.With 1930s prices for pens, glue, notebooks and even T-shirts, the season seems more “Back to the Future” than back to school. A penny these days buys eight No. 2 pencils at Staples or a wooden ruler at OfficeMax. Fifty cents buys a watercolor set at Target. A box of 24 Crayola crayons is the cost of a gumball – 25 cents. Or, as Sharon Hartley, vice president of U.S. marketing and sales for Crayola, put it: “Sixteen boxes of a 24-pack equals a gallon of gas.”Such pocket-change bargains, known as loss leaders, are not a novel strategy for retailers, of course. But in the first back-to-school season since the economy weakened considerably, the discounts are earlier, deeper and more creative than in previous years. Staples, for instance, has offered 1-cent deals before, though this is the first year the retailer is giving away products, like Elmer’s glue.Thrift is the theme this back-to-school year: People are spending less, consolidating shopping trips, forgoing discretionary items and going without new wardrobes and backpacks. And stores are trying to play to the public mood…It is perhaps no surprise, then, that Wal-Mart on Thursday announced record earnings for the three months that end in July and raised its full-year earnings forecast to $3.43 to $3.50 per share, up from $3.30 to $3.43. The bargain retailer’s profit rose to $3.4 billion (87 cents per share), up from $2.9 billion (72 cents) a year earlier. Sales at American stores open at least a year, known as same-store sales and a measure of retail health, rose to 4.5 percent (not including fuel) for the quarter, up from 1.9 percent last year…”Can you afford to sell something for a penny?” said Marshal Cohen, NPD Group’s chief industry analyst. “The answer is, you can’t afford not to…”The consumer knows they’re in the driver’s seat,” said Cohen of NPD Group. “The retailer’s going to blink first.”http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/08/16/BU4912BIHO.DTL&feed=rss.business
Guest • August 17th, 2008 at 2:39 pm
Airports brace for fewer carriers, passengers(08-17) Fort Worth, Texas — From his office overlooking the runways of one of the nation’s busiest airports, Dallas-Fort Worth International Airport CEO Jeffrey Fegan sees the slowdown coming this fall.Airlines are cutting flights under the pressure of rising fuel costs, and that means fewer passengers and less money from parking and food concessions at DFW. For the first time in its 34-year history, the airport is freezing its budget and rethinking expansion plans…After years of growth, airports are delaying capital projects, freezing hiring, and considering increases in everything from landing fees to parking. Concessionaires are hurting, and many expect to close.The problems are greatest at secondary airports that are losing a bigger share of their flights and lack international service to shore up weak domestic traffic.Airports in Oakland, Cincinnati, Cleveland, Houston, Honolulu, Las Vegas and Columbus, Ohio, are among those expected to lose more than 10 percent of their scheduled service this year as airlines eliminate flights…There will be about 160,000 fewer passengers a week passing through Los Angeles International Airport, where capacity will fall nearly 11 percent, according to airline industry database Innovata. American, Delta and United Airlines are making big cuts; low-fare Southwest Airlines Co. is standing pat.To offset fewer flights, LAX is raising landing fees 15 percent, to about $500 for a fully loaded Boeing 737 and more than $2,000 for a full Boeing 747 jumbo jet…Southwest is the only major U.S. airline not shrinking, so it stands to pay a larger share of landing fees…http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/08/17/BUKK128P9V.DTL
Guest • August 17th, 2008 at 3:00 pm
Is it for orgies and corruptions such as these that our men have died overseas? There was that poem of Noyes…‘What did you thinkWe should find,’ said a shade,’When the last shot ended,And peace was made?’‘#$&&,’ laughed the fleshlessJaws of his friend,‘I thought they’d be praying –For worlds to mend –’Victory, Victory!On with the dance!Back to the jungleThe new beasts prance!God, how the dead menGrin by the wall,Watching the funOf the Victory Ball…
Guest • August 17th, 2008 at 3:53 pm
U.S. likely to recapitalize Fannie, Freddie: reporthttp://www.reuters.com/article/ousiv/idUSN1747783620080817The U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer’s dime, Barron’s reported in its August 18 edition.The weekly financial newspaper said that such a move could wipe out existing holders of the agencies’ common stock, with preferred shareholders and even holders of the two entities’ $19 billion of subordinated debt also suffering losses…. …The paper reported the infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie’s and Freddie’s existing common shares “effectively would be wiped out, and their preferred shares left bereft of dividends.”The report called an equity injection by the government a quasi-nationalization — without having to put the agencies’ liabilities on the U.S. balance sheet, and thus doubling the U.S. debt.
OuterBeltway • August 17th, 2008 at 3:54 pm
@AfA:Nice work – very nicely done.OK, now that you’ve posited a workable definition of inflation (prices relative to income). You’ve also given what I see as a perfectly sound rendition on when it’s economically appropriate to expand the money supply: when some action is taken either by human effort or operation of a machine (mechanical or electronic) that results in an expansion of wealth, or it’s synonym, value. Then the money stock should be commensurately expanded, and only then. Otherwise deflation happens (less money than value).Taking your ideas down a new avenue of thought, let me ask you this. In order to heal the economy, are you suggesting that we should identify those demographic or economic sub-parts of the economy whose buying power has diminished, and do a refresh operation on their earning capacity? Is your “relative earning power” the index of which parts of the population needs “economic healing”?Suppose the answer is “it’s kinda OK as an indicator”. Maybe it’s not the best metric, but it’s serviceable.How does one do the economic re-boost? Do economists posit methods to change behavior of people? Are there prescriptions to re-boost at the individual level or at the econ-sub-segment level or at the societal level?Never mind the economists of the world, have you done any thinking on that score in your own right?PeterJB, if you’re on-deck, feel free.O.B.
Clam Amity • August 17th, 2008 at 4:06 pm
Getting grimer and grimer in grim town. We’ve (United Statesans) become our pet bogey-men through time. Wars of oppression waged because of lies…er intelligence errors. Exploitation of the innocent and naive, and those still clinging to the ideas of meritocracy, equality, true opportunity. The USA (and by the spread of its culture epidemically) and the world are becoming the sort of people expelled or refused formerly by good society (or London social clubs). Gain by any cost, prevailing in competition by any means, disrespect for integrity, speculation preceding investment, pawnshops as paydirt, paper trading surmounts sweat & tears production. These days of history are where dreams fade from rich techicolor to grayscale. Where the lively diversity of men’s grand dreams and creations collapse into a dull, common sameness; where everyman wears the same dull, common languishing look of desperation subdued. We live in a time where capitalists made war on socialist/communists only to find (after presumptive victory) that they seeded their own institutions and palaces with the very same tendency.Freedom, the real sort–the sort hedged about with high conduct and instinctive morality, is vanishing. It has been hunted about and extinguished by man’s perennial baseness and his making claim on his fellow man. Son on father, father on son, neighbor on neighbor each presumes a due–the collecting of which has bankrupted us. The compleat man, the unsullied man, the blameless man is nevermore. Extinct. Now is where we have defaults and failure to deliver upon the invisible forms of mankind’s honor. No true north in any moral compass. No longer absolutes. Everything must be discounted, debased, mitigated, confounded, contrived, and alloyed. Our financial system and mankind’s means of producing and distributing and underwriting is infiltrated by an insidious plague. It has infected and riddled all its hosts. And none are spared. Calamity.
Guest • August 17th, 2008 at 5:01 pm
GloomySounds like you did some good marketing for Monex on this blog But I wonder if they only have silver in small quantities – and limited supplies? Overall, there still seems to be something going on in the PM markets vis-a-vis real supplies of physical metals.PeteCA
Guest • August 17th, 2008 at 5:41 pm
@Guest: “These assumptions have prompted a rally in the dollar, a sell-off in gold, commodities and foreign stocks, and have cast doubts on the ability of foreign economies to “decouple” from the United States. Investors should not take the bait…”Americans only see the value of the dollar as to what it will buy in relation to their labors – not to other currencies. What matters to the people is what a dollar buys in terms of what they just went through to get one.At home, inflation is much worse than the government lets on, and the dollar is in much worse shape than the government says.The question is, how big is this problem? How close are we to that point where the continued fall in the dollar’s buying power at home crushes the people’s incentive to work when there is no chance for a better life?Say you have a fleet of trucks and all of a sudden you can’t pass the costs of gasoline on. Whether gas is $3.50 or $4.50, you get real upset – it doesn’t matter what Congress says inflation is.That point is the tipping point, when the people look around and ask, Who did this? That is the point when the direction of this country will begin to turn.IMO, the present situation can’t last much longer: there’s bigger trouble ahead in the financial system than’s been revealed. Too bad Congress is only along for the limousine ride.
Gloomy • August 17th, 2008 at 5:41 pm
SUDDENLY RUNNING OUT OF TIMEThe specter of the national debt crisis has been around for decades, happily ignored by the public because it wasn’t today’s problem. And absent the current economic collapse, it would still be tomorrow’s problem. However, massive new issuance of treasury debt will be incurred in the coming months, owing to innumerable coming bailouts of corporate America coupled with plummeting tax receipts is accelerating the debt crisis and will bring this issue to a crisis in the next year or two rather than the next decade or two. The speed at which this onslaught overtakes us will have been unforeseen by most and will overwhelm all but the best prepared. This is the end game. It is upon us now.
Anonymous • August 17th, 2008 at 6:00 pm
@gloomyThe increasing national debt has been around for many years, so I don’t understand why, now, it will become such a crisis within a few months. Can’t Congress increase the ceiling again? Why should we worry about the national debt now if no one has worried about it before?bluebird
Gloomy • August 17th, 2008 at 6:11 pm
@BluebirdThe national debt becomes a critical issue when debt service requirements become so large that issuance of new treasury debt to cover the shortfall overwhelms demand, rates rise, and the dollar plummets. We had a bit of a grace period to get our act together because, absent the current crisis, this scenario would’t have played out for a decade or two. But now new debt issuance will skyrocket in the next few months (for the reasons outlined above), so the grace period is gone.
Gloomy • August 17th, 2008 at 6:16 pm
@PeteCAI don’t really know much about the supply, I just Googled silver and called the company at the top. I suspect your thesis will be proven correct in the end. Keep me informed as you hear more.
Satori Seeker • August 17th, 2008 at 8:18 pm
” John Maynard Keynes, whom Roubini, with only slight exaggeration, calls “the most brilliant economist who never wrote down an equation.””—Uhh do you guys really study Keynesian Economics or was this just badly worded?Curiously yours,-An Austrian
Anonymous • August 17th, 2008 at 8:43 pm
Dr.Roubini:You had earlier predicted that the equity market will price in a deep and protracted recession instead of a mild recession. When do you expect that pricing in to happen?
Guest • August 17th, 2008 at 9:18 pm
The Vicious Circle of Shrinking Capitalsee August 15http://www.oftwominds.com/blog.htmlhlowe
AfA • August 17th, 2008 at 9:31 pm
@ O.B.I guess the answer would be “Kinda Ok”. It maybe a good metric, but a mere metric nevertheless.As of what it can achieve. I guess, the government can use it to direct some welfare and investment programs to where it is needed the most. Other than that, I do not believe that a government or a policy can correct a cyclical downturn (without producing side effects). This is not (or should not be) the function of a central entity except policing and ensuring the proper execution and flow of the market system. And an information like this would give more visibility where to spot problems in early stages.We could argue about why a certain geo-demographic/ industry group is doing worse than others; having higher negative income2price growth differential. The main thing is the underlying cause behind the high “spread”. Is it because the group is lazy, underperforming, unproductive … in which case a stimulus is unjustified. Or is it because the group is in early heavy investment period of its life cycle, suffered from some impeding catastrophe, treated unfairly … in which case help and more investments are justified.However, the most important thing for me is that this benchmark (if it proves to be more accurate) be built into economic models of market actors (esp. investors) to help give more visibility and make more informed decisions (where investments are more needed) the same way CPI or interest rates are built into these models (well, just in case, by model I don’t necessarily mean quantitative spreadsheets but aggregation of assumptions and criteria data that help make informed decisions).But well, as I said, this is only a mere metric. And as any right tool, for it to be purposeful, it needs to fall in the hands of the right people and at the right time.
Guest • August 17th, 2008 at 10:15 pm
@Satori Seeker: “Uhh do you guys really study Keynesian Economics or was this just badly worded?”Roubini’s position these past months clearly indicates that if he does admire Keynes he certainly doesn’t go along with Keynes’ financier-controlled money politics. Keynes, prior to a certain time in history, did take a strong stand against the Treaty of Versailles and make some sound money statements, as did Greenspan who later turned out to be a puppet on a string unable to utter an intelligible word on his own.As Republican primary presidential candidate, Ron Paul, following his second place finish in the Nevada caucus race in January, said regarding Keynesian theory:“The Fed has again taken our country into a terrible crisis. Who else is talking about honest money that cannot be printed up at will by DC bureaucrats? My opponents in both parties are all some variety of print-and-spend Keynesians. Only we are telling the truth, about who is to blame for this recession, and how we can build real prosperity with sound money, no IRS, no deficit, and strict obedience to the Constitution.”Wrote G. Edward Griffin in 1994 in his piece, “Bretton Woods: An Attack on Gold”:The game began at an international meeting of financiers, politicians, and theoreticians held in July of 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire. Officially, it was called the United Nations Monetary and Financial Conference, but is generally referred to today as simply the Bretton Woods Conference. Two international agencies were created at that meeting: the International Monetary Fund and its sister organization, the International Bank for Reconstruction and Development, commonly called the World Bank… It [Bretton Woods] was to terminate the use of gold as the basis of international currency exchange and replace it with a politically manipulated paper standard….so they [governments] could create money out of nothing without paying the penalty of having their currencies drop in value on world markets…In the past, it [gold] had served as a remarkable efficient mechanism but it was a strict disciplinarian. As John Kenneth Galbraith observed:“The Bretton Woods arrangements sought to recapture the advantages of the gold standard – currencies that were exchangeable at stable and predictable rates into gold and thus at stable and predictable rates into each other. And this it sought to accomplish while minimizing the pain imposed by the gold standard on countries that were buying too much, selling too little and thus losing gold.”The “method” was to allow American banks to create money out of nothing without paying the penalty of having their currencies devalued by other banks. It was the establishment of a world central bank which would create a common fiat money for all nations and then require then to inflate together at the same rate…The theoreticians who drafted this plane were the well-known Fabian Socialist from England, John Maynard Keynes, and the Assistant Secretary of the Treasury, Harry Dexter White…White became the first Executive Director for the United States at the IMF. It was learned years later that Harry Dexter White was a member of a Communist espionage ring…
2cents • August 17th, 2008 at 10:51 pm
@ AfAI like your thought process, but this is basically the same line of thought that brought us hedonistic inflation adjustments!Think about the blacksmith and the stagecoach driver, can you back adjust their income disparities to today? No you can’t. I know this is extreme, but the reality is that the world changes and disparities shink and expand for reasons totally unrelated to monetary phenomenon.Keep the brain running though, because surely you’ll evolve a better indicator. I enjoy your thoughts!
