Nouriel Roubini's Global EconoMonitor

Focus on the U.S. Economy

The current U.S. and global economic conditions, remain at the very least quite challenging.  The good news is that President-elect Barack Obama has unveiled a first rate economic team to drive the economy towards the recovery.  Larry Summers, Tim Geithner and Christina Romer are certainly top rated experts and excellent choices to address this most severe financial and economic crisis.  The bad news is that the recovery is not in sight yet and won’t be for some time.

The most recent set of events and the string of economic data are a clear sign that the crisis is not over, and the worst might very well be ahead of us.  On the one hand, consumer confidence got a boost from falling oil prices and new leadership in the U.S. government.  On the other hand, yesterday’s Conference Board report confirms that the economy is in a deep recession (the confidence index is still at the lowest level on record since 1975) and points to further consumer spending declines in the coming quarters.  The release of preliminary Q3 real GDP growth in the U.S. (revised down to -0.5% from the initial -0.3%) displayed a downward revision to personal consumption from the original -3.1% down to -3.7%.  Consumption is expected to be a significant drag on the economy for a while.  Analysts estimate that the fall in energy prices – a reflection of falling U.S. demand and a by-product of the fact that this severe recession is a global one – will boost real U.S. income by roughly $200bn (1.5% of GDP) but it is also.  On the back of this, U.S. home prices keep falling, equity prices may still be very far from the bottom and employment losses are mounting.

News on home prices is never good these days, but instead of getting better, it may still get worse  The U.S. housing sector is still far from stabilizing.  Housing starts keep plunging, and demand keeps following supply downward.  As a result inventories are not getting worked off and remain at record highs; downward pressure on home prices continues.  Home prices (S&P Case-Shiller C-10) are down 23% from the peak and the pace of decline keeps accelerating every month.  The fact that home prices have still a long way to go before reaching a bottom seems to be consensus at this point.  Back of the envelope computations suggest that the wealth losses for households related to the fall in home prices are roughly $3 trillion so far, and are clearly bound to increase further – to eventually reach the $6-8 trillion range.  With a negative wealth effect of 6 cents on the dollar, the reduction in personal consumption could amount to a whopping $500bn.  Things would look even worse if we factor in the losses related to the decline in stock market prices.   Retailers including chain stores, luxury brands and online merchandize are taking a hit from declining consumers discretionary spending.  Retail sales were already down 15% during July-October period.  Moreover, stores expect holiday sales to plunge by almost 50 % this year taking the slump way into 2009.

And after the residential real estate woes, commercial real estate could well be the next shoe to drop.  Last week, news that two big commercial mortgages that had been packaged into securities in the past year, were likely to default spooked the $800bn CMBS market that usually follows the fate of the residential mortgage market with a lag of 2 years.

The worsening credit crisis has caused a sudden spike in job losses and filing for jobless claims in November.  While a hiring freeze across industries began in late-2007, lay-offs started escalating in Q3 as the credit crunch and demand contraction spread from the housing and financial sectors to the corporate and service sectors, export and commodity industries.  Being a lagging indicator, monthly job losses are bound to hit the 300,000-350,000 range in 4Q08 and early-2009, taking the unemployment rate to 8.5-9% by late-2009/early 2010.  The slow economic recovery, massive erosion of consumer wealth and demand and double-digit decline in industrial activity could cause job losses to continue for a few years into the recovery.  With mounting unemployment, we can expect the contraction in consumer spending to accentuate and defaults on consumer and auto loans, credit cards and mortgages to accelerate.

While easing oil prices provided a breather to the trade deficit, the recent boom in exports is fading in the face of the strengthening dollar, trade credit crunch and more importantly, demand and manufacturing slowdown in export destinations like Japan, Europe, Asia ex-Japan and Latin America.  The contribution of net exports to GDP growth of 2.9% in Q2 and 1.1% to Q3 prevented the economy from contracting severely.  But net exports will slow to 0.5-1% in the coming quarters led by declining oil and non-oil import demand amid slowing consumer demand and manufacturing activity even as real export growth continues to fall through 2009.  This slowing, though still positive, trade contribution poses further downside risks to GDP growth.

