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The worst economic and financial crisis in decades

Author: Nouriel Roubini  ·   ·   › Share This Print

Regular readers of this blog are familiar with my views. But here below is a detailed summary of the reasons for my views – as presented in this blog in the last few months – that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades (hyperlinks to my relevant recent writings are provided for each argument):

  • This is by far the worst financial crisis since the Great Depression, not as severe as the Great Depression but second only to it.
  • At the end of the day this financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion. The financial and banking crisis will be severe and last several years leading to a severe and persistent liquidity and credit crunch.
  • This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages including hundreds of billions of dollars of home equity loans that are worth little; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
  • Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust.
  • Dozens of large regional/national banks (a’ la IndyMac) are also effectively insolvent given their extreme exposure to real estate and will also eventually go bust. Most of these regional banks – starting with Wachovia and Washington Mutual – look like walking zombies in the same way IndyMac was.
  • Even some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly. In 1990-91 at the height of that recession and banking crisis many major banks – in addition to 1000 plus S&L’s that went bust – were effectively insolvent, including, as it was well known at that time, Citibank. At that time the Fed and regulators used instruments similar to those used today – easy money and steepening of the intermediation yield curve, aggressive forbearance, creative – i.e. liar – accounting, etc. – to rescue these major financial institutions from formal bankruptcy. But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010. If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 what will a 30% fall in home prices – and massive defaults on many other forms of credit (commercial real estate loans, credit cards, auto loans, student loans, home equity loans, leveraged loans, muni bonds, industrial and commercial loans, corporate bonds, CDS) – do to these financial institutions? It challenges the credulity of even spin masters to argue that financial firms are not in worse shape today than they were in 1990-91 when a significant number of major banks were technically insolvent. So, not only hundreds of small banks and a significant fraction of regional banks but also some major money center banks will become effectively insolvent during this crisis.
  • In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
  • The FDIC will for sure run out of money as hundreds of banks will go bust and their depositors will have to be made whole given deposit insurance. With funds of only $53 billion, already up to 15% of such funds will be used to rescue the depositors of IndyMac alone. Thus, the FDIC is already requesting to Congress that the deposit insurance premia should be raised to compensate for this shortfall of funding. Too bad that this increase in insurance premia – that should be high enough in advance (not ex-post) to ensure that deposit insurance is incentive-compatible and not leading to gambling for redemption via risky lending in banks – is now too little and too late and is requested when the damage is already done as the biggest credit bubble in U.S. history is now going bust. Also the FDIC has done a mediocre job at identifying which banks are at risk. So far there are only about 90 banks on its watch list; and IndyMac was not put on that list until last month! So if the FDIC did not even identify IndyMac as in trouble until it was too late, how many other IndyMacs are out there that that the FDIC has not identified yet? Certainly a few hundred but such honest analysis of banks at risk is nowhere to be found.
  • Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
  • Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognizing their true losses. First, most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.
  • Additional earnings manipulation occurs in a variety of ways. First, ad hoc assumptions still used to value and write down level 2 and level 3 assets. Second, banks are leaving aside less reserves for loan losses that are much less than necessary; they do that by using ad hoc assumptions about future losses on mortgages, credit cards, auto loans, student loans, home equity loans and other commercial real estate loans and industrial and commercial loans. Reserves for loan losses have been sharply lagging actual and expected losses, thus padding earnings as decided by the financial institutions’ managers. Third, there is disposal of illiquid and toxic assets in ways that misleadingly reduces the amount of actual writedowns. An example is as follows: suppose a bank wants to dump illiquid MBS or leveraged loans that are worth – mark to market – 70 cents on the dollar rather than 100 cents on the dollar. Then, instead of selling these at a price of 70 and showing a 30% writedown these are sold to hedge funds and other investors to a price closer to par – and thus showing in the balance sheet a smaller writedown – by providing a subsidy to the buyer of the security: so a hedge fund will buy such toxic securities at 80 or 90 cents and receive a loan to finance the transaction at an interest well below the borrowing costs for the funds. Thus, writedowns are then shown smaller than the true underlying loss on the asset and the bank finances that fudged transaction with earning less revenues than otherwise on its credit portfolio. This is an accounting scam that auditors and regulators are abetting on a regular basis. An example of such a scam is the recent Merrill Lynch transaction with Lone Start to “sell” its exposure to CDOs.
  • The bailout plan of Fannie and Freddie implies a direct bailout of financial institutions and helps them to report better than expected earnings in two ways. First, since these financial institutions hold massive amounts of agency debt the government bailout of the holders of such unsecured debt props the market price of the agency debt (reduces its spread relative to Treasuries) and thus allows financial institutions and investors to report less mark to market losses on the values of such assets. Second, after the bust of subprime, near prime and prime mortgage markets the market for private label MBS is dead with absolutely no origination of new MBS. Thus, today – as senior mortgage market participant put it – Fannie and Freddie are “THE mortgage market” as the only institutions that securitize and guarantee mortgages are Fannie and Freddie. Without the government bailout plan that last channel for mortgage securitization and insurance would be frozen and the ability of banks to originate even prime and conforming mortgages would be serious hampered and its cost sharply increased. Thus, the Fannie and Freddie bailout is actually a bailout of the mortgage market and of every institution that holds agency debt or the MBS issued by the two GSES and of every institution that is in the mortgage origination business. On top of this Fannie and Freddie have also been used as tools of public policy in order to further grease the mortgage market and the banks originating mortgages: their portfolio limits were increased; their capital requirement reduced; and the limit for what a conforming loans – the only ones that Fannie and Freddie can securitize – increased from about $420K to over $720K.
  • The Fed has been actively beefing up the earnings and balance sheet of financial institutions in four major ways. First, a 325bps reduction in the Fed Funds rate sharply reduced the cost of borrowing for banks and allowed them to enjoy a nice intermediation margin (the difference between longer terms interest rates at which they lend and the much lower short term interest rates at which they borrow). This steepening of the yield curve is a major subsidy to financial institutions. Second, the Fed has created a range of new liquidity facilities – the TAF, the TSLF, the PDCF – that allow banks and now non-bank primary dealers to swap their illiquid toxic asset backed securities for liquid Treasuries and that provide access for non-banks – and now also Fannie and Freddie – to the Fed’s discount window liquidity. Third, the bailout of Bear Stearns creditors – JP Morgan and many other counterparties of Bear – not only avoided a systemic meltdown and a certain run on the other broker dealers but it has led the Fed to take on a significant credit risk by taking off the balance sheet of Bear Stearns over $29 billion of toxic securities. So the Fed has directly and indirectly systemically subsidized and propped up the financial system and the earnings of bank and non-bank financial institutions. Fourth, a variety of forbearance regulatory actions – starting with the waiver of Regulation W for some major banks – have been used to beef up the profits and earnings of financial institutions and reduce their reported writedowns.
  • The entire Federal Home Loan Bank system – another GSE system that is another effective arm o
    f the government – has been used to prop hundreds of mortgage lenders. The insolvent Countrywide alone received more than $51 billion of funds from this semi-public system. This is a system that has increased its lending in the last 18 months by hundreds of billions of dollars: Citigroup, Bank of America and most other US mortgage lenders have also been beneficiaries of this public subsidy to the tune of dozens of billions of dollars each.
  • The ability of US financial institutions to recapitalize themselves is constrained by financial protectionism: the only large players that have funds to put at work are sovereign wealth funds, especially from countries that are strategic rivals – not allies – of the US or from unstable petro-states. Thus, the backlash against such SWF will seriously limit the ability of banks and other financial institutions to recapitalize themselves.
  • This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (August). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices.
  • This will be a long, ugly and nasty U-shaped recession lasting at least 12 months and more likely 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects. While an L-shaped decade long economic stagnation is unlikely the recovery of the economy from this recession will be weak as the financial crisis and serious macro imbalances will lead to sub-par (below trend) economic growth for years to come.
  • The US recession has already started in Q1 of 2008 based on the five indicators tracked by the NBER. The Q2 rebound is only driven by the temporary tax rebates and GDP growth will slip into negative territory from Q3 2008 until at least Q2 of 2009.
  • Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. gThus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of US and global stock markets.
  • The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing. Indeed all of the G7 economies are now entering a recession. While the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.
  • The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.
  • But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 30% will further reduce inflationary pressure.
  • The Fed will have to cut the Fed Funds rate much more as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial crisis and severe recession cycle.
  • The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for its existence.
  • Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.
  • This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.
  • This crisis also represents a Crisis of the Suburbian (“McMansions and Gas-Guzzling SUVs”) American Way of Life. The sharp rise in gasoline and energy prices and transportation costs, together with the sharp fall in home prices, will radically change the pattern of living of the typical American household.
  • Some of my views are fleshed out in more detail in my recent interview on Barron’s and in the profile article about me recently published by the New York Times magazine.

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172 Responses to “The worst economic and financial crisis in decades”

bytheway • August 20th, 2008 at 6:08 am

“This financial crisis signals the beginning of the decline of the American Empire; over time the relative economic, financial, military, geostrategic power of the US and reserve role of the US dollar will significantly decline.”I dont now but maybe this is not a great damage for the world.I hope this leads to a significant decline of stupid wars.

Guest • August 20th, 2008 at 6:14 am

White House Continues To Push For Immediate Russian Withdrawal From Georgiahttp://www.rttnews.com/Content/Policy.aspx?Id=689119The russians should push for immediate US withdrawal from Irak.

Gloomy • August 20th, 2008 at 6:40 am

Nouriel,Great summary. How about a post devoted to the consequences of the demise of Bretton Woods 2 for the dollar?

Guest • August 20th, 2008 at 7:35 am

bytheway on 2008-08-20 06:08:01>I hope this leads to a significant decline of stupid wars.Now that would be great:-)Guest on 2008-08-20 06:14:43>The russians should push for immediate US withdrawal from Irak.Now that would be great as well!It is funny how US, UK et al supported independence for Kosovo, but not for South Ossetia. Or how it seems to be so important to “stop the Russian bear” and so forth, but how about stopping “the American eagle” and the UK “lion” from attacking Iraq? When it comes to lies and exaggerations, it seems like there is a lot of scrutiny of what Russia does (or does not do)…Another issue is that Georgia had started the war, Russia responded, and then there is an attempt to either make Russia the bad guy or both equally bad. Not that it matters in other ways except that people should always be told the truth and that is not happening here. It is not funny for Russians to be made look bad when at the same time there seems to be an attempt to hide what Georgia did. Or to make it look like Georgia was just continuing an already escalated situation.

Anonymous • August 20th, 2008 at 7:41 am

Opened Le Figaro, Paris, this morning to read on financial pages a headline saying Danger of US recession fading, supported by quotes from analysts from a couple of reputable banks. When bankers like these enter the land of make believe and pass their comments on to the public, you know that things are probably even worse than Dr Gloom would have us think!

Guest • August 20th, 2008 at 7:47 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

bytheway • August 20th, 2008 at 8:08 am

Real astonishing is that America has delivered himself at the socket of not so friendly countriesas the great creditors.They can pull the plug anytime.(See fannies bailout.They are not amused if this go bust)Is there a plan behind or is it stupidity?

ptm • August 20th, 2008 at 9:05 am

From the previous thread. Guest on 2008-08-20 05:09:42 – 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.I would not go as far as to say there is a conspiracy between economists and the Gubmint. I see it more like a professional philosopher who is doomed to never hold a basic set of beliefs or have a true anchor. As for economic academics (NR being one of the few exceptions) I must agree that there is huge disconnect from day-to-day economic realities and concerns of economists, especially given today’s crisis. What if this were true of other academic disciplines? Then biologists would not concern themselves with H5N1 (bird flu) or computer scientists would not worry about implementing and optimizing database algorithms, or engineers worry about the tradeoffs of cost, safety, and functionality. Said another way, the looming economic collapse is no less important than concerns about global warming, yet look how many thousands of scientists have signed up to address that issue! I think this crisis will go down in history as an indication that economics is truly (as OR says) “the miserable science.”

mammon • August 20th, 2008 at 9:20 am

Dear Professor:An exceptional analytical summary! We realize the true defficiencies of the fourth estate that was complicit in bringing us to this point when we read your Dragnet Summary(Just the facts). The journalism departments at most universities are cranking out Public Relations Drones and no Journalists. They should change the name of their departments. The liberal arts colleges should label their Departments Propaganda,Neoliberal privatization Arbitrage,Social Darwinism, and Advanced theoretical Eugenics. The business school should be labeled Latent Ponzi Edification. The science department should be calledHuman Project for Nuclear or Environmental Extinction. Where has our education gone? If we don’t allow a true marketplace of all orthodox and heretical outlier ideas to flourish, so that we can methodically test their validity,we have problems.We must constantly test all our presumptions and try to falsify them. I have seen the progression of your posts and you have the capability of adapting prior ideas ever so slightly to fine tune them. By the way when critics resort to ad hominem attacks, they show themselves to be morons! They should learn from you!Just the facts!