Guest • August 17th, 2008 at 11:54 pm
Congratulations Professor, You truly deserve praise not only for your work and foresight but because you had the guts to present it to a skeptical world in the face of criticism and in some cases scorn.I read an economic theory years ago that foretold of the dollar strengthening after a period of weakness.The weakness is/was due to excess dollars in the system with no where to go. This is highly inflationary. First driving down interest rates and then driving up asset prices until they get so high that the debt supporting them can not be serviced.This can lead to a deflationary cycle. Why? Because Carry Trade style mechanisms were allowed to flood the system with to many dollars. When the banks and other institutions are able to get dollars for much less than the inflation rate, as if there is no risk. Then lend out these below market cost dollars to any and all takers, this creates excess liquidity or dollars. This also cause prices to rise. In this last episode, it was housing that rose, then commodities. House prices are collapsing and it appears that commodities have finally reached a top and are starting down too.Lend dollars below cost long enough and create so much debt that it can not be serviced and then there is only one thing that can happen. Defaults and debts collapsing or in other words, a deflationary cycle. Don’t let the media pundants fool you into believing that we don’t have deflation. Yes we have had rising prices in energy and food and other items but this is the end game of the inflationary cycle. The debt creating, dollar creating part. We have now moved firmly into the opposite side of the cycle.In a deflationary cycle, as the debt collapses dollars are destroyed. As a house price goes down, that asset is worth less. As the house price goes down, RMBS and CMBS and all the derivatives of these securities are worth less. This is deflation because the actual worth of all the assets and the notes written on these assets are then worth less. Thus the entire pool of dollars available shrinks. Our national wealth is shrinking. No the assets don’t go away, it just takes fewer dollars to purchase them. But then there are fewer dollars available and a lower asset value to borrow against.This really becomes a problem when the collapse of the asset values and the debt underlying it exceeds all new paper (debt) being created. That is going on today.When this happens, real (available) dollars actually rise in value or purchasing power.If this follows the scenario I read about, the next stage will be a sell off in stocks and bonds because dollars start becoming worth more than the assets they are held against. Also people who are on the margin need all the dollars they can get to try and support their own personal levels of debt or in other words, the standard of living they have grown accustomed to. Companies bought on LBOs and others that went out on a binge of buy backs who became addicted to easy cheap money will also be needing dollars which are no longer readily available. Thus dollars become worth more. And the fed can’t create more debt because they system already can’t handle servicing the debt it has taken on because it was priced below real market and something had to give, prices rose until they couldn’t be supported.As more and more debt collapses, there will be fewer and fewer dollars available to purchase anything with. Then those with dollars will benefit from holding them as long as possible. Thus the dollar rallies even higher…Along with this, interest rates will rise as the risk of loaning out dollars in a deflating environment will be more and more valuable. And the dollars available to most people will be fewer. This is already starting to happen with the rising interest rates on homes and commercial real estate loans.There is little the fed can do about this once it started because it is math and emotion and you can’t change the math and the emotion won’t change until we have had a long flattish bottom.The only assets that may not continue to collapse could/should be the precious metals complex because they can not be as easily leveraged. I think the current sell off is from leveraged positions by funds needing cash. When they have sold what they have, the PMs should go right back up because they will then be real unencumbered assets. If you have to hold something in a world of risky paper, precious metals start looking less and less risky. Maybe because they are real and all the paper assets are just paper promises.Anyone want to comment?
GM • August 18th, 2008 at 12:01 am
The only thing that can save the USA is immigration
Guest • August 18th, 2008 at 12:48 am
@ Guest on 2008-08-17 23:54:30″As more and more debt collapses, there will be fewer and fewer dollars available to purchase anything with. Then those with dollars will benefit from holding them as long as possible. Thus the dollar rallies even higher…The only assets that may not continue to collapse could/should be the precious metals complex because they can not be as easily leveraged. I think the current sell off is from leveraged positions by funds needing cash. When they have sold what they have, the PMs should go right back up because they will then be real unencumbered assets. If you have to hold something in a world of risky paper, precious metals start looking less and less risky. Maybe because they are real and all the paper assets are just paper promises.”Can PM go up when the dollar rallies?hlowe
AfA • August 18th, 2008 at 1:10 am
@ 2centsThanks for the remarks.I did not have the impression I touched to anything close to hedonics, although I perfectly get your point. Hedonics are also an untested and unverified assumption about price behavior which is used to adjust for increased quality (something that perfectly make sense, but only for high-end discretionary products and they also have a countering force: competition that is not taken into consideration)I did not try to provide any adjustment on the way prices (and their change) are computed. I was looking for a mainly descriptive metric of the level of affordability and purchasing power, where CPI is only half story. I was not trying either to presume that wages should be adjusted to price increases or to anything else (at least not automatically). Nor do I want to justify that income discrepancies have to be narrowed or fought, but their widening need to be kept in check, if prices do not automatically do that (the income discrepancy between the rich and the poor could widen, but if prices paid by the poor decrease while the ones of the rich increase at least proportionally, the discrepancy widening is not material: something that cannot be captured by a mere CPI, but can with income2price growth differential for each “cluster”).I also thought about your blacksmith and driver example, and this is why I said we need to put incomes (I mean PEOPLE) into different but homogeneous groups. If the cluster to which the blacksmith belongs witnesses a rise in income by 1% and prices of a typical basket of this cluster increased by 6%, it means inflation (or whatever you want to call it: I2P GD) is 5%. A middle class cluster would see their income rise by 2% but prices by 10%, which means they are subject to 8% inflation. The Warren Buffet cluster would have made 10% and paid 15% more, which means an inflation of 5%.If you also know that Mach2, er, I mean M2 increased by 10% over the same period, you would want to know where this newly created money came from and went to.Now, I agree with you that there are details that need to be addressed (beyond any computation or data problems): who will be in charge of diffusing new money? how can it be controlled? how to make sure the new money gets to where it belongs to (not lost)? how to balance between economy parts that creates value (need money supply to fight deflation)and parts that needs value (need money supply to fight inflation)?As you said, I need more thinking.NB: Everything is in nominal terms
Guest • August 18th, 2008 at 1:29 am
Conservative Republican Pat Buchanan’s take on Russian conflict is spot on…a must read. (Sure wish the bully-headed unilateralist Bush & Cheney would do the same)…”Is Not Western Hypocrisy Astonishing?”http://www.lewrockwell.com/buchanan/buchanan93.html
Anonymous • August 18th, 2008 at 3:04 am
@AfA”That’s getting boring.Two Fridays without a bank having failed and being taken by the FDIC?”WaMu is toast – regulators have approached other banks about acquiring them. You heard it here first.
Guest • August 18th, 2008 at 3:25 am
Guest on 2008-08-18 01:29:34Conservative Republican Pat Buchanan’s take on Russian conflict is spot on…a must read. (Sure wish the bully-headed unilateralist Bush & Cheney would do the same)…”Is Not Western Hypocrisy Astonishing?”http://www.lewrockwell.com/buchanan/buchanan93.htmlIt is also interesting how Saakashvili was able to bomb what he claims is his own country (South Ossetia) and yet US takes his side and tries to portray Russia as the agressor. On the other hand US often took up the issue on how Saddam Hussein had bombed the separatists in Kurdistan.I think the Anglo-American Empire suffers from an attempt to remake itself to some sort of a World Messiah. Unfortunately they are too hypocritical to be considered any sort of a “true savior”.
Guest • August 18th, 2008 at 6:16 am
The War on Terrorism Brings Mass Surveillance – In Swedenhttp://www.lewrockwell.com/bylund/bylund25.htmlWhat is interesting about the entire Swedish surveillance situation is that it affects, not just Sweden but also Finland and, notably, Russia. The reason is because a large amount (if not all) of the Internet traffic between these two other countries goes also through Sweden.For this reason some people have in fact said that the surveillance law is an attempt to spy on Russia.
Christopher • August 18th, 2008 at 8:41 am
@Guest: “That point is the tipping point, when the people look around and ask, Who did this? That is the point when the direction of this country will begin to turn.”Who did this?Unfortunately, I think the people will be told that Iran, Russia, China, Mexico and illegal immigrants did this.How many people in the US will know what really happened?
scientella • August 18th, 2008 at 9:02 am
What I dont see is why saying there will be a recession is pessimistic!!!!!Of course there will be a recession and those of us who have ever taught anything to do with the economy have for at least 3 years preceeding end of 2007 being standing in front of graphs in hyperbolic states saying “this wont last.”THERE WILL be recession THERE HAS TO be a recession. WE CANNOT AVOID a recession IT is like the ebb of the tide. There was massive housing price inflation due to easy money and inelastic supply from Chinea etc.We now have two choices.a) STAGFLATIONa) effectively transfer housing price inflation to the broader economy. This is what the fed is attempting to do by printing money. This will stop housing prices, sticker price wise, in coming down so much, and stop interest rates from going up so much, but will result in massive price inflation, which is already resulting in stagflation. It will also massively increase the govts exposure to debt, putting government itself in a very precarious position.b) FINANCIAL SYSTEM COLLAPSEJust let the banks fail and housing prices massively readjust. People to lose overinflated value of their homes, and some who are not careful, their savings. This shock and awe is my preferred scenario. Firstly it will more fairly punish those who were stupid in the first place. It will break a system that needs to be broken. Its a correction that has to happen. Its just a matter of how much you socilialize it.
Anonymous • August 18th, 2008 at 9:15 am
@scientella:I want to understand the “financial system collapse” scenario in a bit more detail. Why would banks collapsing necessarily mean that people lose their homes? If my creditor disappears, that’s good news if anything, if I am the debtor.It all depends on whether we are willing to protect homeowners or not. I think we should, then let the banking and broker-dealer chips fall where they may. Especially with regard to broker-dealers, it is a system that needs to be broken!
Guest • August 18th, 2008 at 9:19 am
This might happen, but it will be unsustainable and result in an even more painful disaster. It baffles me how financial professionals can continue to take markets seriously after the SEC, the Treasury, and the Fed’s ad hoc, ‘fly-by-the-seat-your-pants’, ‘make ‘em up as you go’ interventionist actions are all that have stood between propping up markets and systemic collapse. They don’t care as long as it appears to work. This is the danger of placing your trust in a performance-based system rather than one that is process-based. And this is what happens when you are continually forced to treat the symptoms of the disease rather than the disease itself (excess debt and money). And each time the treatment is a little more unconventional and extreme as the symptoms become ever harder to treat. Just once they are going to reach for a rabbit and they are going to find nothing at the bottom of the hat.http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10097
Anonymous • August 18th, 2008 at 9:38 am
I’m tired of the focus on “moral hazard” in evaluating the Fed’s actions. When someone breaks into a house and steals stuff, do you say that letting him off is “moral hazard”? Well yes, but first you say the theft has to be recognized and punished.What the Fed is doing now is stealing from the common man to give to the banks and broker-dealers. That’s theft.
Guest • August 18th, 2008 at 9:39 am
@scientella@scientellaI see the problem with STAGFLATION as there is really no way to get any increase in the money supply into the hands of the general public to spend. It is impossible to have prices rise for very long without this happening because as prices rise, the ability to purchase declines without either raising wages or increased borrowing.We’ve been thru the rising wages in the past and those in power spent years dismantling the public’s ability to effectively demand higher wages thru the slow changing in the laws that promoted and protected unions. And secondly by the process of globalization of workforce to places where labor was cheap and thirdly by allowing massive illegal immigration. All these diluted the working public’s ability to demand higher wages.We just completed the borrowing scenario and that can’t happen again for a long time. Those with the propensity to borrow, did so to the point where they couldn’t service their loans and those of us who refused to play the game aren’t going to jump in now.So the INFLATION scenario part of Stagflation is just about dead due to demand destruction within the US and Europe. And without the US and Europe buying from China and India, their inflationary monetary policies are already starting to effect their economies.We may not see huge declines in commodity prices because demand remains high but the increases have stopped because incomes are unable to rise and high debt levels have already reduced demand.A financial system collapse is possible but it is more likely that it just continues to decline for years until we again reach equilibrium.
London Banker • August 18th, 2008 at 10:31 am
@ GloomyI came out of Dark Knight wanting to erase the film from my memory. It made me sick. I told my children that I never want to see a movie like that again, and then refused to go see the new Mummy film a week later. I am so tired of films that uphold propaganda and supression of civil rights as worthy and admirable (which CSI and Numb3rs do as well). I am so sick of films that take pride in the destruction of civilisations and achievements thousands of years in the making (Kung Fu Panda and the new Mummy film). I am boycotting American films for now unless they have Ben Stiller or Steve Martin in them.It takes amazing feats of cooperation and organisation to build a terracotta army or a modern financial market. A society that revels in fear, destruction and violence as an admirable reaction to other peoples’ cherished history and love of achievement cannot be heading in the right direction.
curious • August 18th, 2008 at 10:49 am
Negative feed back loop due to distressed asset sales (Minsky/Fisher deflationary force) confirmed by Mr. Mortgage. (This guy is very good, especially in CA market.) Here is a clip from him: “BULK ASSET SALES – THE ‘QUICKENING’This leads me full circle to the beginning of this story. With IndyMac, Merrill, Fannie and now Lehman all in bulk ‘asset’ dump mode, other entities with less will want to get out ahead of them. Especially those banks holding vacant REO (real estate foreclosures) wanting to get ahead Fannie Mae’s 54k units. There is so much ’shadow’ inventory on bank’s shelves, an asset dump across banks holding large amounts of property such as WaMu, Countrywide, GMAC, Chase and IndyMac could seriously depress prices for a long time. This is a variable nobody is considering.Bulk ‘assets’ go for pennies on the dollar as you saw with Merrill’s CDO dump. Therefore, the vacant REO and non-performing notes in these bulk asset sales will be sold so cheaply that vulture funds can swoop this up and get this product back into the market fast at deeply discounted prices. This brings values down immediately. The result is an immediate and swift mark-to-market in that neighborhood…as one family gets a ‘great deal’ 100 have more equity stripped away, 50 are thrown into an incurable negative-equity situation and 25 default as a result. This leads to even more inventory. It is a vicious cycle; a feedback loop from which there is no escape.”