After taking a hit from high oil and commodity prices, the manufacturing sector is facing tight credit conditions and slowing domestic and export demand, leading firms to lower the sales forecast through 2009 and scaling down inventories.  Declining orders for durable and capital goods indicate that industrial production will decline significantly in 2009.  Plunging demand and corporate earnings will also cause a double-digit fall in business expenditure, at least through 2009, given that business sentiment especially for small firms are near record lows.  The auto sector is also in a perfect storm amid slumping vehicle sales and tight credit conditions.  But the recession might help pave the way for the much needed auto industry restructuring to improve fuel-efficiency and competitiveness of the Big Three automakers.

Fiscal policy will play a pivotal role in 2009 as the Fed Funds rate approaches zero.  Significant fiscal stimulus will be needed during these 4-5 quarters to prevent significant growth contraction and deflation.  Since any boost from tax cuts to households and businesses will be temporary, raising government spending via grants to deficit states and infrastructure spending would be more effective.  While spending on infrastructure and green technology as endorsed by Obama can provide some stimulus during this prolonged growth slowdown, the extent of job creation would largely depend on the reallocation of the unemployed labor between sectors.  Democrats are also pushing for unemployment benefits and food stamps which are well-targeted and have the largest bang-for-the-buck.  While Obama has prioritized a large fiscal package as soon as he comes into office in Jan 2009, delays in Congress approval and actual implementation will make the stimulus less timely.  Meanwhile a $500-700 bn stimulus along with other Treasury bailouts will push the fiscal deficit in the $900bn to $1 trillion range in the next two years, especially as the recent revenue boom in corporate income and capital gains and dividend taxes are fading significantly.

The recent readings of both the PPI and the CPI are showing the beginning of deflation.  Slack in goods markets with demand falling and supply excessive, slack in labor markets with sharp fall in employment and slack in commodity markets means lower inflation and actual deflation ahead – with a concrete risk of falling in a liquidity trap.   And given the costs and dangers of price deflation and the deadly deeds of debt deflation, central banks have to recur to unorthodox monetary policy to address the liquidity trap and the severe liquidity and credit crunch.  The Federal Reserve has reached further into the box of unorthodox tools by announcing direct purchases of $600bn in conforming MBS and agency bonds ($500bn and $100bn, respectively.)  Simultaneously, the Federal Reserve is setting up a new $200bn Term Asset-Backed Securities Loan Facility (TALF) for investors of consumer loan-backed securities (i.e. credit cards, auto loans, home equity loans.)  The U.S. Treasury will backstop the first $20bn in credit losses. 

A few days ago the government was forced to provide a $306bn rescue package for Citigroup whose toxic asset overhang prevents a return to normalcy even after the government’s first $25bn capital injection under TARP.  Under the rescue program, Citi will be responsible for the first $29bn in writedowns; after that the losses will be shared between the government (90%) and Citi (10%) who has recourse to a loan from the Fed for this purpose.  In return, Treasury will get $7bn of preference shares with 8% dividend rate ($4bn to UST, $3bn to FDIC).  In addition, Treasury will inject another $20bn in capital, buying further preference shares under the TARP program.  Commentators seem to agree that action was necessary but worry that the terms are exceedingly lenient.

And going forward there is another problem: 8,000 banks that are not ‘too big to fail.’  Many regional banks have important capital concentrations in the next leg of this debt-deflation story, commercial real estate.

The backdrop to the renewed flurry of government interventions remains the completely frozen credit environment that is now gripping the non-financial corporate sector, both high-yield and investment grade.  The spreads in the cash bond markets went on to exceed their CDS counterparts and reached new record highs on November 21 as the specter of bankruptcy looms ever larger for automakers and manufacturers around the world.  Debt-ridden LBO companies are struggling to refinance or repay their debt while private equity companies face investor flight.  Importantly, the record spreads are not only driven by firesales but find some justification in the deterioration of credit quality down the rating scale.  Experts such as Edward Altman and also rating agencies predict a record default wave in the high-yield sector above 10%.