Guest • August 20th, 2008 at 10:06 am

For the average person it was too much to swallow that the largest, most prestigious Wall Street banks and investment houses were engaged with Washington in managing the largest capital market in the world – the U.S. mortgage markets – on a criminal basis.“Until now,” writes the one person who knows, in revelations sweeping the internet this week…Catherine Austin Fitts.Her company was lead financial advisor to FHA under Clinton. And she was Federal Housing Commissioner and Assistant Secretary of Housing in the first Bush administration. In revelations expanding on the internet, Fitts calls the criminal banking activity a kind of “tapeworm” economics, whereby lobbyists and new computer technology create corporations with guaranteed profits and slush funds. Many can even be secret, under the National Security Act of 1947 and the CIA Act of 1949. Lots of gifts and hush money for banks, university spokesmen and Congress are spread around to keep the ball rolling.“The real model (of the tapeworm concept) has now come out of the closet,” says Fitts.“Whereas the last year of Wall Street bailouts were making things clearer, the Housing and Economic Recovery Act of 2008 now leaves no room for doubt. The Act could not be more blunt about infinite government subsidy funded with infinite debt benefiting the private few. The Tapeworm corporation is in full bloom.“The American taxpayers are, in essence, guaranteeing $5 trillion of Fannie Mae and Freddie Mac debt. The Federal Reserve stands by to subsidize Fannie’s and Freddie’s stock in the stock market. Fannie and Freddie continue to pay dividends to their shareholders. All the profit goes to the shareholders and management. The taxpayers get no compensation or payback for saving all of Fannie and Freddie’s equity and essentially guaranteeing their income. The management of Fannie and Freddie get to keep all their compensation and bonuses.”They get to spend as much as they want on more lobbyists and law firms. They and their foundations can continue to hand out money to universities and not-for-profits… (see footnote by Guest)”The housing bill has put forward the most explicit description yet of the true corporate model prevailing in America—congressionally legislated businesses with central-bank-determined stock prices.”It is a fascinating combination of friendly fascism and multiple personality disorder. Now that the fundamental nature of the Tapeworm corporation is out of the closet and clear, keeping it afloat will require a mind-numbing combination of global force to maintain financial liquidity, plus global propaganda and payola to preserve its brand…”http://news.goldseek.com/GoldSeek/1218694140.phpFannie’s Friends: Partial list of Fannie Mae Foundation Recipients 1980-2007: Harvard University, $5,031,000; Brookings Institution, $3,906,000; Acorn, $797,000; Citizenship Education Fund (Rainbow Coaliltion/PUSH), $660,000; Center for Policy Alternatives, $635,000; Congressional Black Caucus Foundation, $608,000; Manhattan Institute for Policy Research, $600,000; Center on Budget and Policy Priorities, $400,000; Congressional Hispanic Caucus Institute, $285,000. (Source: wwwfanniemaefoundation.org)Note: Partial list does not include any of Fannie’s gifts to Congress and politicians

Guest • August 20th, 2008 at 10:30 am

National failure to save i.e. federal structural insolvencyhttp://www.chrismartenson.com/failure-to-save

Guest • August 20th, 2008 at 10:36 am

Ahhhhh, no wonder wall thief is rallying today!! LOLOL11:23 a.m. Forecasting further write-downs, Goldman cuts estimates for banks

Tod Fletcher • August 20th, 2008 at 10:38 am

This is an excellent summary of your views; thank you. It reassures me that the massive pressure on you to conform to the shallow boosterism of the mainstream economic commentary (that was an obvious subtext in the New York Times article about you) has not succeeded yet. Please stick to telling things as you see them! That’s why you have such a wide and diverse readership. Your work is highly valued.

Guest • August 20th, 2008 at 10:38 am

@From April 19 Spotlight Issues on RGE Monitor ~August 18 Barron’s: “Government officials anticipate the companies will fail to raise the equity capital they need, prompting the U.S. Treasury to step in very likely before the end of Q3″–> A rescue would include preferred stock with a seniority, dividend preference and convertibility right that would wipe out common stockholders, according to undisclosed source within Administration.Bill Gross (PIMCO): “U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac to help shore up their capital.” [About 61 percent of PIMCO holdings were Agency MBS as of June 30]–> July Congressional Budget Office letter to Congress: Paulson Rescue Plan May Cost Taxpayers $25 Billion over fiscal years 2009 and 2010.Whalen (IRA): “Both Fannie and Freddie are going to be profoundly insolvent by the time we’re done with this. It’s time to do the right thing and nationalize the GSEs and then downsize them.”… EndIs not this all white noise? Who’s to say Paulson hasn’t been there and done that already, and how much and how deep ~ and that with “nationalization” the taxpayer gets hit with a double whammy?I just remember the impatience of Paulson on the deal with Freddie and Fannie, on how anxious he was to get the deal signed, that each day he had to knock down an additional problem like a veto power that might stand in his way: every day we saw Paulson yammering and pounding on the screen until the bailout went through Congress with no changes, and Paulson got his full authority. And then, just a few days later, it’s discovered that Freddie is under water 3x deeper than originally thought. Such a big surprise, wasn’t it, how the discovery” came just days after Paulson and Congress got this all settled? And how the taxpayer, through his “elected” representation, found himself with the biggest corporate/banker welfare bailout package in man’s history strapped to his back.Looks like Joe is going to have to lift that bale nearly seven months now just to keep his representatives and their Wall Street lords living in their accustomed style. Didn’t the peasants in England have it better than this?

Guest • August 20th, 2008 at 10:41 am

read my lips, wall street firms will not be allowed to fail. helicopter Ben, Treasury Paulson, and PPT will make easy accounting, loose loan-toxic waste swap, and cheap money will be there to support financial system forever.

Softwarengineer • August 20th, 2008 at 10:55 am

GREAT CLARIFICATION OF TAKES ON ECONOMYI see you have added a need for simultaneous federal regulation of banks, not just social welfare to the rich type bailout alone….I agree.Its time to chop them into smaller more managable pieces?

Guest • August 20th, 2008 at 11:06 am

I am Guest on 2008-08-20 10:06:23. I did not mean to attribute my entire article on the tapeworm corporation to Goldseek: only Fitts’ quotes were taken from the Goldseek post of her article, “The Housing and Economic Recovery Act of 2008: An Analysis by Catherine Austin Fitts.” Apologies to Goldseek. And thank you hlowe for originally alerting us to this astounding piece (8-14 21:10:19)!

Guest • August 20th, 2008 at 11:07 am

“Senator, I can tell you what you can believe. You can believe I believe everything I say.”~ H. Paulson, Senate Testimony, July 15, 2008

Guest • August 20th, 2008 at 11:20 am

While GOP and DEM partisans trade barbs on the economy few rise to the blowtorch level like Bob Scheer’s column today on not voting for McCain. Sample paragraph:“The economy is in a downward spiral, the national debt is at an all-time high, the dollar is an international disgrace, and inflation in July had the steepest rise in 27 years, driven by oil prices fivefold higher than when President Bush invaded the nation with the world’s second-largest petroleum reserves.”

Guest • August 20th, 2008 at 11:31 am

@Guest: “Senator, I can tell you what you can believe. You can believe I believe everything I say.” ~ H. Paulson, Senate Testimony, July 15, 2008Paulson’s comment reminds me of a woman’s comment after Sen. Barbara Boxer had made her comment in a recent Senate hearing.“Can you believe that? Don’t you just want to smack her?”

steve • August 20th, 2008 at 12:05 pm

much of what is said here goes right along with Faber, who sent a special mid-month letter out this morning. another place to go is Krausmoscow.com, who lays out the Russian/Georgian situation quite nicely. NY Times, LA Times, Washington Post all leftist, soft-headed, intellectual bankrupts. Did anybody say BEARISH?

Gloomy • August 20th, 2008 at 12:20 pm

FANNIE AND FREDDIE REALITY TVThere is no better entertainment than watching Fannie and Freddie, each down another 17% today. All the kings horses and all the kings men couldn’t put the GSE’s back together again.

curious • August 20th, 2008 at 12:20 pm

There are other assaults and casualties to consider (and hopefully still avoid) during this massive national deleveraging of over-indebtedness besides truth and trust. There are a host of civil liberties and freedom(s)including privacy that we are blindly volunteering to relinquish. Can someone comment on what we are giving up, and to whom we are giving it to when we (our representatives)agree to allow the IRS to record every debit and credit card transaction as a part of the over-sweeping powers granted to the US Treasury with the FRE and FNM guarantee legislation? Who slipped that in there and why? Also, what is with the unsolicited proposal from the Wall St. firms to (take over) manage the defined benefit pensions of this country? Why should be grant extraordinary breadth and depth of power to such a few?

xtreeter • August 20th, 2008 at 12:27 pm

Dear Professor,Please correct me if I am wrong, but I believe Citi’s near failure in the early 90′s also had a lot to do with their loans in Latin America went bad, before Brady came the the rescue. Of course, the falling real estate value added salt to the wound, later.Your comment: “If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 “…seem a little partial in order to make a point. I do, however, see and agree with the overall premise about “The worst economic and financial crisis in decades”, and enjoy your blog very much. Thank you.

Guest • August 20th, 2008 at 12:30 pm

@Mr. Joe Average: “What can the average Joe do to survive this crisis?”Hold tight. Don’t make any rash moves. The gold-inlaid coach-in-four bearing the powdered heads of the rulers, cracking whips and rolling over the taxpayers is headed for an ambush by the market economy.

OuterBeltway • August 20th, 2008 at 1:04 pm

@curious on 2008-08-20 12:20:59Would you please provide the readership here with a link to the text of the legislation that grants IRS the right to acquire and store each American’s credit or debit card transactions?I’ve heard this assertion at various places around the Internet, and I would like to run it to ground.Can anyone prove/disprove this assertion?

Anonymous • August 20th, 2008 at 1:22 pm

Thank you for your insight Professor Roubini. I have been a loyal reader of your website, and I took steps early on to protect myself and my family from this downturn. My kids and their college funds thank you too.

A. • August 20th, 2008 at 1:33 pm

Prof. Roubini,Great presentation yesterday at Brazil. Thank you very much for your thoughtful insights.Best,A.

Guest • August 20th, 2008 at 1:33 pm

OuterBeltway on 2008-08-20 13:04:08Would you please provide the readership here with a link to the text of the legislation that grants IRS the right to acquire and store each American’s credit or debit card transactions?I’ve heard this assertion at various places around the Internet, and I would like to run it to ground.Can anyone prove/disprove this assertion?This talks about it but if I read the comments it does not sound like literally EVERY transaction:Ron Paul Housing Bill Commentary: All Credit Card Transactions To Be Reported to IRShttp://www.campaignforliberty.com/blog/?p=235There are actually a lot of pages that seem to discuss it, one other is this:Senate Housing Bill Requires eBay, Amazon, Google, and All Credit Card Companies to Report Transactions to the Governmenthttp://www.freedomworks.org/newsroom/press_template.php?press_id=2571

Guest • August 20th, 2008 at 1:36 pm

In case in the future you wonder how come McCain “won” the election, here is the first seed of the disinformation…now he is leading;-)Reuters/Zogby poll: McCain leads by 5 percenthttp://www.suntimes.com/news/elections/1117409,elexpoll082008.articleLooking at the reduction of privacy rights and the increase of government powers within the last few years, at this rate he will probably enforce martial law…and select Cheney as VEEP. It would sort-of fit into the developments.

Gloomy • August 20th, 2008 at 1:39 pm

THE DAM IS ABOUT TO BREAKWhen Fannie and Freddie go, a large brick will have disloged from the dam, and as the torrent of bad US debt pours over, the underlying structure of the whole financial system will begin to give way, as piece by piece all is swept away. Pity those who haven’t yet headed for higher ground, thinking that it would hold.

Erik T • August 20th, 2008 at 2:19 pm

@Mr. Joe Average: “What can the average Joe do to survive this crisis?”Check out Chris Martenson’s “Crash Course”. It’s intended for Joe. American Citizen, and talks in layman’s terms about what all this is going to mean and what the average citizen can do to protect himself. Excellent stuff.www.ChrisMartenson.comErik

Anonymous • August 20th, 2008 at 2:30 pm

Hi, I am looking to short regional and small banks that are in bad shape. Anyone have a list? Any help would be appreciated. Thanks.

London Banker • August 20th, 2008 at 2:44 pm

@ Professor RoubiniExcellent summary. You should be proud to stand out from the crowd and speak truth, to power and to the masses via this forum. It isn’t without cost, and I appreciate that, but it is of greater benefit than can be measured in your critics’ neo-classical models.@ AllI’m in South Africa, via Dubai, and am feeling very optimistic about humanity and its ability to adapt, collaborate, innovate and thrive. The UK and US may be going to hell in a handbasket, and the whole world may be confronting deep financial recession and political instability, but here in this country and in this time I have hope.This country made a choice to forgive and reconcile to build a better future collectively than it could have if racial and economic divisions had poisoned its future. Today it is vibrant, prosperous and hopeful. South Africa has many problems, but it is also a very potent example of what man at his best under inspired leadership can achieve. Each time I visit here I learn a lesson in humility and in humanity. I am here to train, but I will leave not being quite sure who between teacher and students has learned more.

John Brock • August 20th, 2008 at 2:46 pm

Bailing out Fannie-Failure and Freddie-Crack is just plain wrong. Financial institutions can fail, just like any other business. It’s not something to be affraid of or to shy away from, that is unless you want to protect the rich. It is as normal a part of the economic evolutionary process as the bankruptcy of Joe’s Bagels down the block. Bailing them out is in effect a from of socialized medicine for the financial elite and it is the not way to allow the market to adjust, reform and evolve into something better. Stop behaving like an abused spouse, forgiving those that do you harm and let the damn things fall.

London Banker • August 20th, 2008 at 2:47 pm

A quick story about my driver from the airport. He saw the way things were going a year ago. He sold off one minibus to payoff the other. He pays every credit card bill on time. He knows many of his competitors are in debt, and sees the day soon when he will be taking up their clients as they fold in the downturn. Even here in Johannesburg, the power of the internet has enabled one small tour driver to be prepared for the economic tsunami swelling beyond the horizon.

oldtree • August 20th, 2008 at 2:53 pm

The optimists keep telling us that if we take the long-term view, the big banks are a great buytoday. Their reasoning is these stocks will go back to their 2007 highs in two or three years.Professor Roubini or anyone else please comment on the following question……….How can thesebanks possibly get back to their 2007 highs when their business model of 15:1 leveraging is, at leastfor the next decade, as dead as a doornail?