Guest • August 18th, 2008 at 11:25 am
Guest • August 18th, 2008 at 11:33 am
This is hypocritical:“It is not an easy sell,” Bernanke told Senator Evan Bayh, an Indiana Democrat, during an April 3 hearing on the Bear Stearns rescue. “But the truth is that the beneficiaries of our actions were not Bear Stearns and were not even principally Wall Street. It was Main Street.”http://www.bloomberg.com/apps/news?pid=20601087&sid=a0v71H6gketc&refer=homeBS was a planned killing by Wallstreet.
PhilT • August 18th, 2008 at 11:47 am
@Guest on 2008-08-18 11:33:22″BS was a planned killing by Wallstreet.”Sir, can you please elaborate what you are talking about.Looking forward to your reply post..
Guest • August 18th, 2008 at 12:47 pm
The challenge in facing Fannie and Freddie problems “is that a significant number of mortgages that serve as collateral for U.S. backed securities markets are not real. They do not exist.”Who would make such a radical claim? Just Catherine Austin Fitts, Assistant Secretary of Housing and Federal Housing Commissioner in the first Bush administration. Then, her company, Hamilton Securities Group, was lead financial advisor to FHA during the Clinton administration.Fitts has a great deal to say about missing money, fraud and Congress, Treasury, and Federal Reserve complicity. Here’s just a portion:After I began researching HUD fraud in the late 1990s, I would be contacted by people with experience with HUD fraud. They insisted that the same home was being used to create ten or more mortgages that were placed into different pools. They alleged that Chase as the lead HUD servicer and the other big banks were implementing such systems. This was why we would see the same house default two, three, or four times in a year, they claimed. FHA mortgages had to be churned through multiple defaults to generate the cash to keep all these fraudulent pools afloat. This, they insisted, was all going to finance various secret government operations and private agendas.This issue of collateral fraud was repeated in other markets. As I started to learn more about precious metals and the commodities markets, I would hear story after story about precious metals arrangements in which what investors really had was a bank credit—there was no bullion behind the arrangement.I have come to believe that the allegations of mortgage collateral fraud are true—not just for FHA and Ginnie Mae at HUD but across the board throughout the mortgage markets as well.What this means is that Freddie Mac’s and Fannie Mae’s obligations must be converted to what is essentially government debt. Such conversion means that investors simply don’t care if the mortgages have a lien on anything real or not (at least for the time being). Otherwise, there would need to be a process by which all the defaulted mortgages can be sorted through to determine which of the mortgages are legitimate and which are not.Creating and managing such a process would indeed crash the global financial system. It is hard for a multi-trillion-dollar financial system to maintain liquidity when contracts and laws are meaningless.The challenge for Hank Paulson is that by increasing the national debt by $5 trillion—whether collateralized by real estate or by phony paper—he can delay the day of reckoning, but he cannot cancel it.http://news.goldseek.com/GoldSeek/1218694140.php
Guest • August 18th, 2008 at 12:58 pm
@Guest 23:54:30: “And the fed can’t create more debt because the system already can’t handle servicing the debt it has taken on because it was priced below real market and something had to give, prices rose until they couldn’t be supported.”This is what I have been thinking all along, that the debt is much greater and more unserviceable than anybody knows. That’s why it follows that the big banks and investment institutions are seeking all the personal authority they can possibly get to save themselves – even to the point of exposing this rigged system to the public.Excellent, convincing article.
Nika • August 18th, 2008 at 1:04 pm
Dr. Roubini,This is my first time here, came via the article in the NYT that you reference (tho initially via EB). I am not an economist (am a life scientist) so it was great to be able to get the profile along with context. I thought the profile was a bit too reaching in it’s familiarity and personalization but I guess that’s the norm in an industry that trades on psychological pressures and appearances (Wall Street and MSM).It is great that you are able to carve a niche simply by stating your well thought out hypotheses. Regarding the whole “permabear” crap, be a perma-duck, let it glide off.My reason for commenting is to ask why you are so optimistic that China and India can integrate into the global economy (in a way different than it does now) such that it restores stability given the problem with Peak Oil.Do they not both import fossil fuels and experience demand degradation like the other global economies? Any educated reader could imagine many ways that rising fuel costs will serve to kill/suppress globalization – something it seems is necessary for the Chinese and Indian economies to increase. Perhaps there is even now an emergent quality of the internal economies that can help them thrive as closed systems but I doubt it. Their burn rate on local and imported resources alone would kill that balance sheet.While one can appreciate the psychological drivers the men and women on the street in China and India may feel, namely wanting to grasp the brass ring they feel they are entitled to as global contenders, I think the wanting will be overshadowed by the simple factor of rising fuel costs.I also think that both China and India have skeletonized, or have nearly done so, their capacity and resilience in terms of water, food, and infrastructure. These factors, along with a slowing and even perhaps downturn in their unsustainable forward nascent globalized economies along with their vast populations could lead to collapse a lot sooner than one might expect.After 90 some comments, I do not expect that you will get to mine but it would be great if you did. I will also take a look at your back posts and see if I can find anything on this in your past writing.Thnx!Nika
Gloomy • August 18th, 2008 at 1:04 pm
@LBI’ve never been as rabid (or informed) about government abuse as you seem to be. However, I’m getting there…
Guest • August 18th, 2008 at 1:14 pm
@PeterJB: “My position is that the World is in the mid-pangs of a global economic collapse and that the USA has led this rush since the days of Mr Greenspan, who actively promoted the invasion of Iraq – due to the obviously then; the systemic collapse of the US economy.” (20:47:23)@ 20:22:38: “The amount lost to corruption [by the World Bank] was originally computed at ~60%. It was thought too high for even political consumption, so it was then adjusted downward to ~40% and reported accordingly. I was there when the study was carried out.”It is an honor to be on the same blog with you and Professor Roubini. Your world position and status give your observations major significance and weight. I always give them top rating. Thank you.
John Brock • August 18th, 2008 at 1:46 pm
Dr. Roubini,I am relieved that an exercise in realist economic thinking has gained momentum, although at the unfortunate expense of being correct about recent events. Realistic approaches are all but dismissed among the majority. Many economists have become forecast junkies looking to please anyone that will listen to them or throw them a dime for a snippet of bright eyed eventuality. While it concerns, no nearly frightens me that the United States may be seeing the beginning of the end of its economic empire, I must admit that I agree. Based on events over the past decade, I believe that any reasonable person would have no choice but to agree regardless how patriotic one is.The simple fact is that the current state of borrowing and spending can not be maintained and there is no economic equation that can change this reality. Our nation’s military is the only thing that stands in the way of much more aggressive policies from our competitors than we’ve seen in the last decade. Your point that Russia, China and the Gulf States are rivals not allies can not be understated. There are deeply held, long standing disagreements on federal governance, civilization and spiritual management present that no amount of economic prosperity will overcome and when the time is right, they will, mark my words make a move. It is my belief that we are seeing a bit of that in play right now as we look at Russia’s strategy implementations regarding Georgia. The switch from America being the strongest economy in the world to being “among” the strongest is perhaps inevitable.As the saying goes; the first step to recovery is recognizing you have a problem. The question is how recognition can ever happen with a nation that can not even admit when it is in a recession…Traditional economic modeling will never be able to predict human behavior. Predictions based on modeling, backed up by perception is the only way to account for the human variable.Anyways, thank you for “keeping it real”.John Brock
Gloomy • August 18th, 2008 at 1:57 pm
ARE THE MASSES AWAKENING?The Dr. Doom article is now the #2 most emailed article on the NY Times website. Maybe the sheople are beginning to wake up.
Guest • August 18th, 2008 at 2:01 pm
Lets see if stocks stage that mairaculous late day surge that we are so used too…
Guest • August 18th, 2008 at 2:01 pm
“The American banking system may not need a shove from Russia to fall on its face. It’s effectively dead now, just lurching around zombie-like from one loan “window” to the next pretending to “borrow” capital — while handing over shreds of its moldy clothing as “collateral” to the Federal Reserve. The entire US, beyond the banks, is becoming a land of the walking dead. Business is dying, home-ownership has become a death dance, whole regions are turning into wastelands of “for sale” signs, empty parking lots, vacant buildings, and dashed hopes. And all this beats a path directly to a failure of collective national imagination. We really don’t know what’s going on.The fantasy that we can sustain our influence nine thousand miles away, when we can’t even get our act together in Ohio is just a dark joke. One might state categorically that it would be a salubrious thing for America to knock off all its vaunted “dreaming” and just wake the fuck up.”http://www.kunstler.com/
AfA • August 18th, 2008 at 2:18 pm
Weird,FNM and FRE are eating dust (each down about 20%) and Paulson nor any official is coming out to clear things out.One would wonder whether the new CEOs of America Inc. are facing the same dilemmas bank CEOs do.
Guest • August 18th, 2008 at 2:27 pm
Here come the stock buying ferry’s!!!!!!
Guest • August 18th, 2008 at 2:45 pm
@ ~ Here come the stock buying ferry’s!!!!!!The important thing is for the PPT to make it look like it’s going up at the close, whether it’s +250 or -45, i.e. a good omen for tomorrow.
Guest • August 18th, 2008 at 3:05 pm
@Christopher: “ Who did this? Unfortunately, I think the people will be told that Iran, Russia, China, Mexico and illegal immigrants did this.”Well, maybe. On today’s Market Dispatch: Russian bear may be weighing on markets 8/15/2008 6:30 PM ET
Guest • August 18th, 2008 at 3:15 pm
At Naked Capitalism: “US Export Boom Leaves Manufacturing Largely Behind”We have been skeptical of the idea that a weak dollar would be the boon for US manufacturing that many thought it would. The reason? The best possible outcome would be to see a resurgence in manufacturing, since manufacturing has higher potential for productivity gains than does the service industry (although getting back some of those service jobs that have been offshored would be nice too). In the long run, economic growth is a function of demographic growth and productivity increases.So why did we think manufacturing would not come back? Consider what has been lost: plants have closed, workers with specialized know-how have moved on. Rebuilding those industries won’t happen overnight. It would take a significant investment of funds for equipment, training, and start-up costs. With currencies volatile and China now less inclined to see the yuan rise, who is going to bet that the dollar will stay weak long enough for new entrants to make a go of it?That isn’t to say that manufacturing might not eventually come back to the US. But it will take sustained dollar weakness, perhaps even evidence of a shift away from the greenback as reserve currency. And the dollar is not the only part of the equation. High fuel prices are leading manufacturers to rethink their supply chains, with increasing emphasis on having more manufacturing and assembly closer to the customer. That consideration may bring some manufacturing back to the Americas, but it might wind up in Mexico.As an aside, I have been told by people with good industry knowledge that the US ceded far more manufacturing than it needed to, that some public companies moved manufacturing overseas because it was what Wall Street wanted (this from C-level employees of said public concerns). Similarly, the US lost much of its shoe manufacturing because Interco went bankrupt under too much LBO debt and the speed of the unraveling led a manufacturer that could have been salvaged being liquidated.That being said, existing US manufacturers could pick up more orders from overseas with a weak dollar. But the ones that woud benefit are players with established international distribution. And per this article from the New York Times by Louis Uchitelle, even for those companies, the degree to which domestic factories have benefitted is not as great as popularly believed….http://www.nakedcapitalism.com/
Guest • August 18th, 2008 at 3:20 pm
Hellasious in latest post “Unemployment” says:Claims for unemployment benefits are rising sharply now.In my opinion jobs are the most crucial element for the future direction of the economy, dependent as it is on consumer spending. There is an interesting aspect here: most previous slowdowns were caused by excess inventory build-ups, with unemployment claims rising fast as manufacturers cut back on production. This is no longer the case because:a) Manufacturing is no longer the driver of the economy, having previously shed millions of jobs in the 2000-04 period and,b) The slowdown is not caused by excess inventory but by excess debt.Job losses are now happening increasingly in services, particularly the FIRE sector where – unlike plant closures – mass layoffs simply do not exist. Rather, job losses come in dribs and drabs; also, some people may still be listed as employed but making very little – if any – money. For example, realtors and mortgage brokers who rely entirely on commission.The bottom line is that unemployment benefit data is slower in building than previous recessions and will likely persist for longer than usual.http://suddendebt.blogspot.com/
Michael • August 18th, 2008 at 3:47 pm
HOW RUSSIA AND CHINA CAN EASILY DEFEAT AMERICAThe post by Nouriel “The Decline of the American Empire” outlines how easy it would be to end America for Russia and China. What he does not point out is that America has now accumulated enemies around the world due to Empire Building and Pride. If China and Russia and others hate America then why not collapse her? Why bankroll the twin deficits that will after the forthcoming massive corporate bailouts this coming year(s) far exceed the 700 to 800 billion they cough up annually up to this point. They hold the ticket for the collapse of America and they know it. America has already ticked Russia off by putting “defense” missiles in Poland and starting a war in the S. Georgia. And Putin has already shown he is at odds with the American Empire building. China bankrolls the twin deficits so they can sell their goods cheaply in America, but when it becomes obvious that Americans have no more money to spend, why not pull the plug? Even in the scenario where Russia and China keep funding the debt will they and others be able to afford to do it with the massive increases coming? It seems to me America, with it prideful and flawed foreign policies, is doomed.
