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Revisiting my February paper “The Risk of a Systemic Financial Meltdown: The 12 Steps to Financial Disaster”…And Some New Policy Recommendations to Avoid the Meltdown

Author: Nouriel Roubini  ·   ·   › Share This Print

Last February – well before the collapse of Bear Stearns – I wrote a paper “The Risk of a Systemic Financial Meltdown: The 12 Steps to Financial Disaster” where I outlined how the U.S financial crisis would become more severe and virulent and eventually lead to a systemic financial meltdown and a severe recession.

It is now worthwhile revisiting these 12 steps of the financial meltdown as the events of the last few weeks and months have confirmed – literally step by step – the 12 steps that I then argued would lead us to the current economic and financial near-meltdown. I thus provide below a summary version of this paper where each of the 12 steps of this financial meltdown is reported in summary as written in the original paper.

Steps 9 through 12 are presented in their full – not summary – original version as they are the crucial final steps of this financial disaster scenario and they closely match the rapid escalation of the severe strains experienced by financial markets in the last two months. You can compare for yourself how the 12 steps outlined in that February paper match with the actual evolution of financial markets and the real economy in the eight months since that paper was written.

After reviewing my 12 steps scenario I will present below some policy recommendation that are urgently necessary now to prevent this systemic meltdown from occurring.

Here is first the February paper in a summary – but literal – version of the original (bold added):

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon…

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime …were occurring across the entire spectrum of mortgages;…Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits;..And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans…

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided…The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters…

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one…And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions…

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur…

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%….Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. ..If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems – cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets… will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion so far – will be unable to stop this credit disintermediation – (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible. I will argue – in my next article – that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

This is what I wrote in February and indeed, step by step, we have gotten very close now to this systemic financial meltdown, first in the US and now also in Europe. Last week I suggested, among many other policy options, the need for a coordinated monetary policy rate cut. That cut arrived this morning with Fed, ECB and other central banks cutting their policy rates by 50bps. This action is necessary but only cosmetic and it is too little too late. European central banks should have cut rates – as I suggested – many months ago before the recession and financial crisis became so virulent; and now 50bps for the Eurozone is peanuts at the time when a minimum of 150bps is necessary to restart the economy and unclog frozen financial markets. 50bps is also too little in the US given the damage to the real economy of the financial shocks of the last month; during the last recession the Fed cut the Fed Funds down to 1%; we are still 50bps away from that level. But at the end of this cycle – as I argued before – the Fed Funds will be closer to 0% than to 1%.

Policy rate cuts will have limited effects as they don’t resolve the fundamental problem in markets that is keeping money market spreads relative to safe rates so high, i.e massive counterparty risk. To resolve that triage of insolvent banks and recapitalization of solvent banks, together with massive injections of liquidity in non banks and the corporate sector are necessary; yesterday plan to support the commercial paper market – something I recommended last week – is a step in the right direction.

Other more radical additional policy actions are also needed now; here are four suggestions for such additional policy action:

- To reduce the counterparty risk in the money markets a triage between insolvent banks that need to be shut down and a recapitalization of solvent banks is necessary together with massive injections of liquidity in non-banks and the corporate sector. Yesterday’s plan to support the commercial paper market – something I recommended last week – is a step in the right direction. Direct lending by the government to small businesses – via the Small Business Administration – is also necessary to avoid the implosion of smaller businesses.

- a generalized temporary blanket guarantee of all deposits is now necessary both in the US and in Europe followed by a triage between insolvent banks to be closed rapidly and illiquid but solvent banks that deserve to be rescued to avoid the moral hazard of such blanket guarantee;

- the flawed $700 bn TARP legislation will have to be modified in three ways to: a) allow for direct government injection of public capital in banks in the form of preferred shared matched by private capital contributions by current shareholders (via suspension of all dividend payments and matching Tier 1 capital provided by private shareholders); b) implement a clear plan to reduce the face value of mortgages for distressed home owners and avoid a tsunami of foreclosures; c) do a rapid and radical triage between solvent banks and insolvent banks that need to be rapidly closed.

- given the collapse of private aggregate demand (consumption is falling, residential investment is falling, non-residential investment in structures is falling, capex spending by the corporate sector was falling already before the latest financial and confidence shock and will now be plunging at an even faster rate) you need to give a boost to aggregate demand to ensure that an unavoidable two-year recession does not become a decade long stagnation. Since the private sector is not spending and since the first fiscal stimulus plan (tax rebates for households and tax incentives to firms) miserably failed as households and firms are saving rather than spending and investing it is necessary now to boost directly public consumption of goods and services via a massive spending program (a $300 bn fiscal stimulus): the federal government should have a plan to immediately spend in infrastructures and in new green technologies; also unemployment benefits should be sharply increased together with a targeted tax rebates only for lower income households at risk; and federal block grants should be given to state and local government to boost their infrastructure spending (roads, sewer systems, etc.). If the private sector does not spend and/or cannot spend old fashioned traditional Keynesian spending by the government is necessary. It is true that we are already having large and growing budget deficits; but $300 bn of public works is more effective and productive than spending $700 bn to buy toxic assets.

So we are now very close to the systemic financial meltdown that I outlined in my February paper. But radical action can be taken and should be taken to control the damage and prevent this meltdown from occurring. At this point the US, the advanced economies (and now most likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on. We are already now in a global recession that is getting worse by the day. What radical policy action can only do is preventing what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade long economic depression. The financial and economic conditions are extreme; thus extreme policy action is needed now to save the global economy from an ugly depression.

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497 Responses to “Revisiting my February paper “The Risk of a Systemic Financial Meltdown: The 12 Steps to Financial Disaster”…And Some New Policy Recommendations to Avoid the Meltdown”

Grateful Guest • October 8th, 2008 at 8:37 am

Thank you for all you have done for me personally to protect my hard earned assets. If only the powers that be could have your insight. God help us.

Chris • October 8th, 2008 at 8:46 am

“systemic financial meltdown”Can you please describe what that looks like? Because for all the recommendations you can give, it doesn’t seem like anything like what you say is going to be implemented. So the next 12 step paper should try and find a path over the road, “systemic financial meltdown.”I have a feeling it leads through “ugly depression land.”

Guest • October 8th, 2008 at 8:48 am

I am faxing your paper to all senators and representatives and to Obama. I trust you are in contact with them and I pray they will finally listen to you. What should the middle class do to prepare??? Thank you for your hard work, candor and your valiant efforts. You must be exhausted.

London Banker • October 8th, 2008 at 8:57 am

Greatings from the great socialist state of Britain! As you may have read, our big banks are being part nationalised to shore up confidence. Works for me!Between socialism and fascism, I’ll take socialism every time. It comes with the assurance of food, housing, medical care and civil rights at no extra charge.I’m meeting up with central bankers here shortly, and will let you know how I read things globally when I post Friday.

London Banker • October 8th, 2008 at 8:59 am

Should be “Greetings”. Feeling a bit faint from the lack of oxygen down at these depths of the markets.

Guest • October 8th, 2008 at 9:02 am

I like the article and I think it demonstrates great insight. But, I don’t think the American public will go far an amendment to TARP that reduces the face value of mortgages for distressed home owners even if it means avoiding recession. Americans will view it as a further bail out of irresponsible home buyers and I think it would be very poorly received. The sense of fairness in American minds is at a heightened level and unless everyone is allowed to reduce the face value of their mortgages such an amendment will be rejected by the public.

Alessandro - http://castellidicarte.blogspot.com/ • October 8th, 2008 at 9:02 am

London Banker: “and civil rights”This strongly depends on the flavor of socialism, but then again, looks like U.K. is approaching the problem from a more people-friendly angle.

Guest • October 8th, 2008 at 9:04 am

Prof RoubiniRespectfully, it is clear that Mr Bernanke and Mr Paulson are not listening to inputs from respected economists or academics. Therefore, while your commentary is interesting … it’s basically having no effect. This is not a personal attack in any way. Justg a suggestion that the various news commentaries are not actually going to change things very much.Let me suggest instead – that you actually take time to consider what needs to happen if we do enter a real world financial crisis. It’s not clear how far this thing will go. The current steps by the central banls might temporarily stabilize things for a while (or they might not). I do think there is some value in people who are respected, and somewhat objective, taking time to consider how to handle a real global crisis. Very likely, if the world were to reach that stage, central bankers could be so distraught that they are not even thinking clearly.It is far from clear how people would stop to put the pieces back together again. I doubt seriously that the answer is just to forgive all debts. There has to be an element of accountability in any solution that is reached. So I’ll let you consider that.Just a suggestion. It might take a little time – but I think the effort could be quite vital. I’m not suggesting that you stop the blog. Just offering the advice that your skills might be best used where they will be needed the most.PeteCA

Guest • October 8th, 2008 at 9:09 am

Here’s a thought for the day …Anyone in the markets who is holding large short positions in gold might want to seriously consider reducing or dropping their positions. This certainly applies to the OTC markets as well. Otherwise you’re very likely to get run over by a herd of panicked global investors. Never stare an angry buffalo in the eyes.PeteCA

Anonymous • October 8th, 2008 at 9:10 am

The other question is what will happen to inflation? Will we get deflation like the Depression and Japan or super high inflation like EM crises?

Anonymous • October 8th, 2008 at 9:10 am

Dow is up despite the fact that there is no basis for pricing under the presence of the highest level of uncertainty. I would use the most insulting words to Wall thieves, however, it would be very insulting to those who would really deserve these words. This is ridiculous! The entire financial system in on the brink of a collapse and these people still have no problem with manipulating the markets! Unbelievable!

Leo70 • October 8th, 2008 at 9:12 am

This idea of cutting the interest rates is not all that clear to me. If there is a major concern that there will be a run on the banks (or if already one is going on), isn’t cutting rates going to make it even more likely? The most likely effect of a rate cut in this environment IMHO is that rates of returns on deposits, money market funds, CDs, Treasuries, etc. will drop, whereas interest rates on loans won’t go anywhere. Then, what is the incentive for savers to keep their money in those vehicles? Any rational individual at that point (0% rates that Nouriel takes about) should just take their money out and stick it under the pillow. What they are saying is that they need people to leave their money in the financial system, and at the same time they are taking away from them any incentive to do so.The only way I can make sense of this is that the financial meltdown has already happened, and there is no rational way to save the boat from sinking. They are essentially hoping on the stupidity (or irrational exuberance if you prefer) of the people that actually lived within their means and saved.

Guest • October 8th, 2008 at 9:14 am

With the Nikkei down over 950 points last night, it’s unlikely we’re going to see much recovery in the US markets today.PeteCA

Guest • October 8th, 2008 at 9:18 am

2 scenarios leading to hyperinflation: Frank Barbera Financial Sense,posted yesterday & Bob Chapman, International Forecaster, posted Sat.

Guest • October 8th, 2008 at 9:32 am

I don’t think there’s much that’s going to shift people out of a flight to safety this week – and probably not for the rest of October.PeteCA

London Banker • October 8th, 2008 at 9:35 am

A laugh for you from FT Alphaville:

The short sellers must die.The SEC has just caught its first illegal shorter, Kenneth Rickel, of Lion Gate Capital, Beverly Hills. The regulator has also announced the appointment of a Dr Crippen as senior advisor to Chris Cox. Coincidence?We conclude Rickel will shortly be dismembered, his bones burned in a specially established stove and his organs dissolved in acid. A treatment broadly in line with the SEC’s current stance on short selling.Said Chairman Cox:
We look forward to drawing on his skills as we work to protect investors and restore confidence in our markets.

The SEC’s Dr Crippen is not, alas, Hawley Harvey Crippen, the American physician-come-psychopath hung in 1910. He is the ever-so-slightly less exciting Daniel Crippen formerly of the congressional budget office.

For those who don’t recall Dr Crippen’s macabre murder and dismemberment of his wife, he was the first criminal caught with the aid of wireless communication, aboard a Canada bound ship.

bthomas • October 8th, 2008 at 9:38 am

With all due respect “PeteCA”, I think Mr. Roubini’s commentary is actually very helpful because it shows just how wrong the government and FED are playing this. There is not much to consider since we are already in a real world financial crisis. You cant put the pieces back together until you know what those parts are..

Guest • October 8th, 2008 at 9:40 am

Everything points out now to massive inflation as a way to reduce real debt. After asset crash we may witness massive debt reduction in real terms. Any thoughts on this?

P&L • October 8th, 2008 at 9:42 am

Hey, give the poor guy a break! Why spend this time on “what needs to happen IF we do enter a real world financial crisis. It’s not clear how far this thing will go.” What impact can ANY economist, even one so astute as Dr. Rubini,have at this point. WE need to educate the public on what HAS HAPPENED, and wait for the dust to settle. In the mean time, the REAL danger to the world comes from ANY international incident that adds to public anxiety. What happens to the markets if something big (Iran nuclear facilities?) gets blown up by somebody…US, Israel, Iran, Bin Laden? Attack on US soil? Think about THAT! This looks like a pretty good moment for some international political leverage.

Guest • October 8th, 2008 at 9:44 am

LB: Remember your suggestions some months ago on this blog? The real steps that will help the markets are those that involve a restoration of honesty, integrity and transparency to the financial system. Perhaps you can provide some input to the BOE and ECB along these lines. I’m not sure we’re going to see this kind of change in Washington, until we get a major change in our financial leadership.PeteCA

SG • October 8th, 2008 at 9:46 am

Prof Roubini,I wonder if you would ever consider being the next treasury secretary or fed chairman if asked. You would certainly be my choice if I were running for President.