London Banker • August 20th, 2008 at 2:53 pm

@ John BrockUnlike the bailouts of Fannie and Freddie, socialised medicine has much to recommend it and little moral hazard. It isn’t encouraging people to get sick to treat them when they do. If you want to refer to corporate welfare, I’m okay with that. Socialised medicine is something I value highly every time I or my family falls ill and we trot around the corner to my local National Health Service GP in full confidence that we will be seen quickly and never have to fill out a form or pay a bill.

lance • August 20th, 2008 at 3:01 pm

@Mr. Joe Average: “What can the average Joe do to survive this crisis?”http://www.energybulletin.net/node/23259Closing the ‘Collapse Gap’: the USSR was better prepared for collapse than the USThis is written by a Russian who observed the collapse of the Soviet Union.It contains dark humor with an element of truth.

Guest • August 20th, 2008 at 3:09 pm

I agree with posters who point out the ridiculousness of a bankrupt USA trying to maintain a world empire costing billions every day. Absolute insanity. The USSR collapsed when its economic underpinings gave way. Ditto for the future USA.

Curious • August 20th, 2008 at 3:16 pm

@Outerbeltway: Thanks for your interest in this issue. I noticed it via Ron Paul’s analysis of the bill. Thanks Guest for the freedomworks link. I orignally posted it in hopes of learning more myself. I do find it hard to believe myself.On the pension issue see this link:http://www.nakedcapitalism.com/2008/08/your-pension-is-safe-on-wall-street.htmlI find it equally absurd that we would allow those that perpetuated so much destruction to manage pension investments for their own profit. Have we ever heard of ERISA? This would be the fox in the hen house. Outerbeltway, let us know if you find out anything.

OuterBeltway • August 20th, 2008 at 4:05 pm

@all:The main themes I’m taking away from London Banker’s posts include:”saw the tsunami coming”"paid off debt”"cooperated with others, didn’t let divisive politics ruin my society”"cooperative behavior can sometimes produce results superior to organizations whose main object is profit”"internet brings ideas and information to all corners of the globe; worldwide, fast response to problems becoming possible”

Guest • August 20th, 2008 at 4:24 pm

no wonder those poor people ended up in Russia (of all places)…Georgian refugees flee deadly trail of destructionhttp://www.news.com.au/heraldsun/story/0,21985,24165107-663,00.html(dated August 12th)

Guest • August 20th, 2008 at 4:32 pm

“Forbes” ’64: “Smell that! That’s gasoline you smell in there. You can’t buy any perfume in the world that smells as sweet.” William K. Whiteford, chairman, Gulf Corp.Mainstreet ’08: “Smell that! That’s the smell of money, big oil money, big government money, big problems for the truckers, companies and citizens who need it to survive.”

Curious • August 20th, 2008 at 4:36 pm

@outerbeltway and guest: re: IRS payment notificationIt looks as though this invasion will initially deal with only on-line sellers reporting back to IRS credit card transaction over a nominal minimum. I did not want to be alarmist on our loss of freedoms. But, let us hope this will not encroach on “all transactions”.

Guest • August 20th, 2008 at 4:37 pm

Glenn Greenwald on Aug. 19:It’s hardly news that the U.S., like many countries, espouses standards that it routinely violates, but still, even in light of such routine hypocrisy, wouldn’t you think that this, from Condoleezza Rice today, on an airplane to U.S. reporters while traveling to a NATO meeting, would be too brazen to utter:“Russia is a state that is unfortunately using the one tool that it has always used whenever it wishes to deliver a message and that’s its military power. That’s not the way to deal in the 21st century.”

Jomos • August 20th, 2008 at 4:42 pm

The average Joe needs to: take ownership of their assets(their retirement funds, their stock certificates, their homes…). For inflation: ownership of gold and silver in your possession. For deflation, Cash in US Treasures or Cash at your finger tips. Coins are not Federal reserve notes which might be exchanged for a new US currency in worst case. Crazy advice for a crazy time.

economicminor • August 20th, 2008 at 5:13 pm

All this posturing and positioning to save the financial institutions is counter productive insane behavior.Paulson, Bernanke and the others leading this fat cow to the slaughter either have no clue or no souls. Can’t they add two and two any longer? Even an idiot has a sense of self preservation. What’s there not to get? Debt has already exceeded the carrying capacity of the debtors and is crashing down. Additional debt does nothing positive. Additional debt just causes the system to implode quicker.When the Monopoly game is over and there is no one left to land on Park Place, the game is over. But in real life, what does that mean? There really will be no where to hide when Joe figures out what happened to his standard of living. In the end, no one benefits from the end of this game Wall Street is playing against Main Street.Why force a game where in the end, everyone loses?Marie Antoinettes supported by the Ostrich Society!

Stormy • August 20th, 2008 at 5:16 pm

Prof. Roubini:While I agree with much of what you say, one problem is consistenly overlooked in your analysis: The trade deficit. Generally speaking, its growth has paralleled America’s reliance on more and more credit. Unless America wishes to become a closed system–making and selling only to itself as if it were the world–, America has no option but to address this problem.After all, those countries who enjoy a substantial trade surplus with us also have a substantial financial surplus. Set aside, for a moment, the petro-states. Think “emerging markets.”I do not see any real recovery until the U.S. addresses this issue honestly.IF”U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices….”THENwhat brings America back? What exactly will we have that the rest of the world wants to buy?The only hope–ironically– is that the rest of the world suffers as much as we, which I very seriously doubt. The world economy may be coupled to ours, but in our fall, that economy may finally decouple when we reach bottom.

Guest • August 20th, 2008 at 5:22 pm

Talking about reality, fantasy, economic reform and Hollywood:Q. Can the current global economic, monetary, financial crisis be fixed / normalized / corrected?A. Yes, but the ones’ who could do it and have the capacity to effect a solution – an easy task technically – would be murdered before the event by the sacred vested interests of the “faith-based” industry – see Water world below).Q. Will there will be a harsh global collapse then?A. Yes, there has to be as there is now, no alternative!Q. Is there a Hollywood movie that epitomizes the relationship between the USA and World Governments and their peoples?A. Yes, Water World. View the scene on the bridge of the Exxon Valdez where ‘Dear Leader’ is throwing out cigarettes to the excited constituents on the deck of this fuel tanker – who rush off to row around in circles – without knowing the reason why or in which direction they are rowing.This scene precisely represents the state of World Government today. (The other symbolism is extremely powerful – another great film!).What hope do you (me) see for the human race?A. In the near long term I am totally optimistic and see enormous growth and expansion of our technology bases exponentially. I see the human race starting to colonizing space in the next 50 years led not by the likes of NASA (a very sick puppy)but by private industry.In the short term, our main objective is to rid ourselves of crasse stupidity that today rules and to start believing in our personal selves, rather than transferring our hopes to a race of feral of the government classes who have made us believe that it is only they that can be “Dear Leaders”.Q. Is there a person in the USA who could have the capacity to lead the American peoples towards stability and growth?A. Yes, Ron Paul is such a person but hold little hope for his election as the masses only desire cigarettes and empty promises while rowing around in circles going nowhere. Mr. Paul would probably be murdered before he was elected to the Presidency. Such is the state of American politics today.Q. Is there a simple answer for the future?A. Yes, confront reality!Ho humPeterJB

Guest • August 20th, 2008 at 5:31 pm

London Banker, I’m glad you’re there to give us an update on how South Africa is progressing these days. But from what I’m hearing, your first impressions there may be a little optimistic concerning “man at his best,” perhaps 360 degrees too optimistic.Here’s an item from Marian L. Tupy, Cato Institute, 2003 (rhodesian.net):“The country suffers from stratospheric levels of crime, low economic growth and an HIV/AIDS epidemic.Mbeki’s response to those issues was to withhold crime statistics, retard economic growth through restrictive labor laws and nationalization of mineral rights, and deny the link between HIV and AIDS. Corruption is so rampant that Nelson Mandela felt compelled to criticize his own party, the African National Congress. Mbeki’s apparatchiks dismissed Mandela as a man of the past.Instead of addressing pressing domestic problems, the South African president chose to focus on international affairs, dispensing “wisdom” about such matters as the conflict between the Israelis and the Palestinians and possible war in Iraq…Judging by the company he keeps, President Mbeki is sending the opposite signals. South Africa was the only democratic country to recognize the outcome of Zimbabwe’s deeply compromised presidential elections and Mbeki sent his deputy to congratulate Mugabe on his “victory.” At no point — until very recently — did Mbeki voice his concern over rape of women, torture and intimidation of opposition, starvation of the population and unlawful expropriation of the farmers in Zimbabwe.During the U.N. Summit on Sustainable Development in Johannesburg, Robert Mugabe was welcomed as a friend…And here’s an appraisal of South Africa’s crime problem from Rhodesian.Net:Over a million whites have left South Africa since 1994, more than 1,600 farmers have been killed and millions of blacks live in the shadow of lawless gangs. Christian leaders are pleading with their arrogant and aloof president to do something, reports TREVOR GRUNDY…Recently Andre Brink told his shocked countrymen that he is no longer able to tell outsiders that SA is moving in the direction of democracy, truth and justice. “I can no longer do that.”White farmers I spoke to on the telephone last week told me that their great fear is that a “Mugabe-style” land revolution will “just happen.” “We have watched events in Zimbabwe unfold since 2000,” said one worried farmer’s wife whose children -all in their 20s and 30s – live in Commonwealth countries. “Over a million whites have left South Africa since 1994. We stayed on because we said – This is our home. But now?…More and more whites are packing their bags for Europe, North America and Australasia thanks to Justice Minister Charles Nqakula who described whites who criticize President Mbeki’s policies, or lack of them, as “unpatriotic moaners.” He said:” They can continue to whinge until they’re blue in the face or they can simply leave the country.”Trevor Grundy – The Zimbabwean 26th October 2006http://www.rhodesian.net/whites_butchered.htm

Guest • August 20th, 2008 at 5:39 pm

@John Brock ~ “Stop behaving like an abused spouse, forgiving those that do you harm and let the damn things fall.”Hallelujah!

PhilT • August 20th, 2008 at 5:49 pm

@those who have not seen/read it…Pointing to another article in this site that might be relevant to discussion in this thread…Social Origins of the American Corporate Predator Stateby Thomas Palley | Aug 20, 2008http://www.rgemonitor.com/us-monitor/253342/social_origins_of_the_american_corporate_predator_stateBest …

Guest • August 20th, 2008 at 6:43 pm

Nouriel,Great summary. How about a post devoted to the consequences of the demise of Bretton Woods 2 for the dollar?Written by Gloomy on 2008-08-20 06:40:01I also would like more explanation on this subject, as I am having trouble with whatappears to be a conflict with A and BA) The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing. Indeed all of the G7 economies are now entering a recession. While the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.B) The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for its existence.Many of us are trying to protect ourselves through ownership of PM in the event of dollar decline. Is this what happens when Bretton Woods 2 unravels?What happens when the dollar collapses?Many things, most of them bad. When foreign investors and central banks stop demanding dollars, U.S. bond prices will fall, which is another way of saying that U.S. interest rates will rise. Mortgage and credit card rates will soar, bursting the housing bubble. Home prices in hot markets like California and New York will fall by 50% or more in a matter of months, bankrupting millions of over-extended homeowners. The U.S. government will respond by opening the monetary floodgates, printing as many paper dollars as necessary to keep the economy from collapsing. This surge in supply will send the value of the dollar through the floor. Prices for most things will skyrocket, and people whose life savings are in cash, bank CDs or dollar-denominated bonds, will be wiped out. Most U.S. consumer finance companies will be ruined, along with their stockholders.THEN the Dollar Disease will go global. The only reason Japan or Europe have been able to generate their current meager rates of growth is the willingness of U.S. consumers to buy their Hondas and BMWs. As the dollar plunges, Asian and European goods, priced in suddenly-appreciating currencies, will become prohibitively expensive for U.S. consumers, who will respond by buying U.S.-made alternatives or nothing at all. Correctly interpreting this change in buying patterns as a threat to their vital export sectors, European and Asian leaders will respond with the only weapon they have left: monetary inflation. They’ll cut interest rates and buy dollars with their currencies, flooding the world with euros and yen the way the U.S. now floods the world with dollars. The result of these “competitive devaluations” will be a death spiral for all major fiat currencies, in which European and Japanese bonds will, eventually, fare as badly as their U.S. cousins.Source http://www.dollarcollapse.com/faq/@MACan you elaborate as to why your negative on PM other than owning a little just in case? Is the dollar to remain stable or rise in your opinion?If anyone can explain why A and B above do not conflict, would you be kind enough to share?Thank you Professor for all you do!hlowe

Guest • August 20th, 2008 at 6:51 pm

Also,If oil prices are going down due to demand destruction this election year, does anyone know why prices have dropped for at least a few previous election years around this same time? Seriously, no implied conspiracy theory here.

Anonymous • August 20th, 2008 at 7:03 pm

Subprime financial systemMakes me think of my college days back in the late 80′s early 90′s. Every credit card company out there was practically giving away cards and lines of credit to students. So on top of student loan debt most graduated with credit card debt as well. After gaining degrees many of my debt burdened friends ventured forth into their careers hopeful at first that their ‘investment’ in education would pay off. Some started families and bought homes at insanely inflated prices with risky loans. Now jobs are disappearing through the double whammy of outsourcing and the effects of the credit crunch as all this fictional money (credit) disappears and businesses are forced to cut back. Really, is it any wonder this is happening? Maybe if someone with an ounce of sense had done something about predatory lending long ago it wouldn’t be so bad. Maybe if there was some sort of oversight on all the fudging of the books that has gone on for the past 15 years at every company I’ve ever worked for it wouldn’t be so bad. (Except my current employer…who rocks) Know what I mean?

Anonymous • August 20th, 2008 at 7:17 pm

Okay I’m out of school with a BA and 35K loan which I can put on the hold by taking courses at the local community college. My credit debt is 4K and I have about 4K currently in the bank. I’m married with 1 child who is 2 yrs old. I have a stable office job at 30K per year.How can this horrific downturn take me out? And what can I do to best deal with the impending conflict?

billmon • August 20th, 2008 at 7:56 pm

“the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses.”Some may recall that when the Japanese banks did precisely this back in the mid-’90s, with the active encouragement and sanction of the MOF, it was universally condemned as proof positive of the utter corruption and obsolescence of the Japanese model of capitalism — by many of the same people who are now doing and sanctioning the same flimsy scams here.I guess one country’s “creative destruction” is another country’s “unacceptable systemic risk.”If there were a hypocrisy Olympics, I do believe the USA would take gold, silver AND bronze.

