Article from todays Financial Times - http://www.ft.com/cms/s/0/4d19518c-df0d-11dc-91d4-0000779fd2ac.html
Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006. At that time, his view was extremely controversial. It is so no longer. 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.”
Prof Roubini lists his 12 steps to financial disaster:
Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.
Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had “reckless or toxic features”, argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks’ ability to offer credit.
Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The “credit crunch” would then spread from mortgages to a wide range of consumer credit.
Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.
Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.
Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.
Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a “fat tail” of companies has low profitability and heavy debt. Such defaults would spread losses in “credit default swaps”, which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.
Step nine would be a meltdown in the “shadow financial system”. Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.
Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.
Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.
Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices”.
These, then, are 12 steps to meltdown. In all, argues Prof Roubini: “Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe.” This, he suggests, is the “nightmare scenario” keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.
my commentary - I sure hope this guy is wrong.
interesting article duckie..thanks..
Currently we have had a bull market in stocks that has effectively lasted 26 years and an economic recovery that has been almost uninterrupted for as long. Traders and pundits are thus convinced that any recession must be short-lived – hence the immediate credibility among the chattering and trading classes of Bernanke’s extraordinary assertion that the US economy would return to rapid growth in the second half of 2008.
Easy market conditions lasting over a generation have an obvious effect on traders and commentators – they make them persist far beyond rationality in believing that such conditions will continue. That is why commentators continue to forecast a recession lasting at most one or two quarters with a Gross Domestic Product decline of less than 1%. However, with many of the financial structures underpinning the market having come crashing to the ground, and with even the housing bust showing every sign of becoming far more serious than the tech bust of 2000-02, there can be little chance of this unduly favorable scenario playing out.
In reality the self-indulgences on Wall Street and throughout the world economy have been excessive and we can expect the subsequent hangover to be as pronounced as they were. In terms of the recession’s duration, it is likely that the $150bn stimulus plan recently passed will push its onset into the third quarter of 2008, after the stimulus payments have been spent. Thereafter however we will be lucky to escape with a recession of the severity of the relatively deep 1973-74 episode or the “double-dip” recession of 1979-82. What is more, by the end of the recession, the US budget deficit will exceed $1 trillion and inflation will be above 10% per annum. Both those problems will require to be solved, imposing considerable further economic pain in their solution.
Whoever is elected President this November had better accustom himself or herself to the idea that there is likely to be little economic recovery for his whole first term in office. The expectant candidate should not expect a Great Depression – unless his own policies are exceptionally inept as were those of Hoover and Roosevelt in the 1930s -- but he should prepare for an experience like the unhappy second term of Grover Cleveland in 1893-97 or the miserable White House tenure of Martin van Buren in 1837-41. As Japan demonstrated in the 1990s, there is no reason that the recession that follows a period of vast excess should be over within a year or even two.
However, there is very little likelihood that market traders and economic commentators will expect such an unpleasant development before it arrives. It is also very likely that when vigorous recovery begins in say 2013 they will refuse to believe it, and will thus miss the first 50% price move in the stock market recovery.
Persistence of market trends can be profitable, but persistence in intellectual error is generally financially fatal.
QWAK,mikie,It is a hard crule world out there but most in the USA have been INSULATED from the greater reality and are OBLIVIOUS to how things ARE out side the USA or even for the ones at the very bottom here.
As "The GREAT DEPRESSION 2.0" gets farther under way it is going to be a RUDE AWAKINING and a shattering of there ILUSIONS as they confront the GREATER REALITY than -- NOT EVERY ONE SURVIVES!:(
Eggs.. big difference betw a sharp economic downturn and armegeddon which you, Dummy and teh Dwark One have been predicting.
Still quite unclear how 'sharp' a downturn will actually materialize and still some respected economists that actually beleive a recession will not occur. I think the downturn will be typical of the last few. No Armegeddon here.
REGARDING: Do they eat rocks and dirt or food like people HERE do?
RESPONSE: Our planet has its own share of dirt eaters. Makes one ponder as we sit in front of our shiny laptops connected wirelessly to high speed internet hookups.
Dwark One.. Are you blind in both eyes or just blind in one with a patch over the others. Repeating your gold mantra makes you blind to the entire picture. It is you that refuses to see the blue sky as well as the clouds. It is you who insists on seeing Katrina in every drop of precipitation . Sorry Dwark One. The sky is not falling.
QWAK,alpha,What color is the sky on the planet YOU live on?
Do the people there always believe such FOOLISH things?
Do they eat rocks and dirt or food like people HERE do?
You make absured statments that are devoid of LOGIC or basic comprehension of the FUNDAMENTALS of MONEY and you constently CONFUSE MONEY with CURRENCY.
If you are charging people for YOUR investment advice you are ROBING them and they are ignorent so they know, no better.
Unlike you Dwark One.. I am responsible for my own choises and dont choose scapegoats for my own poor judgments. Suggest you try it sometime. Even you could find it liberating though terribly unnatural. See if you can survive without your constant whining of victimization.
Problem with the article, Eggs, is the significant wording 'probablility rising.' If there was a .05% chance of a catastrophic recession and now there is a .075%, there has a been a 50% increase in the probability. But note there is still less than a 1% chance.
Hell, just double the number of millionaire lottery tickets you buy each week and you will have a 100% increase in the chance that you will b/c a millionaire.
In other words, dont hold your breadth on such long odds. Instead concentrate on that which is much more LIKELy to occur. Not only will your outlook brighten, your opportunity for profits will improve as well.
Yo eggs... Oh my God... can't you just once for the sake of me and spliter... post a short paragraph??????????????
I have to do some paper work that need doing immediately. I'll have to get back to this one later, probably a lot later... I have to take the wife out for din din again tonight. :)
How's that spliter? Did you like that?
just as the stk mkt...has contuinued to rise over the years..........so will the housing mkt...land values..........OVER THE LONG TERM!!!!
>> there is one question there tho....as duckie says...the $$ is just worth less.....so dow 800.........dow 14,000..?? house 5-8,000...now say 200,000........
>>ie..the mkt and house/land haven't gone up....$$ is worth less.......some things never change..........
same thing in real money...right?
Clear as mud, Bear. You have joined the nuts that cant distinguish betw a 10% increase in inflation and 100% increase.
If you think that the dollar's purchasing power has declined at the same rate as the market has appreciated over any 10-15 yr period, time to do some homework. With very few exceptions, maybe Nixon's 6.5 yrs, market has returned a net positive versus the dollar. And as a real estate mogul, I should think you would know the facts about realty