Guest • October 8th, 2008 at 9:48 am

Perhaps. But if Iceland goes bust then I suspect that Dr Roubini should give some very serious thought to the global financial system. It looks to me like Iceland could wind up as a piece of financial wreckage – after the demise of the carry trades.PeteCA

Guesto • October 8th, 2008 at 9:50 am

at least shorting gold is still allowed… ! :-) clearly those other bulls who needed to be protected with the ridiculous ban on financials short-selling don’t seem all that dangerous anymore — they were brought to the slaugherhouse alreadyeither way, i agree with your gold buffalo “bullions”, except they are not angry – they are panicky and scared

Guest • October 8th, 2008 at 9:51 am

The NAR have no credibility whatsoever. But the financial and mainstream media lap dogs eat up the NAR stats like a dog that eats its own excrement. (sorry about the tasteless image)

Guest • October 8th, 2008 at 10:00 am

Likewise. Here’s hoping the next administration actually listens. Hmmm … Treasury Secretary Roubini has a nice ring to it!

Prepared • October 8th, 2008 at 10:03 am

I agree, P&L… I’m not much of an economist, but I am a historian and (former) practicioner of public policy, and my experience tells me that a wounded government is a dangerous government – and right now there are a lot of wounded governments out there. Hopefully, everyone keeps their head…

London Banker • October 8th, 2008 at 10:04 am

Pete,I fear it is too soon. Remember that the Securities Exchange Act of 1934 came a full five years after the crash of ’29. Perspective is required for good policy. Panic leads to authoritarian solutions that are almost always in error, as the extra-legal liquidity facilities of the Fed and the egregious Paulson Plan surely proves.

JGU • October 8th, 2008 at 10:05 am

Dear professor, I never questioned your sharpness in your predictions. I think the most urgent thing now is to separate the good banks from the bad, and shut the bad ones down, I can not think of any other way that can restore confidence.

ewulf • October 8th, 2008 at 10:10 am

It would be very interesting to know what stage policy makers are at, regarding the solutions sequence,given that the transaction cost for “do it all with a coordinated approach” ,is lower than at the beginning of this crisis.Thus,It seems more likely that as long as markets volatility goes on deeper into the point of no return, radical measures will become more feasible,rushing up the expected next steps.-

Medic • October 8th, 2008 at 10:11 am

Pete;In times such as now, when things move so fast and so far from where we perceive “normal”, people become scared and panic. The descent from our heights will be dizzying, but when it is over, the ones with the plans drawn up will be the ones who see their plans implemented.I concur with your suggestion to the prof. I think the worst case should be assumed at this point and the plans for the next foundation need to be prepped. Let’s just hope we can do it right for once….

Guest • October 8th, 2008 at 10:13 am

OK – the Fed has taken the remarkable emergency action of dealing directly in commercial paper. What we now seem to have is a banking system where the Fed simply becomes “The Mother of all Banks”. But that leaves us with a few dilemmas. The first is, how exactly do our commercial banks make any money in this current environment – or survive at all. They are almost becoming cut off and isolated during the current crisis. Residential mortgage lending … zip. Commercial RE …. zip. Consumer loans … not over your dead body. It still looks like we’re going to wind up with a lot of banking casulaties here.Second. Why aren’t banks making loans? Well simply put, becauase they are now factoring in risks into their loan packages. Which demands much higher interest rates. Let’s face it. A lot of corporate America is carrying debt ratings that’s not much better than junk bonds. And the US consumer is looking blue from a lack of oxygen. US banks have been on the forefront of facing this situation. But it’s not going to change because of the Fed’s actions this week. Take a look at the current stock values for Ford and GM. Will these companies survive long enough to collect their bailout packages from Congress???PeteCA

curious • October 8th, 2008 at 10:22 am

Back to the pricing mechanism question. There may be a resemblance (analogy) in the mark to market price synonamous with the spot price (i.e. today’s price) and the “hold to maturity” price being synonamous with the future delivery price. However, let me ask, should there be a “market clearing” price (i.e. reality price)? If so, is it different? Then, what is the market clearing price?

Guest • October 8th, 2008 at 10:34 am

Fair question. If indeed they had attacked this issue of market clearing prices … then we might be a lot further down the road towards a solution. So let’s take your analogy. What do they do in the futures markets? After all, they’ve got essentially the same problem, don’t they? Nobody knows what the price of oil will be in a years time – but people still have to reach a price today on forward contracts. So … they simply establish bundles of assets (futures contracts) that are tied to different delivery dates in the future. And they allow the market to bid the prices of these contracts up and down as time goes by. And the key is that the futures contract must eventually converge on the final spot price at delivery, right? Why? Because the commodities that are trading today have their prcies set by today’s laws of supply and demand. The problem with Paulson’s plan is that you don’t really have free market forces determining the prices of the assets. It’s still gamed to deliver a false set of values on the assets. But they could have tried to set up a kind of “futures market” for mortgage based assets … tied to expectations for future prices of residential properties. Da problem is … nobody on Wall St wants this to be a fair resolution.PeteCA

Guest • October 8th, 2008 at 10:39 am

I want to know about the collapse of BWII.Roubini doesn’t think that there will be more inflation than there already is.So how will it collapse?

Bob • October 8th, 2008 at 10:46 am

A friend of a friend just had their bank refuse to cash out their CD. I can’t think of anything that could induce panic more than that. Retain liquidity at the price of confidence. I would post the name of the bank, but I don’t have that information yet.

Guest • October 8th, 2008 at 10:46 am

Cashin (one of the few good ones on CNBC) says to watch 9213 on the Dow – break that and it’s yesterday all over again and then some. Separate Note oil is breaking down.

preparingfortheworst • October 8th, 2008 at 10:51 am

This comment about “wounded governments”: The US has just repatriated an Army Brigade that has been serving in Iraq for Homeland Security. Part of their charter is “civil unrest”… perhaps this “crisis” has been planned all along. I know the good Professor doesn’t have time now, but it would be interesting to hear about the possibility that this crisis has been fabricated and executed willingly for the purpose of ending our great Republic. I hope all of you are preparing for the worst and hoarding cash, stocking up on nonperishables and paying off debt as fast as you can… buying some firearms probably would be good, too, while you still can.

Guest • October 8th, 2008 at 10:51 am

Paulson has scheduled a press conf. today at 3 est. If stocks keep falling evey day, are they going to call for a “holiday”for a few days to calm things down? The volatility in US equities is unprecidented today!!

Guest • October 8th, 2008 at 11:02 am

There are actually two videos on Yahoo Finance featuring Roubini first thing this AM -here is the other linkhttp://tinyurl.com/4qtlky

Guest • October 8th, 2008 at 11:04 am

OCTOBER 8, 2008 Housing Pain Gauge: Nearly 1 in 6 Owners ‘Under Water’More Defaults and Foreclosures Are Likely as Borrowers With Greater Debt Than Value in Their Homes Are Put in a Tight SpotBy JAMES R. HAGERTY and RUTH SIMON

jhawk • October 8th, 2008 at 11:08 am

I am not an economist, just a lowly MBA type, but have been reading and listening and wonder if the following logic reveals a perhaps inevitable path.1) From the mid-1980s, M3 increases dramatically and at an accelerating pace from 2002 to 2007. Essentially “numbers in a computer” created globally by multi-tiered leveraged investments that we called wealth that drove up asset prices in “computer money” terms. M3 grows to dwarf M1 (cash and equivalents). M3 tracking stops in 2006.2) Crisis starts when the marginal limit is hit on the “ponzi scheme” as consumer repayment of the multi-tier leverage structure starts to crack. In other words, they ran out of suckers to feed the next rung of the scheme.3) Most investment banks don’t take evasive action soon enough, so get caught in the silent “computer program” run on M3. They begin to fail (e.g. Bear Stearns and then Lehman)4) Banks and non-bank investment institutions begin hoarding cash to remain solvent to avoid a similar fate, drying up the “legitimate” solvent business credit markets.5) This turns into is a silent run on M2 (i.e. money market accounts) to source that liquid cash6) M2 gets tapped out, so then governments have to step in to guarantee that money supply7) Through incremental steps (nationalization of Fannie/Freddie, guarantees on investment firm and bank mergers, a $700 billion tax payer loan) government transfers (“buys”) the debt bubble (the former M3 on some fractional basis a proxy for the size of it); but as with the AIG example, it is unknown what cash position will be needed to deleverage underlying assets from computer dollars into real dollars of the multi-trillion dollar derivatives markets8) Governments, which are ultimately funded by taxes on the economic productivity of its citizens, can’t service the debt they just acquired because it is simply too much and/or the nation’s economic productivity plummets with the extinction of business expansion credit and collapse of household wealth (perceived and real) and household spending.Choice A) Government goes bankrupt (bankruptcy transferred from financial institutions to government) as the Iceland canary now faces and countries as solvent civic organization cease that severely limit future growth driving down household well being;Choice B) Government prints its way out of the debt bubble they just acquired by creating enough inflation to make yesterdays debt just pennies on tomorrow’s dollar (aka monetize the debt bubble) also leading to a massive devaluation in quality of life

OuterBeltway • October 8th, 2008 at 11:09 am

Saw William Poole on Bloomberg this AM.Poole Provides PerspectiveKey points:a. rate cuts are not that relevantb. economy is slowing down, not really all that far into recession territory yetc. infrastructure still there, so why freak out?Item (c) above is important to keep in mind. We are going to re-allocate resources from stupid business models to smarter ones. It may take a while, or may not. The basic infrastructure components are in place, they simply need to be re-purposed.Post the “re-purpose”, some “assets” will be re-priced down, some will be re-priced up.The reason I’m here is to figure out what the fundamental forces on the economy are, and how that re-pricing is likely to turn out.Change is going to happen. That’s good. Don’t get too distracted by the noise and fear; pay attention to where the ship is going, and get yourself positioned.

randy • October 8th, 2008 at 11:16 am

Good Post!I’m in GLD, SLV, DGP, Cash, and some SRS. I also have some long-term CALL LEAPS on some companies that are leders in new technology.

curious • October 8th, 2008 at 11:21 am

Thanks PeteCA, it is nice to receive your feedback. One of the areas of curiosity these events have awoken in me is natural pricing theory. You are quite right, artificial (govt)pricing manipulation (unnatural)just puts the brakes on everything it seems. No one can trust the price mechanism, partly because risk metrics have been obfuscated.

Lynn Shepherd @ SwanJournalforWomen.com • October 8th, 2008 at 11:26 am

We cannot continue to allow the failed corporate and political leadership in our country to continue. Accountability, ethics, and prudent decision making must return. If they can put Martha Stewart in prison for her actions, surely these corporate bandits have a criminal price to pay for creating a global economic meltdown.There have been other economists and financial experts who had the foresight to see this coming. No one listened. Time to trust the truth.Thanks you for your insightful article which hopefully will serve as a public wake up call. I have placed links to your articles on my blog.

Siva • October 8th, 2008 at 11:31 am

Prof Roubini, I can unashamedly crown you as Nostradamus of modern economy. Good analysis.We are where we are because of excess growth of money supply gone unchecked for too long. Govt’s primary role should be to attain sustainable economic growth, and not to encourage unsustainable boom (money supply) and then make a case for intervention.I miss Milton Friedman……………

MNmom • October 8th, 2008 at 11:33 am

Dow now stands at 9227.52.I wonder what the chances are of an international *stock market* holiday. If the markets continue to drop like this, I don’t know that I’d rule it out. I think that might be more likely than a bank holiday.

Guest • October 8th, 2008 at 11:35 am

To London Banker and Others:This is a critical moment in Western Civilization. And it’s not useful to provide people with false choices. First of all, the choice for America is not between socialism and fascism, no more than Europe faced the choice between communism and national socialism.Instead the choice has always been between freedom and totalitarianism (camouflaged through the decades as fascism, communism, Maoism, Stalinism, and even democracy). The United States has been a beacon to the world because it was none of these, and to look to the British System at this point in our history would be a mistake. Our opportunities lie with representative government, not in increasing power in the hands of the state. Because we all know that state power leads to dictatorship.Western civilization has had the benefit of America’s leadership and strength that was based on the true power of the people and not on Trotsky’s lie about the dictatorship of the proletariat. Socialism, without the check of a strong power like the United States’ representative government, leads to the imitation of communism that Stalin practiced, which leads to, once again, Stalinism.ThomasJS

Guest • October 8th, 2008 at 11:35 am

Cashin’s an egghead, just like the rest of the clowns on CNBC. My prediction – if the NYSE opens today, it will end up a lot like yesterday. Oh wait, it already has, …never mind. Sadly, just as valuable as Cashin’s comment.

Michael • October 8th, 2008 at 11:38 am

Has anyone discussed the negative feedback loops in the Credit (debt) Card market? I’ve read that CC companies are reducing credit lines which is making it harder for people to buy basic necessities. Which will reduce consumer spending further limiting growth in the US and world. Individuals that are in debt to CC companies are facing 30%+ interest rate. People with these usury rates will eventually default.We can thank Obama, Biden, and McCain for their votes against a bill that would have capped credit card interest rates.Did the idiots on Wall Street securitize these debts too? What will happen when this unravels? The new bankruptcy law protects the lender and will likely create debt peonage for the debtor. I can not help but think that this crisis was artificial. All the bills passed under Bush and Clinton have benefited and protected corporate power while creating debtors out of the middle class.And finally, IMHO the Mammoth in the room is that the US is bankrupt. 1 in 6 houses are underwater. Most people are in some form of credit card debt. The government has 11 trillion in debt. 11 TRILLION. There is no way that the US will pay this off. My country is bankrupt.

devils advocate • October 8th, 2008 at 11:38 am

Nourielalthough The Powers That Be never listen, we do to you: YOU’RE THE MAN!————–at best:the Fed “stabilizes” the inter-bank lending + stock marketbut the Fed balance sheet will be written in bloody redwith implications for the dollar and gold

Jason B • October 8th, 2008 at 11:40 am

Michael,I believe you are correct. Now continue on a logical path from that premise: The country is bankrupt. Then what?I think it bodes very poorly for the dollar.