Jason B • August 20th, 2008 at 7:57 pm

Anonymous on 2008-08-20 19:17:59The worst situations you can get into, in no particular order, is to lose your job, get divorced, or have someone get sick and require expensive medical care.If your wages can keep pace with inflation, and inflation ensues, then you will pay back debts with less valuable dollars.If deflation takes hold, you will be paying back your debts in dollars more dear.Your family is your first priority. Cut back on all non-essentials. No premium cable, or lotto tickets, or organic food, or big screen TV’s. Buy a used chest freezer and buy in bulk. Get good at garage sailing – its a real skill.Keep your spirits up, things are never as bad (or as good) as they may seem.

Neophyte • August 20th, 2008 at 8:31 pm

On-the-street anecdote: Today at Washington Mutual, I was withdrawing $200, and the teller asked, perhaps inevitably, “Would you like to hear about our new savings options?”"No thanks,” I said. “I have my savings accout in another bank.”"Do you mind if I ask which bank?” she said somewhat officiously.Not wanting to seem rude, I didn’t blurt out, “None of your business,” but said reasonably, “Washington Federal Savings.”"Oh,” she said, giggling a little. “I guess that makes sense, given the name…”This incident struck me as extremely strange. I’ve never had a teller ask a question like that, and I found her bland manner, well, telling.

Guest • August 20th, 2008 at 8:49 pm

It’s 30 minutes to midnight for hundreds of banks, and many face insolvency in this financial crisis. Meanwhile, a train load of magic money from the Fed, greased rails at the Congress and a plunge protection train crew postpone the pain as long as possible.As the clock ticks, banking establishments shovel bad paper out the back and scrounge for capital from the front.For banks, every day with an artificially low interest on borrowed paper and the higher margin for the in basket is generally a plus. Paying back old bank debt with devalued dollars helps, too, and a smiley face for Wall Street keeps the ball rolling, in spite of some of the worst economic news in years.Inflation and interest rates are quite another story for small companies and for average citizens.Savers and anyone on a fixed income lose money every day that the Fed holds interest rates below inflation and allows inflation to continue to erode value. Most wage earners now lose money with every paycheck, and raises and bonus payments aren’t enough for them to break even. Many, of course, are unaware of the losses, innocently believing the government’s slippery Alice in Wonderland hedonic-adjusted inflation numbers.Inflation is the great hidden tax and it works best when hidden. And bailouts are taxation. Here is a warning coming from the year 1816 from Thomas Jefferson:“We must make our election between economy and liberty, or profusion and servitude. If we run into such debts as that we must be taxed in our meat and in our drink, in our necessities and our comforts, in our labors and our amusements,… our people…must come to labor sixteen hours in the twenty-four, give our earnings of fifteen of these to the government,… have no time to think, no means of calling our mis-managers to account, but be glad to obtain sustenance by hiring ourselves out to rivet their chains on the necks of our fellow-sufferers … And this is the tendency of all human governments…till the bulk of society is reduced to be mere automatons of misery… “And the forehorse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression. ~ “Basic Writings” (New York: Willey Book Co., 1944), pp. 749-50

Guest • August 20th, 2008 at 9:58 pm

Guest on 2008-08-20 20:49:39

Savers and anyone on a fixed income lose money every day that the Fed holds interest rates below inflation and allows inflation to continue to erode value. Most wage earners now lose money with every paycheck, and raises and bonus payments aren’t enough for them to break even. Many, of course, are unaware of the losses, innocently believing the government’s slippery Alice in Wonderland hedonic-adjusted inflation numbers.Inflation is the great hidden tax and it works best when hidden. And bailouts are taxation.

No need to quote Thomas Jefferson, your words are “What oft was thought, but ne’er so well express’d.”http://en.wikipedia.org/wiki/Alexander_Pope

J. • August 20th, 2008 at 11:03 pm

@Guest on 2008-08-20 15:09:24,The U.S. can’t bankrupt so long as export dependent creditor nations like China must recycle money into Treasury debt, which is to say must support our deficit financing. The recycle is the only way they can keep their economies turning over at sufficient rates to mitigate against severe socio-political turmoil. In this sense, we exploit our creditors, even to the point that they assist in financing U.S. wars. A strong weakening of the U.S. consumer will ‘stress test’ this global structure that’s been operating now since the mid-1970s. It may fail.LB,Yes, to which I’ll only add that teachers must always be students and vice versa.

Gary Alan • August 20th, 2008 at 11:27 pm

I have to agree with your post with one exception, this will be one for the history books, with deflation, nationalization of the banking system, the collapse of government finances, and finally crippling inflation resulting from all the monetizing of federal debt and loss of the dollar’s reserve currency status, with the end result being the loss of your freedom and your wealth as we are plunged into a Corporate Fascist police state. And I would also add severe food shortages to that list.

Guest • August 21st, 2008 at 2:32 am

London Banker — I feel that you are being too optimistic regarding South Africa and may have only seen the ‘sanitized’ version of that country.Crime is sky-high there, as is poverty; there is an AIDS epidemic, with public health in general bad shape; many of the most economically productive members of South Africa are leaving the country at an increasing rate, seeking to leave behind economic/political uncertainty and crime; the infrastructure of the country is antiquated and in dire need of major work; economy is too dependent on luxury industries like diamonds and tourism, which decrease in hard economic times like these; and ethnic strife is rising quickly and may soon explode in to a Zimbabwe type scenario.

geokalp • August 21st, 2008 at 3:40 am

Professor Roubini,I would like a post, a series of posts, on the policies that should be adopted, given the above summary of the current situation, together with any other thoughts like the inevitable change of life os the American people.I’m tiggered by some thoughts of David Rosemberglink No.1: Americans need radical surgery to revive country’s economy – http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/09/ccprof109.xml&page=1link No.2: Long road from here to normality for stocks: James Saft – http://www.forbes.com/reuters/feeds/reuters/2008/08/19/2008-08-19T190003Z_01_LI199061_RTRIDST_0_COLUMN-MARKETS-STOCKS-REPEAT.htmllink No.3: Nightly Business Report interview with David Rosenberg – http://www.creditwritedowns.com/2008/08/one-on-one-with-david-rosenberg-chief.html

Guest • August 21st, 2008 at 4:24 am

@ Mish (I am sure Mish ventures here on occasion):”Greed, fraud, corruption, and overpaid bureaucrats are practically anywhere you look.”Wrong! They are “everywhere” (which equates to anywhere:-), just like cockroaches; bottom feeding has become a frenzy of government policy. And, don’t think most of these are competent. There are exactly the opposite – Incompetent!Taxation is the indicator of the incompetence of those who have the arrogance and impudence to govern the unwashed masses.In Australia, we don’t have any Government at all – we have three levels of taxation! Where, the answer to every question and consideration is – Yes, you have guessed it – TAXATION! The Australian Creed of “Government”: If is moves – TAX it. If it doesn’t move – TAX it. If in doubt – TAX it.Now, we have the Feral Government considering giving 4 BILLION of taxpayers funds to two US Companies – GM and Ford! Great! Just great yes, to build motor vehicles (there is a long story here and all of it condemning). As soon as this Mr. KRudd became the Prim Minister) he gave the Cayman Island RE’s a 5% Insurance premium boost – from the taxpayers, of course.It seems to me that its about time that we get some competence and integrity into Government – everywhere throughout the World – and start exterminating the vermin that has bred in the cracks , nooks, crannies and sewers of our global society. Wanna War? Her is an opportunity, just for —————>>>> YouWe could start by fumigating the UN, World Bank, and such like. Give them some cigarettes and tell them all to start rowing:-) – it doesn’t matter where.It is a problem; a very big problem!Vivre la RevolutionHo humPeterJB

Anonymous • August 21st, 2008 at 6:41 am

I could agree that the 12 steps to financial ruin are directionally correct. What I can’t buy is the conclusion you jump to regarding the decline of the American empire.While America’s relative position may be in decline, there is no other country positioned to take the place of America.China? Their economic policies will wreak far more havoc in the long-run than the pain we’re now experiencing. And however painful it might be along the way, we are infinitely more flexible to adapt to the changing environment.“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” I would bet on America any day of the week.

Guest • August 21st, 2008 at 7:09 am

@Anonymous on 2008-08-21 06:41:08

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” I would bet on America any day of the week.

Well in that case let’s hope they change for the better, because if they stay on the current borrow-and-spend-in-the-military route, it will keep going downhill.Another aspect of the current direction is the increased government surveillance in the U.S. of A. This article brings up a yet new plan of broader powers for FBI:New Guidelines Would Give F.B.I. Broader PowersA Justice Department plan would loosen restrictions on the Federal Bureau of Investigation to allow agents to open a national security or criminal investigation against someone without any clear basis for suspicion, Democratic lawmakers briefed on the details said Wednesday.

Aussie Rob • August 21st, 2008 at 7:38 am

Well done America ! Stuff up the political world by supporting Israel and then invading Iraq and Afghanisan, then destroy the financial system. You deserve every president you idiots elect !It is only going to be a couple of years before the BRIC’s and OPEC own your country, then 3rd world here you come.God bless America because nobody else will.

P1AQL • August 21st, 2008 at 7:40 am

Prof. Roubini, Many thanks for the summary post itself – I was on vacation enjoying the bottom – and also many thanks for posting what tags are allowed. Appreciate it!Now, Stormy on 2008-08-20 17:16:57 wrote:

“what brings America back? What exactly will we have that the rest of the world wants to buy?”

A more important question will soon be: What brings Rest of the World back? Who shall the rest of the world sell to if we Americans choose not to buy? As I mentioned on a prior post, Gandhi’s Khadi brought down the merchantilist British Empire.Nothing can put a seller out on the street with a begging bowl faster than a buyer’s strike. If you need confirmation go ask the homeowners who are desperately looking for a short sale.Best,P1AQL.

richinar • August 21st, 2008 at 8:51 am

Want to change government… take away their money. Looks like the world is changing our government (lower tax receipts) whether we like it or not. If only the people had a say in government.

Guest • August 21st, 2008 at 8:58 am

NY State could face its worst hardship since the Great Depression, warns NY Governor David Patterson

Guest • August 21st, 2008 at 9:00 am

Looks like 11,300 is the “no go” number for stocks. Each time we have hit or apporached that level, BAMM! mystery buyers show up…

Guest • August 21st, 2008 at 9:04 am

This oughta run stocks positive LOLOLOL!10:02 a.m.U.S. Aug. Philly Fed improves to -12.7 vs. -13.5 expected

ptm • August 21st, 2008 at 9:21 am

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS – FLASH UPDATE – August 21, 2008 – July M3 Expanded Month-to-Month, Year-to-Year – Inflationary Recession Continues to Intensify – Broad Outlook UnchangedA popular-media story of a private company UK M3 estimate said there was a $50 billion monthly contraction in July U.S. M3 money supply.”Based on my regular estimation of ongoing M3, no such contraction took place in the series as traditionally defined by the Federal Reserve (methodology discussed in the August 2006 SGS Newsletter); to the contrary, monthly M3 increased by roughly $81 billion….the largest M3 component increase was in M2, reported up by $38.9 billion per the Fed. The other M3 component that still is published fully by the Fed — institutional money funds — was shy of flat, with an $800 million monthly contraction. Large time deposits, repos and Eurodollars — all modeled to a certain extent with a backing in other Fed reporting — increased for the month.“

Guest • August 21st, 2008 at 9:22 am

Oil up $3, Philly Fed contracts for 9th straight month, LEI falls out of bed-confirming recession about to deepen, bank earnings lowered again by Citi, S&P earnings estimates lowered dramatically and yet…US stocks are about to turn green on the day. What a farce!

PhilT • August 21st, 2008 at 9:45 am

Nicholas D. Kristof: Beyond gold medalsPublished: August 21, 2008, IHTBEIJING: China is on track to displace the U.S. as the winner of the most Olympic gold medals this year. Get used to it.Today, it’s the athletic surge that dazzles us, but China will leave a similar outsize footprint in the arts, in business, in science, in education.Entire article ==> http://www.iht.com/articles/2008/08/21/opinion/edkristof.php

London Banker • August 21st, 2008 at 10:46 am

@ Guest on 2008-08-20 17:31:38I’m talking to a lot of people here, and getting lots of views on the points you raise, but the strong majority are upbeat. They see Zimbabwe on their border, they see the 40 percent unemployment (which is why refugees from Zimbabwe outweigh democratic principles in stabilising the refugee influx from their neighbour to the north), they see the crime (down from a couple years ago), they see the risk of Zuma government taking the Mugabe road, and yet they are optimistic. More in my post on RGE tomorrow.My own reading is very positive. Last time I was here ‘black’ faces (includes Asians here)were a minority in my class. Today they are majority, and the quality of the people (all bankers) is very, very high – without regard to colour. The most out of her depth is white with 20 years experience.Citing a 2003 fear-mongering article isn’t going to convince me when my eyes and my students are telling me that South Africa is still changing for the better. There are risks, but I could see living here (especially since it is warmer and sunnier here in winter than it was when I left cold, rainy summer Britain). There is no perfection, but there is quality of life and the sense that better is possible. And there is pride in what they have achieved, and how many of us remember what that is worth?

Anonymous • August 21st, 2008 at 11:08 am

Dear Mr. Roubini,Given your impressive list of headwinds, I don’t understand how you still stick to a 12-18 months recession forecast.Manufacturing contributes only to 12% of GDP, business services contribute also 12% only. Industries representing almost 75% of GDP have absolutely no export capability. How do you resurect such a weak and debt overwelmed economy in a 12-18 months time frame?I just don’t see the rational?