159 Responses to “Focus on the U.S. Economy”

Mike G.November 26th, 2008 at 2:41 pm

Are you talking about Obama’s first rate team of Clintonites that were the original turn-your-eyes away from regulation that got us in this mess? Are you talking about the Reagenesque next step of cutting the government budget that will include programs that benefit Main St? Or are you talking about the bailout of Citi that was a give away to unsecured bond holders and common stockholders while management is making hundreds of millions in pay and bonuses. When asked what they are going to use the money for, the CEO replied, with a sly grin, “what we have always done” meaning chase profits by buying paper.

kilgoresNovember 28th, 2008 at 8:30 am

OK, Mike, who would you want to see on the economic team that you believe would have sufficient experience to make a substantive contribution to resolving the current financial crisis and yet would not fail your apparent litmus test for change? All I have seen from posters on this blog in the last several weeks are complaints about this person or that person being a “Washington insider,” being from the same corporate culture that created the financial downturn, etc. For once, I’d like to see some suggestions from you or another participant here as to who they think SHOULD be on the team that is not now.SWK

GuestNovember 28th, 2008 at 11:16 am

@SWKYou’re not interested in suggestions, that’s just subterfuge. Are you that vacuous and inane that you can’t see a better way of handling this crises? This bailout is protecting the very people who caused it. Main Street will not only pay higher taxes, they will see hugh cuts in social welfare programs. Your line and outlook need to be exposed for what it is – reactionary.

kilgoresNovember 29th, 2008 at 9:44 am

Well, “Guest,” you can impugn my motive for asking all you want, but your cowardly “bait and switch” ad hominem attack on me merely sidesteps my question, which didn’t go to the issue of how the current economic crisis should be handled or to the merits of ‘the bailout’ — a term the nature and scope of which is susceptible of many interpretations — but only to the selection of an economic team by the President-elect that would be charged with addressing the crisis. If you think I’m a (right-wing, I assume you to mean) reactionary, you have misjudged me completely. Frankly, if anything, many of my political views tend to be left of center, closer to democratic socialism than to paeloconservatism, neoconservatism, libertarian conservatism, or any other right-wing ideology that you apparently have assumed that I embrace.If you are truly concerned about main street paying higher taxes and huge cuts in social welfare programs, your irrational lashing out at what you perceive — in this case, erroneously — to be views contrary to your own will not win adherents to your position or help to effectuate real change, but will only intensify polarization within your audience. I suggest you go read or re-read Saul Alinsky, who emphasized the point that rhetorical garbage doesn’t win people over, so one must communicate “within the experience of his audience” and give “full respect to the others’ values.”SWK

GuestNovember 28th, 2008 at 11:42 am

@SWKYou’re not interested in suggestions, that’s just subterfuge. Are you that vacuous and inane that you can’t see a better way of handling this crises? This bailout is protecting the very people who caused it. Main Street will not only pay higher taxes, they will see hugh cuts in social welfare programs. Your line and outlook need to be exposed for what it is – reactionary.

kilgoresNovember 29th, 2008 at 9:48 am

“[T]the mark of a free man is that ever-gnawing inner uncertainty as to whether or not he is right.” – U.S. Supreme Court Justice Learned Hand (yes, that was his real name).SWK

GuestNovember 28th, 2008 at 5:13 pm

Stop trying to spend your way out of this economic corruption, but restructure it fully by returning it back to an honest form of capitalism. Don’t use the people that created it. They can’t fix it and fix it for whom? Goldman Sachs and Harvard! We do not want to end up with a fascistic society controlled by political lobbyists, corporations and big banks in charge of our savings. Too big to fail needs to disappear and brokers and investment bankers have to get their hands off our savings. The present people are mostly financial and political bailout artists..

kilgoresNovember 29th, 2008 at 9:55 am

You’ve made it clear what you don’t like, but you haven’t said anything about HOW you would go about restructuring to bring back “an honest form of capitalism,” or WHO you believe would be qualified to assist in bringing about such change. Complaining about cancer is a lot easier than finding an effective cure for it.SWK

jomosDecember 1st, 2008 at 2:43 pm

Remove all US troops from 130 foreign bases. Wind down the war. Remove all US funding around the world. Close Federal Reserve and put Treasury and congress back as providers of pubic funding.Year of Jubilee proclaimed for all world debt including pensions and retiree accounts. Reestablish an open honest money system backed by gold and silver (3% natural growth). Move from consumption to thrift. Abolish all regulation passed since 100 years ago and debate their merits again (this would keep congress preoccupied). Abolish the IRS. Place states and municipalities back in charge of most affairs.Turn our priorities to empowering people to take control of their own lives with dependence on family instead of government (this will keep the people busy for a while). Reinvesting any vision on next generation energy production and establishing a model to the world what freedom could look like.