Guest • October 8th, 2008 at 11:40 am

Just to clarify – Nazi is short for National Socialist party. Fascism and socialism are NOT mutually exclusive. Fascism loves socialism – it gives immense control.

Guest • October 8th, 2008 at 11:44 am

From previous thread:Sure am glad that congress approved suspending the mark to market accounting rule.Now I can apply that to my 401K and tell my wife that our portfolio is worth what we originally paid for it. Whew!!! Gonna get me some sugar tonight!Hide reply Reply to this comment By Guest on 2008-10-08 09:00:56have they done this ? when can i turn in my credit card debt at the window and get some more liquidity. the outstanding balances are marked wrong anyways – they should be less…

randy • October 8th, 2008 at 11:48 am

@ Jason BWhat else do you think it does not bode well for?short-term?Long-term?I’d like to hear your thoughts.

Guest • October 8th, 2008 at 11:52 am

An hour ago Yahoo finance said 9213 was the intra-day low — now it says 9196 and another site says 9194 — it is interesting that it has been bouncing off 9213 – maybe there’s a PPT Lurker on this site.

Mandarin • October 8th, 2008 at 11:53 am

Yes the political/war danger increases exponentially (?) when the world goes into a crisis like this. Chalk it up to panic, itchy trigger fingers, paranoia, or good old fashioned plunder thy neighbor. I hope the world gets through the next ten years more successfully than it did 1929-39. The analogy is flawed, but relevant! In the end the rising states like China and India can either bail us out or face/join us in the trenches. We’re not going to get out of this unscathed or alone, and certainly the dollar’s status as reserve currency is finished. We can suck it up and face facts or live in a haze of illusory present and future military glory. Sorry, no longer an option!

K in TX • October 8th, 2008 at 11:56 am

Wish I could find my old post with the link. Former Merrill Lynch big-wig called for housing bottom of 1 in 4 underwater and half of those people defaulting.

Guest • October 8th, 2008 at 12:01 pm

Mr Roubini,I am not a fan of neither the democrat party or Obama, but since it looks like he may win and since you’ve worked with Clinton’s administration before, it makes the most sense that you be appointed as the man to fix this crisis.That may be the only real hope for America. If Obama on the other hand surrounds himself with Wall Street crooks and international banker sell outs. We are doomed.Are you thinking of applying for the job??

JC • October 8th, 2008 at 12:12 pm

Dear Nouriel,I see that your proposals, unlike Buiter’s, do not include mandatory debt capitalization. How come?

One-Eyed Fiona • October 8th, 2008 at 12:12 pm

Belty, that post was a quite refreshing contrast to the “Harry Browne roaring ’80s survivalists”, who, for some reason, keep trying to end the discussion on this blog by reducing it to their Steinzeit views.I would also like to suggest that our energies be put towards exposing and prosecuting the real crimes, which are, as El-Erian calls them (in his inimitably polite style) the “rather laissez-faire attitude in reaction to the migration of risk away from official and private supervisory bodies that had the expertise to conduct the necessary oversight.” (Soros is plainer: “the shocking abdication of responsibility on the part of the regulators”.)Rather than hoarding canned-foods & guns (good idea about the gun — you’ll need it to kill yourself with after 2 weeks of eating canned food!), let’s continue to discuss how we can “re-purpose” our whole economy and what we want our country to look like in 5 years. Why shouldn’t the equities market and DOW be demolished (at least to 7200) to get rid of the hollowness and fraud? There are innumerable opportunities for making money (which is why I’m here too) in a REAL economy — the old one gave opportunity for a few to make a lot of money, but the way it was un-regulated and allowed to do it is what caused the trouble we’re in now.Cheers,One-Eyed Fiona

furiouscalves • October 8th, 2008 at 12:13 pm

so an essential part of any emergency plan is to set up a transparent public market for all these securities – and quickly. it wont take long for people to realize that – yes – you can make money and do it within the rules of a regulated open market. let the price discovery begin! it might not be that bad – who knows until you try, we (as in us here) dont have anything to lose at this point. its those “other” guys who are not admitting defeat and fear that they do have something to lose.

Guest • October 8th, 2008 at 12:16 pm

PIGS FIGHTING TO BE FIRST IN LINE AT THE TROUGH by Bill Butler (Oct 8)On October 2, 2008, LewRockwell.com exposed the political truth behind the bailout: that its purpose is to transfer wealth to Citibank and JP Morgan from the US taxpayer as well as the Wachovia and Washington Mutual equity holders. Although many additional state-empowering bells and whistles have been added to the bailout plan, at its core the bailout dictates that the US government will purchase somewhere north of $850 billion in subprime mortgages and otherwise unmarketable mortgage-backed securities from the financial institutions holding those securities. In the week prior to the passage of the bailout, the federal government, through the FDIC and the Office of Thrift Services, forced the transfer of $307 billion in Washington Mutual assets (including at least $34 billion in non-performing loans) to JP Morgan for $1.9 billion. The FDIC also “facilitated” the future transfer of more than $300 billion in assets (including at least $42 billion in non-performing loans) from Wachovia to Citibank. There can be little question about how the FDIC “facilitated” these deals. In these gun-to-their-head transactions, the FDIC brought the gun. The FDIC, as the regulator of WaMu and Wachovia, has the worldly power to shutter these banks, liquidate their assets and sell those assets over to whomever it desires. As it is neither a buyer nor a seller, it brings nothing more than regulatory leverage to such a transaction. This fact is palpably demonstrated in JP Morgan–WaMu takeover.Developments just prior to and immediately after the bailout illuminate interesting political and potentially ominous market realities. The political reality is that George W. Bush, unlike his father, is most likely a Morgan man. Press reports indicate that W himself was involved in these transactions. Comparing the transactions shows that Morgan received the federal 800-pound gorilla’s unbridled support whereas federal coercion in the Citi-Wachovia transaction was, by comparison, restrained.In “facilitating” the JP Morgan–WaMu deal, the FDIC first wrestled WaMu to ground, executing a midnight foreclosure and repossession of all its assets. The FDIC then sold WaMu’s $302 billion in assets to Morgan for $1.9 billion and wiped out the WaMu equity holders, including a group that had invested $7 billion six months ago. Monday JP Morgan further announced that had no intention of hiring or retaining WaMu management. Wachovia was just the latest bone thrown to JP Morgan. In another federally “facilitated” transaction, on March 17, 2008 JP Morgan acquired global securities giant Bear Stearns for $236 million, or $2 a share. After shareholders complained, JP Morgan increased its “offer” fivefold, to $10 per share. In February of 2008, Bear Stearns stock had a market value $93 per share. Citi, by comparison, has not received the same level of government support. In the Citi-Wachovia transaction, the FDIC did not actually seize Wachovia’s assets. It only threatened to seize Wachovia’s assets, allowed Wachovia to survive as a legal entity and gave Wachovia until December 31 to close the deal with Citi. If W is not a Morgan man, then he is not a good negotiator, because the delay has opened the door for Wachovia to negotiate a better deal.On the morning of October 3, in a “surprise announcement” Wachovia’s management and board of directors seized the little daylight left open in the Citi deal and negotiated a deal with Wells Fargo to receive an additional $13 billion for their shareholders in a transaction that, unlike the Citi transaction, would not expose the FDIC (US taxpayer) to any direct losses. Wells Fargo’s offer, seven times larger than Citi’s, was made the night before the bailout, at a time when the probability of bailout, according to Intrade trading, was 90–95 percent. Wells’ offer provides a lesson in Austrian economics because it tacitly recognizes that Wells believed that the bailout would cause Wachovia’s subprime portfolio to become more valuable overnight. It is a basic principle of Austrian economics that those that are first in line when fiat money is created benefit the most – the pigs that are first in line at the trough get the fattest. Wells’ offer illustrates this. Wells recognized that Congress was going to pass the bailout and that as a result Wachovia’s unmarketable portfolio of subprime mortgages would have a willing buyer – the US taxpayer with newly minted US dollars. Wells’ $15 billion offer ($13 billion more than Citi agreed to pay) was the price it was willing to pay to take Citi’s place at the trough. This development of course sent Citi into a rage. Citi and Wells have both obtained court orders authorizing them to go forward with their transactions as they fight over the right to be first in line to receive taxpayer funds.Most interesting, however, is the FDIC’s reaction. Erasing all doubt as to the federal government’s impartiality and in a stunning rejection of a private company’s right to enter into a free-market voluntary exchange, FDIC chairman Sheila Bair indicated that the FDIC would continue to support the coerced transfer to Citi. Ms. Bair, apparently a Citi woman, objected to the Wells deal, a deal that was negotiated in a free market exchange without the FDIC’s “facilitation.” Never mind the interests of the taxpayer (Citi deal placed additional obligations on FDIC), never mind the interest of the Wachovia investors and stock owners, never mind the fiduciary obligations of the Wachovia managers and directors to obtain the best price for the company’s assets, Ms. Bair says Wachovia should stick to Citi deal that her agency helped coerce: “the agency is standing behind the agreement it made with Citigroup Inc.” George Orwell’s fiction has become reality, the pigs are now in charge…the rest of the story:October 8, 2008Bill But is a Minneapolis litigator representing individuals and businesses in real estate, contract and property disputes, including eminent domain claims.http://www.lewrockwell.com/orig9/butler-b3.html

ptm • October 8th, 2008 at 12:18 pm

Five Reasons Why Deflationists Are Wrong…1. With all of this loss of wealth, it sure seems like there will be deflation; however, one must remember that most of the losses are debt-based wealth based upon future earnings and, therefore, these losses do not have a direct effect on tangible assets. In other words, debt-based loss of wealth is neutral to both deflation and inflation.2. The Federal Reserve claims to be using “sterilized” asset swaps that should not increase the money supply. At the same time it is clear that the Fed is holding about $600 billion of MBSs that are worth $0.05 on the dollar in the open market. Regardless of the Fed claims, independent measures of the money supply (shadowstats.com) show that the money supply has continued to grow around 15% per year and, at the current rate, it will increase by about $3 trillion this year. So, the dollar backed with worthless MBSs combined with a growing money supply can only mean one thing, more inflation for 2009.3. We will not see the end of the sub-prime mortgage defaults until late 2008 or early 2009 at which time the 10-15 million under-water home owners will decide to stay or walkaway from their homes. This is a pending $400 billion to $1 trillion additional loss to the banking system; and it should have a deflationary effect. Nevertheless, we have full confidence that the government will intervene and bailout the mortgage holders, which will directly impact the money supply and subsequently inflation throughout 2009.4. So even though there may be deflation, it will be restricted to certain asset categories such as homes and capital equipment; on the other hand, we will see inflation where it hurts the most – in our day-to-day cost-of-living expenses.5. The world is rapidly moving towards a gold-backed reserve currency, or basket of currencies. When this occurs, the relative value of the dollar will dramatically drop compared to gold.

Guest • October 8th, 2008 at 12:18 pm

Bingo – the financial porn channels have been planting seeds all morning that as soon as news of the first auction is announced (suggesting sometime in the next couple of weeks we’ll get a 1000 point rally) – I bet Paulson is going to announce that they are doing one today or later this week.

Guest • October 8th, 2008 at 12:31 pm

Geoffrey Pike today:This last week, Americans awoke from a deep sleep. Or maybe they were already awake, but we didn’t know it yet. Congress got flooded with calls opposing the bailout. One Congressman said that the calls to his office were running 50–50; 50% no and 50% hell no. Although the majority of Americans still don’t understand inflation and the boom/bust cycle very well, they instinctively understood that Americans were being ripped off with this bailout and that the government officials were simply rewarding their friends on Wall Street who had failed. Even as far as rising prices, many more Americans are realizing that the cause is monetary inflation, although we probably don’t have a majority that understand this yet.We have a lot to be positive about. Now you may think that is crazy because Congress still passed the bailout bill, despite strong opposition from constituents. Now don’t expect all of these people to be voted out of office next month who voted “yes” on the bill, but this cannot go on forever. First of all, the empire is coming crashing down. Even if this weren’t the case, it won’t matter over time. Americans are becoming far more well informed than in the past. The internet allows us to communicate to each other quickly and effectively and expose many of the lies of the politicians. When a large number of Americans finally withdraw their consent, the government will no longer function as it does. It will come crashing down, much like the Soviet empire did.http://www.lewrockwell.com/orig8/pike8.html

Paul Benequista • October 8th, 2008 at 12:36 pm

Nouriel Roubini has my vote. Moreover, as a non financial markets employee, I always put more stock in academic individuals who don’t try and sell me something. Almost all the individuals I know are oblivious to the severe crisis we are facing and have not done anything with their finances. If they had, things would be even more clearly to the downside. Why can’t you get some time on capitol hill?

Guest • October 8th, 2008 at 12:37 pm

We have property rights.And I would like to say again to Frank, Pelosi, Reid and Dodd, and Bush, Paulson, Bernanke, and Greenberg: Get off my property! GET OFF MY PROPERTY!I owe the investment bankers nothing. Nothing!“I laid my bones to, and drudged for the good I possess; it was not got by fraud, nor by luck, but by work, and you must show me a warrant like these stubborn facts in your own fidelity and labor before I suffer you, on the faith of a few fine words, to ride into my estate, and claim to scatter it as your own.” R. W. EmersonGET OFF MY PROPERTY! GET OFF MY PROPERTY!!!