Anonymous • August 18th, 2008 at 4:06 pm
@LB: “It takes amazing feats of cooperation and organisation to build a terracotta army or a modern financial market. A society that revels in fear, destruction and violence as an admirable reaction to other peoples’ cherished history and love of achievement cannot be heading in the right direction.”We think differently about what is cherished and what are humanity’s great achievements. Our financial markets, our crushing debt load on the common people, are things I do not cherish.The debt, and the great disparity in wealth, is an evil I want to turn back on that not-so-cherished financial system from whence it came, so that that system is devoured rather than the common people.
Anonymous • August 18th, 2008 at 4:23 pm
@PhilT:I didn’t make the comment originally about “planned killing” of Bear Stearns, but I think I agree with it. BS did not participate in the Fed-organized bailout of Longterm Capital. They continued to tweak the system by having a Chairman who spent all his time playing bridge and golf. Nobody was going to extend themselves to save BS. (I don’t know whether “club” members had done things to marginalize BS previously, causing BS’ reaction. Not unlikely at all.)But JP Morgan was a good boy, a club member, and deserved to be saved.Personally I think it’s real people who deserve to be saved, and not particularly the rich either.
Guest • August 18th, 2008 at 4:36 pm
PeterJB, if you’re on-deck, feel free.O.B.@ OuterBeltway on 2008-08-17 15:54:52This is a big subject for which I do not have the time to bring to bear but the short answer is that diffusing into the economic system via individual economic – er demographic units, where the system is not designed for such infusions (which it isn’t), creates turbulence and instabilities. This is always the case when a new political parties wins the golden prize of office and immediately starts sending load of cash from the national coffers to major donor centres.AfA is correct when he says or infers that labour is the value item in the real economy (gold is the redundancy of achieved labour in the metals family) – it is also the foundation value item in the secondary economy. The errors of recent decades has for the regulators to endorse and allow the secondary economy to open frenzied feed off the real economy – which it had to as it had run out of steam; Greenspan knew this and in a panic opened up all the taps without limitation hence the repeal of the G_S Act and eventually War (with any Nation conveniently weak at that time).The diffusion and infusions of financial energies into the socio-economic dynamic is properly done through the designed banking system, however this was crashed through the repeal of the G_S Act which basically let the barking mad bankers out of the box and now the situation is that the Banks are given bail-outs from the public purse to keep the system primed, however the Banks, true to form, refuse to act like Banks and pass the spice through the system: IOW they hoard because they are in survival mode which indicates that there is far worse acoming down the pipe and, the grassroots and the National and World economy, in their opinion can just go an get f*&^%$, if you understand what I infer.So, back to my point, the Bankers reactions are not only predictable, they are a matter of historical record and therefore the should never had been trusted: ever! This is a socio-economic fundamental that has been buried, due to the consensual “faith” economics being practiced in the economists’ world of irrationality.A proper system is when the Banks of infusion and diffusion points are small and numerous and exist in redundancy numbers at all socio-econmic levels. “The spice must flow”. Buckminster Fuller coined the term and process as ephemeralization. It is practiced in many countries in Asia informally.Apologies for the brevity.Ho humPeterJB
PhilT • August 18th, 2008 at 5:05 pm
@PeterJB 2008-08-16 20:28:33″Talking of Moral Hazard (again): … ” …Who were the buyers who bought puts 50% below the price with just a week to exploration? “Sir, I have read many of your postings and have benefited from your wisdom, but I am confused by this post. I followed your link to Chapman’s article and read that as well, and still I am not sure as to the value of any of this type of discussion.I an not in the know, except for what little I read that seems valid. The entire Bear Stearns episode seems to me to be hidden from view. I do not understand how any share value above zero was arrived at by JPM, the Fed, the Treasury or anyone else. I still have questions concerning the quality and face value of the $29 billion in “Toxic Assets” and why the Fed took that on to its balance sheet.I am utterly unconvinced that allowing Bear Stearns to go its natural course (bankruptcy) would make matters any worse than already are, In fact, it is more believable to me that, by now, a proper Bankruptcy Judge would have revealed many of the maladies that are still plaguing the entire market and would have discovered appropriate pricing for opaque securities so that the entire shadow asset problem could begin to be rightly dealt with.The fact that no party has been open, up front or clear about any of these things, is a further indictment of the nature of the current financial system, the regulatory agencies, and all individuals affiliated.Is Chapman suggesting that Bear Stearns insiders (possibly with the help of other Wall Street insiders), knowing that the Bear Stearns ship was going down, told the public one thing through their acting CEO while they scuttled their own ship by transacting the $1.7 million put for the personal gain of a saavy few? Deplorable and disgusting, yes, but certainly believable. Isn’t this the nature of the beast that is Wall Street and casino capitalism?And finally Sir, what place does Moral Hazard or any reference to the word moral have in this immoral/amoral and apparently savage environment ?With the utmost respect, I look forward to your reply and to anyone else who might be able to shed light on this issue?Sincerely,
Guest • August 18th, 2008 at 5:26 pm
“The fact that no party has been open, up front or clear about any of these things, is a further indictment of the nature of the current financial system, the regulatory agencies, and all individuals affiliated.”@ PhilT on 2008-08-18 17:05:54You say it all! I did not comment on Bob Chapman’s article as I just don’t know; like you but I brought it to attention just to see if somethting surfaced. Bob’s been around in these circles for many years so I think that we should consider, at least, what he says.Personally I just think that Hank and Ben panicked and in doing so, made a lot of bad decisions, all for the wrong reasons. It is understandable that they don’t wish it to be opened to the public as I am sure that there were many other people in the room with them when it was all happening; people that they don’t wish to be publically associated with in these types of times.Thank you for your kind words.Ho humPeterJB
Guest • August 18th, 2008 at 5:30 pm
CNBC Financial News: (who’s a pessimist now?)“Financial Crisis Is Expected To Bring More Big Shocks”August 18, 2008 — The year-old financial crisis is not only far from over but could actually get much worse, bringing more big shocks to the US economy and stock market, a host of experts said Monday.Among the predictions: the failure of some of the country’s biggest financial institutions, the collapse of 1,000 banks and a possible government bailout of mortgage giants Fannie Mae (NYSE:FNM – News) and Freddie Mac (NYSE:FRE – News).”I think the financial problem is halfway through the cycle,” David Kotok, chairman and chief investment officer from Cumberland Advisors, told CNBC. “There’s another shoe to drop ahead of us and it could be more severe.”Kotok thinks Merrill Lynch (NYSE:MER – News), Wachovia (NYSE:WB – News) and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities.The cash companies need to shore up bad investments, “is up to about $50 billion and will probably top $100 billion before it’s over,” he added.”Those firms—Merrill,| Wachovia| and others—are going to have to raise that cash,” he said. “They are either going to have to get it from the Federal Reserve, through some direct or indirect means, which means more leverage, more Fed balance sheet, more regularly oversight or they’re going to have to get it in the capital markets.”Meanwhile, billionaire investor Wilbur Ross told “Squawk Box” that a thousand banks could fail before the financial crisis is over.”Not very big ones necessarily,” he said. “But a thousand banks is going to be a lot.”And the impact on the credit crunch could be severe, he added.”Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there’s a tremendous magnifier effect of small changes in bank equity.”His comments were echoed by Morgan Stanley co-President Walid Chammah, who told a German newspaper that the financial crisis will probably not end until next year or even 2010.”We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business,” Chammah said.And a Barron’s article over the weekend said the U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer’s dime.The weekly financial newspaper said that such a move could wipe out existing holders of the agencies’ common stock, with preferred shareholders and even holders of the two entities’$19 billion of subordinated debt also suffering losses.On CNBC, Kotok agreed that Fannie and Freddie are in jeopardy.”Were it not for government aid and backing they would have already had to declare bankruptcy. Their portfolios have problems,” he said.”You see one brick at a time in the financial problem area become addressed. Here’s Lehman (NYSE:LEH – News) trying to divest real estate holdings in a falling real estate market,” he added.http://biz.yahoo.com/cnbc/080818/26264706.html?printer=1
Guest • August 18th, 2008 at 5:47 pm
” The current financial crisis was therefore an inevitable follow-on to the collapse of the housing bubble and will almost certainly amplify its negative impact on the economy.This all seemed painfully obvious from even a quick look at the housing data back in 2005 when the central bankers were honouring Alan Greenspan. In fact, it should have been obvious at least three years sooner.But the economic elites were convinced that everything was just fine. Their new mantra is “who could have known?” (Actually, that is an old mantra. They said the same thing after the stock bubble collapsed.) The really tragic part of this story is that there are no consequences.The same group of economists that led the economy into this catastrophe still has its hands on the wheel. Holding them accountable for their disastrous performance is simply not on the agenda.”So, let’s all hope that the Jackson Hole crew has a good time at their summer retreat. We’ve paid a big price for it.”http://www.guardian.co.uk/commentisfree/2008/aug/18/useconomy.creditcrunch/print
Guest • August 18th, 2008 at 5:53 pm
The location for the nation’s nuclear waste disposal system needed to be far from population centers, of course, for maximum protection. But sparse population also means a state would have fewer members of Congress block the location with “not in my backyard.”When the nation’s banking industry needed a place to dump leaking, bleeding, seeping, poisonous mortgages, a dumping ground with as few protestors standing in the way was essential. So in it came, by land, sea and air, to good old Fannie and Freddie. How much smaller protest can you get from anybody than everyday good guys like Mr. And Mrs. America?
Gloomy • August 18th, 2008 at 6:02 pm
GREAT THINGS AHEAD FOR OUR NATION’S LARGEST BANK” Countrywide is on Bank of America’s life support, dragging both into the infinite gravity of the black hole.”"Countrywide clawed its way to the top of subprime with a kamikaze allegiance to greed. On the other hand, Bank of America’s interplanetary travel into subprime was relatively more pedestrian, and it wound up being force fed a heaping plate of Countrywide. Now Bank of America hovers on the horizon of implosion.”http://bankimplode.com/blog/2008/08/14/dark-star/
Guest • August 18th, 2008 at 6:43 pm
“Ben S. Bernanke,” Bloomberg.com reports today, “is still trying to define which financial institutions it’s safe to let fail.” In other words, which American citizens will now receive fewer Federal Reserve notes and which private citizens will be the recipients of those stolen notes.Ben, of course, is only the conduit for the wealth transfer…the transfer decision will be made by the partners of the recipients.Long ago Isabel Paterson made this decision making clear:“As the coercive power of the state will alone decide who is to have what, the only power worth having will be a share in the exercise of this directing power.”
PhilT • August 18th, 2008 at 6:49 pm
@PeterJB 2008-08-18 17:26:02″…I did not comment on Bob Chapman’s article as I just don’t know; like you but I brought it to attention just to see if somethting surfaced.”Unfortunately, I am not expert enough to provide valid feedback on all that was written in the Chapman article, although I am certain that there are others who read this blog that are perfectly capable. That said, I had no difficulty in following the high-level flow of what he wrote, and I do think that there is value in his accounting of events.The reason that I replied to you has to do with the portion of his article that you quoted in your post along with your moral hazard comment.There are plenty of timelines that attempt to account for the ultimate demise of Bear Stearns – most of the one’s I have seen begin their coverage in May/June 2007 as opposed to the last week of its life when the vultures were circling. The notion that a $1.7 million dollar put – put BSC out of business is preposterous and deceptive.This reminds me of an account that I read some time ago as to the cause of the sinking of the Titanic being rooted in a sub-standard metal composition of the rivets that could not withstand the great forces generated on the structure following the collision with an iceberg. I don’t doubt that qualified metallurgy experts made that startling discovery, but I still think that those steering the ship took unnecessary and unwarranted risks, perhaps for selfish gain, and caused the collision were responsible.Be well, Sir
Average Jane • August 18th, 2008 at 7:25 pm
@ London Banker — your posts are always so succinct and so correct. I’m afraid, however, that the Folks on Main Street will get to the point where they will be begging to have the noose put around their own neck–if you know what I mean. It’s terrifying to me, that with the state budget crises in both New York and California, the respective governors are looking to privatize those activities which our government is supposed to provide to its People: namely, infrastructure and Good Governance. The fact that New York’s governor is looking to partially privatize New York’s roads is insufferably short-sighted. I’ve been appalled for years that the Masters of the Universe have privatized our most basic necessities and arrogated the profits to themselves–electricity, communications and the like. And don’t get me started on health care. The fact remains that these b***tards want to turn the U.S. into a third world country and We The People will actually ask them to do it if we’re in enough pain. “Go ahead, sell our roads to the highest bidder.” We shall pay and pay. I wonder what it’s going to take for all of us to wake up. The assault on our personal privacy is simply unconscionable. I don’t feel any darned safer with six surveillance cameras on every corner, nor do I feel safer with the guv’mint snooping through my snail mail, e-mail, bank records, health records and telephone conversations. Honestly, it’s just too ridiculous–I wonder sometimes if even George Orwell couldn’t have dreamed up this sick scenario. To arms, Plain Folks! We must stick together and beat ‘em back! With people like you, LB, and the other posters on this blog (Afa, Peter JB, SWK and so many others), I have so much hope. Integrity does still exist in this most challenging time. Thank you from the bottom of my heart.
Guest • August 18th, 2008 at 7:29 pm
Obama Tilt Toward Rubinomics Stirs Warning From Organized LaborAug. 18 (Bloomberg) — AFL-CIO Secretary-Treasurer Richard Trumka delivers a slap at former Treasury Secretary Robert Rubin in a slide show exhorting union members to back Democrat Barack Obama for president.Blaming unfettered global trade and inadequate government regulation for lost manufacturing jobs and a staggering economy, Trumka’s presentation cautions that “it will do us little good if, when the next Democrat moves into the White House, Wall Street takes command of our country’s economic policy.”Trumka leaves no doubt that the rebuke is aimed at Rubin, Wall Street’s most prominent Democrat. It’s “hard to tell the difference” between Rubin and Republican Treasury Secretary Henry Paulson, the presentation says. Trumka’s critique reflects the concern among organized-labor officials that Rubin and like- minded Democrats may win the behind-the-scenes battle to shape Obama’s economic thinking…Obama, 47, can’t afford to alienate organized labor. Union households account for almost one in four U.S. voters, and labor is crucial to turning out the vote. The 10.5 million-member AFL- CIO, the nation’s largest labor organization, plans to use 250,000 volunteers to contact 13 million voters in 24 states; the Steelworkers plan to deploy 250 paid election workers across 27 states.http://www.bloomberg.com/apps/news?pid=20601070&sid=aJ.pKsYB_DfU&refer=home#
AfA • August 18th, 2008 at 7:39 pm
@ PhilT,This is just my opinion but I believe that the $1.7 million dollar puts few weeks before the tragic happening was not the cause of BSC’s demise but rather a consequence of a previous knowledge, the same way the puts on Airliners prior to 9/11 were not the cause of attacks against WTC with planes but a consequence of insider knowledge.I could not venture of why the men behind the curtain decided to sacrifice BSC (probably Hermes required to spill the blood of an old adulterous lady to calm his Sub-Prime anger)All I think is that some people came to have access to that knowledge that BSC will be sacrificed within days (the puts wouldn’t have worked if BSC went through natural BK which would have taken months or ever). The renegotiated price from $2 to $10 would very easily been a result of a threat from some big BSC shareholder(s) to diffuse “classified” information about the deal.In this case, it doesn’t make sense to wonder why SEC did not investigate who bought these puts or why the final price was what it was. It could be that Bernanke panicked and accepted the first engineered deal presented to him. Who knows?