AnonymousDecember 2nd, 2008 at 9:17 am

He was director of the Policy Development and Review Department at the International Monetary Fund from 2001 until 2003. Before joining the Treasury, Mr. Geithner worked for Kissinger Associates, Inc. Criminal and International Fugitive, Henry Kissinger, Says Hillary Clinton Would Be Outstanding Secretary of State Can you feel the Hope and Change yet? I wonder…… bill repeals parts of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act…”The world changes, and Congress and the laws have to change with it,” said Senator Phil Gramm…”With this bill,” Treasury Secretary Lawrence H. Summers said, ”the American financial system takes a major step forward toward the 21st Century — one that will benefit American consumers, business and the national economy.” Summers stayed on to ensure passage of deregulatory laws that enabled enormous banking greed, Rubin was rewarded with a $15-million-a-year executive position at Citigroup, a job that only got more lucrative as the bank went from one disaster, beginning with its involvement with Enron in which Rubin played an active role, to its huge role in the mortgage debacle. It is widely acknowledged that Citigroup fell victim to a merger mania, which Rubin and Summers made legal during their tenure at Treasury. THE FOXES GOING TO RAPE THE CHICKENS AGAIN?

MarkNovember 28th, 2008 at 11:44 am

For more on why Obama’s selection sucks see this RGE article from Chris Whalen:What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup[Excerpt:]By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.The bailout of AIG represents the last desperate rearguard action by the CDS dealers and the happy squirrels at ISDA, the keepers of the flame of Wall Street financial engineering. Hopefully somebody will pull President-elect Obama aside and give him the facts on this mess before reality bites us all in the collective arse with, say, a bankruptcy filing by GM (NYSE:GM).You see, there are trillions of dollars in outstanding CDS contracts for the Big Three automakers, their suppliers and financing vehicles. A filing by GM is not only going to put the real economy into cardiac arrest but will also start a chain reaction meltdown in the CDS markets as other automakers, vendors and finance units like GMAC are also sucked into the quicksand of bankruptcy. You knew when the vendor insurers pulled back from GM a few weeks ago that the jig was up.

RichNovember 29th, 2008 at 11:30 am

Responsible people weren’t thinking in terms of the level of stupidity and corruption that the Bush administration has operated at.Most people were assuming that problems cropping up from deregulation would be recognized and dealt with. Nobody thought that FEMA would be so poor after Katrina. Nobody thought that the Iraq occupation would be so mishandled.What I’m pointing out, is that normal people assumed a level of competence that wasn’t present with the Bush administration.

GuestDecember 1st, 2008 at 6:53 am

Bush administration, GOP, and Sarah Palin are moronic clown that is running the country now. Lets see how Obama and his democratic party clown gonna run this country when he takes over. Moronic clown here and there, soon this country will be doomed.

SoftwarengineerNovember 29th, 2008 at 3:04 pm

BANKING WOLVES GUARDING THE MAINSTREET HEN HOUSEI was laughing my head off at a Yahoo advertisement article that asserted it offerred bachelors of science degrees in business. Like a business degree will miracuously design better engineered cars in Detroit [albeit if these MBA business folks could convince Americans on buying foreign/domestic cars that do better than 20 mpg +/- 2 mpg, then I’d have more respect for this useless globalist tripe].More of the same, that’s what see on Obama’s economic team.None of these buffoons will admit that the way out of the mess is depopulating the credit crisis, not adding our great/great grandchildrens’ debt on to it, as it worsen with more uncontrolled growth anyway. Hades, a grade school kid could figure that out.Maybe that’s who should be running our economy, the kids we socked the contiuous uncontrolled debt on. But let’s make sure they get real bachelors of science degrees first.