Guest • October 8th, 2008 at 12:46 pm

We have reached the end of the utility of Roubini’s analysis. He has been the one telling us that nothing can be valued, yet he wants to “triage” banks and recapitalize them. Based on what? So he is contradicting himself: he says nothing can be valued, but his suggestions are based on the idea that things can be valued.It’s idiotic.No, the only thing to do is what I have been suggesting for over two years (to him and others) and which is part of the movement away from the West Coast Hotel v. Parrish (1937) “scrutiny” regime toward what I describe as the “maintenance” regime: policy maintains important facts (important using the test laid out by the Court in West Virginia v. Barnette). All this I describe in my book, The Eminent Domain Revolt (New York: Algora, 2006).We have to have an immediate, individually enforceable, permanent, complete and absolute ban on housing evictions.Never mind this “prime the pump” bridge to nowhere nonsense. FDR, JFK and LBJ are dead. No more of this corrupt nonsense. The political system doesn’t want to ban housing evictions because it knows that doing so will take away the power of the political system over housing (in “scrutiny” regime terms, it will elevate housing from “minimum” scrutiny to “strict” scrutiny–any lawyer or judge will tell you that this means a Constitutional revolution in the United States: well bring it on!). However, the political system’s power over housing has already disappeared. People will–of course!!–reject the mass evictions which are going to happen first thing in this Depression.So enough of dropping money from helicopters.Instead, drop the political system’s opposition to a ban on housing evictions. If you notice, Nouriel doesn’t advocate any more rights, either: he’s just like Paulson–HE wants to decide what should be done with the facts. It’s not people’s RIGHTS he’s interested in, it’s his own POWER. This is megalomania. Reject it.John Ryskamp

Guest • October 8th, 2008 at 12:48 pm

From Frank Barbera:”At the moment, the $54 Trillion Dollar Credit Default Swap market is directly in the cross-hairs, with this month featuring several major settlement days for institutions like Lehman, AIG, and Washington Mutual. Dates include Lehman CDS deals on October 10th, and WaMu deals on October 23rd. For many insurance companies, these CDS Contract settlement dates could be a kind of ‘waterloo,’ where billions of dollars in losses could come home to roost.”

Dan W • October 8th, 2008 at 12:49 pm

I love it…Increase unemployment benefits? Block grants for states??? When you said “radical” you weren’t kidding. Now don’t get me wrong: I don’t disagree. I’d even go further and say that we must internationalize—not simply nationalize—the entire global financial “system”, with INTERNATIONAL oversight of ALL business entities, banks, etc., with strict regulation of monetary and trade policies, with adherence to these laws compulsory or a nation faces expulsion from global trading community…i know, I know…not so “free market” of me. But the goal here has to be to even the overall playing field, to provide oversight through the employment of multi-national boards and organizations, and to prevent individual or national avarice from creating another 50 Trillion dollar ponzy Derivative and Hedge-based debacle again.

Guest • October 8th, 2008 at 12:54 pm

1:52 p.m.Russian stocks plunge again, trading suspendedLOL, as the dow has a miracle 350 point rally! Too bad Russia doesn’t have a PPT lie the US does!!

Guest • October 8th, 2008 at 12:55 pm

I find it absolutely astonishing that central bankers that are supposed experts on the causes of the great depression offer up cures like more liquidity or lower interest rates as a fix.The real problem is that nobody wants to risk lending money in an environment of deflating assets prices and soon to be an oversupply of goods and services. It seems to me that higher interest rates would be needed to compensate for that added risk and thus get banks and investors to start lending more freely. But that’s obviously tough medicine to take in this environment.It’s ironic that the Fed’s disdain for bubble popping and it’s preferred solution of mopping up with extra liquidity is leading us to the same devastating economic results as the last time around. Only this time it’s because nobody in their right mind would risk lending in this environment. And no $700 billion bailout will make a difference.The experts aren’t that smart after all (Ok, Roubini is the rare exception). It pains me to think that there is really no way out of this mess.

Guest • October 8th, 2008 at 1:04 pm

I’d like to make a couple of points.Democracy is a political system; Capitalism is an economic system. Don’t conflate the two; they are not interchangeable.To those looking beyond this crises: Dr. Roubini is trying to save this venal, corrupt model of how society should be organized. It should be dismantled, not propped up.Dr. Roubini is not your daddy. His allegiances lie with the people who created this mess. If not, he would not be given an audience.

Dan W • October 8th, 2008 at 1:05 pm

Ahhh, Denial. DOW 10,000, “W” comes on TV and claims the worst is over…lots of smiles and back patting in Congress…phew, disaster averted! Ooooops…hmmmmm….what about the CDS volcano getting ready to erupt? What about the ten of TRILLIONS of dollars in virtual “assets” that are about as worthless as is used TP…What about the need for 50 Billion dollars/month to fight wars in foreign lands…hmmmm…

PhilT • October 8th, 2008 at 1:06 pm

Iceland’s finanical/economic situation (potentially)changes the geo-political risk equation for the USA and Europe.

Guest • October 8th, 2008 at 1:09 pm

or its a short covering bounce that folks who are long in the market will sell into — don’t forget financial shorts will be set loose later today after a couple of weeks in captivity – let’s see how it looks just before 3pm

Guest • October 8th, 2008 at 1:11 pm

I am sure your friend is of sound financial accumen and telling you the whole story, but, before posting anything, you should verify when the CD was purchased, the term of the CD, the penalty for early withdrawal, and whether it is stand alone or part of an IRA that has special rules.No point in furthering a panic with un-verified data.

Guest • October 8th, 2008 at 1:18 pm

…it is rather arrogant to tell pensioners or people losing homes and jobs don’t want to hear about buying opportunities or as our present prime minister of canada tells us that even his own mother worries on a daily basis…we are one democracy -human WE WANT CHANGEhttp://ca.youtube.com/watch?v=bjoH5Qbh5Qc&feature=related

Guest • October 8th, 2008 at 1:18 pm

Deflation is the level of asset prices declining due to distressed sales of assets, coupled with the restriction of available credit to borrowers resulting in decreased velocity in the fractional reserve lending system. Rising day to day expenses for commodity or resource based goods is now moving through the economic data, but will continue to demand destruct. Remember in a monetary based economy money is debt. Very few want to add to their debts, they would rather pay them off, so at best debt is being paid off with, as of this morning, lower prime rate based debt. Flat or negative real incomes, job losses, and negative wealth effect due to asset deflation will curb consumer demand. It matters not what the amount or cost of new debt is because it isn’t being used. Deflation before inflation. Respectfully submitted in the spirit of debate.

PhilT • October 8th, 2008 at 1:19 pm

Towards that end (from One-Eyed Fiona’s point)…@ OB … the threads are so thick these past weeks I am wondering if you ever saw/thought about the brilliant suggestion put forth by TfT about 8-threads back establishing a Roubinipedia page on Wiki ?Looking forward …

Anonymous • October 8th, 2008 at 1:22 pm

We saw the true power of the people with the bailout last week. Through a tremendous amount of pressure from the electorate, the House amazed the world by defeating a 100 page proposal. Several days later they passed a similar but porked-up 450 page proposal.We don’t care about being a beacon, nor saving the world. Rather, we’re all in this world together. I think you’re wrong about the choices we have.

Guest • October 8th, 2008 at 1:23 pm

BOOM! RALLY TIME! 9600 dead, 10,000 stragiht ahead! What news was leaked about the Paulson press ocnference, once a gain, it must be great to be connected with privilage and access to inside information on Wall Street!

Guest • October 8th, 2008 at 1:27 pm

Just one big ol’ world plantation ruled by one big ol’ master with a knotted whip in his hand. Got it.

Guest • October 8th, 2008 at 1:29 pm

Why? We’ve been above 9600 several times in the past 15 minutes or so and were there not long after the open, and nothing has taken off.

Guest • October 8th, 2008 at 1:35 pm

That’s not a clarification. It’s just your liberalism.The Nazis rose to power when they made a deal with the German aristocracy and bourgeoisie, not with any socialist party, which was defunct in the German case before the rise of fascism. When it came to seizing power, the enemy of Nazis was communism and “radicalism”.Liberalism has a long tie with fascism and its own history of “immense control”. If I’m not mistaken, liberalism in some form rules the world today and has been in “control” for about a century and a half… whether you consider yourself liberal or not, those are the facts.

Capone • October 8th, 2008 at 1:41 pm

the short selling ban ends today ? that is a contrarian BUY signal if it is… to be figured in with the other 900 cross streams nikkei down 900, rate cut today… aye

MyPlanWillWork • October 8th, 2008 at 1:43 pm

I like the solutions that mr Roubini suggests but I think I am on something better. It is based on the same ideas but my solution is simpler and more effectiv it is called “The FED Lending Machine 2.0″.The Fed Lending Machine 2.0 will look like an ATM and many ways it is. The differenses between The Fed Lending Machine 2.0 and an ATM is that from an ATM you redraw money from your own account but as with the FED Lendng MAchine 2.0 you will lend money from The FED and you will be able to lend as much as you want with a zero or below interestrate.I prefer the “below” rate since it realy boost lending. Of course you have to apply for a FED Lendng MAchine 2.0 card but nobody is going to be rejected.This will not be a a costly undertake. The machine is easy to build and instead of money it will contain a fairly simple printer. All cost fo producing the machine will be covered by the machine itself. It will borrow us the money.With The Fed Lending Machine 2.0 there will be no more foreclosures, no more autoloan failures. The shoppingmalls will once again be filled with the notorius US shopper.Eternal shop-happines will flow with the boost of liquidity that The Fed Lending Machine 2.0 will give us.Lets make this work

Lester Ingber • October 8th, 2008 at 1:44 pm

I see the logic, but not the numbers. E.g., consider:”$300 bn of public works is more effective and productive than spending $700 bn to buy toxic assets.”I would hope that many see the importance of spending $300 bn on infrastructure, both to address building the economy as well as our decaying infrastructure. However, is it correct to measure this against the $700 bn issue? In both cases, this is not money totally flushed down the drain, as there has to be some discount for money generated in either process. Just what estimate can be made of these re-normalized numbers?

Guest • October 8th, 2008 at 1:47 pm

I think that you’re right Anonymous. ThomasJS doesn’t realize how state controlled the US economy has been since WW II. He also believes in abstractions like “western civilization”. We have more choices than his narrow framework… and we need more common solutions for our common problems than the elitism of Paulson and others allows.

Guest • October 8th, 2008 at 1:50 pm

It’s not going to fly that we look to Europe for our strength, as London Banker suggests. It was no accident that Tony Blair was referred to as Bush’s poodle. The reason is because the socialism system is a failed system when it comes to real progress and strength. Is there any doubt that the British Empire folded because of increasing weight from the state after WWII?The real strength of a government is based on economic growth and, Guess what, freedom of the people. The people exercising their own decisions for their own benefit profits their fellows as well.Bernanke studied the causes of the Great Depression: Roubini studied Keynes’ and FDR’s fixes. But study does not mean that you learned.Roubini is a great forecaster but a poor solver. He has no feeling for where the money is coming from, nor does he understand government graft. He doesn’t understand that if these fat cats agree with everything he says, that they will turn around and take 80% and devote the remaining 20% to try to fix the problem.His solution, that “if the private sector does not spend and/or cannot spend old fashioned traditional Keynesian spending by the government is necessary,” fits right into FDR’s stated plan: “Spend, spend, spend. Tax tax tax.” It took WWII to bring America out of depression.The plight we’re in now was created by FDR: Keynes is failed economics. All these departments, all these agencies, all this failed central planning and favoritism. It’s like going to a loan shark when you run a little short of money. He keeps increasing what you owe him over and over again and you’re never free. And, suddenly, he owns you.

AfA • October 8th, 2008 at 1:50 pm

What “systemic financial meltdown” looks/feels like?Unfortunately, it is very difficult to describe it for the non-experienced (and we are almost all inexperienced). Like many other extreme experiences we only refer to it by “it”.Q: But how would I know when I am in one?A: You will know it when you see/feel it. At that particular time you will not ask “is this it?”

Guest • October 8th, 2008 at 1:51 pm

Deflation for the financial collapse.Inflation for the economic collapse.That’s what it looks like to me.

Guest • October 8th, 2008 at 1:53 pm

Ohh … and by the way. They did pump in that big injection into the markets rights after lunch! Otherwise, the real reaction of the markets would have been a further drop today.PeteCA

Guest • October 8th, 2008 at 1:58 pm

Why don’t you read about monetarism, petrodollars, and perhaps … Greenspan?Meebee you will find out something strange, something new.