Guest • August 18th, 2008 at 7:46 pm
CNBC today quotes David Kotok of Cumberland Advisors as saying Merrill Lynch, Wachovia and others are at risk of failure as the cost of raising capital soars.“They are either going to have to get if from the Federal Reserve,” he said, “or they’re going to have to get it in the capital markets.”This comment brings to mind a Phil Donahue TV show during the Savings and Loan crisis, where the billions for a taxpayer bailout were being discussed. From the audience a man asked angrily: “Why can’t the government pay for these debts instead of the taxpayer?” The audience cheered its approval.So, why can’t the Fed just bail out Merrill and Wachovia and keep the taxpayers out of it? What’s a Reserve for anyway? It’s free money, ain’t it?
Anonymous • August 18th, 2008 at 8:43 pm
I hope Prof. Bernanke will consider balancing the interests of some common debtors with those debtors who are big powerful broker-dealers and banks. I hope and implore him not to forget the little guy. Maybe this time, if he has the spirit to do it, the big guy can see less protection so the little guy can have more, and the little guy not bear the unfair burden of bailing out the rich and powerful.Maybe even some of the formerly rich will have to be more humble after this, so that common people will have more security and food to eat.Prof. Bernanke, please consider this in your decision making.
PhilT • August 18th, 2008 at 9:27 pm
@AfA on 2008-08-18 19:39:20″All I think is that some people came to have access to that knowledge that BSC will be sacrificed within days (the puts wouldn’t have worked if BSC went through natural BK which would have taken months or ever).”This point of view makes the most sense, and it is the nature of the beast that is Wall Street.It is ironic that we are discussing this topic in the thread that featured the NYT article that cast Professor, Dr. Roubini as a pessimist due to his clarity and blunt assessment of economic and financial reality. The country would benefit greatly if the BSC/JPM episode(among others) could be clarified with the same sharpness and accuracy.Best to you, Sir …
Guest • August 18th, 2008 at 10:31 pm
Charley Reese:[S]ince most media companies are now controlled by a handful of corporations whose sole interest is in maintaining a high profit margin, you are getting mostly fluff instead of hard news. Hard news is labor-intensive. It is cheaper to go with the fluff.Thomas Jefferson’s theoretical belief in a free press soon foundered on the reality, and he came to despise it. He advised one young man never to read newspapers, since it was better to be ignorant than misinformed.As for government corruption, it’s all around us. Sure, there are honest public officials, but the system itself is corrupt. It now requires so much money to run for office that the field is narrowed to bored millionaires and office-seekers willing to take as much money as they can from anywhere they can get it. That’s why Congress pays no attention to the people. It pays attention to the suppliers of campaign funds – not to mention junkets, fancy vacations and off-the-radar business deals.
2cents • August 18th, 2008 at 10:32 pm
@ AfAI love to see those wheels turning in your head. I must say you are talking about one grandiose metric!However, I thought the original nugget was to have a ‘simple’ metric to determine if we were in inflation or deflation! Now you are proposing ‘class’ based inflation/deflation. Oh, I do get the logic of your argument, but somehow I don’t see it answering the original question. Rather under your metric, we could theoretically have both inflation and deflation based on your W2, net worth, and buying habits, etc.!I think the easiest way to determine inflation vs. deflation is to look at a typical debtor/creditor relationship. If both debtor and creditor are emotionally comfortable with their deal then you could assume we are +/- equilibrium. If however the debtor is happy and the creditor is unhappy, then we are in an inflationary environment. If the debtor is unhappy and the creditor is unhappy it’s because the debtor knows the gig is up and the creditor is mad because he knows he’s got a turkey to kill and you can assume we’re in a recession. If the debtor is unhappy but nonchalant and the creditor is unhappy but amenable and forgiving, it’s because the goose is cooked and we are in a depression.Of course all debt arrangements have individualized parameters, but I do believe that the nuance of the creditor/debtor relationship is as good a canary as any.This is the hunky dory-gobble gobble-hiss hiss economic metric. Of course some are just able to lick their finger and stick it in the wind and have all the pertinent information they need without all the analysis!
Pecos Banker • August 19th, 2008 at 2:52 am
If you have a couple of months of spare time, do what I did and read Naomi Klein’s book “The Shock Doctrine–the Rise of Disaster Capitalism.” This book is about 1000 pages, but it is also a real “page turner”. It aims at unveiling the power and influence of Friedmanian economics (aka “globalisation”). In a nutshell, the idea is to privatise everything that the government does, leaving the government itself as an empty shell. She starts off discussing Pinochet’s Chile which provided the model for Bolivia, Argentina, Poland, Russia, South Africa, Sri Lanka, Iraq, as well as our very own New Orleans and more generally, the US itself. The idea is to profit from disasters that occur naturally such as the tsunami for Sri Lanka and Katrina in New Orleans or from disasters that are engineered specifically to apply disaster capitalism, such as Chile, Bolivia, and Iraq. What is most interesting is that this idea of implementing the shock doctrine comes right out of the effectiveness of using electroshock therapy on psychiatric patients to “reconstruct” their personalities by essentially wiping out their memories as pioneered at McGill University (a high point in that school’s history) and later adapted by the CIA in interrogation techniques; these techniques are currently in use at Guantanamo where, for example, hoods are used on prisoners as part of sensory deprivation. The CIA played a large role in Chile which acted essentially as a laboratory for these techniques applied through “economic shock therapy”. The idea is to create an ongoing crisis that puts the whole population into such a state of shock that you can move in there, convince the government that you are some kind of economic doctor, and scoop up all their prime assets! People are so naive that they buy in to this!I can hardly do justice to this book. It is frighteningly well-written and well-researched. It should get a Pulitzer. It provides a different perspective from our usual quasi-mathematical discussions of LIBOR and ABCP. One could even suggest that it inaugerates a new school of economic thought: the “cui bono” school.
Pecos Banker • August 19th, 2008 at 2:58 am
That should be “inaugurates”–I had a feeling I mispelled that word.
Jason B • August 19th, 2008 at 4:49 am
I’d like to bring toyour attention the lastest post at generational dynamicshttp://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e080819#e080819
Wild Bill • August 19th, 2008 at 5:42 am
The previous postings regarding privatization of public assets reminds me of biologist Lynn Margulis and her description of evolution being driven by the fusion of former free living entities, to produce more efficient symbiotic organisms,eg. cells with mitochondria and chloroplasts. These new entities arise when conditions are no longer favorable for the formerly independent organisms. Many of these fusions were certainly doomed to failure and some have come down to us today. Some of the alliances we see today are rather frightening. Among these are the unholy alliance of zionists with neocons to dictate our foreign policy.In New York State, privatization of our infrastructure is a cause for great concern. A political decision recently enacted, is the rewriting of environmental standards of the Department of Environmental Conservation, in order to make it easier for drillers to develop natural gas in the Marcellus Shale. The alliance of New York’s government with the gas drillers is undermining any sane consideration of the state’s environmental standards, under the guise of “energy independence”.New York City has spent hundreds of millions of dollars to protect its valuable reservoir system to provide its residents with pure, unfiltered drinking water. They’ve bought up land to prevent development, built sewerage treatment plants, upgraded septic systems, paid compensation to local Catskill Mountain municipalities in the watershed. etc. Now, with a stroke of the pen, drillers can fill thousands of small feeder streams with effluent from their drilling operations. The effluent is full of toxic and carcinogenic chemicals. This promises to be a battle of the Titans between New York State and New York City, with the fate of the city’s drinking water at risk. The promise of great wealth to local landowners may be too attractive to resist. Enviromental decisions based on corrupt amalgamations between government and private capitalists may enjoy short term rewards, but the costs in the long run will be disatrous.
crgordon • August 19th, 2008 at 7:13 am
@ AfA”the same way the puts on Airliners prior to 9/11″Any suggestions as to where I may find more and credible info?
AfA • August 19th, 2008 at 7:20 am
Talking about Mrs. Doom:Large U.S. Banks May Fail Amid Recession, Rogoff Says” Aug. 19 (Bloomberg) — Credit market turmoil has driven the U.S. into a recession and may topple some of the nation’s biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.”The worst is yet to come in the U.S.,” Rogoff said in an interview in Singapore today. “The financial sector needs to shrink; I don’t think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.”"http://www.bloomberg.com/apps/news?pid=20601087&sid=a08cRVrtu86I&refer=home
AfA • August 19th, 2008 at 7:30 am
That was Messrs. Doom not Mrs.@ crgordon,One does not need much imagination nor a sense for conspiracy theories to ask how much investigation does it take the SEC to reveal who were behind the transactions. I remember coming across some sources giving names that are part of the CIA.I am not very sure about where to find credible info. However, that specific information is true, many theories have been built around it, which I cannot confidently endorse or reject it. If you really need one, give me some time to find some or that one of our savvy guests provide a link or two.
lennyt • August 19th, 2008 at 8:24 am
from the historycommons.org…German central bank president Ernst Welteke later reports that a study by his bank indicates, “There are ever clearer signs that there were activities on international financial markets that must have been carried out with the necessary expert knowledge,” not only in shares of heavily affected industries such as airlines and insurance companies, but also in gold and oil. [Daily Telegraph, 9/23/2001] His researchers have found “almost irrefutable proof of insider trading.” [Miami Herald, 9/24/2001] “If you look at movements in markets before and after the attack, it makes your brow furrow. But it is extremely difficult to really verify it.” Nevertheless, he believes that “in one or the other case it will be possible to pinpoint the source.” [Fox News, 9/22/2001] Welteke reports “a fundamentally inexplicable rise” in oil prices before the attacks [Miami Herald, 9/24/2001] and then a further rise of 13 percent the day after the attacks. Gold rises nonstop for days after the attacks. [Daily Telegraph, 9/23/2001]
lennyt • August 19th, 2008 at 8:35 am
there’s much more on the insider trading at http://www.historycommons.org/ all noted…here’s another entry…April 25, 2004: Academic Paper Determines 9/11 Insider Trading Not Due to ChanceAllen Poteshman, a professor of finance at the University of Illinois, publishes a paper demonstrating that the insider trading in options on United and American airline stocks indicates someone profited from foreknowledge of 9/11. Poteshman concludes, “There is evidence of unusual option market activity in the days leading up to September 11.” [Poteshman, 3/10/2004 pdf file; Chicago Tribune, 4/25/2004]
Guest • August 19th, 2008 at 9:06 am
10:00 a.m.Fisher: Growth in next quarters will be ‘unpleasant’10:00 a.m.Fisher: Fed runs risk of losing credibility10:00 a.m.Fisher: Businesses plan to pass costs to consumers10:00 a.m.Fisher: ‘Too early to tell’ if inflation spike has peaked10:00 a.m.Dallas’ Fisher: Fed must remain ready to hike rates
Guest • August 19th, 2008 at 9:07 am
“The worst is yet to come in the U.S.”-Kenneth Rogoff, former chief economist at the International Monetary Fund
Guest • August 19th, 2008 at 9:09 am
LEH will be the next large failure…coming soon to a theatre near you.
Guest • August 19th, 2008 at 9:35 am
Your next 3 victims…10:30 a.m.J.P. Morgan cuts Lehman estimates as Neuberger sale talk lingers10:26 a.m.[FRE] Freddie Mac shares fall 8%, to $4.0310:26 a.m.[FRE] Fannie Mae shares fall 6%, to $5.77
Gordon • August 19th, 2008 at 9:52 am
“In the long run, economic growth is a function of demographic growth and productivity increases.”I don’t see how this can be a “long-term model”– population in any country can’t grow infinitely. At some point, the population outstrips available natural resources, at which point the economy collapses and generally, the civilization with it, as people take off to fend for themselves. This was the whole point Jared Diamond made in “Collapse,” with the Mayans and Easter Islanders as examples, and we’re seeing the same thing evolve in real time in much of the world. Population growth is exploding in places like Haiti, Zimbabwe and Niger, yet everyone just becomes even poorer because they can’t be provided for.The same thing in India. Yes, their economy is still growing, but India is rapidly running out of water to supply their population, and arable land is disappearing as topsoil is worn off from massive overfarming. Unless they bring their population under control, I suspect any sensible economist would realize that India’s economy will collapse due to utterly outstripping the country’s ecological support base. Just like for the Mayas, further production for an excessive population goes toward just barely keeping people afloat, rather than innovation and infrastructure building– it’s massive subsistence.This isn’t just a developing-world problem– Australia has a very small carrying capacity since it’s basically one oversized patch of desert. And it’s getting even drier! It’s a place that could handle 20-25 million people max, and the country is already feeling the strains associated with outstripping natural resources– droughts in Australia are causing chronic and sustained price rises, and massive failures in the agricultural sector (which of course further inflames inflation). So in Australia, as in India, excessive population growth damages the economy– further production beyond an inflection point goes toward mere subsistence rather than innovation.We in the USA also deal with this– we used to be the world’s biggest oil exporter, now we’re it’s biggest importer. We’re even having to import food. Our culture arose during a time of cheap oil and food exports, but it’s killing us now. If our population continues to grow even larger– especially in the absence of a genuine renewable energy program, and in the midst of our ingrained car culture– we just won’t hold together. Population growth has to be constrained at some point, and that applies to the USA as much as any other country.I still think that economies can grow with better productivity and increasing creativity– this is “quality” growth as opposed to mere numbers. But it’s far better to have a smaller population with a better quality of life for everyone, rather than a bigger population and everyone miserable.