RushNovember 28th, 2008 at 8:22 am

It was Clinton’s fault. It has nothing to do with the government that was in power for the last EIGHT MOTHER@*#$*&/ years.BTW GWB is still looking for his legacy. Anyone seen it?

ptmNovember 28th, 2008 at 9:57 am

Yes, Bill Clinton was president, but here are the salient facts if you care to take the time to read them. Michael Greenberger, the former Dir. of the Commodity Futures Trading Commission (1997-99), explained that it was the financial industry lobbyists who donated millions to Phil Gramm over his 24-year congressional career and drafted the 285-page bill called the Commodity Futures Modernization Act. They used Phil Gramm as a vehicle since he was then the chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.On December 13, 2000 the Supreme Court had issued its decision on Bush v. Gore. Two days later, December 15th, President Bill Clinton and the Republican-controlled Congress were locked in a budget showdown over a massive 11,000-page, $384-billion, omnibus spending bill. It was the perfect moment for Gramm to slip in his 285-page measure sponsored by Senator Richard Lugar (R-Ind.), who was the chairman of the agriculture committee. They had tried to get the measure passed earlier and it had been considered dead. But remember, committee chairmen have the right to submit bills directly to Congress without committee approval so the bill was never debated in committees or even by the House or Senate. Phil Gramm stood up on the Senate floor to hail the act’s inclusion into the must-pass budget package. But only an expert (or a lobbyist;-) could have followed what Gramm was saying. The act, he declared, would ensure that neither the SEC nor the Commodity Futures Trading Commission (CFTC) got into the business of regulating newfangled financial products called swaps – and would thus “protect financial institutions from overregulation” and “position our financial services industries to be world leaders into the new century.”It worked! Just prior to the Christmas holiday, the act found its way into the The Consolidated Appropriations Act for FY2001 (Labor, Health and Human Services, and Education Appropriations Bill) (H.R. 4577). 157 Democrats and 133 Republicans voted for the appropriations bill. 51 Republicans and 9 Democrats opposed the appropriations bill vote results in the house. The Senate version passed by “Unanimous Consent.” President Clinton signed it into Public Law (106-554) on December 21, 2000. and the rest is history.Earlier in his career Phil Gramm sponsored the Gramm-Leach-Bliley Financial Services Modernization Act which, in turn, repealed the Glass-Steagall Act and allowed traditional depository institutions (banks) to speculate in financial markets just as they used to do before the Great Depression.So, if you feel the need to point-the-finger, I suggest Phil Gramm deserves more attention than Bill Clinton.

GuestNovember 28th, 2008 at 10:42 am

Wow, very impressive research, very insightful and very well said. Hopefully this will put to rest a lot of the grumblings here about what really went down in respect to his particular issue which is getting very tiring.

MarkNovember 28th, 2008 at 11:47 am

I didn’t sift through all of this, but is Robert Rubin’s name in there somewhere? Also, what about NAFTA?The “Democrat” “Republican” argument is all a smokescreen by the wealthy elite.—Do people demand a really just system? Well, we’ll arrange it so that they’ll be satisfied with one that’s a little less unjust … They want a revolution, and we’ll give them reforms — lots of reforms; we’ll drown them in reforms. Or rather, we’ll drown them in promises of reforms, because we’ll never give them real ones either!!- DARIO FO, Accidental Death of an Anarchist