Guest • October 8th, 2008 at 1:59 pm

Thanks very much for this comment today. I have actually been thinking hard about it all day. It raises a really interesting proposition. What if the folks that dreamed up the whole MBS-assets market had taken the time to also construct a special futures market. This market would have priced assets based upon future estimates for US home prices, foreclosure rates etc. But the whole thing would have been done along the lines of the existing futures markets. There’s a pretty good argument that they might have succeeded in creating a system that properly priced in risk, and that the terrible catastrophe in MBS securitiers might have been avoided. As it is now … all the assets are badly priced, and can’t move back to equilibrium without disastrous financial consequences.PeteCA

Guest • October 8th, 2008 at 2:01 pm

Just so folks understand. I’m not trying to beat up on Prof Roubini in any way. I’m just making the observation that things could actually get even worse – and it might be a bad idea if he contemplated a bigger global solution. We might need it!PeteCA

Guest • October 8th, 2008 at 2:02 pm

3:00 p.m. Paulson pleads for patience to give remedies time to work3:00 p.m. Paulson: Some banks are bound to fail in crisis3:00 p.m. Paulson: Conditions are particularly difficult at the moment3:00 p.m. Paulson seeks bailout chief acceptable to McCain and Obama

Guest • October 8th, 2008 at 2:02 pm

Sorry: that last post should have said – and it might not be a bad idea if he contemplated a bigger global solution.PeteCA

Free Tibet • October 8th, 2008 at 2:07 pm

If you will permit me just this one Steinzeit (is that stone-age?) view. The answer to OB’s question about where the ship was going. It took 8 years but GWB answered that one last week. “This sucker’s going down.” Do we have to go down with it? Not necessarily, but it’s going to take some new thinking. And I don’t mean gold, guns, or bread crumbs (except that guns could be a store of value in the medium term rather than a solution to an oversupply of canned goods).I’m with you. We need to be looking forward to re-purpose both ourselves and our economy. Forget about equities. Forget about these markets. It’s not for us. We will never be allowed to make any money at that. They’re going to be allocating loses to day-trading suckers like us for years. And we don’t have to do anything about it. It’s already baked in the cake. In a little while all that excess will be gone.Knowledge. Knowing how to disintermediate a broken financial system might be worthwhile. Knowing how to create real value. I wish I were smart. I would have already done those things.

Guest • October 8th, 2008 at 2:09 pm

They sell it off initally to sucker in the shorts then BOOM back up over 100 points in minutes! This volatility is unbelievable, simple unbelievable.

Guest • October 8th, 2008 at 2:09 pm

Alan Greenspan found his reading glasses, and just agreed to write out a personal check to cover the whole mess. Boy – what a difference a pair of bifocals can make to the global economy. :-) PeteCA

BK • October 8th, 2008 at 2:10 pm

If it does not bode well for the dollar, then it does not bode well for a lot of other currencies as well. Many countries hold dollar denominated assets, if those assets are worthless it doesn’t do good things for their balance sheet. The dominos keep falling. Truly uncharted waters.I still think the greatest thing, is education. Being able to understand, think, and make progress. I have a finance degree and an MBA, but I am strongly considering finishing my mechanical engineering degree (where I started). I think the country will have to move back in that direction if it is to make progress toward the future.

Guest • October 8th, 2008 at 2:19 pm

Prof Roubini:

First, this is the worst housing recession in US history

Worse in at least one aspect than the Great Depression, at least that has now been said.I am sure that Nouriel will eventually admit that US will be in a situation that is worse than the Great Depression on most, if not all, counts.Lead to major changes this will, would Yoda say. In fact it would not surprise me if the changes would be include a major power structure change in world financial system. Namely something that would place the United Nations in a position of far more authority. And financial authority would with itself likely lead to other type of authority as well, directly or indirectly…

Guest • October 8th, 2008 at 2:22 pm

JohnI’ve never been sure if you advocacy for an evictions ban is based on human compassion for the homeless, or a desire for some sort of socialized housing system. For the moment, let’s go with the former. I am not in favor of housing evictions because people signed contracts. They should honor their agreements! You’re a lawyer – you above all else should understand that. Therefore, I believe that the system should work its way through the foreclosure process, and if possible the abandoned property should be sold at a competitive rate in the housing market. This is the process that brings DOWN housing prices – so they become affordable again. However, once we have a situation where American families are living in tent cities, and tons of abandoned houses are piling up – then I am in favor of a type of “emergency dwelling program” whwere families could be assigned back to abandoned houses. If the houses are simply not going to sell at all, then this makes a lot of sense socially. The important point, though, is to allow the free market mechanisms to work through the normal process first. Once houses become re-occupied in a social welfare system they will be largely value-less anyway.PeteCA

Guest • October 8th, 2008 at 2:25 pm

How long before Mr Putin becomes disgusted with what is happening, and decides to raise the price of oil by cutting back on production. It wasn’t his economic system that caused these massive losses.PeteCA

Guest • October 8th, 2008 at 2:27 pm

They’re just looking for the headline in the financial press that says … “Fed announced emergency rate cut and Dow closed up for the day”.The really significant feature about today’s trading is the new low in the Dow around 9200. The market showed that this is possible.PeteCA

Guest • October 8th, 2008 at 2:28 pm

True enough, but at least he had the foresight to predict this mess. Cheerleaders of the bubble like Greenspan and Bernanke never even saw it coming.

Guest • October 8th, 2008 at 2:34 pm

Alessandro is right …US treasuries got hammered today. That is the really big story of the day. Either today’s auctions did not go very well and the market found out about it (they were selling a variety of notes today – esp. 10-year notes), OR someone decided to get out of US treasuries in a big way.Readers take note. Stocks were lackluster, but bonds and treasuries were hammered. Very painful for pension funds and 401K investors who have fled into bond funds. Further loss of wealth.PeteCA

Guest • October 8th, 2008 at 2:35 pm

We are all in this together! Huh?Were we all in this together on the upside? Do you think we will all be in this together on the downside?You need a reality check.If they do anything to help us down here, it will be because we forced them to.Who is dying and paying for the two wars we’re in. Who is profiting?

Guest • October 8th, 2008 at 2:37 pm

Listening to to to Paulson, I am now really getting a a afraid. Sho sho shocking. Bring in NR, Buffet asap!

Guest • October 8th, 2008 at 2:39 pm

3:38 p.m.’Too early’ to look for credit market improvement: Paulson3:37 p.m. Iceland’s financial regulator takes control of Glitnir Bank3:37 p.m. Paulson defends decision to let Lehman Brothers fail

Brian • October 8th, 2008 at 2:44 pm

Today’s rally shows that there is no “capitulation” in the markets yet.I would take the rally as a sign that there is still substantial downside before the “bargain hunter” bottom-callers are finally cleared out, and we can start testing real market bottoms.I think this rally sets up the market for another massive loss either tomorrow, or Monday.

Guest • October 8th, 2008 at 2:45 pm

Pete, with the US now in the commercial paper market, they are as good as trueasuries but have better yields and shorter terms to go with those yields. I think what you are seeing is competition for yield now.

Guest • October 8th, 2008 at 2:51 pm

at this rate we will end up with one or zero banks. OK so lets keep one bank, whether good or bad. Makes it easier to control both the bank and the populace (meaning those potential terrorists) when there is a single bank.And while at it, get rid of the remaining pesky civil liberties. Or stop skipping like a cat around hot porridge and go full speed ahead. Make UN to some sort of a demi-God organization and control all human activities through that.

Guest • October 8th, 2008 at 2:52 pm

Say…did anyone notice that only 6 banks (big banks) have actually lowered their prime rate today? Is the market leaving prime because of the horrible credit environment?

Guest • October 8th, 2008 at 2:57 pm

Also, the 5 largest banks in Canada left their rates unchanged as well-Global banker anarchy is here!!!!!

Guest • October 8th, 2008 at 2:58 pm

The spot price of a toxic (foreclosed) mortgage is zero. It will never be repaid. A foreclosed house asset priced or marked to market via appraisal or foreclosure determines the market clearing price. The future price may be calculated using the historic rate of inflation of 3% for appreciation thus doubling the value of the collateral asset value in 24 years using rule of 72. So you at least know when the asset would double its value. If the mortgage is also 24 years you would have free and clear asset to match the amortization period. So future delivery price of the mortgage is amortized to zero, (when the mortgage is paid it is worth zero to the lender). Thus, the future and spot price converge to zero over 24 years. The market clearing price was the basis for the new mortgage at purchase or forebearance time. What may not be tangible is the hold to maturity price of the asset, which doubled in the 24 year period, unless there was an equity sharing arrangement with the lender within or above the maturity price.

Guest • October 8th, 2008 at 2:58 pm

3:37 p.m. Paulson defends decision to let Lehman Brothers fail3:38 pauslon promotes former vp at goldman to run the tarp program

AfA • October 8th, 2008 at 3:02 pm

I see many disturbing patterns forming.Remember when indexes used to rally on all-bad-news days when we were told that all is already priced in? Now indexes crash on every new interventionist step taken by either the Fed or the Treasury, and they sometimes rally for no evident reason. Cases in hand, last Friday when the bill was passed, that morning there was a dismal job report and stock rallied. The pattern continued Monday, yesterday and today. The Central banks announced a rate cut that has done nada to indexes which plunged lower and then rallied buck up around midday (before Paulson’s speech, which, err whatever, DOW is red again).As you said, one scenario I am afraid of is in the Bond market. As investors are rushing to safety, more and more (especially with more bailouts) will run out of long bonds into short term treasuries. Remember the LTCM episode? The secondary and most dramatic reason that brought LTCM to its knees (second to the default of Russia) was a huge flight to liquidity. The flight to liquidity was so strong that investors run into “on-the-run” short term treasuries (new issuances). If the same pattern is followed again, we may see a big disequilibrium not only on the yield curve between short and long rates, but also a discrepancy between new and old issuance (this discrepancy would not be discernible from tickers – similar to discrepancy between the spot price of a commodity and the price of constant maturity futures index).The pattern is even more dangerous when it reverse its course, i.e. people exiting short on-the-run treasuries to other asset classes, bringing a dismal disequilibrium to Treasury financing.

AfA • October 8th, 2008 at 3:06 pm

“They’re just looking for the headline in the financial press that says … “Fed announced emergency rate cut and Dow closed up for the day”.”Looks they need to wait for that.Another try Ben, one more 50 bps, perhaps next time you will be more successful.

Guest • October 8th, 2008 at 3:12 pm

4:07 p.m.Limited Brands Sept. same-store sales fall 6%4:07 p.m.[MW] Men’s Wearhouse cuts Q3 EPS outlook to 22c-26c

Guest • October 8th, 2008 at 3:13 pm

LOLOL Instead, here is your new headline:4:09 p.m.U.S. stocks thud lower for a sixth consecutive day

MASHIACH BEN CHANA • October 8th, 2008 at 3:19 pm

To sons and daughters of Jewish nation living inUSA.Be on alert there is a possibility of another crystal nacht happening here in USA.Don’t be scare everything will be all right.The worst scenario you can take refuge in land of Israel.

Guest • October 8th, 2008 at 3:25 pm

There are a lot of signiicant parallels with 1929-1939, esp. regarding the need to deal with imense German debt after WW I.The single most important thing Americans can do is to be vigilant to see that we avoid fascism at home and do not militarily attack our creditors…the lead up to this would be a lot of racist propaganda, debt default, and outright government coup. Does anyone remember the London Economic Conference of 1933? That was a tragic lost (late in the game) opportunity for all nations to work together to repair the world economic crisis. The Germans were already desperate and feeling without options, as we could easily become if we don’t, for example, welcome “help” from our creditors. And Roosevelt (as president of the creditors) failed badly due to poor economic undestanding and having poor advisers (Henry Morganthau).We need to make sure Obama doesn’t follow that same path. Some time ago I wrote here asking Professor Roubini if he had been trying to set up talks with the Obama campaign. Now people are starting to see this as a real need, not a joke. Robert Rubin would be like leaving Mellon in charge ot the Treasury throughout the Great Depression.From another one who is more historian than ecnomist.

Guest • October 8th, 2008 at 3:31 pm

4:30 p.m. [AIG] Fed to lend to AIG’s insurance subsidiaries4:30 p.m. [AIG] Fed loan brings total AIG lending to $122.8 bln4:30 p.m. [AIG] Fed to lend $37.8 bln more to troubled AIG

Detlef Guertler • October 8th, 2008 at 3:32 pm

Horrible times indeed: The banks are running out of cash, and MASHIACH BEN CHANA is running out of CAPS!

Free Tibet • October 8th, 2008 at 3:37 pm

Am I reading the charts wrong? It’s the yields that were hammered today. Bonds are up. Same story for the last week.

AfA • October 8th, 2008 at 3:37 pm

Another pathetic Bloomberg headline. They really cannot find anything better to show that the “coordinated” rate cut did work.

Ten-Year U.S. Swap Spreads Collapse, May Presage Easing in Credit PressureThe spread between the rate on 10- year interest-rate swaps and Treasury yields collapsed to the least since before credit markets began to seize last year after coordinated central bank rate cuts.

All that to say “The two-year swap spread is down almost 1 basis points to 133 basis points.”

Guest • October 8th, 2008 at 3:39 pm

Very bad idea pursued in 1934 by FDR (and an eccentric chicken farmer from Cornell, Professor wArren)-rather than helping people in real need and slowly restoring confidence, e.g., first by triaging banks. Tinkering with money can’t save the economy.

AfA • October 8th, 2008 at 3:43 pm

HuhuhuhahahhahWith a bit of intended pun, you would have said, Mashiach, just like banks, is running out of capital.Note to banks: to recapitalize, you need to press the “caps lock” key. If the A rated LED (not TED) is green, it means you are recapitalized.

kdp59 • October 8th, 2008 at 3:48 pm

OK…I have a question, maybe it’s really stupid though.what would happen if the US abolished the Federal reserve.The US Treasury printed $11 Trillion (and payed of the national debt).what would be the rsults of this?I assume it would mean rapid inflation (for a time anyway), at least a doubling of interest rates on an open market and perhaps massive un-employment for a bit (as a new economic model takes over).but I’ve been trying to find any writing on what the results/implications of the US doing something like this would mean.any help is appreciated (links are good too).

Guest • October 8th, 2008 at 3:53 pm

Where is the savior faire? My state representative thanked me today for sending him the link to the RGE Monitor. We need great leadership right now:knowledgable and understanding. There is no better place to start the necessary correction than in one’s home. We do still control what we buy…What should the father of a young family do? Just try to hang on to the job and save so if it is not around in 6 months??

AfA • October 8th, 2008 at 3:53 pm

Outch …Does anyone out there who knows about some corporation that uses exchange rate correlation to manage and hedge its balance sheet forex risk?