MASHIACH BEN CHANA • August 21st, 2008 at 11:10 am

ALL THE READER OF THIS BLOG, IF YOU LEAVE IN WESTERN EUROPE TAKE ADVANTAGE OF THE DEPRESSED HOUSING MARKET IN USA. , BRING YOUR EURO BUY A NICE HOUSE HERE IN USA AND ENJOY LIFE. YOUR EURO WORTH SOMETHING TODAY. ONCE THE WAR STARTS BETWEEN NATO AND RUSSIA YOUR EURO WILL CRASH TO ZERO YOUR HOMES WILL BE DESTROYED FROM RUSSIANS CARPET BOMBING AND WILL BE LATE TO COME TO USA. AS A REFUGEE.ALSO WHOEVER THAT IS CITIZEN OF USA, SPEAK TO YOUR LAW MAKER OR WRITE TO THEM AND TELL THEM THAT IF RUSSIA INVADES THE WHOLE WESTERN EUROPE WE AS THE CITIZEN OF USA DO NOT WANT THE US TO GO TO WAR WITH RUSSIA BECAUSE WE DON’T WANT TO DIE IN A NUCLEAR CONFRONT IAN WITH RUSSIA WE HAVE TO LET GO OF EUROPE IF WE WANT TO STAY ALIVE, IN AN EVENT OF NUCLEAR CONFRONTATION WITH RUSSIA THE MORTALITY RATE OF US POPULATION WILL BE 70 PERCENT.ALSO ALL THE WEALTHY PEOPLE OF INDIA AND PAKISTAN ALL OF YOU SHOULD ALSO BRING YOUR WEALTH TO USA. BECAUSE EVENTUALLY THERE WILL BE NUCLEAR EXCHANGE BETWEEN YOUR COUNTRIES.THE RUSSIANS ARE COMINGHELLO RUSSIA GOODBYE NATOTHE AMERICAN ARE COMINGHELLO USA GOODBYE IRANTHE CHINESE ARE COMING IN NEAR FUTUREHELLO CHINA GOOD BYE USA.

Guest • August 21st, 2008 at 11:17 am

Congressman Ron Paul (Tex) has long said that “The ups and downs of the economy have all come as a consequence of Fed policies, from the Great Depression to the horrendous stagflation of the ‘70s, as well as the current ongoing economic crisis.”But, he says, the set of circumstances we face today are unique and quite different from all the other recessions the Federal Reserve has had to deal with.“Generally, interest rates are raised to slow the economy and dampen price inflation,” he says. “At the bottom of the cycle, interest rates are lowered to stimulate the economy. But…the recession came in spite of huge and significant interest rate reductions by the Fed. This aggressive policy did not prevent the recession as was hoped; so far it has not produced the desired recovery.“Now we’re at the bottom of the cycle and interest rates not only can’t be lowered, they are rising. This is a unique and dangerous combination of events. This set of circumstances can only occur with fiat money and indicates that further manipulation of the money supply and interest rates by the Fed will have little effect.His next comments explain, IMO, the reality behind Professor’s Roubini’s call for continuing lowered Fed fund rates (although I would prefer that we bite the bullet):“The odds aren’t very good that the Fed will adopt a policy of not inflating the money supply because of some very painful consequences that would result. Also there would be a need to remove the pressure on the Fed to accommodate the big spenders in Congress…that’s not about to happen. Poverty is going to worsen due to our monetary and fiscal policies, so spending on the war on poverty will accelerate….the cost of defending the American empire is going to accelerate.“A country that is getting poorer cannot pay these bills with higher taxation, nor can they find enough excess funds for the people to loan to the government. The only recourse is for the Federal Reserve to accommodate and monetize the federal debt, and that, of course, is inflation…”[I]t would be politically tough to bite the bullet and deal with our extravagance, both fiscal and monetary, but the repercussions here at home from a loss of confidence in the dollar throughout the world will not be a pretty sight to behold. I don’t see any way we are going to avoid this…”Says Paul, “Liberty is virtually impossible to protect when the people allow their government to print money at will… If unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny — a consequence of which the Founders were well aware…“Real economic growth won’t return until confidence in the entire system is restored. And that is impossible as long as it depends on the politicians not spending too much money and the Federal Reserve limiting its propensity to inflate our way to prosperity. Only sound money and limited government can do that”

Guest • August 21st, 2008 at 11:33 am

The top film at my video store apparently is “Street Kings (Their City, Their Rules, No Prisoners).” And the jacket photos have the usual…guns, bombs, fire, smoke, the killer countenance on the faces.A far more frightening film than this, however, is now beginning tonight in theaters around the country. It’s “I.O.U.S.A.,” a movie from Patrick Creadon on the national debt, “surprisingly engaging,” reviewers say, in spite of a doom and gloom message.Director Creadon says the presidential campaigns aren’t taking debt seriously enough and he wants to inject more emphasis on its ramifications in this election year.“The American voter tends to vote for fiscally irresponsible candidates,” Creadon said. “And guess what? That’s what they’ve got. We have the government we elected. I don’t think people understand the issue.”

Guest • August 21st, 2008 at 11:36 am

The Fed really doesn’t have a lot of wiggle room on lowering rates. If they do lower rates, they will start to cause problems for a lot of money market funds…

Guest • August 21st, 2008 at 11:44 am

Another bad week for LehmanCommentary: Fed intervention, a scotched deal and looming losses revealedBy MarketWatchLast update: 11:02 a.m. EDT Aug. 21, LEH 12.84, -0.89, -6.5%) hasn’t made any public announcements but the investment bank has been at the center of talk on Wall Street. On Thursday alone there were two revelations: that the Federal Reserve investigated some nasty market rumors about the firm and that a deal to sell a 50% stake to Korea Development Bank fell through, according to reports.These disclosures came after there were reports Lehman would report a $1.8 billion loss on about $4 billion in write-downs in the coming quarter, that it was seeking more capital, trying to sell $40 billion in real estate and was trying to sell its asset management arm Neuberger Berman

richinar • August 21st, 2008 at 11:53 am

@Written by Guest on 2008-08-21 11:33:22We do have the government we elected. Until we change that we get what we deserve. 4 more years 4 more years!!!

Softwarengineer • August 21st, 2008 at 12:07 pm

RE: CHANA BLOG ABOVEIrrespective of any resurgence in the Cold War impacts in Europe, you had me rolling on the ground in laughter….Bring in more European and Indian money [more population?] snapping up real estate in America; before their currencies collapse?LOLThat’s how the American real estate collapsed in price in the 1st place and your plan would make it far worse as American wages [bottom 90% of household incomes] go into even more dismal collapse with even more uncontrolled American popualtion growth.Couple that calamity with simultaneous tighter bank lending standards making even the top 90-95% househould incomes [even they see below "real inflation" wage increases too] in America insufficient to buy a house in America….you get the gyst…

Christopher • August 21st, 2008 at 12:16 pm

@Guest: I.O.U.S.A.Yes, this movie starts tonight. I am going to see it. Supposedly, it’s like Inconvenient Truth or Super Size Me, but it deals with America’s debt, economy, etc.Here is a link to the movie trailer:http://www.youtube.com/watch?v=cs-UDj4J4JQ (about 2 min)Here is a link to the web site to locate theaters:http://www.agorafinancial.com/iousa.htmlThe movie stars Warren Buffet, Dave Walker, Pete Peterson, others.Hopefully, this will awaken more people. Then, more of us can accept what is happening, take action and get prepared.The economic Hurricane is here and the winds are strengthening. Hopefully, it will turn out better than Hurricane Katrina!

Guest • August 21st, 2008 at 12:16 pm

P1AQL on 2008-08-21 07:40:04Who shall the rest of the world sell to if we Americans choose not to buy?I do not know but Peter Schiff (www.europac.net) says in his book that the Chinese should disconnect their currency from the USD, let it appreciate, and start selling to their own selves. Domestic consumption, in other words.

Guest • August 21st, 2008 at 12:21 pm

LOLOL Dick Bove come out and says buy LEH becuase it is a hostile take over target at these levels and the whole market rallies to greens’ doorstep just becuase of that!!

Anonymous • August 21st, 2008 at 1:41 pm

I highly recommend a book by Robert Scheer called “Pornographic Power” about Militarism and the budget,when you go see IOUSA.

ptm • August 21st, 2008 at 1:52 pm

London Banker on 2008-08-21 10:46:56

I’m talking to a lot of people here [South Africa], and getting lots of views on the points you raise, but the strong majority are upbeat.

I do not doubt what you see, but you should know that there seems to be a real fear of violence among the population in South Africa.To be prepared for plausible future events here in the USA, I have purchased a small library of self-defense books. The self-defense industry (which is code for how to carry and use a concealed pistol, and how to use a shotgun/rifle, to shoot people) is lead by handful of trainers who are also authors. They include Massad Ayoob, John Farnam, Stephen P. Wenger, Tom Givens, Jim Higginbotham, Jeff Cooper, and Gabe Suarez to list the better known. One or more of these trainers have significant satellite training facilities in South Africa, write about South African training, and use past South African case studies to beef up their training curriculum in the USA.The impression I get from their writings is that there is a lot of self-defense training going on and that the average middle class South African carries a concealed weapon! Something we could be seeing here in the USA!

AfA • August 21st, 2008 at 2:17 pm

@ P1AQL@ J.”The U.S. can’t bankrupt so long as export dependent creditor nations like China must recycle money into Treasury debt, which is to say must support our deficit financing.”I hear this argument everywhere. This week, there was a headline on Bloomberg saying that China overtook the position of the US as the main client of Japanese firms. How long will it take before what China, India and the rest of emerging markets start consuming most of what they produce? What will the US do then?I expect this will be the case in the next 5 years. How fast will the USA adapt to a lower deficit? A manufacturing base is not developed overnight, nor is a substantial saving (especially after a negative one).I do not intend to criticize your position, as I too believe this is one of the main reason things are still holding, the biggest piece of the dam, but how long will it withstand? This I think is politicians religion and faith, one of the most shortsighted strategies (if we can call it so). Consumerism was and will never be a competitive advantage if it is financed with debt. We will be overestimating the capacity of US to go from the world’s consumer to the the world’s producer in no time.I do believe it will be done ultimately (this is how markets revenge), but it will be done on the expense and suffering of a generation. We shall see whose generation will it be.

Guest • August 21st, 2008 at 2:17 pm

P1AQL on 2008-08-21 07:40:04Who shall the rest of the world sell to if we Americans choose not to buy?I do not know but Peter Schiff (www.europac.net) says in his book that the Chinese should disconnect their currency from the USD, let it appreciate, and start selling to their own selves. Domestic consumption, in other words.Written by Guest on 2008-08-21 12:16:43Here are some timely articles on this subject. I think it is important to recognize that the Chinese middle class is larger in number than in the middle class in the USA, and as I understand was to soon equall the whole population of the USA. I for one am closley watching the China factor, especially after the Olympics. My gold dealer who frequents China believes China will allow their currency to rise considerably (implying inside info). Of course he is in the bussiness of selling gold, but has gone out on a limb considering his reputation and being in the market for decades.The question is will they allow there currency to rise and replace the American consumers.”China’s policymakers are considering a $58 billion (400 billion yuan) economic stimulus package, and will ease monetary policy later this year, as focus shifts from taming inflation to promoting economic growth, said Frank Gong,”Source:http://www.moneymorning.com/2008/08/20/china-stimulus-package/Thursday, August 21st, 2008″Foreign Economies Must “Decouple” from the United States by Suspending Lending to U.S. Consumers”By Peter D. SchiffGuest ColumnistSource: http://www.moneymorning.com/2008/08/21/dollar/hlowe

Stuart • August 21st, 2008 at 2:38 pm

Anybody who goes to see IOUSA will very quickly stop debating whether the US is insolvent. You will see them crouching over on a park bench in despair contemplating the repercussions for themselves and their kids.

Guest • August 21st, 2008 at 2:41 pm

“Chinese middle class is larger in number than in the middle class in the USA”not sure if that is true, but certainly, middle class in the USA is shrinking due to squeeze from extreme right and left (you got it democrats and republican).

Guest • August 21st, 2008 at 2:45 pm

“The single most exciting thing you encounter in government is competence, because it’s so rare.”-Daniel Patrick MoynihanHo humPeterJB

Guest • August 21st, 2008 at 3:03 pm

“Your best option, as a citizen of the U.S.A., is to think very, very seriously about the upcoming major-party nominating conventions. If you do not bring about the nomination of a combination of President and Vice-President who reject the politics of the present nuclear showdown which London’s puppet, the George W. Bush Administration, is staging, there might be, very soon, no United States as it exists today, and perhaps no you, nor your city or town, or family, either. “http://larouchepac.com/news/2008/08/21/tale-two-generations.htmlHeed these words…Ho humPeterJB

Guest • August 21st, 2008 at 3:16 pm

Talking of Ron Paul:“Real economic growth won’t return until confidence in the entire system is restored. And that is impossible as long as it depends on the politicians not spending too much money and the Federal Reserve limiting its propensity to inflate our way to prosperity. Only sound money and limited government can do that” (Ron Paul)@ Guest on 2008-08-21 11:17:11Confidence in the entire system means “leadership”. This is a “leadership” crisis as previously stated.”Sound Money”…. of the “real” economy = labour = values (labour here, does not necessarily infer manual labor alone)”limited government”… we need a whole new system founded in reality after throwing this “faith-based” crap out the rubbish shoot.Ho humPeterJB

Guest • August 21st, 2008 at 3:51 pm

Contrary to popular wisdom, China’s rapid growth is not hugely dependent on exportsSource:http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=10429271What is “Middle Class”?Present estimates of “middle class” in China range from 100 million to 247 million,source: http://www.wikinvest.com/concept/Rise_of_China's_Middle_ClassThe past decade has seen the rise of something Mao sought to stamp out forever: a Chinese middle class, now estimated to number between 100 million and 150 million people.Source: http://ngm.nationalgeographic.com/2008/05/china/middle-class/leslie-chang-textFrom the last article: She hated America too, because it always meddled in the affairs of other countries.Bush telling the China how to behave may come back to bight us.hlowe

Guest • August 21st, 2008 at 4:55 pm

Wendell Phillips has criticized successful politicians as falling in one of two categories: “men of no principle, but of great talent; and men of no talent, but of one principle—-that of obedience to their superiors.”Perhaps history will judge whether Senator Chuck Schumer (Democrat of New York) fits one of these categories (hint, the warning letter to FDIC which led to the run on IndyMac Bank did not display the customary glint one expects from talent).Now, Reuters is reporting that a letter from 51 former IndyMac employees is asking California Attorney General Jerry Brown to investigate if the Schumer letter triggered the bank’s collapse. IndyMac is based in Pasadena, Calif.Write the employees: “From the day (Schumer’s) letter was made public on June 26 until the closure of the bank, a run on the bank took place and the failure became inevitable.” FDIC’s Office of Thrift director John Reich blamed the bank run on Schumer’s letter as well.Here’s pertinent background: Democrat Jerry Brown, a former governor, is said to be interested in running for governor again. And GOP groups appear to be closely watching IndyMac developments for possible leverage in national, local and state elections. At the least, they believe the situation could help turn back some of Schumer’s criticism of Republicans on the economy.Schumer, with powerful connections to Wall Street, investment banks and banking committee members, may not be the ideal target in an election year. But, who knows, maybe Jerry Brown, a very unpredictable guy, has a few out-of-the-box moves remaining from his former life as “Governor Moonbeam.” Sure.