GuestNovember 28th, 2008 at 3:53 pm

rush, i think i see it. he will be remembered as the vlad dracula of free market capitalism. in his time he impaled just about everything that moved. it is a monumental mess. a pyramid of mess but human beings are exceptional, resilient, opportunistic, and sometimes wise. that is if they have not been impaled.what will emerge from this is a new form of free market capitalism. perhaps an enlightened, responsible market capitalism.a non ponzi pyramid system that does not depend on cancerous growth rates and emerging market colonization, genocide and poverty, but has built in mechanisms for survival without expansion and growth? heresy?maybe a tranched market system that recognizes the needs of humanity rather than exploits the illusions of the desperate.a debt basis model in an international environment requires a central authority and this is problematic, to say the least, so maybe the basis needs to be something other than debt. or a modified conception of debt? w. may be remembered as the father of this experiment?i don’t think people object to other people having luxury as long as it isn’t based on the destruction of their own environment or god given liberty. w. may turn out to be the father of a more just paradigm. spin can do that.the first thing we have to do is differentiate the junk from the capital, anyone who stands in the way of that is openly saying their own petty interests are supreme. in the current model that may be so because the system is designed to function just like this. extension of debt that requires growth and expansion and when the limits are met it defaults. get yours and get out. end of story, but the story doesn’t end. w. can’t rightly be blamed for that but he could be credited with meeting the end bravely and swiftly.we will have to wait and see. in this environment legacies,like markets, are almost infinitely plastic. we have been brought to Halloween by vlad dracula.

ptmNovember 28th, 2008 at 8:44 am

Arpitha Bykere , Elisa Parisi-Capone and Christian Menegatti – The recent readings of both the PPI and the CPI are showing the beginning of deflation.If you wish to make a case for deflation, that’s fine, but it’s dishonest to say that a drop in the rate-of-increasing inflation is deflation.May I suggest a re-wording: The recent readings of both the PPI and the CPI are showing a decreasing rate of inflation and if this trend continues there would be no inflation, perhaps even deflation.Your article goes on to justify deflation by describing massive cash injections by the Treasury and Fed with a total liability exceeding $8 trillion! finish up with a description of debt implosion and loss of mostly future earnings suggesting this weak force will have the same or greater effect than the outrageous direct effect of the Treasury and Fed’s monetary policy described above.

GuestNovember 28th, 2008 at 8:57 am

First Rate Economic Team??Excluding Volker all these guys are good friends and directly or indirectly were working for Bush Govt.So that we can conclude that Bush had a first rate economic team too, right??And this miss is a first rate economic mess!

blindmanNovember 28th, 2008 at 10:09 pm

m, anything can be defended against in the name of preserving institutional and systemic function at this point. it all goes to national security. security in general. there is no escaping that. modern economic man survives on institutional identity and there is the problem because institutions have no heart, they have “stated purpose” which is self preservation, first and for most, regardless of the description of that identity. this is our mess and our destiny.investment banker or hobo, it makes no difference, they will fight to maintain identity. this is our global problem. not reality, world view. (but then there is the possibility of treason? are stated purposes of individuals in positions of influence and power sincere?)this dynamic reduces the individual to a functioning unit in their chosen or dictated institution. they, we, represent something or some group rather than are independent thinking human people. the position outweighs the man, woman. you see it every day, every where. money makes it happen, the more money involved the stronger the dynamic, and we’ll see what circumstances do to influence these accused impostors.the “positions” must be confronted with the realities. i don’t assume that they will function as people. they, no matter who they might be, are representatives, for someoneand of something. the people need to, not prejudge them but, impress upon them or suffer the consequences.i know you get it. i just couldn’t help myself.

GuestNovember 29th, 2008 at 2:58 pm

First rated economic team? This is disaster!!!!These guys are all terrible people who have made these whole financial mess and economic crisis, including Tim Geithner, Robert Rubin, Bill Gross, and Larry Summers, except Paul Volker. I am certain that they are going to mess up more our financial system, economy and country.Your analysis is terribly wrong.

GuestNovember 28th, 2008 at 9:04 am

When the dollar will colapse ? After the deleverage ? If so when the market will deleverage , in march next year ?

The RussianNovember 28th, 2008 at 10:44 am

To what currency exactly should the dollar “colapse”, Ruble, Rupees, Yuan?And why didnt it already happen then?

GuestNovember 28th, 2008 at 10:02 am

@swk “All I have seen from posters on this blog in the last several weeks are complaints about this person or that person being a “Washington insider,” being from the same corporate culture that created the financial downturn, etc. For once, I’d like to see some suggestions from you or another participant here as to who they think SHOULD be on the team that is not now.”_____________How about Roubini, for example.If one buys into Obama’s justification for his choices then one is agreeing that:- He has selected the best and the brightest in America.- The Clinton administration employed the best and the brightest in America.- The financial crisis was created by individuals including some who are the best and the brightest in America.- A pre-condition to participate in change is that you must be a Washington insider.- Obama has the vision and executive skills to guide this group of the “best and the brightest” to implement that vision.A question what exactly is Obama’s vision for America – I know it’s change – but what exactly is it. e.g. a mission statement.