OuterBeltway • October 8th, 2008 at 4:07 pm

FT:You are smart. One of the sharpest knives in the drawer, and one of the best-intentioned of the lot.I say you’re a good one.

PeterJB • October 8th, 2008 at 4:08 pm

@ Roubini”Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article – is twofold: ” end quoteQuestions:1. Can the Federal Reserve bring “leadership” to the World :that a. people will respect, 2. people will trust and believe? 3. people will follow? 4. people will not believe as being the tools of the American financially laden power giants? 5. and does Dr. Benanke fit this role model?2. Can the Federal Reserve find a home for all that massive liquidity that exists in the oil producing countries and elsewhere where this collective cash now rejects buying US debt – as usual, include sovereign funds, national reserves, and other such coffers?; I believe that we just saw one round of this? Will this not bring about huge rising prices as this loose liquidity in sizes unimaginable, seeks places of rest and security, despite how momentary? We call it inflation but I suspect another term will soon be coined?3. Can the Federal Reserve handle and nay, normalizes the insolvency and bankruptcy of the banks and the banking system throughout the World?4. Can the Federal Reserve restore public confidence?5. Can the Federal Reserve contain the saturation of Moral Hazard that now not only exists throughout the financial industries, but throughout the whole World as everyone scrambles to survive the coming “leadership” induced global collapse?6. As the Federal Reserve and its political and bureaucratic cronies from around the globe have transferred the peoples money to broken banks that have found themselves embarrassingly bankrupt and in the need of funds to keep their usury going, how does or how can the Federal Reserve, provide the necessary medium for the Banks to continue their nefarious trade, when, they themselves, have closed their doors to the flow of liquidity and thereby betraying the public trust, not to include, the Law?7. Does anyone believe that Dr. Benanke understands that the “economy” is the innate value of the labours (both mental and physical) of the people en masse and if so, how do you think that the Federal Reserve will re-harness this free-market cow, now that it has kicked the Sh&% out of the milking shed and is about to run free….Me, I know that the Federal Reserve has no idea about that which it is playing with.As I believe Mr. Peter Tolstoy once said, ‘a good man should focus on being good and bring his family up in the same manner… or words to that effect.’And suddenly the people found that they were free, the chains on the ground they fell; they moved their arms, their legs; they first walked, then they ran and suddenly they all started to laugh with the feeling of the joy of their new born freedom; at last.’Ho hum

Mark • October 8th, 2008 at 4:33 pm

Thankfully I was able to set one of my bank CDs to not auto-renew tomorrow :-) Wings are starting to flap, must find new safe haven…

Guest • October 8th, 2008 at 4:34 pm

Agreed. I am grateful for Roubini’s forecasts. They have saved me a boatload of cash, but I do not agree with his solutions.One must look to Austrian economics for the answer.

Alessandro - http://castellidicarte.blogspot.com/ • October 8th, 2008 at 4:34 pm

@ptm on 2008-10-08 12:18:16since apparently I’m the resident deflationista I’ll answer the first of your points.”1. With all of this loss of wealth, it sure seems like there will be deflation; however, one must remember that most of the losses are debt-based wealth based upon future earnings and, therefore, these losses do not have a direct effect on tangible assets. In other words, debt-based loss of wealth is neutral to both deflation and inflation.”Very true. This is a mistake made by many, maybe even by Mish.First of all, I assume that only debt redeemable on-demand (like checking accounts and credit lines) is part of the money supply, so any debt with a set duration can be payed back or defaulted upon without any influence on the money supply. We agree, and it is standard Austrian Economics.But, the way the current reduction of the amount of debt outstanding (by default, not by repayment) actually exercises deflationary pressure because banks are eating a good chunk of the losses. When a borrower default on the debt owned by a bank, the bank books a loss that needs to be covered somehow. If the bank cannot raise capital (sounds familiar?) it needs to use the incoming cash flow (mortgage payments, cash deposits, etc). Cash used to cover losses it cannot be lent out, so the bank has to tighten credit standards and ultimately cut credit lines like HELOC and credit cards (sounds familiar?).Then you have bank failures in which even the outstanding on-demand credit on checking accounts is instantaneously cut to the FDIC limit.

Mark • October 8th, 2008 at 4:38 pm

Yeah, there’s a way to cash in and skip out on taxes ala Paulson- sign up to be Treasury Secretary! Help the rich become even richer!

Alessandro - http://castellidicarte.blogspot.com/ • October 8th, 2008 at 4:42 pm

ptm,I agree on one point that I didn’t have clear a few months ago.Big ticket items, like houses, cars and boats, have been the first to deflate due to the tightening of the lending standards on mid to long term debt. This is not immediately deflationary. Only with the tightening on on-demand credit deflation is getting into everyday life.

Andrew Macpherson • October 8th, 2008 at 4:42 pm

I totally agree, I see nothing short of riots in the streets if the flippers, jackers and slackers get bailed out and the rest of us don’t.A 20% reduction of the principal on all primary resident mortgages across the land would be hugely popular, giving a massive boost to the middle class at much less than the cost of another year in Iraq, or bailing out some other failing bank.

Anonymous • October 8th, 2008 at 4:47 pm

Can USA really pay off $11 trillion keeping the value of dollar against other currencies at current rate? The number $11 trillion is mind boggling.

GrouchoMarxist1 • October 8th, 2008 at 5:05 pm

I don’t think your ideas will work. Japan had a huge stimulus package during the largest boom in history – they still struggled. In a global recession there’s little chance. Why is there so little liquidity? Because the banks see massive bad debts. Has anyone suggested that those bad debts be gotten rid of in some way? No. Then what changes? Re-start the music? Where will banks invest for returns? There’s nowhere left? Paper assets are overvalued! Houses have been sold to people with no jobs! Credit cards are given to teenagers! There is literally nowhere left to go with lending and hot money. So, what can solve that problem?

OuterBeltway • October 8th, 2008 at 5:21 pm

PTM & Alessandro:I disagree that the debt evaporation is not deflationary.When the money goes “poof”, the velocity of money slows because of the fear of additional loss. That’s what the “lockup” in the credit market is. Velocity is tending toward zero.That’s deflationary. M * V = P * Q.See Monetary Exchange EquationRight?

economicminor • October 8th, 2008 at 5:36 pm

Thanks Professor for allowing me to participate.This is an insolvency issue. Keeping the banks opperating is somewhat irrelevant in the big picture I think.. I don’t mean to sound crass but when so many people and companies and government entities have been living way beyond their means, will keeping their lending facilities open really make a difference? When America has made poor decisions for years (decades)about the use of debt and invested in consumption rather than production, it was inevitable that at some point, insolvency would take over.Add to that the insanity of pyramiding cdos and cdss and other derivitaves and it will take a lot more than a little confidence to change the paradigm back. I think we are a long way from the bottom. What we need is transparency but then again, can we take it?Seing as we are going to have to work thru this, the big question I have is would we be better off putting all the cards on the table ASAP or slowly doling out the knowledge a piece at a time and try and deal with smaller bites?I really don’t think there is any *solving* this! All we can do is work thru it. And that is going to take some time. Maybe a lot of time.

economicminor • October 8th, 2008 at 5:43 pm

Just send everyone $10,000 to start with, so that most can pay back payments and pay off debts. Then send everyone $2,000 per month until the system is reflated..Then deal with the inflationary pressures caused by all the reflation.Fix the problem from the bottom up. Not the top down.

AfA • October 8th, 2008 at 5:45 pm

OB,according to traditional and “formal” definition of M (money) debt is not part (included) in the money supply, or what would stop us from including nominal value of derivatives into the M? However, you are quite right about the Velocity point (which tends towards ONE not 0, by the way)I am not saying I am agreeing that debt evaporation is not deflationary. Nor the contrary, in fact.I tend to take things from quite a different and unorthodox angle. I do not care much by how much M’s are increasing or decreasing, or what is included or not in each layer.The items I focus on are relative pricing (arbitrage), wealth transfer and cash flow. (I can explain each more extensively if you wish, but the 3 items are applied in their most generalized version). It happens that debt distorts the 3 items quite significantly and in different (and negative) ways when the credit spigot is shut.

London Banker • October 8th, 2008 at 5:56 pm

Go to the head of the class – and tell them what they can expect in the real world. Only 10 percent of what they learned in school will be relevant to the world they face.M3 has been my preferred indicator ever since the Fed stopped publishing it.

Guest • October 8th, 2008 at 6:00 pm

grow vegetables in your back gardens, if all around collapses you will at least be secure in your food supply

Alessandro - http://castellidicarte.blogspot.com/ • October 8th, 2008 at 6:08 pm

OuterBeltwaythe short story is that money is whatever is accepted in exchange for today’s wealth (real goods and services), while term debt is a claim on future, not present, wealth.You can find the long story in this article by Frank Shostak (cited by a poster on London Banker blog):http://mises.org/story/2364Term debt/credit doesn’t enter in the money supply so debt/credit reduction, via payment or default it’s not deflationary.What is hugely deflationary is if I don’t trust my bank that is said to be insolvent and I withdraw a pile of cash and stash under the mattress.This is the reason you may get a deflationary spiral. It always starts with bad banks.

Alessandro - http://castellidicarte.blogspot.com/ • October 8th, 2008 at 6:11 pm

With fixed money supply, interest rates can float and be set by the market as any other rate.(You certainly know that the FFR target is really following, not leading, the short term T-bills market rates)

Alessandro - http://castellidicarte.blogspot.com/ • October 8th, 2008 at 6:13 pm

Whoops, not a fixed money supply (you can’t control credit), but fixed supply of cash (M0).

AfA • October 8th, 2008 at 6:15 pm

That would be unacceptable for those in charge, and would produce unpredictable dislocations during the transition period without proper enablers in place.But I am in favor of a mostly market-based monetary system.

Guest • October 8th, 2008 at 6:17 pm

I notice there is no conversation around the dept and our possible credit rating decline. From my perspective, in the long run we will only increase our dept, and the present flight to safety (USD) will be over. It’s the dollar that I am unsure of, and believe the value of said dollar is dependant on the rest of the world’s ability to continue to choke on it.hlowe

randy • October 8th, 2008 at 6:25 pm

The federal reserve is a private corporation that has been granted the power by our CONgress to coin money. This came about by the federal reserve act of 1913. Look it up. The federal reserve is NOT federal meaning it is NOT a part of the US government iit is owned by wealthy individuals from around the world including the Rothchilds, the Morgan et al. Read the “Creature From Jekyll Island”. it lays it all out for you.

Bourning Markets • October 8th, 2008 at 6:29 pm

Triage.I see all other measures -Fed lending directly to corporations, deposits guarantee, concerted rate cut, etc- are as best like first aid to prevent inmediate global meltdown. Triage of bad banks is the only measure I see that could attacks directly and specifically the root of the disease: mistrust. Half-joke: this measure, I call it “stalinist capitalism”. So what. If it can be done, and prevent a global “lost decade”, go ahead, crash the bad banks. Survivor banks would know what to expect about their counterparts and resume lending. BUT (a big but) what I have doubts if this can be achieved having in mind the CDSs huge and opaque monster-market. We are about to see what happens with Lehman’s CDS. That’s what I like to know, if a triage is a relly feasible measure given its CDS consequences.

Guest • October 8th, 2008 at 6:29 pm

My bad. Deflation will obviously happen due to historical fundaments with regard to asset prices being out of whack. I was coming from the perspective of an American in consideration of my currency.

Guest • October 8th, 2008 at 6:31 pm

Until your hungry neighbors take it. And the guy in the coin shop tells his “friends” that you occasionally drop in to cash in a gold coin and you get robbed at gun point. Or you pull out your gun and get your whole family killed trying to protect your gold and food stash.

Guest • October 8th, 2008 at 6:34 pm

Wow. You actually got a non-scripted response? I’m impressed. I’ve been stonewalled with script responses from two, regardless of all information & links, and no response at all from one (but I’m forgiving that one, since she voted against the bailout).

Guest • October 8th, 2008 at 6:40 pm

I see that Italy’s Central Bank Chairman, Mario Draghi, has made a U-turn and is heading back to Rome and will not attend this weekend’s IMF Boards of Governors meeting.

Guest • October 8th, 2008 at 6:45 pm

This was posted above and is very very significant:________________________4:30 p.m. [AIG] Fed to lend to AIG’s insurance subsidiaries4:30 p.m. [AIG] Fed loan brings total AIG lending to $122.8 bln4:30 p.m. [AIG] Fed to lend $37.8 bln more to troubled AIGHide reply Reply to this comment By Guest on 2008-10-08 15:31:39__________________________________They just increased the amount of the AIG bailout by almost 50%.Consider that for a moment and the implications on the other bailout packages. Ostensibly the additional money was required to cover redemptions. So the question is who were the beneficiaries — Was Goldman perhaps a beneficiary…. no details were provided — and this from a government that voted down a $7bn health care reform for children….

Guest • October 8th, 2008 at 6:48 pm

This is very very significant:They just increased the amount of the AIG bailout by almost 50%.Consider that for a moment and the implications on the other bailout packages. Ostensibly the additional money was required to cover redemptions. So the question is who were the beneficiaries — Was Goldman perhaps a beneficiary…. no details were provided — and this from a government that voted down a $7bn health care reform for children….

