"Dr. Doom" Roubini: High Risk of Global Systemic Meltdown & Depression

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Roubini is issuing an incredible dire warning, even for him.

The world is at severe risk of a global systemic financial meltdown and a severe global depression

The US and advanced economies’ financial system is now headed towards a near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms

He has a set of immediate policy prescriptions:

  • Another rapid round of policy rate cuts of the order of at least 150 basis points on average globally
  • A temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made
  • A rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures
  • Massive and unlimited provision of liquidity to solvent financial institutions
  • Public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses
  • A massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government
  • A rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers
  • An agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

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RGE is Correct. 'A prophet in his own country is without honor.'

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Roubini echoes much of what we have said. The question is whether polictos understand and know what to do about this crisis. RGE understands it is not just finance but the productive economy that matters. I hear such utterances from the Obama camp but they remain unclear.

By 'rapid resolution of banking ...' we understand freeing liquidity by regulation and investment.

By 'rapid agreement between lender and creditor' this should be the SWFs, but who says they are willing?

We have discussed a 'triage' amongst financial instutions.
This triage should identify
1) insolvent and under-capitalized
2) undercapitalized
3) liquid and well capitalized (strong regional banks)

For Bank Finance 101 - Banks are required to mark ecurities to market under FASB 157 (a long story). This means that a bad loan or bad CMO must be written down to its market value. When a financial institution marks to market, they charge a loss, and credit the reserve (loan or security). Reserves are an offset valuation to the loan or bond asset. So bad assets are carried at the written value already.

Important to contrast with the 1930's, when FDR did not require the insurance companies and brokers to mark to market but to carry securities at face value. FASB 157 was suspended.

"A massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government"

On target, and right-on. Consider when the US borrowed 4 times GDP from 1939 to 1942. Will it take a bigger war instead? Or can we have peace with economic stimulus?
Are you sane?

Roubini, Congress and Senate needs to co-opt what the populist economists (and our site) has been saying for months in detail. I expect little leadership from the administration, so it falls to the people to lead.

Burton Leed