AfANovember 28th, 2008 at 11:02 am

The same question applies, what is that Geithner has that Paulson does not or what does Summers have more than Bernanke?There will always be criticism about the choices made about management change in time of crisis – just ask sport clubs. Being smart is clearly not a sufficient prerequisite, because one would assume any person would not escalate to such a high position without having some kind of intelligence. Being an outsider, considered as an insider, having experience, thinking outside the Box, committed to having one’s hands dirty but not have them dirty already … are all important.Then the most important of all is the informal mission and directives given by the Boss: Paulson would probably have done a good job if he was dealing with a more honest and committed Administration. This is why the ones chosen have to be responsive to their boss but not afraid of going against his wish if that contradicts the responsibilities of his position (what came to be known as Integrity).I do not have names but I believe that is a good benchmark to assess each potential candidate

GuestNovember 29th, 2008 at 6:49 am

I believe a realist like Dr. Roubini would have been a great choice. But voices of reason and reality are usually not welcome in the great hall of the people in Washington

kilgoresNovember 29th, 2008 at 10:11 am

I would support emphatically the selection of Dr. Roubini for the team!I don’t agree with all of your conclusions. Perhaps Mr. Obama has selected from among the best and the brightest in America, but that is a really big subset of the population (I also note with healthy historical skepticism that that Robert McNamara, McGeorge Bundy, Dean Rusk, George Ball, William Westmoreland, and Maxwell Taylor were all members of the “best and the brightest” Americans who, in the 1960s, contributed significantly to our fatal blunders in Vietnam). The Clinton Administration probably did include some of the best and the brightest of the time. The financial crisis no doubt was created, at least in part, by individuals in the best and the brightest category. I don’t think you have to be a Washington insider to participate in meaningful change, but it helps to have some folks with experience in Washington if you’re going to make things happen (I commented on a previous thread about the problems Jimmy Carter’s “Georgia Mafia” had in implementing the changes they wanted because they didn’t have anyone on the time with substantial experience in Washington politics). I think Mr. Obama is about as good as it gets in terms of an executive with vision and skills to make change happen. You’re right about the notion of “change,” however: the devil is definitely in the details!SWK

irving fphelmpNovember 28th, 2008 at 10:21 am

“A question what exactly is Obama’s vision for America – I know it’s change – but what exactly is it”as we’re only in the pre game show for an Obama Administration one can see indications of what that vision might include:closing down Guantanamomassive investment in re tooling American industry to 21st century needs-mass transit, clean energy infrastructure and production, industries of the futurewithdrawing from Iraqa national health care structure so that every American has some form of coveragea jobs program for 2.5 million new jobs by 2011, cleaning up our delapidated infrastructure. Bridges, roadways, subways.

MarkNovember 28th, 2008 at 11:55 am

No increases in spending can be undertaken without exacerbating the problem!I agree with the withdrawal from Iraq (though the MIC will just see to it that these resources are pushed further East) and the closure of Guantanamo.The US needs to curtail most subsidies, not create MORE! Subsidies are, after all, supports for unsustainable actions.