Guest • October 8th, 2008 at 6:53 pm

You would have thought that he might have had a couple of his clerks working on the plan back when he first predicted the end of the world — instead they are just getting started – what has he been doing — Oh I know — that AIG boondoggle in California that cost a half million — he was getting spa treatments.

economicminor • October 8th, 2008 at 6:54 pm

If the credit system fails and all credit is halted. I think that is what we are talking about. Total lock up or shut down of the entire credit apparatus. That means when a truck driver goes to fill up his truck his credit card will be rejected.I think this is the fear that is running thru the Treasury and the FED. It seems incredible that we have gotten to this point but IF that happens, then food and fuel and everything just stops moving.

economicminor • October 8th, 2008 at 7:03 pm

I think that many are actually insolvent or way below their reserve requirements. I know a lot of people who have with drawn thousands in cash for the possibility of the credit system shutting down or just fear, meaning banks have even lower reserves.It is pretty hard to lend when you need every dime to keep from being bankrupted by a run..Crazy mess, isn’t it!

Jason B • October 8th, 2008 at 7:05 pm

I’m no expert, but I think it will be very bad for all asset classes, but especially the dollar. The Fed and the treasury are cutting their own throats, one by backing the commercial paper market. Now it competes with treasuries, which they have to sell to fund all these bailout efforts. Second, they are also competing with commercial banks by being the lender of last resort. CBs are the only reletively healthy part of the system left. They are taking in MBS and equities for treasuries, so now the dollar is backed by these. If investors wanted to buy these, they would buy them on their own, but this will just cause loss of confidence in the dollar. Equities and commodities will go down (but not in dollar terms!) as the world economy slows due to reduced consumption and lower earnings, but the dollar will drop due to debasement and loss of confidence.In the US I expect commodities to get more expensive as more debased dollars are demanded for the same amount of commodities. The world may even drop the dollar as reserve currency. Without seignorage benefits of dollar holdings, our standard of living will plummet.Long term I expect horse drawn well drilling rigs and farming implements to increase in value.

OuterBeltway • October 8th, 2008 at 7:10 pm

AfA: If you’ve got the time to write, I’ve got the time to listen. I’d appreciate more detailed remarks on price arbitrage, wealth transfer and cash flow; will you provide brief definitions and then outline the distortions from higher/lower credit levels?Also, how come V tends toward 1 if money supply is decreasing (deflation)? I expected (from looking at the equation) that to make the left side of the equation decrease (lower money supply), it would tend toward 0. Can you explain?Lead on. Good times.

kilgores • October 8th, 2008 at 7:17 pm

Back when Dr. Roubini was only talking about a severe recession lasting 12 to 18 months that would not be as bad as the Great Depression, and noting the average drop in the Dow of 28% in previous post-war recessions, I was figuring a bad case would bring us down to the 45% drop in the Dow seen during the 1973-74 recession following the oil shock, or a bottom of about 8400 that might occur sometime in late 2008 or early 2009. Now it looks as if the Dow already may drop below 9,000 tomorrow (and the Nikkei will probably drop below 9,000 tomorrow, too, judging from the futures market).Dr. Roubini has expressed surprise at the speed of the deterioration, and in the past week has begun talking plausibly about the possibility of a global depression lasting 10 years or more, comparable to that experienced in the 1930s. If we really are looking at Great Depression II, I’m now digesting the fact that the Dow plunged 90% over a 2-1/2 year period or so. A plausible worst-case scenario may now be 1400 or so on the Dow at bottom, and it may not take 2-1/2 years to get there, either! Brrrrrrrr…..SWK

Guest • October 8th, 2008 at 7:29 pm

Since this article assumes that banks are a necessary intermediary throughout the economy, is there any possibility that competitive alternatives, like using new intermediaries such as the Internet to connect savers directly with local businesses could provide a large mitigating effect on the potential global crisis. Of course, such an endeavor would require US, if not global, leadership.Just curious to see if there’s any literature out there on the potential for rapid scaling of some of the current local alternatives.

Guest • October 8th, 2008 at 7:44 pm

Please read the following article. If this is true, it is ridiculous.Dissecting the Bailout And;Following the Money TrailYour Daily Market Beat——————————————-Extra Pork Anyone?–Tim FieldsWe’re at a very shady time in our nation’s politics. We have politicians blaming everything and everybody but themselves for the mess they put us in and, as a response, they’ve penned one of the most social bills this country has ever seen.The Bush Administration brought this so-called “bail out” bill forth at first- and it was going directly to the matter at hand- it was about 3 pages long.After the bill’s defeat, things changed; we went from something with a purpose- 3 page rescue plan, to a bill so packed with pork its not even funny- and the kicker- it’s now 442 pages long.As a taxpayer, I’m mad as hell and you should be too. That’s our money. And even though a majority of us were against it, the politicians pushed it through anyway.———————————————————————————————Billions Of Government Funds Are EarmarkedFor Alternative Energy!See where the money trail leads…and capitalize from the “Surge”of funny money entering this soon-to-be bloated market.————————————————————————————————-My job here is not to get mad about what the government does and how they do it. My job is to show you where to make the best investments at the most opportune times…and I sure have found the place to be…After going over the bill and all of the pork that came with it, there are a bunch of sectors that are getting a tremendous amount of cash from this bailout plan and the rightly played stocks underneath those umbrellas are set to make an unbelievable run.But first, let me show who and what are getting bailed out- with the pork to follow: I’m sure you’ll find it quite amusing…Financial bailout package approved this weekUp to or more than $700 billionBear Stearns financing$29 billionFannie Mae and Freddie Mac nationalization$200 billionAIG loan and nationalization$85 billionFederal Housing Administration housing rescue bill$300 billionMortgage community grants$4 billionJPMorgan Chase repayments$87 billionLoans to banks via Fed’s Term Auction Facility$200 billion+Loans from Depression-era Exchange Stabilization Fund$50 billionPurchases of mortgage securities by Fannie Mae and Freddie Mac$144 billionPOSSIBLE TOTAL$1.8 trillion+NUMBER OF HOUSEHOLDS PER U.S. CENSUS105,480,101POSSIBLE COST PER HOUSEHOLD$17,064+(Stats provided by Reuters)Moving to the pork:The part of the bill that should really get under your skin is the following:Manufacturers of kids’ wooden arrows – $6 million.Puerto Rico and Virgin Islands- lands rum producers – $192 million.Wool research. Auto racing tracks – $128 million.Corporations operating in American Samoa – $33 million.Small- to medium-budget film and television productions – $10 million.Quite laughable wouldn’t you say? Yes, these are the people looking out for the common good in all Americans.Getting to the stuff that actually matters:Inside this bill, aside from the fluff, are measures that will have a dramatic affect on your wallets- investment opportunities that are tucked neatly within this bill. The most pertinent are as follows:One-year extension for wind and refined coal energy tax credits. A production credit for electricity produced from renewable marine energy sources (meaning through wave power and river power, or by exploiting the differences in ocean temperature). Energy credits for “small wind properties,” geothermal heat pump systems, and energy-efficient residential properties.New renewable-energy bonds. Up to $800 billion in energy bonds may be offered to the public, with a third from “public power providers,” a third from governments, and the remainder from “cooperative electric companies.”Tax credits for “cellulosic biofuels” and for “carbon dioxide sequestration.” An extension of an alternative fuel credit. Tax credits for “new qualified plug-in electric-drive motor vehicles.” Bicycle commuters get a nod, as do regulations aimed at “residential top-loading clothes washers.”The most important things you need to know is that just because the market is in complete shambles doesn’t mean that the “entire” economy is heading in that direction. With this bill being law, expect to see some very strong profits coming from some very, green companies…and we’ll be here all the way, showing you where to be and where not to be.——————————————————————————————-Financial Crisis Or Colossal Opportunity?As Wall Street Gets “Bailed Out”- Certain InvestmentsStand Poised to Benefit…See How Government Demand for this TechnologyCould Revive This Company————————————————————————————————Now is the best time to be a member of Untapped Wealth, as we guide you through the ins and outs of this bill and point you into the direction you need to be to maximize your profit potential.Stay tuned next week when we’ll show you the single best investment to make in the coming weeks- it will make you forget all about this past month!Have a great day!TimWhere to Invest in October–Eric DicksonExcessive lobbying, “Golden Parachutes,” privatization…isn’t that contrary to free markets?Do we really trust the government to “bail” us out of this mess? Aren’t they the same people that got us here in the first place?According to a Washington Post article, “Before they were taken over by the government, Fannie Mae and Freddie Mac spent millions of dollars a year on internal and outside lobbyists to keep politicians at bay, countering legislative efforts to regulate them more closely.”Doesn’t it concern you that the same people who voted for this “bail out” have been receiving hundreds of thousands of dollars from arguably the two companies that got us into this mess in the first place?It is everyday Americans that are feeling the pinch here. Are we going to be the ones paying for this?At this point, I have little faith in Congress to do more than advance their own political and economic well being.

Jason B • October 8th, 2008 at 7:46 pm

Sheriff in Ill. county won’t evict in foreclosuresOct 8, 2:19 PM (ET)CHICAGO (AP) – Residents of foreclosed properties in Chicago and other parts of Cook County don’t have to worry about deputies forcing them out. Sheriff Tom Dart says that starting Thursday his office won’t take part in evictions.Dart says he’s concerned that many of the people being evicted are renters who were unaware that their landlords have been failing to pay their mortgages. He says his deputies have no way of knowing whether they’re removing someone who has defaulted on a loan or someone who has been faithfully paying rent.Dart says he thinks he’s the first sheriff in a major metropolitan area to stop such evictions during the ongoing foreclosure crisis.Dart says the number of mortgage foreclosures in Cook County has skyrocketed and will probably keep rising.

kilgores • October 8th, 2008 at 7:50 pm

Wow! Interesting thought. Seems to me, though, that banks evolved to dominate commerce because they create certain natural efficiencies. I suspect there would be a host of problems with an Internet-based system, because it requires no third-party as a clearinghouse, which seems to be one of the reasons we’re having such an acute credit crisis in the interbank market itself.SWK

kilgores • October 8th, 2008 at 7:55 pm

Eventually the national guard could be used, as suggested in a article in Harper’s a year or two ago.SWK

OuterBeltway • October 8th, 2008 at 8:09 pm

I found this explanation of the role of AIG in the vast expansion and recent contraction of mortgage-backed credit very interesting.While I don’t necessarily agree with the author’s investment recommendations, I do appreciate the background material. I recommend reading this.Why AIG Matters

AfA • October 8th, 2008 at 8:17 pm

@ OB from previous threadI’ll be happy to explain what I’ve got to say whenever I have time to put it all together.Money velocity cannot go to 0. It means no one is holding the money. 1 means a one way transfer. Or if you wish, using the MEE equation: M*V = P*QIf you put V=0, therefore P*Q=0, therefore P=0 OR Q=0 (the OR in its mathematical sense), which means free (costless) products and assets OR null GDP

Guest • October 8th, 2008 at 8:17 pm

And I am sure that you find that perfectly acceptable. The NG is now controlled by the Fed and not the states. Posse Commitatus is gone along with everything else thanks to your ilk.

Guest • October 8th, 2008 at 8:35 pm

C-SPAN -Congressional Representative Brad Sherman (D- California) on Oct 2 Paulson / Bernanke hearings. Representative Sherman references threat of Martial Lawhttp://www.youtube.com/watch?v=HaG9d_4zij8

Guest • October 8th, 2008 at 8:44 pm

each country is now trying to defend a key level in their stock mkts/indicessome e.gUS tried to defend 10k — failedin AsiaKLSE tried to defend 1k — failedtoday you can see it in Singapore, desperately trying to defend 2kin this type of environment, even a half brained one eyed deaf muteless monkey can make easy moolaah

K in TX • October 8th, 2008 at 9:06 pm

That’s why you should get to know your neighbors and get them started growing vegetables too. Join the neighborhood crime watch while you are at it.

K in TX • October 8th, 2008 at 9:11 pm

Someone in an earlier thread brought up local postal banks as a possibility. There are already post offices everywhere and there were postal banks in the past. Sorry for lack of credit OP.

Guest • October 8th, 2008 at 9:14 pm

Nouriel IS Really FAMOUShttp://incakolanews.blogspot.com/2008/10/nouriel-roubini-halloween-facemask-free.html

K in TX • October 8th, 2008 at 9:17 pm

From NYT about 2 minutes ago:October 9, 2008U.S. May Take Ownership Stake in BanksBy EDMUND L. ANDREWS and MARK LANDLERWASHINGTON — Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.The Treasury plan, still preliminary, resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.In a coordinated action, the central banks reduced their benchmark interest rates by one-half percentage point. On top of that, the Bank of England announced its plan to nationalize part of the British banking system and devote almost $500 billion to guarantee financial transactions between banks.The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.Yet the world’s financial markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.The gloomy market response sent policy makers and outside experts on a scramble for additional remedies to stabilize the banks and reassure investors.There is no shortage of ideas, ranging from the partial nationalization proposal to a guarantee by the Fed of all lending between banks.

Kamal • October 8th, 2008 at 9:22 pm

Hello Dr Roubini,Well I have a short question! Since every thing else seems to me falling apart..How is Gold or Gold stocks as a safe storage of Wealth? How has it done in the past, or will do in the future, in such a difficult scenario!

Guest • October 8th, 2008 at 9:31 pm

There is no shortage of ideas, ranging from the partial nationalization proposal

There is no such thing as partial nationalization.

kilgores • October 8th, 2008 at 9:42 pm

Piss off before I call out the black helicopters to hunt you down and return you to you mental ward.SWK

Guest • October 8th, 2008 at 9:43 pm

is there a velocity for inflation?I mean, how fast is the inflation if the government prints X amount of dollars per second, versus if they print Y amount of dollars?Or perhaps what I am actually interested is the speed of the-practical-effects-of-inflation. The government may be printing X amount of new dollars but the actual prices on the street will not change until several weeks/months/years of heavy printing? Looking at how the U.S. businesses have not increased their prices extremely much in comparison to how much money the US government seems to be printing.Actually the whole inflation theory is probably some bogus “excuse” to why the capitalistic system can not provide money to individuals but can provide it to companies. The real reason has to do with the fact that individuals play a different role in a capitalistic economy (and it is not the role of benefactors), and providing “free” money to them would alter their behavior in a “wrong way”.