Guest • August 21st, 2008 at 4:55 pm

Talking about fixing the “real” economy:What is the “real” economy?1. A job?2. A home – to own or rent?3. Food?4. Education and hope (privilege) for the future of our children?5. Having a drink once in awhile?6. And, of course, basic values.Oh, Yes, all of the above.Okay, now that is clear – what is all this global economic collapse crap about?A. Its about the collapse in “investment, stock, bonds, borrowings and the Stock Exchange(s)”.But isn’t that about capitalism and as such has nothing to do with the “real” economy?A. Yes, but the Investors are loosing money and the government wants the “real” economy to pay for those losses – this is the problem!Q. But we are losing our jobs?A. Your jobs are being given to others because your government promised to give you too much of yours, so that you would vote for them, so, if you didn’t want so much, you would probably still have your job. IOW, you cost too much, so do something else.Q. But what else can I do?A. Use your brains for a change!Oh!Ho humPeterJB

K in TX • August 21st, 2008 at 4:56 pm

@ PeterJBFrom the LaRouche article:However, the threat comes not from the United Kingdom as such, but from the kinds of cabals of financier interests typified by London’s errand-boy and Senator Obama backer George Soros.So we are to believe that Obama, as Soros puppet, will lead us into nuclear war? Does anyone believe that McCain isn’t pro-war? Guess we are out of luck then, eh?Abstaining isn’t likely to help either, though I understand the impulse. It’s like the old Bill Hick’s bit – will you vote for the puppet on the left or the puppet on the right…wait, it’s one guy working both puppets.

Guest • August 21st, 2008 at 5:18 pm

“Abstaining isn’t likely to help either, though I understand the impulse. It’s like the old Bill Hick’s bit – will you vote for the puppet on the left or the puppet on the right…wait, it’s one guy working both puppets.”@ K in TX on 2008-08-21 16:56:12Of course you are correct but what says that one of those that present themselves for election, must take office?Why not vote for Ron Paul, for example? Must you vote for the two presented morons?Then again, you always get the government you deserve which infers that those presenting themselves for the golden pot award, normally and typically represent the mindset of the constituents.The hope is when a gap grows between the two mindsets; it is called revolution. It is of feminine gender and of nurture and etymologically means, “To Grace the Word of God” as extracted from the Hebrew:-)What you get is up to you!Ho humPeterJB

Guest • August 21st, 2008 at 5:28 pm

@ Guest ~ Ron Paul quote: “Now we’re at the bottom of the cycle and interest rates not only can’t be lowered, they are rising. This is a unique and dangerous combination of events. This set of circumstances can only occur with fiat money and indicates that further manipulation of the money supply and interest rates by the Fed will have little effect.”Time to reread the August 19 RGE newsletter:Greetings from RGE Monitor!It was little over a year ago (August 9 2007) when short-term credit markets froze and the ECB, Fed and BoJ started pumping billions of dollars into their systems to ease the liquidity crisis associated with the subprime crisis. In the following days, the three central banks continued their injections of liquidity into the money markets. Various mortgage originators, inside and outside the U.S. started drawing billions from their credit lines and filing for bankruptcy. On August 17 2007, in an unscheduled meeting, the Fed cut the discount rate half a percentage point (after leaving rates unchanged in the FOMC meeting that took place ten days earlier). From then onward the central banks of the developed world kept injecting funds to ease the liquidity crisis and started accepting a wider range of collateral.One year later, in the U.S. the lack of improvement in the money markets is still taking center stage and the Fed – on top of having cut the Fed Funds by 325bps – continues to expand its liquidity facilities and lengthen the maturity profile of the Term Auction Facility without significant impact on credit creation.Supply and demand of credit are both suffering a severe downturn, as highlighted by the Fed’s Senior Loan Officer Survey for Q3 2008. The contraction in bank lending seen in the recent weeks is unprecedented and, while U.S. financial institutions will be in need for refinancing of billions of dollars in maturing debt in the next few months, they also have to cope with mounting credit-related losses and rising funding costs. This could force banks to raise lending rates, thus exacerbating the squeeze felt by U.S. businesses and individuals and aggravating the downturn in economic activity…

Guest • August 21st, 2008 at 5:38 pm

From Chris Martenson:”Thousands of homeowners with distressed mortgage loans linked to failed lender IndyMac may soon be able to avoid foreclosure under a program announced on Wednesday by U.S. banking regulators.The Federal Deposit Insurance Corp, which seized Pasadena, California-based IndyMac on July 11 in the third-largest bank failure in U.S. history, said 4,000 mortgage modification proposals were going out this week and it hoped to send out 25,000 modification notices over the next few weeks.”Oh, this is nice. Now the FDIC is getting into the mortgage business. This is a serious departure from their past activities, skill sets, and possibly charter. To date we have the Federal Reserve accepting bad mortgages in exchange for cash and Treasuries, the FHLB sporting a $1.5 trillion mortgage portfolio where it was barely half that a few years ago, and Fannie and Freddie with absolutely frightening growth in their own guaranteed and retained mortgage portfolios.In short, every possible government program is already neck deep in this mess and steadily getting in deeper. The galling thing about this FDIC act is that they are re-working some of these mortgage terms in very extreme ways. This is good if you happen to hold one of these mortgages and you get your payment cut in half. It is painful if you happen to have been less reckless or happened to bank with someone else besides the most reckless bank in CA, because you don’t get any such break. Where again does the constitution allow the government to bestow such disproportionate good luck upon a select few?”

PhilT • August 21st, 2008 at 5:39 pm

@PeterJB, 2008-08-21 17:18:04″…Why not vote for Ron Paul, for example? Must you vote for the two presented morons?…”Excellent idea, Sir !We in the USA even have a mechanism in place for not voting for morons – it’s called a write in vote. There are (sometimes cumbersome)procedures to learn and follow, maybe varying from state to state, but drastic times demand drastic measures!Best …

Guest • August 21st, 2008 at 5:47 pm

@ Guest: “Now, Reuters is reporting that a letter from 51 former IndyMac employees is asking California Attorney General Jerry Brown to investigate if the Schumer letter triggered the bank’s collapse… IndyMac is based in Pasadena, Calif.”That’s our trouble, to solve abuse and misuse of the political system by a politician we have to seek redress from a politician.Isn’t this a little like asking the a fox in the hen house to investigate the disappearance of the chickens?

dhome • August 21st, 2008 at 6:34 pm

Reading Dmitry Orlov’s 2006 piece in the Energy Bulletin, amusingly called:”Closing the Collapse Gap – the USSR was better prepared for collapse than the US”, (Link: http://www.energybulletin.net/node/23259) ; I was struck by the one non-common factor between the USSR and the US.The US has custody of the world’s reserve currency – the US dollar.That has in the past and, is right now giving successive US governments, Treasury, The Washington Consensus and the Fed the ability to force the rest of the world to pay for US excesses. This is achieved by manipulating relative exchange rates through interest rates so that the amount the US owes in a foreign currency can be reduced by “devaluing” the currency of the trade – the US dollar. A slightly complicated way of “bilking” or not pay your bills. This has happened in five times in the last 40 years (1969, 1973, 1987, 1990 and now.)So although I agree with Dimtry on the utter inevitability of US financial collapse: I suspect, as other writers have stated, that the US will try to take the rest of the world with it into the abyss through its hold on the fiat currency.The only alternative is to rapidly strip the US dollar of its reserve status (move to a yen/euro basket maybe) and let the US go into bankruptcy (Argentinean-style) and have the IMF manage its affairs. Without feeling that pain, US governments and people will never believe that basic financial laws, like living within your means and paying your bills, apply to them.Now all the rest of the world needs to do is to find enough politicians with guts to stand up to the US to achieve this; that maybe where a certain Mr. Putin comes in.

Anonymous • August 21st, 2008 at 7:32 pm

@PeterJBYou are correct that the government is taking from the people to pay the Investors. The people have maybe two choices:1. Change the government’s behavior in a fundamental way.2. Leave.In my opinion, 1. is unlikely. We can do our best, we can call out jerks like Stern of the Minneapolis Fed, when he says things like that we should bail out all the Investors and then wait for a “calm market” to discuss too-big-to-fail. When I watched his interview on CNBC (?) , I felt that there was a face of evil who wants exactly what is best for the Investors.So while we do 1. we should also think of 2. It’s our life and our choice. The Investors may own this country but they do NOT own us.

Gloomy • August 21st, 2008 at 7:58 pm

Anyone expecting Fan and Fred shareholders to be wiped out is going to be sorely disappointed. CDS counterparty risk means that bailouts will always be done leaving shareholders with something.

lost in the USA • August 21st, 2008 at 8:06 pm

Truly life pondering…What’s amazing is the lack of precious metals out there..When prices were high there were shortages…Now that prices are down there is none to be had! Apmex, kitco etc etc are out of most products. scary times indeed. Be safe !

K in TX • August 21st, 2008 at 8:48 pm

@ PeterJBI have Ron Paul’s manifesto on my bedside table. And I have voted for longshot candidates in the past. Ross Perot, anyone? Once I even voted Libertarian just because I wanted to help increase public campaign funding for a third party.The odds of a write in candidate being elected are vanishingly small.@ Anonymous on 2008-08-21 19:32:53Also in my bedside reading stack are several books on leaving the U.S. My husband favors Canada. I’ve been eying Argentina as it is a nice distance from the 3 big players and is already in recovery from a big crash.@ AllI would rather see the U.S. turned around. The only real power I see in the hands of Average Joe & Jane is the power to withhold tax payments – a tax strike. Pitchforks and torches may be picturesque, but the citizens are outgunned.

Anonymous • August 21st, 2008 at 9:03 pm

@K in TXHi, I’m in Houston …Caracas, Venezuela has a perfect climate, and it’s more or less the same all year: near the equator but up in a mountain valley. However there is some political stuff going on there at the moment …Argentina already had their crash, and the people there are very amusing, I like them a lot. Consider it!

OuterBeltway • August 21st, 2008 at 9:18 pm

@K in TX:I’d rather see the U.S. turn around, too. We have two other huge, absolutely uncontrollable powers: the power of understanding where our interests truly lie, and the power of the purchase decision.Votes only happen once every two to four years, and we only get to vote for whomever is vetted and accepted by the big players – we only get to vote for the Coke or Pepsi, but it’s still brown fizzy sugar water.But every single day, you make several, maybe dozens of votes with your dollars. You choose to commute, you choose to use various forms of energy, you choose which television station to watch, you choose which products to buy. You shape your world by your purchase decisions.A flood is formed one drop at a time. Gradualism may be unglamorous, but it is exceptionally effective – hence all the talk about “hockey sticks” and “compound interest”.How do you translate your interests into individual purchase decisions? That’s a question worth pondering. I don’t have a good answer for it yet, but I’d really like to see some discussion here on that subject.I agree with your general premise, though, that the exercise of power is through the purse. Let’s re-think “purse”. Where’s the most immediate, most direct application of that power?

Jason B • August 21st, 2008 at 9:44 pm

OuterBeltway on 2008-08-21 21:18:51Barter unless the use of dollars is legally required (paying taxes or paying off debt)

J. • August 21st, 2008 at 9:44 pm

@AfA on 2008-08-21 14:17:38,As I wrote, this recycling dynamic, what Micheal Hudson termed ‘the U.S. Treasury Bill Standard’, began in the 1970s. I did not write that it was permanent but that it may be failing (or at least on its last leg). Quantity (of deficits) must modify Quality (of world economy). Your five year horizon seems more than reasonable.AnywayInternal markets do not ‘fall from the sky’ but develop — export dependency works against, slows, such development so also helps perpetuate relative undevelopment. Lets not so hypothetically say that most of a particular nation’s exports derive from subsidiaries of transnational firms which have sited there. These firms will generally have a higher capital:labor ratio than strictly domestic firms, i.e. they operate at higher productivity and create relatively fewer jobs than the domestics. Evidently this contradicts broadening/deepening of the domestic market while creating a structural dependency, the persistance of which has not been unrelated to that same recycling dynamic, a form of imperialism.

2cents • August 21st, 2008 at 10:44 pm

The trend of the future: emigration.Just as the Northeast and Midwest witnessed net outflows of citizens over the last generation, so too will the US see net outflows of certain classes of its citizens. Of course this will be somewhat offset by immigration. The net effect will be diminishing percentages of native born citizens.