Gloomy • August 19th, 2008 at 9:56 am
Rogoff is silly. NO large banks will ever be allowed to failed. All will be nationalized. Unfortunately our country is too big to save.
Guest • August 19th, 2008 at 10:03 am
Wholesale prices rising at fastest pace since 1981read my lips, helicopter Ben will not raise rate. he will expand the duration and amount of Treasury and Toxic Waste swap.
ptm • August 19th, 2008 at 10:39 am
Zimbabwe’s inflation rate
Official figures dated Monday show inflation has surged from the rate of 2.2 million percent recorded in May, despite the government’s price controls….Analysts have said the Zimbabwean government’s official inflation rate figures are conservative. Last week, one of Zimbabwe’s leading banks, Kingdom Bank, said the country’s inflation rate was now more than 20 million percent.
mammon • August 19th, 2008 at 11:07 am
Cheer up gentlemen!The financial elite always have contingency plans to complement their excesses. When you are in the business of creating wealth from producing nothing, it is best to be prepared for some “creative destruction”. Selected emerging world markets can be conveniently crashed by geopolitical events through proxies that have been patiently maneuvered. This is a carefully thought out game of Chess! Madelyn Albright will tell you ; “What is the use of having such a huge military when you can’t use it”. The only free standing(non-eurasian)cosmopolitan financial center is New York. London and Frankfurt are in jeopardy from the wounded Bear! What other financial center has the military capabilities and is easily manipulated in the vested interest “democratic process”. New York is home base for the “Masters of the Universe” when the military has to be activated.Everybody but America will be involved in some kind of active proxy action soon! This is a big boy game!This is not for the faint of heart! I would highly recommend that you bone up on Chess. The pawns are expandable. The Queen is on the move!
Guest • August 19th, 2008 at 11:18 am
How to change a system that causes miseryhttp://www.radio4all.net/index.php/program/7310
Medic • August 19th, 2008 at 11:29 am
@ mammonYour analogy should be changed. You cannot compare the US to the Queen – we are much too limited for that. We are closer to the King – essentially imposing, but in reality non-threatening and unable to move far or fast. We will be the ones who need protection soon.
JLC • August 19th, 2008 at 11:32 am
@ Average JanePecos Banker is quite correct – Naomi Klein’s “The Shock Doctrine” is a fascinating and well researched book that has utmost relevance to our present situation. I just finished it last night. It presents the dark side of global corporatism and exposes a part of history that has been kept in the shadows. It is the best book I have read in a long time.It hits heavily on the theme of your post – in the “shock” of a financial crisis, the prime assets of various countries (Chile, Bolivia, Argentina, Russia, South Africa, etc) have been appropriated and sold off, often in no-bid contracts. The winners have always been the powerful and well connected, especially Wall Street and multinational corporations. Often times, the shock has been deliberately engineered to set up the looting operation.I believe it is a blueprint for what is going on here and now. This crisis will be exploited by the well connected in a very well planned looting operation. Our prime assets will be sold for pennies on the dollar, crucial government functions will be outsourced in no-bid contracts. The rich will get much richer, and the rest of us will get the shaft like we always do.Everyone here should read that book.
Guest • August 19th, 2008 at 11:52 am
Dip buyers in early today…hmmmmm….
Guest • August 19th, 2008 at 11:54 am
Looks like loans from the Fed have hit brokerage trading desk bank accounts!!
Guest • August 19th, 2008 at 12:33 pm
The powers that be have seen enough red in stocks today-losses cut in half already and it ain’t even witching hour yet!
Guest • August 19th, 2008 at 12:38 pm
@Wild Bill: “New York City has spent hundreds of millions of dollars to protect its valuable reservoir system to provide its residents with pure, unfiltered drinking water. They’ve bought up land to prevent development, built sewerage treatment plants, upgraded septic systems, paid compensation to local Catskill Mountain municipalities in the watershed. etc. Now, with a stroke of the pen, drillers can fill thousands of small feeder streams with effluent from their drilling operations…”I thought you were going to say, officials are going to privatize the City’s reservoir system and some company gets to own and profit from it. Either way, it’s taxation without representation – unbelievable. We have lobbyist-elected governing bodies — politics has become as Ambrose Bierce said, public government for private interests.Our government was set up to protect the people from enemies foreign and domestic and to protect our basic rights, but that isn’t the government we have, we’ve got 24/7 day-after-day fulfillment of private interests.Our governing bodies pass the right bills not to protect our rights but to do something for a lobbyist interest — such as what I read today about “college presidents” attempting to lower the drinking age in our universities. Read: the liquor business is seeking to broaden its drinking base.Another example: In the next few months all television broadcasting converts to digital processes. In the meantime, government is offering coupons so that Americans can get a discount on converter boxes to convert their old television to receive digital. This is government support of private interests. The minute the public turns its back, it finds out there are special tax breaks for corporations or the son of one of the legislators has a steam ship company, or an airport interest, that receives special-interest legislation.The answer is the Congress. You go back to the Congress, put them under the microscope, kick out the people who are connected with these interests, and put in the people who are going to roll back the system. It’s got to be done, otherwise Big Lobby is going to have an ironclad tyranny that cannot be broken. Politicians are still vulnerable, you can tell by the way they sell their products, i.e. John McCain doesn’t say we need to enrich the companies who make military hardware, he says we need to protect citizens…As the adage goes: WE MUST NOT BE LIKE CATS”One of the most profound differences between dogs and cats is that cats focus on effects while dogs focus on causes. If you toss a pebble at a cat, it will look at the pebble. If you toss it at a dog, it will look at you.”It’s time to look at Congress.
Mammon • August 19th, 2008 at 12:55 pm
@medicYou are the winner! You figured out the defect in the plan! Check mate! How can you be the queen when you owe money to everyone on the board including the pawns! Everybody is bound to unload on the GSEs and Treasuries. New York has not been keeping up with the constructive energy technology and has concentrated on Boeing’s Laser Beam jet. We are the King, however the puppetmasters have no other move! They are stuck and must try the Chaos Option. They will either tip the King over or the world over!Medic! You are a gentleman and a scholar!It is fun to meet your gray matter!
Gloomy • August 19th, 2008 at 12:59 pm
WHY FANNIE AND FREDDIE ARE SUCH A BIG DEALBecause the magnitude of their bailout would be enough (probably 1 trillion-upper end of S&P estimate) to do in the financial system all by itself. Their bailout would leave no room for helping out the other supplicants, if the government had any hope of not issuing new debt at a hyperinflationary rate. But bailed out they all will be. God help us when the consequences come home to roost.
Guest • August 19th, 2008 at 1:06 pm
“The latest Producer Price Index for Finished Goods is out, and its screaming hot: It advanced 1.2% in July (seasonally adjusted). 1.2% headline and 0.7% core vs consensus estimates of 0.6% and 0.2%.This follows a 1.8% jump in June and a 1.4% rise in May. The earlier stages of processing were even hotter. Prices received by manufacturers of intermediate goods moved up 2.7% in July versus 2.1-% in the prior month, while prices for crude materials climbed 4.2% after a 3.7% in June.Year-over-year gains were 9.8% headline — the highest reading since 1981, while the 3.5% core (why do we still mention this?) was the most since ’91. I cannot figure out why there was a big jump in car and truck prices.Bottom line: These were scorching hot price increases. And, as Michael Donnelly astutely notes, PPI did not adopt the whacky ideas (hedonics, substitutions, weightings, OER) that the CPI did adopted over the years — especially, the Boskin Commission’s junk recomendations. That’s largely because PPI is not as politically important, nor does it move any government payouts.So we can fairly compare the current PPI of today — 9.8% — very easily with the 10% PPI back in 1981. The two are actually very comparable.Note that in theory, headline PPI number should cool in coming months due to the big drop in commodity prices. However the core rate won’t drop as quickly, as many price hikes have been put in place over the past 6 months, and are working their way through the supply chain.http://bigpicture.typepad.com/comments/2008/08/ppi-july-2008.html#comments
Guest • August 19th, 2008 at 1:14 pm
Sharp US money supply contraction points to Wall Street crunch aheadBy Ambrose Evans-PritchardLast Updated: 3:04pm BST 19/08/2008The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.Data compiled by Lombard Street Research shows that the M3 ”broad money” aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.”Monthly data for July show that the broad money growth has almost collapsed,” said Gabriel Stein, the group’s leading monetary economist.On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.
Guest • August 19th, 2008 at 1:24 pm
cnbc talked about hot inflation.but bottom-line helicopter Ben will not raise rate. helicopter Ben will continue to pump liquidity to market. talk about controlling inflation is crap, central banks will pump tons of liquidity to market. central banks around the world will print currency period. CBs will lower rate lower and pump more money.
Guest • August 19th, 2008 at 1:27 pm
hot hot PPI. it will become hotter, cuz helicopter Ben, Treasury Ben, and CBs around the world will continue to provide cheap money.
Guest • August 19th, 2008 at 1:27 pm
hot hot PPI. it will become hotter, cuz helicopter Ben, Treasury Paulson, CBs , and PPI around the world will continue to provide cheap money.
Anonymous • August 19th, 2008 at 1:32 pm
“The only way to put discipline into the system is to allow some companies to go bust,” Rogoff said. “You can’t just have an industry where they make giant profits or they get bailed out.”Thank you Prof. Rogoff for having the courage to say that.
Anonymous • August 19th, 2008 at 1:32 pm
“The only way to put discipline into the system is to allow some companies to go bust,” Rogoff said. “You can’t just have an industry where they make giant profits or they get bailed out.”Thank you Prof. Rogoff for having the courage to say that.
Guest • August 19th, 2008 at 1:33 pm
http://www.prudentbear.com/index.php/commentary/guestcommentary?art_id=10098Great Consumer Crash of ’09–just 80 years later.
Guest • August 19th, 2008 at 1:53 pm
@Guest: “. I cannot figure out why there was a big jump in car and truck prices…”Steel and transportation and… ~Published: March 1, 2008 by The Tampa TribuneTAMPA – Businesses that use steel for construction and other projects will continue to face high prices during the first half of 2008, despite a continued decline in housing and automobile demand that theoretically should begin to bring prices down.That was the general consensus among steel industry and government trade officials who spoke Friday at the 19th annual Tampa Steel Conference, which drew more than 400 participants to the Tampa Marriott Waterside.The price for a ton of cold-rolled steel coil, which now is about $752 in North America, could rise to $900 by April or May, said Tom Stundza, executive editor of the trade journal Purchasing Magazine. However, conference participants expected the high prices would begin to abate by midsummer or soon thereafter…EndNOTE by guest: World Carbon Steel Transaction Price ($/metric tonne) for hot rolled steel coil was $617 in Apr 2007 and $998 May 2008; cold rolled steel coil went from $577 in April 2007 to $920 in May 2008; cold rolled steel plate from $698 to $1080. http://www.meps.co.uk/world-price.htm.
Guest • August 19th, 2008 at 1:53 pm
Rogoff is wrong, nothing will be allowed to fail. As long as master Ben is FED chairman and Paulson a Treasury, nothing will be allowed to fail.
Guest • August 19th, 2008 at 2:00 pm
two head turtle Ben reported on CNBC. i call that pathetic. helicopter Ben is pathetic. but make no mistake, helicopter is no inflation fighter, he is cheap money pumper.
Average Jane • August 19th, 2008 at 2:10 pm
@ JLC — I’ve just finished reading “The Shock Doctrine.” As I’ve mentioned before, most of the erudite posters on this blog would enjoy the read. And become as horrified as I at the sequence of events in our most fragile representative democracy. The manipulation of the population to, as it were, beg TPTB for mercy in the form of indentured servitude to the multinational corporations. Yike. It is true that We The People have been lax in our vigilance. Please, all, continue talking to your families, your coworkers and anyone who will listen to you, even if you feel like a voice in the wilderness. You are being heard.
AfA • August 19th, 2008 at 3:04 pm
2cents,”However, I thought the original nugget was to have a ‘simple’ metric to determine if we were in inflation or deflation!”That’s exactly my point. I got bored with debating whether will it be hyperinflation or depression, inflation or deflation. For me they are coexistent all the time but at various degrees and with different relative power over time. This coexistence is even more flagrant and important today, that defining the state or fate of the economy using only when of them is not complete IMO. This is the original cause that pushed me to think about another method to define ..??.. affordability, ie. Income2Price growth differential (in nominal terms). Probably the same metric can be used to explore other economic and decision patterns: Rate_of_return2Debt_cost growth differential, saving2consumption ratio growth differential …I do not have much time now to really know whether what I am saying makes any freaking sense or how they can be used in decision making.
Anonymous • August 19th, 2008 at 3:06 pm
@Average Jane:What choice do I have but to continue working for them, begging for the privilege? My wife doesn’t want to leave the country. Though that resolve may be softening.
