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US economic meltdown forecast and the 12 steps to hell

By Paul Wallis     Feb 20, 2008 in Business
When Professor Nouriel Roubini of New York University's Stern School of Business, who predicted a recession in 2006, talks against all data, people now listen. Prof Roubini has defined what would need to happen to create a catastrophic crash.
The guy’s not exactly vague. There’s a lot of basal logic in his 12 steps. People who’ve seen recessions before will recognize this situation from Yahoo Finance:
Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome". The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."
In other words, “Go broke, and you can go a lot broker, and keep doing it”.
This is what many people have been howling about since this mess started. This isn’t book-entry stuff. This can affect you overnight.
Real money, and a lot of it, has gone down the tube.
It’s not coming back.
The 12 steps cut a scythe-like swathe through whole financial sectors.
Housing, mortgages, credit, commercial property, institutions, corporate defaults, funds, stocks (several times in the scenario), capital assets…
This would make the Depression, or several of them, look like a weekend without pocket money in the US.
Roubini doesn’t think the Fed can stop it. Yahoo’s piece is naturally a bit heavy on terminology, but this is a synoptic paragraph:
Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.
1. The dollar can’t take much pressure, and anyway, there’s only so much left in interest rates to cut, and inflation is lurking nearby.
2. It won’t make any difference to those who are now insolvent, anyway.
3. The insurance industry needs credit to cover itself, and that credit, and lack of liquidity, spells chaos.
4. Sovereign wealth funds, now big buyers, are risking big losses.
5. Housing losses aren’t susceptible to a fix by the Fed.
6. The shadow financial system (hedge funds, private equity) isn’t under any sort of regulatory control.
7. Losses can’t be hidden or regulated into a cute form.
8. The transactions-oriented financial system, being the markets, are a mess.
Government intervention, generally, may be inevitable, “an iron law”, as the article describes it, but the US is a debtor country. Lack of foreign credit means inflation, like it or not, and most won’t.
Drawing a parallel I can’t claim to like in the slightest, this is a Russian scenario. Capital meltdown, assets for sale to any sleaze who’s found the money for them. All that’s needed is the vodka, and I guess tequila would do.
The 12 steps are straight over a cliff.
You Yanks are voting in November.
Whoever you vote for, make sure it’s someone who knows what governments are supposed to do, and how business is supposed to operate.
Either that, or invite Putin over for some seminars.
More about Economy, Roubini, Recession