Anonymous • August 21st, 2008 at 10:53 pm

@OuterBeltway: we’re in deep personal debt, our creditors are being absolutely unforgiving (unlike what I have seen earlier, the only forebearance these days is for big financial institutions) — we do NOT have control of our spending. We can adjust it at the margin, and we’re trying.If the suffering gets to be too much, declare a jubilee for yourself and start over free, elsewhere. Nobody will give you forebearance these days except yourself.

Stormy • August 21st, 2008 at 10:58 pm

P1AQL,”Choose not to buy“? I don’t think it will be a matter of choice!Beggars can’t be choosers. Maybe we can manufacture begging bowls.

Guest • August 21st, 2008 at 11:47 pm

GloomyWatch gold prices carefully over the next week or so. If gold rises back across $850/oz consistently, then that is a good sign. The immediate question is whether new buying spree has enough momentum to cross this barrier, or if $850/oz becomes a (temp) resistance level. If it crosses smoothly, a recovery to around $900/oz is likely, IMHO.Significant technical damage was done to gold as hedge funds dropped trades (they were SHORT US dollar and LONG commodities, but dropped these bets). However, the hedgies may also swing back behind gold if they sense a meaningful recovery is going on.In the mean time, actual physical precious metals are being gobbled up and stashed away by serious investors. If the hedgies had any sense, they would be warehousing gold themselves. There may come a time when the bartering price on the street for physical gold is MUCH higher than the spot price on the futures markets. ESPECIALLY if the credit default swap markets implode in the next few months.PeteCA

Anonymous • August 21st, 2008 at 11:59 pm

@PeterJBRon Paul is the man! I am deeply sadenned that a man of this stature was not given a fair shake in the media, but then again you only need to realize who owns the media in the USA, and it itis far from inpartial./

Guest • August 22nd, 2008 at 1:07 am

Looks like the government has been giving Americans the bad news from Freddie and Fannie in small doses at a time. And it also looks like Roubini, who predicted the insolvency of the GSEs two years ago and later argued in “The Mother of All Bailouts” that the profligate couple could need as much as $200 to $300 billion, came closer to the bull’s eye than any of our illustrious government Cracker Jacks.Says CNNMoney today (August 22) “In the Trillion-Dollar Mortgage Time Bomb,” “Although few are predicting an imminent need for a bailout [of Freddie and Fannie] just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.“This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980′s and early 1990′s. That cost taxpayers about $250 billion in today’s dollars.“S&P added that saving Fannie (FNM) and Freddie (FRE, Fortune 500) might cost so much that the federal government’s AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive.”When Treasury Secretary Hank Paulson was seeking full authority to bail out Fred and Fan, the GAO told Congress that the “likely cost” of Paulson’s plan would be $25 billion. Paulson sought and got a blank Treasury check, with no oversight, from Congress.Wrote Roubini in August of 2006::One cannot even exclude systemic risk consequences if the housing bust combined with a recession leads to a bust of the mortgage backed securities (MBS) market and triggers severe losses for the two huge GSEs, Fannie Mae and Freddie Mac..If this systemic risk scenario were to occur, the $200 billion fiscal cost to the US tax-payer of bailing-out and cleaning-up the S&Ls may look like spare change compared to the trillions of dollars of implicit liabilities that a more severe home lending industry financial crisis and a GSEs crisis would lead to…Wrote Roubini on July 11, 2008 “In How to Avoid the Mother of All Bailouts”:An implicit liability that is not made explicit is the worst of all worlds as fat cats on Wall Street and around the world get a 100bps spread relative to safe Treasuries ($50 billion subsidy) on their holdings of agency debt and they know they will be anyhow bailed out if Fannie and Freddie go bust. Saving those $50 billion will not make Fannie and Freddie solvent as their insolvency hole is too big to be filled but it would at least reduce the fiscal bailout bill – that could be as high as $200-300 billion – that their insolvency and government takeover will imply…[T]he financial costs of this financial crisis – the worst since the Great Depression – are mounting so fast that any bailout will become fiscally extremely expensive…Indeed, my initial estimates of $1 to $2 trillion dollars of losses from this financial crisis did not include the bailout of Bear Stearns’ creditors, the bailout of the GSEs bondholders, the fiscal costs of the Frank-Dodd bill, the fiscal costs of a severe U.S. recession that is mushrooming an already large fiscal deficit, the fiscal cost of bailing out – a’ la Bear Stearns – the last four remaining major independent broker dealers,…the cost of bailing out the Federal Home Loan Bank system… Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it.Thus, soon enough, if we fiscalize all of these losses the U.S. may fast lose its AAA sovereign debt rating and eventually end up like an insolvent banana republic…

Dano • August 22nd, 2008 at 2:14 am

AK in TX and @ AnonymouseYou need to consider Brazil.Good Weather.Cheap labor.Reasonable taxation.Growinging ag sector to rival the US.Great spirit in the people.And above all else, energy independent.Brazil is much like the US was at the turn of the century into the 1900′s…

Guest • August 22nd, 2008 at 4:20 am

“So we are to believe that Obama, as Soros puppet, will lead us into nuclear war? Does anyone believe that McCain isn’t pro-war? Guess we are out of luck then, eh?”@ K in TX on 2008-08-21 16:56:12My friends tell me that the “elite” around DC Bars and Dinner Parties are mostly talking about nuking this and nuking that as if it was old hat… damned dangerous this where it appears fairly obvious from scanning the news that “nuking this and that” is highly in favour amongst the US rulers.Now considering that Mr Putin ain’t as dumb as most of those in the USA and is probably thrice as alert and sentient, and is on his own turf, I would think that the US as insane and irrational as it is, may just make the mistake and press the button.And for the record, Napoleon invaded Russia during winter as did Hitler and both lost there ball-bags and so will those richard-craniums in the USA – er, winter approaches.If this happens, then we need to hang all concerned; no alternative and this is the bottom line: The USA is acting more irresponsibly and criminally today than it has anytime before in its history – and that is saying quite a lot!Obama is a blow-off and McCain a sick jerk-off but it will be the American people who will be held fully responsible for a nuclear war on this, our, planet.Economics are one thing but nukes; yet, another.Ho humPeterJB

Guest • August 22nd, 2008 at 6:03 am

@hlowe >

Bush telling the China how to behave may come back to bight us.

And I who thought that all other countries would be used to U.S. telling them what not to do. Don’t torture, get your army out of the other country, and other good stuff…

Guest • August 22nd, 2008 at 6:10 am

Talking of the old nautical days, when a Captain, given a commission, would spend a few days and nights crawling the ship until he knew its every knot:I strongly suspect from experience, and observation that many CEO’s (Captains) when talking, sic, up a new company challenge (however temporary and or permanent) er… position, would normally and typically immediately and firstly, a priori, contact his beloved and favourite headhunter and place his name back on the eligibility list for new CEO (Captain) positions. No crawling around stinking holds below decks this lot; no inspecting pipes, crooks and crannies; no knocking the timbres that brace the decks. No indeed. Straight to the Mobile for the modern busy “executive”.Methinks, again, er still – that incompetence will be found to rule the day downwards as the Courts advance their questioning; and the galleries stand aghast, ‘n shocked indeed. T’was that ‘The Captain was never on deck; never on watch and never held the tiller’! Did he know the name of his ship, Sir? you will hear asked…Where was this ship asailing? – then they of the Court will ask. Well, of course, on a direct coarse to my next ship the Master t’was heard to say…Incompetence; irresponsibility; neglect and er, self-agenda; did I mention incompetence?Ho humPeterJB

P1AQL • August 22nd, 2008 at 6:55 am

@hlowe aka Guest on 2008-08-21 14:17:47 wrote:

I think it is important to recognize that the Chinese middle class is larger in number than in the middle class in the USA, and as I understand was to soon equall the whole population of the USA.

Take a look at the latest McCulley post:http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2008/Global+Central+Bank+Focus+Narrowing+Ecologies+August+2008.htmSays,

This self-fulfilling dynamic rapidly accelerated the pace of industrialization in emerging economies, as developed country consumer savings rates dropped to new lows amidst rapidly inflating asset prices, and demands on global production capacity increased significantly in a very short period of time.

Next, take a look at the chart titled, China PMI Inventories to New Orders Ratio on the same page. Looks like China is caught baking too many cakes for those crazy Yankees!My bad about the Chinese middle class. When you can’t afford your own bread and are making too much Yankee Doodle cake, why not buy and eat your own cake! Eat that cake!Slurp! Burp! Hick!P1AQL.PS. Prof. Roubini, Kudos to your tech team for the cool inline Preview feature.Many thanks and warm regards,P1AQL.

Guest • August 22nd, 2008 at 7:11 am

PeterJB >

Talking of “evil barbarians”:http://www.theinternationalforecaster.com/International_Forecaster_Weekly/The_Big_Sting_Two

From the article:Last week we may have seen the beginning of WWIII. Russian peacekeepers were in Georgia and the Russian military brought a stinging defeat to the Georgian military, American and Israeli mercenaries and American forces all of who participated in the murder of 2,000 or more civilians.I guess that is why US+UK complained about the Russian response being “excessive”…This is too funny…looks like they would have liked Russia to come in with a tiny army so that they could have been defeated…It is also weird how US+UK supported the independence for Kosovo, but not for South Ossetia. But I guess it is because they are not really honest (Kosovo wanted independence from Serbia, which is an ally of Russia). And how US+UK held Saddam responsible for gassing the kurd separatists, but allow Sahakasvili to bomb South Ossetian separatists.And on top of that they make it look like Russia attacked Georgia first, or that Georgia had walked into some trap that Russia had set up. Georgia = Good, Russia = Bad, does not matter what either country does.I have been contemplating starting my own website where I write NEUTRAL news articles. Of course a problem is where I would dig out the real truth from, in some cases.In any case, the truth is that this world will never see true global peace. Just one major reason for this is this sort of trash-talking about other countries. How the heck do they expect Russia to think about them when they constantly talk cr*p about the country? Not to even mention Venezuela and other countries that we often hear cr*p about…In fact that Sahakasvili could probably have ended up with better results and lower costs (less dead people, less damaged infrastructure, etc) if he would have tried pampering the South Ossetians with social benefits and such. Offer free University education to their kids, free health-care, and other perks if they take up Georgian citizenship or something like that (or are willing to move out of South Ossetia). Eventually that area would have probably been rather empty, with not many people voting for independence.Also, if most people would have been encouraged to move out of there, their economy would have gotten smaller, leading to less jobs and so on. Such a process would have been self-feeding.

Guest • August 22nd, 2008 at 7:20 am

Wonder what Hanky Bernanke Panky is up this morning? Some silly fed speak and maybe a new facility to defer the day of judgment for LEH or FNM,FRE? Trotting out some more ridiculousness to impose a bear squeeze and use taxpayer money and self-arrogated powers to jawbone a rally. How many of these have we seen? How sick and tired of the voodoo doctor trying to revive the flagging, gangrenous, and soon-to-expire patient.This is so like the USA model of health-care: neglect (even encourage counter health policies) preventive care of patient and then expend a lifetime’s wealth accumulation to prolong a diseased and deteriorated last few hours.Get ready for your day-trading FED to oppose the market forces seeking to set aright all the abuses and excesses of this age.

Gloomy • August 22nd, 2008 at 8:32 am

INNOCENT MONEYThere was a great quote from Buffet this morning on Bloomberg, germane to Koreans buying Lehman:”Buffett has been seeking acquisitions to put some of Berkshire’s idle cash to work and toured Europe earlier this year to find candidates. He said today that he’s been getting more “distress” calls than real opportunities, and that he’s been referring callers to sovereign wealth funds, which he characterized as “innocent money.”

Guest • August 22nd, 2008 at 8:50 am

Well, now with phony and fraudy backstopped and LEH gone, there are no worries mate! US stocks will now rally to new all time highs to celebrate the new socialist arena called USsr where there will be no more loser forever more!

Guest • August 22nd, 2008 at 8:53 am

From the BigPicture blog:Earnings forecasts of Wall Street Analysts “missed the mark by the biggest margin in at least 16 years last quarter,” according to Bloomberg data.How often did the Street get it right? Try 6.7% for the companies in the S&P500 Index in Q2. That’s the worst showing since Bloomberg began tracking this data way back in 1992.While some blame the credit crunch, Oil, and Housing as the problem, a more likely source of error is Reg FD. Analysts have been increasingly wrong since the adoption in October 2000 of Regulation Fair Disclosure. The regulations barred CEOs and CFOs from giving the inside dope to the outside dopes. No more whisper numbers to favored bankerd or their pet analysts.What does this mean to investors? Well, traditional Wall Street Research seems to be of minimum value to investors.

Guest • August 22nd, 2008 at 9:01 am

10:00 a.m. Bernanke: Growth likely to remain week ‘for a time’10:00 a.m. Bernanke: Economy beginning to feel effect of bank turmoil10:00 a.m. Bernanke: Dollar, commodity price trends to limit inflation10:00 a.m. Bernanke: Financial market turmoil has not yet subsided

HankHenryP • August 22nd, 2008 at 9:13 am

You little peons are mere suckers in the game of wealth confiscation we run in the US and on Wall Street! Thanks for our $ Billions!!!

Guest • August 22nd, 2008 at 9:17 am

NR,what happen to your bearish call? looking at $VIX and $OEX, it is quite bullish for stock. looking at RSI of both $VIX and $OEX, it is quite bullish for stock too. what happened?

Anonymous • August 22nd, 2008 at 9:24 am

The rise in the stock was first due to early buying before Bernanke’s speech, and now it’s due to possible buyout of Lehman by a Korean company. There is an obvious effort to make things look rational in the markets. (The case with the US economy – I call it the MAKE IT LOOK GOOD ECONOMY). The meadia has been very competent in treating information at its face value but incompetent in enlightening people. One need regulators to act in this market given the obvious manipulation since the crisis started. However, these people prefer to chicken out. The fact that stock market goes up in the light of the obvious economic crisis is ridicoulous! There had already been enough news out there for this market to crash.