Alessandro • August 19th, 2008 at 3:09 pm
@ all inflationistas looking at M3M3 is collapsing.Deflationistas consider it a poor money supply measure, so I’m not freaking about it, but inflationistas may consider the following article as food for thoughts:http://www.nakedcapitalism.com/2008/08/more-evidence-of-sharp-contraction-in.htmlhttp://globaleconomicanalysis.blogspot.com/2008/08/m3-contraction-future-is-now.html
FRIEND OF WASHINGTON MUTUAL • August 19th, 2008 at 3:28 pm
Inshalah WASHINGTON MUTUAL will be the bank that ROGOFF mentioned today will go out of business
Guest • August 19th, 2008 at 3:29 pm
@ Yves Smith on Naked Capitalism:Goldman Sounds Alarm on AIGAugust 19, 2008 – Go read this very good (and disconcerting) post on AIG by Sam Jones at FT Alphaville (hat tip reader Richard). Key sentence:“Goldman won’t say it, but we will. AIG is going the way of the monolines… but on a much larger scale.”Note that the Bloomberg story on the same Goldman research report is comparatively anodyne.The problem of management not really knowing balance sheet exposures is actually widespread and long-standing, as Michael Lewis has argued (and reader Danny has provided further supporting evidence).I know of one bank that recently provided a large loan to AIG and said it went over the financials in detail and was “completely comfortable” with the credit (and this is after the insurer’s not-pretty second quarter earnings release). It is remotely possible that AIG has some undervalued assets somewhere. If so, they had better start realizing value on them, or at least talking them up, pronto.http://www.nakedcapitalism.com/2008/08/goldman-sounds-alarm-on-aig.htmlIncidentally, someone here occasionally asks, Is Yves Smith a he or a she? Here’s her bio:Yves SmithBlogger, “Naked Capitalism”Yves Smith has written the blog “Naked Capitalism” since 2006. She has spent more than 25 years in the financial services industry and currently heads Aurora Advisors, a New York-based management consulting firm specializing in corporate finance advisory and financial services. Prior to that, she worked for Goldman Sachs (in corporate finance), McKinsey & Co., and Sumitomo Bank (as head of mergers and acquisitions). Smith has written for publications in the United States and Australia, including The New York Times, The Conference Board Review, Institutional Investor, The Daily Deal and the Australian Financial Review. She is a graduate of Harvard College and Harvard Business School. For a pix:http://www.milkeninstitute.org/events/gcprogram.taf?function=bio&EventID=GC08&SPID=3194
Guest • August 19th, 2008 at 4:19 pm
This post is dedicated to the Muppit who would cap lock rant for months inorder to pour scorn on deflationists.HOWS YOUR GOLD AND GOLD STOCKS GOING, IM SURE THIS IS ONLY A TEMPORARY BLIP AND THE BOTTOM IS IN. GO AHEAD AND BUY MORE GOLD IM SURE ITS GOING TO GO PARABOLIC AS THE DEFLATION TSUNAMI REALLY GETS GOING.
Guest • August 19th, 2008 at 4:34 pm
Lacker Says Fed May Need to Raise Rates Even With Weak EconomyAug. 19 (Bloomberg) — Higher interest rates may be needed to bring down inflation even before growth and financial markets return to normal, Federal Reserve Bank of Richmond President Jeffrey Lacker said.“It is important to withdraw this monetary policy stimulus in a timely way,” Lacker said today in a Bloomberg Television interview. “That may require us to withdraw before we are certain all of the weakness is behind us and before we are completely certain that financial markets are as tranquil as we would like to see.”U.S. consumer prices rose at the fastest pace in 17 years, limiting the Fed’s leeway to cut interest rates and revive faltering economic growth. Prices paid to U.S. producers in July increased double the amount economists projected, a Labor Department report showed today.Central bank policy makers signaled two weeks ago that falling employment and persistent financial market turmoil would delay any increase in borrowing costs.“I certainly don’t think the federal funds rate should be any lower given where we are now,” said Lacker. `Monetary policy is very stimulative right now.”“We are still in a fairly risky situation” on the inflation front, he added.Lacker said Aug. 12 that even if energy prices moderate, he’s “still concerned” about the “overall pattern” of rising prices.Fisher’s DissentOther Fed bank presidents have voiced concerns about inflation. Dallas Fed President Richard Fisher at the Aug. 5 meeting of the Federal Open Market Committee dissented for a fifth time this year, preferring an increase in interest rates.The Fed can raise rates without impeding a credit market recovery and such a rate increase may occur sooner than many people expect, Fisher said today. The U.S. may face a “lingering inflationary fever” as food and energy costs are passed on by producers, he said.Atlanta Fed President Dennis Lockhart said in an Aug. 15 interview that “the reasonable policy debate will be around holding versus raising rates.” If prices don’t moderate as he expects, he would back an “earlier” increase in rates.Philadelphia Fed President Charles Plosser said July 23 that policy makers should act before inflation expectations become “unhinged.”Lacker, 52, heads a district that is home to Bank of America Corp. and Wachovia Corp., two of the four biggest U.S. banks. A former head of research at the Richmond Fed, he alone dissented in rate votes at the Fed in late 2006, advocating higher rates to stem inflation. He votes again in 2009.http://www.prudentbear.com
Guest • August 19th, 2008 at 4:37 pm
“The reason that I replied to you has to do with the portion of his article that you quoted in your post along with your moral hazard comment.”@ PhilTApologies – the moral hazard point that I was making was directed to the insinuation that there was premeditation or planning in this deal of deals – and of course, the referenced idea of a put, was just normal behaviour of a “Judas” – of the deal.This planning suggests the “authorities”, if one assumes of course, that they are as comprehension in their knowledge, as they themselves suggest and hold.But, I have no insights, only a strong foundation in the behavioral signatures of man; it is enough.PeterJB
Medic • August 19th, 2008 at 4:41 pm
@ MammonThe problem facing those who would go after the king is that they must not get too close in their pursuit – he is much easier to trap from afar, and can strike if you are right next to him. Caged wild animals are always very dangerous……..Allies of the US should follow our lead with extreme caution.
Guest • August 19th, 2008 at 4:46 pm
From “Recent Commentaries” at Prudent Bear:Looking like the millionaire next door by Rob PeeblesJune 13: A lot can happen in nine quarters. A housing boom can turn into a housing bust. A law and order governor can get caught with his scruples missing. And buyers of luxury items can decide it’s time to do time at Costco.In nine quarters the “Luxury Consumption Index” fell from an all-time high to an all-time low.As of Q4 2005 the index stood at 104.8, but by Q1 of this year, it came in at a measly 54.4. The index doesn’t measure actual luxury purchases like $2,000 handbags that are almost guaranteed to be the real thing. No, the index measures how much luxury buyers have on their wish lists. And the lists are shorter than they used to be.A whopping 41% of those surveyed planned to spend less over the next 12 months on “luxury.” A mere 13% – primarily lobbyists looking toward the congressional elections – planned to spend more For the record, these buyers of luxury goods had an average income of $173,000 and an average age of 45.9, according to Unity Marketing.Put in more tangible terms, April same store sales for luxury retailer Nordstrom dropped 3.8% despite an additional shopping day. May same store sales jumped 11% but June is expected to plunge 22%. So despite its high-end image, Nordstrom is taking a page from Stein Mart’s playbook. In fact, LA Times reporter Sandra Jones notes that Nordstrom, Saks and Neiman’s all are cutting prices and engaging in embarrassingly promotional behavior.How can this be? Aren’t the rich recession proof?While there may be more millionaires next door, lots of the millionaires’ neighbors have been buying on credit. In fact, the creator of the Luxury Consumption Index, “luxury expert” Pamela Danziger, claims that there are “…more households in the luxury markets today than there used to be.”But as Nordstrom now knows, more luxury buying households is not the same as more rich people.Not by coincidence, the dollar amount of home equity loans granted of late has plunged like prices of women’s apparel at Neiman’s (a $200 gift card toward one regular-priced item of $500).Retail experts are a notoriously polite bunch. Rather than say that millions of Americans have been buying fancy stuff on credit and are now in a tight spot, they declare that today’s consumers are more educated. So now, because they want to, Americans are just as prone to buy a designer label at Target as Saks. Savvy is the new chic.As broken down by Sandra Jones, the luxury market for years grew around 10%. But luxury spending rose just 2.8% in April, well below the 3.2% gain registered by total retail sales which includes the rest of us. Not only that, Neiman’s isn’t the only store struggling with prices. Prices at luxury retailers were flat in Q1 compared to a 7 percent increase as recently as 2006. Jones quotes an official of a New York consulting firm who studies consumer behavior. For the first time in the study’s 15 years, price is the primary driver of purchase decisions.How unfashionably practical.http://www.prudentbear.com/
Guest • August 19th, 2008 at 4:56 pm
“Rogoff is wrong, nothing will be allowed to fail. As long as master Ben is FED chairman and Paulson a Treasury, nothing will be allowed to fail.”@ Guest on 2008-08-19 13:53:17Consider that there is a war going on and the opponents are:A. The FedRes, SEC, all the CB’s and Western political “Leadership” around the World,andB. That which has evolved as the Global free-market economy, in potential (through a physical process of differentiation).”A” wants its “economic” dreamworld to continue unabated as the status quo, after all, academic reputations are built of this and fortunes are made daily,whereas”B” is far more than “A” understands but Yes will suffer the rages and ravages of abuse hurled at it by the arrogance and ignorance of those of the elite, but in the end, the free-market will win, a priori.Every man, woman and childs’ inherent enegry, organized through structures and organization in thought, labout, creativity and will make up the “free-market” economy and each component is unique; this statistic is far greater than the “faith” based academics acknowledge and their estimate of potentiality is grandly, off base. The Noun “revoltion” is creative and therefore of “nurture” and the process is natural.The establishment is about to lose. The error of its way, is not to allow change. You cannot impose a static on a dynamic as the centre cannot hold. This is elementary physics.Ho humPeterJB
Anonymous • August 19th, 2008 at 6:00 pm
PeterJB: I think you’re right. And Rogoff, although an academic, is on the same side here.
Anonymous • August 19th, 2008 at 6:12 pm
Jeffrey Lacker of the Fed wants to raise rates. I guess that would help the banks (especially if the big banks’ and broker-dealers’ special loans from the Fed are below market rates) while crashing Main Street.It may be time for Congress to vote out the Fed; their priorities are showing too clearly now for the issue to be avoided much longer during this time of crisis.But I have little confidence that Congress (either this one or the next one, regardless of party affiliation) will do it. They’re all bought and paid for. We elected Democrats in 2006 only because they promised to vote us out of Iraq. They lied.It will be interesting to see how this crisis develops politically. The people have to control the politics.
Average Jane • August 19th, 2008 at 6:13 pm
@ Anonymous 2008-08-19 15:06:24If I may share this quote from the short story, “I Stand Here Ironing,” by Tillie Olsen in which the protagonist, resigned to the limitations fate has placed upon her daughter, laments:”Let her be. So all that is in her will not bloom — but in how many does it? There is still enough left to live by. Only help her to know — help make it so there is cause for her to know — that she is more than this dress on the ironing board, helpless before the iron.”
Anonymous • August 19th, 2008 at 6:20 pm
@Average Jane:That is a beautiful passage, thank you. Everyone has to love themselves, first.With that awakening, of that girl and many other people, will come a realization that they are all one and they can spend their time here striving for great things. This is a time of greatness.
ptm • August 19th, 2008 at 6:24 pm
Guest on 2008-08-19 16:19:13 – This post is dedicated to the Muppit who would cap lock rant for months in order to pour scorn on deflationists.I’m not the muppet, but I am one who firmly believes that we are beginning a sever inflation cycle and that will, in time, lead to a true deflationary depression. But these things take at least 18-24 months to play out. So in the same sense that I used the investment-bank-induced commodity run-up as an example of inflation, I say yes, enjoy your moment of deflation.Oh, what’s that? USD 76.76 -0.34, Crude Oil 114.90 +0.37 Looks like a tend to me 
Guest • August 19th, 2008 at 10:44 pm
Guest on 2008-08-19 16:19:13looking at gold and CRB, both has two uptrend line, one began at 2001 and another at mid of 2005. both lines haven’t been violated, so your deflation call is a bit too early. of course, once those two uptrend are broken, then hide.
2cents • August 19th, 2008 at 10:51 pm
@ AfAContinue to keep the gray matter warm, we all appreciate your contributions. Heck, with the way things are evolving, if you weren’t freaking out about this mess then I’d be worried. Isn’t that kind of why we’re all here? We’re all freaking out trying to make sense of this and Nouriel throws us a good nugget to chew on every so often.
mammon • August 20th, 2008 at 12:55 am
@medicGreat wisdom in your perception that with the interconnectedness of the losses the whole world has a problem. You are also wise in your assessment that the best way to handle a wounded King in our present International Chess match is to act with stealth avoid presenting an opposition. China may achieve its objectives if they keep that stealth opposition by providing evident financial debt assistance to allow the King to boil slow like a frog.You seem to be able to adjust your lense far back enough to see the ultimate big picture. I feel privileged to appreciate and respect all the divergent views by the great people that blog here.The Professor really gets the concept of the UTILITY OF THE MARKETPLACE OF IDEAS. Everyone who blogs here presents a piece of a great puzzle. I have the greatest appreciation for any highly opinionated outliers. Cognitive Neurology has taught me that the conscious “I” can bring me information, but the subconscious “me” also contains the exformation that consciousness can’t handle. I would like to suggest an experiment for all the bloggers. The next time you blog, allow the thoughts to flow and type your thoughts without great cortical interference. The subconcious “me” has greater bandwith and can parallel process information. Tor Norretranders in his book “The users illusion” gives a great analysis of the fact that we create a concious illusion that is less representative of reality that our much wiser subconscious. I am also an avid fan of Cognitive Neurologist Ramachandran in San Diego whose experiments with rudimentary improvised instruments with brain damaged individuals provided great surprise findings of the human mind. The bottom line is that we are out of sink with Nature, because we fail to trust the subconscious and override it with conscious constructs. As that most famous movie line says we must “use the force”. This fact lies at the center of most our problems as humans. Just look at the rest of Nature, and you will see synchronicity, and interdependence. On the other hand, we humans are the only ones that don’t follow the wisdom of the least of our fellow earth creatures. Again, I thank you Medic for your insights and thank everybody bar none for this most symbiotic medium the Professor brings us!