Guest • October 8th, 2008 at 9:46 pm

POSSIBLE TOTAL$1.8 trillion+NUMBER OF HOUSEHOLDS PER U.S. CENSUS105,480,101POSSIBLE COST PER HOUSEHOLD$17,064+

So the U.S. government could have given $17,064 to each household and the inflation would not be any worse off than what it is because of the current decisions?

kilgores • October 8th, 2008 at 9:47 pm

New York Times is now reporting Treasury is considering exercising it’s authority under the TARP to buy a stake in various banks to get the credit markets moving again.SWK

Guest • October 8th, 2008 at 9:51 pm

I think a problem with giving money to individuals is that it would be more visible. When money is being allocated to companies, it tends to get lost (to other pockets) somewhere along the way.

Dr. Matrix • October 8th, 2008 at 9:55 pm

The Fed announced that it would “purchase three-month unsecured and asset-backed commercial paper directly from issuers” [WSJ, 10/7/08]. This action of the Fed provides an alternative conduit for the transmission of liquidity to banks, which have been hoarding money the Fed has attempted to inject into them through various mechanisms. But by sidestepping the banking system, the Fed is telegraphing the beginning of an inflationary depression.

kilgores • October 8th, 2008 at 9:58 pm

Get used to it. The pendulum is swinging back to the left with a vengence now. Keynesian policies are coming, and Friedman-style monetarism has gone into hybernation. Socialism will hold sway for a long time to come. Free-market libertarianism is dead in the water for now.SWK

Wolf in the Wilds • October 8th, 2008 at 10:01 pm

Pete,I think the blog and the good Doctor does provide information and alternative views to what the government is proposing. It is not like the government doesn’t understand the problem. It is more that they are unwilling to adopt the policies that will work, because the short term pain for the vested interests will be enormoous.This blog provides insights for investors and voters that contradict and oppose the views of the current administration, and thereby providing grassroot opposition to the scare tactics and bad policies proposed. THAT is a good thing.

Brian • October 8th, 2008 at 10:03 pm

MARKET QUESTION:The ban on short-sales of financial and other special-status stocks is being lifted at midnight tonight.Any opinions as to what effect this might have on the market tomorrow?I postulate that some vulnerable financials might get punished as they are now long overdue to be corrected. Perhaps some of those regional banks that will inevitably fail per Dr. Roubini.My gut felling, though, tells me that it will be a non-event. Anyone else have thoughts or good reasoning as to what tomorrow might bring?

AfA • October 8th, 2008 at 10:03 pm

So, do we get to have that super genius idea of implicit-guarantee-like banking system? They are nationalized but not really.I’m wondering if there would be any strings attached to this, like what happened to the GSE’s.

Anonymous • October 8th, 2008 at 10:04 pm

As long as they are financing all this liquidity injection via issuing more debt, inflation should not be a concern… I guess printing more money not on the cards yet.

kilgores • October 8th, 2008 at 10:07 pm

How is this “telegraphing an inflationary depression?” Circumventing the banking system doesn’t necessarily imply that these Fed operations will be monetized, does it?SWK

kilgores • October 8th, 2008 at 10:14 pm

Good question. Of course, the government didn’t retain a stake in Fannie when it was first privatized, and it never did have a direct ownership interest in Freddie after it was created (until the takeover, of course). I suspect the government would never allow an institution to fail in which it held an equity stake, so yes, it probably would imply a guaranty.SWK

Dr. Matrix • October 8th, 2008 at 10:15 pm

The operative word is ‘yet’–the Fed is telegraphing that it will in effect print money by sidestepping the banking system in the case of commercial paper [example: even such companies as Goodyear have been unable to obtain overnight loans] in addition to financing the liquidity injections through cash auctions and through the Term Asset Facility. Also, “the central bank will also begin paying interest on bank reserves.” [Bloomberg, Oct 6], which means the inflationary cat is out of the bag.

Dr. Matrix • October 8th, 2008 at 10:18 pm

The ban will most likely be extended, I believe through Oct 18. I would be surprised if the ban were not extended. Incidentally, the ban is only one example of market manipulation by the government.

kilgores • October 8th, 2008 at 10:18 pm

Sure there is. The government takes less than a controlling interest in an enterprise, or at least less than a 100% interest.SWK

Wolf in the Wilds • October 8th, 2008 at 10:33 pm

Not true. I think of the money market lock up in the exact terms as OB. The overall money supply (M3) is declining dramatically as a result of the velocity tending to 1. However, the total value of assets outstanding are still “valued” at historical M3. The shrinkage in money supply implies financial asset valuation must decline. Otherwise, you would have the situation now: not enough money supporting too many assets, or rather too high asset values.Without massive writedowns to bring asset values in line with money supply, we cannot get out of the binds.We need to have both asset writedown and bank recapitalisation for the credit creation system to restart. One without the other is pointless.For liquidity injections to work, we would need massive money printing, which eventually lead to Weimar-styled inflation. That cannot be an option.

Dr. Matrix • October 8th, 2008 at 10:44 pm

This is a surmise: the Fed may be attempting to hit the fine line between inflation and hyperinflation.

Guest • October 9th, 2008 at 12:06 am

@ Anonymous: As long as they are financing all this liquidity injection via issuing more debt, inflation should not be a concern…” 22:04:13Debt = Inflation.The American dollar has no intrinsic value. It is…fiat money with no limit to the quantity that can be produced. Its primary value lies in the willingness of people to accept it… [Faith is waning.]It is true that our money is created out of nothing. But it is more accurate to say that it is based upon debt…The entire money supply would vanish into bank vaults and computer chips if all debts were repaid. [Or, say, if corruption freezes confidence.]… [T]herefore, our leaders cannot allow a serious reduction in either the national or consumer debt…[T]he Fed converts debt into money and charges interest [usury]….The end product is artificial expansion of the money supply…the root cause of inflation. G. Edward GriffinAnd inflation creates the causes of any existing depression.“For the real causes most of the time, are maladjustments within the wage-cost-price structure: maladjustments between wages and prices, between prices of raw materials and prices of finished goods, or between one price and another or one wage and another.“At some point these maladjustments have removed the incentive to produce, or have made it actually impossible for production to continue; and THROUGH THE ORGANIC INTERDEPENDENCE OF OUR EXCHANGE ECONOMY, depression spreads.” Henry HazlittAdd in massive corruption, $300tn in “derivatives,” displaced workers with no manufacturing base, a constant pool of low-pay border-crossers for corporate hire, Paulson and Bernanke – and you get, IMO, what you’ve got. A depressing mess.

Guest • October 9th, 2008 at 12:14 am

Actually, on Mish’s blog they were totalling up all the Fed/Treasury interventions over the past year and came up with $2.6 trillion

Mark • October 9th, 2008 at 4:52 am

I’ve been meaning to say this for some time now… PeteCA, you’re one of the best in this forum. Your observations most closely resemble reality. Thank you for being here!

Mark • October 9th, 2008 at 4:59 am

I’d think that US creditors aren’t too thrilled with the idea that the US would look to spend rather than pay on its debts.It doesn’t matter what state the infrastructure is in.If your house is needing repairs and you opt to make the repairs instead of paying your mortgage, well, just see how that goes over with your mortgage holder…

ASmith • October 9th, 2008 at 9:36 am

Dr. Roubini, in Step 10, you describe a severe recession in which the S&P 500 falls by about 28%. Considering we are well below that level now, do you think the stock market’s reaction is over or do you now believe the pullback in the S&P 500 will now be much more than 28%.

Guest • October 9th, 2008 at 10:16 am

ummm… all the numbers on your first list say BILLION, all the numbers on your second list say MILLION.sounds to me like you are getting excited over nothing. try concentrating on the first list. the second is just a red herring. sure, it got the congresscritters to vote the right way, but do you really think it has any effect on the overall situation?

jrod • October 10th, 2008 at 1:10 am

Dr. Roubini, Someone turned me on to your February 2008 article in March of this year. It is amazing how your predictions for the most part except for timing have come to fruition.However, your solutions appear to be Nationalize industries and therefore creating a Hugo Chavez 21st Century Socialism society.Alot of what caused an acceleration that got us here is FASB 157 Mark to Market accounting that was implemented on November 15, 2007. FASB 157 essentially required financial institutions to book their financial assets at an exit value vs. entry value. Exit Value includes liquidity discount entry value does not. If the intent of the company was to hold the asset to maturity no liquidity discount would be required thats why an entry value is more viable for the proper intent. Once the SEC officially suspends FASB 157 which powers were given in HR 1424, this should alleviate alot of the problems and banks would therefore meet their reserve requirements and counter party risk would be significantly reduced.Given your new found powers because of your exceptional predictions, please do not use this situation to promote a nationalized private sector or socialism.I agree we will encounter a hard recession. Unfortuntaly with all the liquidity being pumped in the private sector by World Governments I believe will lead to hyper inflation on commodity products following the latter part of the recession, which I agree will end Winter or Spring 2010.

RoughAcres • October 10th, 2008 at 2:57 am

A few days ago, I posted on a political blog that the situation we find ourselves in is analogous to a credit card holder who misses one or two payments due to a sudden shortage of cash: the interest rate balloons; the minimum payment soars, the late charges accrue, and the individual finds him/herself sinking into deeper and deeper trouble…. possibly bankruptcy. The solution to that situation is not unlike what we need here: renegotiation of debt.We need to freeze all foreclosures immediately, and allow renegotiation of those mortgages that are failing in order to save this housing bust and the “toxic” debt carried by our banks. If the poor and failing middle class have little money to spend on basic needs — and are then thrust into homelessness as well — we WILL have a Great Depression.

maidenusa • October 10th, 2008 at 9:49 pm

Rebuilding the infrastructure means infrastructure reform to be builot upon the terms that depleting energy resources and trade imbalances are demanding. States like Florida have antiquated public transportation systems. We are also facing the climate change tsunami of coastal land that will come in the form of more or less one third land loss in the most urban/suburban areas of s.florida. This will also costs the continental USA its third growing season in the Southeast.Green investment needs to include rezoning suburbs for lower tax bases so that more people can rezone their backyards if necessary to raise food and small animals. Public education modules need to be set up to teach people how to grow food, how to raise small animals.The energy crisis is not just a crisis about how much it costs to heat your home or fill up your car. People need green skills so that when the oil fix is no longer available we will be able to deal the new challenges we will be facing for our survival.Investment in local farming, as well as cottage industries which are clean and within walking and biking distance to their local communities will provide basic necessities for local communities in the future.Large cumbersome Central Government cannot possibly manage this task. The day will come when the local mayor is more important to the people than the President simply because the White House is not capable of managing local needs but must instead become very flexible and supportive of the needs of small town, suburban America as well a large urban areas.You may think this sounds crazy, but it is not. In the future if people want to stay clean they will need to buy soap from their local soap maker or make it themself! If you want to run a soap making industry that is not oil, or coal dependent better start figuring that out now… I believe civilizations had soap before they had generators!Regarding the advice to increase payments for Unemployment Compensation recipients please check this out … Recently someone I know was layed off of a low wage office job working for a construction company. She has two kids one in day care all day the other after school and is a single mom. Unemployment is offering her 152USD a week . How can she do anything with that? Obviously she has to spend over fifty dollars a week on gas alone looking for a salaried job or trying to get hired for day work. Meanwhile…it is people like her who want to work who should not only get decent unemployment compensation, but also get totally free training to step into the infrastructure work or the green training. Now this means reforming the Adult Education system which is chasing people down deadend curriculums of “office skills” instead of life sustaining skills like how to make things, and grow things that our society is going to be needing knowledgeable people for in the future. The future is now folks. Waiting another ten or fifteen years to train people for what is the ineveitable need of that same near future will have a worser reckoning that all the bubbles of the past an present bursting at once could ever have.PS…Part of infrastructure reconfiguration needs to include the building of plants which will manufacture and produce the needed apparatus for green energy like solar panel parts, wind machines, new housing materials, greenhouse and seed banks, mills, small “factories” and more. Please do not forget that yes we will and do now also need lot’s of scholarships for green engineers.USA we can do it…..YES WE CAN!

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America's Jobs Deficit - Robert Reich http://t.co/amPeRE4L
about 3 hours ago
Reuters Business Reuters_Biz
Nasdaq vaults to 11-year high on surge in jobs http://t.co/Iv8x7TKc
about 3 hours ago
Reuters Business Reuters_Biz
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Mark Thoma MarkThoma
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about 3 hours ago
Lincoln S. Ellis EconoGmac
BE CONTRARIAN http://t.co/moLXwy6N via @BloombergNews
about 3 hours ago
Mike Allen mikeallen
WASHINGTON (AP) - Army general orders court-martial of US soldier Pfc. Bradley Manning in WikiLeaks case
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PIMCO PIMCO
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Paul Krugman NYTimeskrugman
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Mark Thoma MarkThoma
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Mark Thoma MarkThoma
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The Economist TheEconomist
After several developments, Susan G Komen for the Cure has announced it will continue to work with Planned Parenthood http://t.co/jCy0OMOY
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Edward Hugh Don't Shoot the Messenger

Congratulations to Edward Hugh whose EconoMonitor blog was #14 on CBNC's NetNet list of best alternative financial and economic blogs. Edward is a macro economist, who specializes in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows. Edward is based in Barcelona, and is currently engaged in research on aging, longevity, fertility and migration, and the impact of all of these on economic growth.

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