Guest • August 22nd, 2008 at 9:35 am

ECRI’s weekly leading index growth rate is worst since 1980! New cycle low reached today and stocks just continue to ignore any economic news as if it won’t drive earnings growth at all! Can anyone explian theis complaceny to me?

Incognito • August 22nd, 2008 at 10:32 am

The only outcome from the rise in the markets is active manipulation based the moral hazard created by FED intervention. Based on the theory, the uniqueness of prices in the markets is obtained either via (1) hedging argument or (2) information modeling (there is utilitarian approach which stands as very abstract for application).For(1): It can be seen that hedging doesn’t work because otherwise no crisis would happen. This suggests that markets are incomplete. Thus, there is a level of risk against which we cannot protect ourselves.For(2) I don’t thin that markets move based on the news. Rather, it seems news move based on the markets :) Well a theoretical explanation would be this: Suppose one finds about the fact that a company might go into trouble in a near future. However, she or he may not be able to short the stock if there is someone else owning the same stock with a relatively much larger resources. This is due to the fact that the investor with larger resources might prevent the short sale to avoid asset value erosion in his/her balance sheet. As a result, the stock price remains higher than it deserves to be. Thus, even under a model where information is used as the underlying, there exists a possibility of mispricing.(3) The possible explanation drives us to resource dominance. That is, those with large enough resources are able to drive the markets where they want. The more these resources are based on fiat money (not credit money), the more enduring the impact is. Large financial institutions and governments are highly likely able to own such resources. [I define credit money as the money amount banks create by giving loans. Fiat money is the true value of the money.]One may interpret the economic situation based on market parameters. This is due to “Efficient Market Hypothesis”(EMH). It asserts that stocks in the market move randomly and thus it’s not possible to make excess gains by actively trading in the markets. Passive investment strategy would be a better idea. Well, random movement here is the key factor. If we were able to model a process that gives us an accurate point forecast, we wouldn’t worry about randomness. However, when things are random, we trust on probabilistic measures (likelihood of a scenario or an economic state).Since under EMH prices act randomly, their state will be revealed as the time passes. When they are revealed their value is taken to be the reflection of the truth. In my view, this cannot be always true because we may not always have the trading strategy to make prices arbitrage free (a price level which doesn’t provide any risk-free gain to anyone) and this may be due to resource dominance as I explained above.

Guest • August 22nd, 2008 at 10:38 am

By Mark Pittman and Shannon D. HarringtonAug. 22 (Bloomberg) — Midwest Bank Holdings Inc. ChiefInvestment Officer Don Wiest is wagering U.S. Treasury SecretaryHenry Paulson will rescue him from a failing $67 million stakein Fannie Mae and Freddie Mac.Melrose Park, Illinois-based Midwest and banks fromPhiladelphia-based Sovereign Bancorp to Frontier Financial Corp.in Everett, Washington, own preferred shares in the beleagueredmortgage-finance companies that have lost more than half their$35 billion value since June 30. Concern that Paulson may stepin with a rescue plan that would wipe them out along with commonstock investors has sent the securities tumbling.“I guess we are betting on Paulson,” Wiest said. “Wehave to believe that his plan carries the day somehow.”Midwest, an owner of banks in Illinois, has $67.5 million,or as much as 23 percent of its risk-weighted assets tied up inWashington-based Fannie and Freddie of McLean, Virginia.Small, regional banks may have the most to lose from thestumbles in Fannie and Freddie, and Paulson may risk bankfailures unless he protects preferred stockholders, said IraJersey, an interest-rate strategist at Credit Suisse Group AG inNew York. The impact on the preferred holders “may be animportant driver” in Paulson’s decisions, Jersey said.“Any wipeout of the preferreds could have implications forthe capital of the greater financial system and these regionalbanks that might have reasonably precarious capitalsituations,” Jersey said. “You don’t want to make that worseif you’re the government.”

Anonymous • August 23rd, 2008 at 1:32 am

An excellent article. However, there is another solution to the financial demise that was not stated. From what I gather, the US came out of its financial malaise of the 1930′s through WAR. There is nothing even close to getting the economy out of strife than by waging war. Iraq has not been too good it seems for the US economy but maybe that’s because it was of the wrong sort or not large enough. I would not rule out a hot and cold war starting up to serve to raise the US economy and restoring some power.

Julius Vizner • August 24th, 2008 at 11:07 am

One sector of the financial industry not mentioned is the insurance industry. Life insurers alone account for $1.9 trillion in corporate bonds and $2.9 trillion in credit market instruments (flow of funds, Q4-07). Property/casualty insurers account for a further $852 billion in credit market instruments. That is, life insurers represent 27% of the corporate and foreign bond market. As premiums are collected and the delta over expenses are invested, this source of liquidity should hold going forward. Large-scale insurer insolvencies are rare in recent history. In part, because they do not rely on bond markets for financing as much as operations and retained earnings. The largest supplier of corporate bond funds today is the “rest of the world” The point is that, aside from tha banking system, there are supports that exist to prevent a full-blown credit crisis in terms of medium-term funding, barring a sharp increase in corporate default rates, which is plausible. That is, the insurer sector of the financial system is not in danger of collapse. Insurers will continue to supply credit to investment-grade credits (as proscribed by regulations) in addition to holding mortgage and related assets. Life insurers claim to be long-term, buy-and-hold investors (a peak at their intra-year trading activity reveals otherwise). As such, write-downs of various MBS (which do not make up the balance of their portfolios) is an accounting phenomenon, barring a huge increase in delinquencies. If you believe that corporate defaults will skyrocket and 1/2 the population will walk away from their mortgages (reminds me of the scenario in Its A Wonderful Life without George Bailey) then of course a crisis is inevitable. From the narrow viewpoint of the insurance industry, however, this is not such a straightforward call.

Bill • August 29th, 2008 at 5:56 pm

Dr. Roubini Sir,Is it possible given the sharp pull back by Asia and Europe from purchasing US gov’t debt financings ~70% down from Julyl, and the ~50% increase in the US purchasing of same from ~40% to 60%, coupled with all the other exposures you detail, that the money supply will grow so rapidly in the US, and the interest rate be so low, that the dollar rise is a dead cat bounce?Worse, could we be on the verge of hyperinflation in goods created by a rapid decline in the dollar from printing so much fiat money by bailing out institutions?An article in Harvard Business Review current edition by a McKinsey think tank member points out how global financial markets have “deepened” and in the deeper financial markets, no single country has much influence on them, and total financial assets have balooned to ~195 Trillion (a low number I think), about 4x global GDP. This is up from just ~12 Trillion in 1980.Has fiat money without any real backing of a gold or land standard set us up like the Weimar Republic?Is the global financial system now essentially entirely out of control such that we are poised for an even worse situation than you predict, basically a second Great Depression, with onset this fall? An additional 20% fall in the stock market is something you already predict, but that much of a fall, might happen in a week in October for instance.The wealth effect of having our homes decline in value 30% is now immense with many having no wealth at all after this decline. Cars are for sale on all our front lawns. Every US citizen feels the malaise, and our national psyche is low.All our large assets homes and cars are deflating while goods are inflating and nobody seems to have liquidity at any level. With the bail out of Fannie and Freddie forecast to at least distrupt the mortgage availability further while it is occurring, the real estate market is essentially a deer caught in the headlights.Once the public begins to realize that the FDIC is having to tap the Treasury, and the true extent of collapsing banks is recognized, bank runs may spark the turn to the worse, ushering in not the worst recession since the last Great Depression, but Great Depression II.The S&L crisis saw the collapse of the FSLIC in a week. Then it was rolled into the FDIC. Today the FDIC has only 1% coverage of deposits. So isn’t it’s bailout shaping up to be $250 billion? Not $30 billion it’s available Treasury line?Similarly a $25 billion Congressional estimate on Fannnie/Freddie seems nuts. With what, ~$6 trillion in mortgages, isn’t it more like $600 billion about 2x your $250 – $300 billion estimate?With all this bailing out AND a trend showing the US has to buy it’s own debt offerings and drop interest rates further do we essentially see hyperinfation?I begin to think there is a chance with the hedge funds failing too and their high, even 100:1 leverage that the risk of Long Term Capital Management is 10x than then and the constant rise of financial assets in the deeper financial market since 1980 is actually a bubble that is about to burst as the assets and debt are wiped out. Basically the curve in the Harvard Business Review will reverse for the first time in 28 years.On top of it even Forbes thinks Israel is about to attack Iran over it’s nuclear program, which should spike oil and get us to $8 – $10 / barrell oil?It seems like a deepening super storm of greater depth than even your 2/2008 article.Is the dollar safe in this environment or should one purchase silver and gold basically? Is there no where to invest safely in the US if real estate and stocks plummet and the dollar value plummets and the interest paid on dollar savings plummet all at the same time?

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Greece pushes back on demand for more cuts | http://t.co/zmRV2kSy $$
25 minutes ago
Paul Kedrosky pkedrosky
Tesla’s electric Model X minivan/SUV. How does this sell with doors preventing roof rack or garage? - http://t.co/X5Vk24sb
26 minutes ago
William Easterly bill_easterly
Paul Krugman assembles remarkably diverse coalition of economists who agree he babbles nonsense http://t.co/RwcyqrfM
28 minutes ago
Robin Bew RobinBew
Despite Greek woes, spreads on Italian and Spanish bonds are narrower than 2mths ago. ECB not doing QE, but bank support seems OK substitute
29 minutes ago
Financial Times FT
Video: Hedge funds bullish on returns http://t.co/LdLJMaVR #FinancialTimes
29 minutes ago
US-China Today uschinatoday
The Awkward Politics of Presidential China-Bashing http://t.co/ncbE2g9F
30 minutes ago
Bill McBride calculatedrisk
Consumer Sentiment declines in February to 72.5 http://t.co/elS1CvkF
31 minutes ago
Tim Harford TimHarford
Gah! How does he do it? RT @doctorow: 1027 more words on INFORMATION DOESN'T WANT TO BE FREE, my copyright/business book
31 minutes ago
Foreign Affairs ForeignAffairs
Fmr. Iranian official: Washington is to blame for the crisis in U.S-Iranian relations. http://t.co/YN0hGS05
32 minutes ago
Stocktwits StockTwits
RT @Benzinga UofM Confidence 72.5 vs 74.8 Est; Prior 75 $$
35 minutes ago
zerohedge zerohedge
UMich confidence misses Exp 74.8, prints 72.5; Another totally worthless indicator
35 minutes ago
Blake Hounshell blakehounshell
What to do about Syria? This was a tough one to write: http://t.co/XDhSubqO
36 minutes ago
zerohedge zerohedge
Phil Lebeau in his prime: reporting of Toyota mishaps
36 minutes ago
CFR CFR_org
Quote of the Day: "This regime is playing a game, seeking to distract attention from the massacres in Homs." Ammar al-Wawi, Free Syrian Army
37 minutes ago
Roubini Global RoubiniGlobal
Clashes broke out in central Athens Friday as Greece's major unions launched a 48-hour nationwide strike http://t.co/i4VfExS2
37 minutes ago
Max Abelson maxabelson
If the Tuba Raid story in the Times today and @FelixSalmon's duck video could somehow be combined, I'd sure be happy
39 minutes ago
zerohedge zerohedge
BAC rally explained: vacuum tubes exaggerating momentum as usual http://t.co/7cVzZLDs
40 minutes ago
Financial Times FT
US trade deficit reaches six-month high http://t.co/7cj1zDEx #FinancialTimes
42 minutes ago
The Economist TheEconomist
Optimism about the latest deal hammered out in Doha reconciling Palestine's two rival halves was in short supply http://t.co/OOMY03Ks
42 minutes ago
Tim Harford TimHarford
Five steps to an organised inbox: http://t.co/jNviymiz
42 minutes ago
Bloomberg News BloombergNews
Fed plays Wall Street favorites in secret deals | http://t.co/1FS81OBc
45 minutes ago
Tim Harford TimHarford
World Press Photo winners 2011 - amazing images http://t.co/MBwpvSdH
46 minutes ago
Tim Harford TimHarford
Only one way to find out! RT @cblatts: Dear Economist: Would this ever work? http://t.co/1rGFxcJP @TimHarford
47 minutes ago
zerohedge zerohedge
GREEK DEPUTY FARM MINISTER RODOULIS RESIGNS FROM GOVERNMENT - BBG
48 minutes ago
Barry Ritholtz ritholtz
10 Friday AM Reads http://t.co/c6rwKU6H $$
48 minutes ago
WSJ Economy News WSJEconomy
Unrest Flares on Streets of Athens http://t.co/SOTlRnEP
48 minutes ago
zerohedge zerohedge
Whither Crude http://t.co/hyABjTjs
51 minutes ago
CGD CGDev
Exploring global multidimensional poverty: RT @andypsumner: Where do the poor live - new maps: http://t.co/Kvzlf3K8 @UniofOxford
52 minutes ago
freakonomics freakonomics
The Statistical Significance of Beer: who knew that a brewer at Guinness was the first to explore the concept? http://t.co/vWN67fBY
54 minutes ago
Paul Kedrosky pkedrosky
Cyberchondria: an unfounded anxiety about one's wellness caused by visiting health & medical websites http://t.co/7qISp9Fc
55 minutes ago
Edward Harrison edwardnh
Tony Brown in 1990: "what is happening to us will happen to you" Now All Americans Are Losing Ground - The Daily Beast http://t.co/dGiJ4DCx
56 minutes ago
Roubini Global RoubiniGlobal
#RGE: Chinese Exports performed slightly better than we expected, though imports basically matched our forecast http://t.co/nOV4hS9n
56 minutes ago
CFR CFR_org
This Day in History: 2005 North Korea announces for the first time that it possesses nuclear weapons.
57 minutes ago

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