Guest • August 20th, 2008 at 3:39 am
Reading at this news article about Califoria Governators attempt to force a lower minimum wage on state employees:Prison workers protest wage cuthttp://www.lassennews.com/News_Story.edi?sid=5012&mode=thread&order=0Several dozen employees from Susanville’s two state prisons — the California Correctional Center and High Desert State Prison — took their concerns and outrage about a proposed wage reduction to the streets during a rally on Wednesday, Aug. 13.On Friday, Aug. 1, California Governor Arnold Schwarzenegger issued an executive order that could result in the layoff of as many as 10,000 temporary and part-time state workers and temporarily slash the wages of as many as 150,000 state employees to the federal minimum wage of $6.55 per hour until the state legislature passes a budget.Schwarzenegger’s approach to solving the budget impasse drew the ire of the prison workers at the rally, especially Michael Stepanich, a teacher and examiner at CCC.“The governor has decided to use us as pawns to somehow leverage the state legislature into making a budget now,” Stepanich said. “He’s a self-made millionaire who can go wherever he wants whenever he wants. He wants to force us to loan the state millions of dollars without interest, and that’s really insulting to us. Most of us live from paycheck to paycheck and have payments to make. Does he think about us? Does he care about us? Does the state legislature even care about what’s going on in the state? It really makes me wonder.”…made me think about how the U.S. government in fact does not care about its people. There are so many examples on this but take for one thing the eagerness to get rid of what is termed “entitlements” (social security, etc), while spending billions on attacking other countries. What I find peculiar is, however, the fact on how the Americans still have their children to participate in the flag ceremonies in the schools. I would like to know why? Why are you interested of your children learning to pledge allegiance or sing songs to an entity that will never reciprocate the allegiance back to you or them?
Guest • August 20th, 2008 at 3:56 am
“This was blatant propaganda advocating that government secrecy and alteration of the facts is “good for the people”. I wonder if some investment bank underwrote this film at the request of the Federal Government.”@ Gloomy on 2008-08-17 12:16:36This film supports my thesis that no person can be trusted and1… the acknowledgment of this is our greatest strength where2… our denial of this is our greatest weakness.Joker was very correct!1. The incorruptible can be easily corrupted!2. It doesn’t take much to create chaos out of this “faith-based” socio-economic system; just a little input here and a little there and the whole house of cards crashes. Why? Because the fundamentals are not sound. The only faith that is sound is physics and reality!3. Sound film – and as to what upsets Gloomy, the Authorities vote (in the film and in true life) for a continuation of this structure without integrity awaiting God to deliver justice – er while the lads, cream to shop, cull the chickens and pocket the loot – as usual.When is this about to start?I think that this film correctly represents the current incorrect approach to our human condition; even as the two groups of the boats (in the film) refused to press the buttons, the human spirit showed its superiority over the human frailty depicted by the Joker. IOW, we can overcome our weaknesses but through intellect and honesty.Imagine what we can do if we embrace our nature and build our structures and organizations in accord?Can not our human technological advances be utilized to build these structures, or will we always be condemned to that part of us which is our own spineless cowardice and weakness that the Joker shows us is easily manipulated, or shall we proceed according to our strengths?Gloomy, may I suggest that you read the message of this film incorrectly? If this upsets you then I apologize.The choice is ours and ours alone!Ho humPeterJB
bytheway • August 20th, 2008 at 5:04 am
@Guest on 2008-08-20 03:39:14..Why are you interested of your children learning to pledge allegiance or sing songs to an entity that will never reciprocate the allegiance back to you or them?..Answer:To train their Sheople behavior.So you could shave them without resistance.Example:9/11Without this event maybe the sheople wouldnt reelect this great president.But with a flag and all this “stand together”crap you get them at the balls(they have no brain obviously)
Guest • August 20th, 2008 at 5:09 am
I wonder how true this is?Inflation Research as Propagandahttp://www.lewrockwell.com/bylund/bylund24.htmlThere should be no surprise to readers of LewRockwell.com that the State statistics on inflation seek to cover up most of the problem. However, this article is not on government statistics (or propaganda, which is probably a better word for it) but on economics research on the phenomenon of inflation…. …It should be clear to anyone with some knowledge in how the economy works that all the individuals in it work together like an invisible hand to produce goods and services and that they tend to do so ever more efficiently. This is true even in a regulated market, which is why even monstrous welfare states talk about the importance of and try to “encourage” economic growth. The concept is a bit confusing, though, since the economy doesn’t only grow – “it” strives to get increasingly efficient in the use of resources in order to produce goods and services of [even greater] value to consumers. Such increased efficiency is generally achieved by entrepreneurs, be they capital owners or labor workers, and innovators finding new ingenious ways of using the resources available.In such a market the natural tendency is for prices to fall – anything else would be incomprehensible. Even in the world of neo-classical economics this is a fact despite the endless calculations on fixed cost functions and production technologies. Competition spurs cost-cutting and efficiency-increasing measures for the actors to gain advantages in the market through satisfying consumers’ wants by offering better products at lower cost. So how could prices ever increase in such a setting?Yet the definition used for inflation is the general increase in prices. Of course, even those trained in mainstream neo-classical economics should realize such a phenomenon is a symptom of something being wrong. But what is commonly overlooked or not understood (or at least not mentioned) is that inflation is not something going wrong as shown in price increases – it is wrong because prices don’t fall. In other words, if inflation is taken as only the price increase the statistic necessarily and systematically overlooks the natural price fall that is also a part of inflation.If prices in the market would naturally fall by 5% in a specific year but we instead experience a 5% increase in prices, the real “price increase inflation” isn’t the experienced 5% increase compared to the level of prices the previous year but the new level compared to what the level would have been, i.e. 105%/95% = 10.5%. In this simple example the official inflation statistic would only take into account less than half of the real price increase inflation…. …It is true that such a world as the one implied by the inflation statistic is very neo-classical in that it is so oversimplified that it doesn’t make sense at all (but allows for taking nice derivatives to optimize abstract functions). It is also true that it is literally impossible to tell how much prices would have fallen, which means the inflation statistic is nowhere close to the real inflation rate and also that it is impossible to even guess how wrong it is.For obvious reasons the State benefits quite a lot from using this definition of inflation. After all, it covers up most of the effects of its tampering with the market. But why in the world would anyone doing economic research use such a statistic that is so totally flawed? One possible answer to this question is that the economics profession (generally speaking) is not about economic truths, but aim to serve the State through providing research on how it can “optimize” its policies to best take advantage of the market processes.
Anonymous • August 20th, 2008 at 12:28 pm
Guest, I think that’s a bit unfair to the economics profession as a whole. One can find discussion of “real inflation” as well as “hedonic adjustment”. It’s not very accurate, but that’s not because of some sort of evil conspiracy among the economists.Or, if there is such a conspiracy, I was never invited to join it. 
kilgores • August 20th, 2008 at 6:42 pm
Written by Guest on 2008-08-20 05:09:42Written by Anonymous on 2008-08-20 12:28:04I agree. I don’t think you can credibly or fairly impugn an entire profession, particularly on the basis of some bald allegation that its “aim” is “to serve the State.” The aim of most economists, which compose a very diverse group of individuals, is simply to put food on the table, just like the rest of us. Some of them may be wrong from time to time, as all of us humans are prone to be, but they’re hardly all acting together in conspiratorial concert to buttress government economic policies.SWK
Kafka • August 23rd, 2008 at 6:20 pm
The Boskin report was government funded which of course justified in a big way hedonics, imputations and substituion.
Paul in Phoenix • September 26th, 2008 at 12:46 pm
Roubini: What makes America GREAT is the fact we have people like you, a “global nomad” who found a home here in the land of the brave, the home of the free. I am VERY PROUD to have you here, Nouriel, and appreciate your views and insight, no matter what color reporters and pundits chose to paint them. You are a TRUE AMERICAN, Nouriel!!! Please help this great country, please help us. WE NEED YOU!!!! Thank you!!PaulPhoenix, Arizona
STORMSTOCKER • September 29th, 2008 at 1:00 pm
FACT 1: THE RICH BILLIONAIRES, ARE GETTING BAILED OUT OF THEIR TOXIC BONDS,CRAPPY LARGE CORPORATE BANK LOANS AND JUNKY INVESTMENT HOUSE SECURITIES,ALL BY THE MIDDLE CLASS TAXPAYERS.FACT 2: THE POOR ARE GETTING, FREE GROCERY CREDIT CARDS, FREE HEALTH-CARE, AND NO DOWNPAYMENT HOUSING, WITH HELP FROM THE MIDDLE CLASS TAXPAYERS.FACT 3: THE MIDDLE CLASS ARE GETTING SMASHED FROM THE TOP (FACT 1)AND DRAINED FROM THE BOTTOM BY (FACT 2)FACT 4: ROUBINI’S RIGHT ON.LIKE THE “TWIN TOWERS”, WHEN “THE MIDDLE” IS “TAKEN OUT”, THE TOP FALLS TO THE BOTTOM, AND ALL COLLAPSE INTO A HEAP OF RUBBLE.
Frederick Daniel Tanggela • October 2nd, 2008 at 10:12 pm
Thanks For all your writings Professor
Guest • October 6th, 2008 at 11:21 pm
Dr. Roubini, I want to congratulate you on your excellent work. To call you Dr. Doom does not do justice. You’re more so like Dr. Truth, which is what you have been saying all along. How do you define the truth? By its’ fulfillment! Most if not all your predictions have materialized. I just wish that you were more vocal or have gotten more publicity. I could have plan better. Keep up the good work.
Guest • October 13th, 2008 at 10:37 pm
and who was head of Goldman Sachs at that time anyone recall?
Anthony J. McNamara • October 23rd, 2008 at 10:25 am
Mr. Roubini was indeed correct to have predicted this economic crisis TWO years ago.There were, and are, however individuals with — forgive me Mr. Roubini — FAR GREATER CREDIBILITY than Mr. Roubini.Credibility, I define as follows:1. Refusal to sell their souls for 30 pieces of silver, to be accepted as an honourary oligarch in the Big Brother Oligarch’s Demockery2. Simplistically, for 30 Pieces of Silver; all that is required is for you to either intentionally or negligently deny or avoid the reality of, simplistically EXPONENTIAL YEWGENICS:
(i) NEVER EVER CRITICISE THE ILLUSION OF NEVER ENDING ‘ECONOMIC GROWTH’ IN A FINITE ENERGY AND RESOURCES ENVIRONMENT;(ii) DO NOT ADDRESS THE ROOT CAUSES OF FINANCIAL CRISES: EXPONENTIAL FUNCTION FINANCIAL, RESOURCE AND POPULATION FACTORS; IGNORANCE THEREOF BY THE MASSES; DENIAL THEREOF BY THE COMPLICIT MIDDLE MANAGERS; AND MANIPULATION THEREOF BY THE DEMOCKERY ‘ECONOMIC GROWTH’ OLIGARCHS;(iii) DO NOT TO BLUNTLY INFORM THE GENERAL PUBLIC THAT ‘ECONOMIC GROWTH’ IN TERMS OF THE FOOD CHAIN MEANS, THEY ARE THE PLANKTON FOR THE OLIGARCH DEMOCKERY WHALES;(iv) NEVER EQUATE ‘ECONOMIC GROWTH’ TO THE MATRIX OF SLAVE AND CANNON FODDER BREEDING CONSUMERS, AND DEBT SLAVES.
What is a Ponzi Scheme?WALL STREET, FORTUNE 500, MEDI-CARE, SOCIAL SECURITY, INSURANCE — ALL — ARE PONZI SCHEMES!!!Defining $lavery Exchange Ponzi Eugenics for the Feebleminded:In 1920 an Italian immigrant Charles Ponzi introduced an investment scheme in Boston that amounts to an expanding game of musical chairs, in which one must buy a chair for someone else in order to join the game, the price of a chair is ever rising (so that eventually, it will be unaffordable), the last people to join the game never get a chair, the number of players always far exceeds the number chairs, and none of the players create anything of worth by way of participation.Demockery v. Republic:Any and every ‘DEMOCRACY’ on the entire planet, has always, and continue to be DEMOCKERY’S OF OLIGARCHS…. KEPT THAT WAY intentionally by the Rich Corporate Economic Growth Welfare Addicts, with the Promises of ‘Economic Growth’ Welfare Entitlement Handouts, from their ‘Economic Growth’ Ponzi Schemes…Is It Possible to Cure A Disease without Addressing the Root Cause?Can We Cure an Economic Disease, by:(I)Intentionally or negligently ignoring the most basic and powerful force of Nature?(II) Imagining that somehow we humans are exempt from Natural Law (REALITY)?THE EXPONENTIAL FUNCTION IS A MATHETMATIC TRUTH (REALITY), AND IT DOESN’T MATTER IF WE DO NOT LIKE IT’S REALITY, WE HAD BETTER CONFRONT IT.(I) EVERY SINGLE RELIGION ON THIS PLANET’S PROSLETYZING AND SUPPORT FOR SLAVE AND CANNON FODDER BREEDING, TO GET MORE ‘CONVERTS’ SAVED SOULS FOR ‘JESUS’ ‘ALLAH’ WORK IN DIRECT CONFLICT WITH THE REALITIES OF THE EXPONENTIAL FUNCTION(II) EVERY SINGLE CAPITALIST, COMMUNIST, ECONOMIST, POLITICIAN, ACADEMIC, OR CORPORATEER, WHO MENTIONS THE WORD ‘ECONOMIC GROWTH’ AND WHO NOT ONLY IGNORES THE EXPONENTIAL FUNCTION OF ‘ECONOMIC GROWTH’ IN A FINITE RESOURCES ENVIRONMENT; HAS CONTRIBUTED TO THE ECONOMIC CRASH THAT HAS NOW BEGUN…..SITTING ON THE TITANIC, POINTING FINGERS AT THIS OR THAT DEMOCRAT, OR REPUBLICAN….. DOESN’T EVEN HAVE ARMIGIDEON AMUSEMENT VALUE.. AND CERTAINLY HAS NO INTELLECTUAL OR EDUCATIONAL VALUE…ENJOYING THE FINANCIAL FRUITS OF ‘ECONOMIC GROWTH’, AS WELFARE PAYMENTS, OR CORPORATE BLACKMAIL WELFARE, UNDER YOUR PARTICULAR LITTLE DEMOCRAT OR REPUBLICAN ‘ECONOMIC GROWTH’ OSTRICH TO EXPONENTIAL FUNCTION NATURAL LAW…. DOES NOT ABSOLVE YOU, FROM BLAME..Exponential Yewgenics of Arbeid Macht Frei….
Susan • October 24th, 2008 at 12:44 pm
M- This is for you!
John E.D.P. Malin • November 17th, 2008 at 4:34 pm
Anthony:Do you have a lucid solution to U.S.’s financial-economic mess?Should we just permit 100 million Americans presently to starve to death?Our military in Iraq has learned how to kill hungry, out-of-work rebellious citizens well?Any new solution for this 40 century old problem?
Rialto • December 1st, 2008 at 5:11 am
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