MedicNovember 28th, 2008 at 2:03 pm

I want to jump on this healthcare issue again. I seem to be reading a lot of people’s posts that claim universal health will cost more than what we pay now. I would argue that ALL other healthcare systems in the world cost LESS and they are more effective because they WASTE LESS than we do.Let me try and explain how costs will be DECREASED with universal health. I will use myself as the example:We are a family of three. My bi-weekly premiums for a low-end program that covers the basics such as regular office visits and preventative care, but requires me to spend a high deductible is $325. That’s my end – my employer also contributes to it and picks up the rest of the roughly $11,000 plan. That covers just the three of us for regular stuff. I still have to pay co-pays and out of pocket expenses for medications and such.Now add to my cost my taxes which go to help fund (although underfund is a more accurate statement) my state’s Medicaid program and the Federal Medicare programs which comes in at another $1000 roughly and I have spent nearly $9500 per year for minimal coverage for my family. My wife and I both work part-time so one of us can be home with our daughter and our annual income is roughly $75,000 combined.Basic math folks: we spend 12.7% of our annual income on healthcare premiums plus whatever other costs I incur for co-pays.If you think about it this way, what if everyone paid a small tax on something no one is exempted from using: food?If I paid $5000 in additional taxes for a healthcare system that provided me and my family with the same minimal coverages we have now but did not have to pay premiums and taxes to fund state and other federal systems, am I better off? You bet. Would MOST of America be better off? I think so.I, like most people, don’t mind paying into a system to make sure it is well funded as long as I can also utilize it. What kills me now is to pay into a system that I can’t use, then pay premiums to a company who works to actively do as little for me as possible. I get screwed both ways.This is a no-brainer folks. It works EVERYWHERE else in the world. We are the only ones who don’t do this for our citizens.

MarkNovember 28th, 2008 at 2:14 pm

Medic, I appreciate your in-depth knowledge. And I absolutely believe that national healthcare would be more financially prudent than the current system. But, in light of the fact that the world is contracting (and will forevermore do so) I’ve got to wonder whether we’re being fair about the realities.2/3 of the world’s population lives on $3/day or less. What level of healthcare do these people have?The other countries that provide national healthcare are coming under severe economic strains. Sadly, I don’t think that their service levels are likely to hold up 🙁

MedicNovember 28th, 2008 at 2:54 pm

Mark -Their service levels may actually hold up. Many countries have prepared for the huge influx of patients and needs that is coming with the Boomers. Countries like Portugal took aggressive steps a decade ago to make sure they increased the number of physicians and nurses working in their systems. Today, their workforce is larger and ready for what is coming at them. Us? Well, our healthcare workforce is shrinking at just the wrong time.Many countries also treat their healthcare systems as important parts of their social backstop and they are likely to cut some but not the devastating levels we have seen here.As an example, my state’s Medicaid fund is in the red in huge amounts and many hospitals are owed millions from several years ago. We have cut funding, but not really told anyone yet except the people who receive those funds. So, to argue that we can continue our current service levels is not realistic. At some point soon, many hospitals will be forced to cut staff, services or close because we don’t the fund the programs we have now and insist on bailing out insurance companies who fight us tooth and nail for payment.Trust me when I tell you we are in worse shape than almost any other industrialized nation on Earth.

PeterJBNovember 28th, 2008 at 3:10 pm

Mark,you seem to assume that just because people in other countries only earn less than USD3 per diem, that these peoples and countries are worse off than the Americans’ – bad assumption and,it is not true…Those other countries are certainly under severe strain – but not as much as the USA, the UK and the EC etc, but this does not necessarily imply that their healthcare facilities are under similar strain… and in many cases, they are not under strain… nor does it imply that they are unlikely to hold up.The USA is under strain and will collapse, no doubt that at all – the USA is already and totally bankrupt and they have no leadership to get them out of it – the USA -s gone – its over but the screaming and pilfering – for proof, just look at the Obama “economic team” for huge signs of bankruptcy – this team of Moral Hazard experts, will go down in the history books with Black Beard and Bully Hayes…LOLHo hum

MarkNovember 28th, 2008 at 7:10 pm

PeterJB,No, I ASSUME nothing. I have quite an understanding of what it’s like outside of the USofA. (and I understand rural life)When you count up the costs of medical equipment and medicines I assure you that those countries with very low per capita income do not have extensive and thorough health care.Another concern with the US is the aging of the population. This plus the (terminal) economic downturn just isn’t looking good…

GuestNovember 29th, 2008 at 10:21 am

Can we stop with the 2/3 of world population lives on less than 3$ per day it’s an emotionally invoking statement that’s relative to the cost of living and rate of currency exchange etc. In the context I keep hearing the same people repeat this mantra it’s completely meaningless!

blindmanNovember 28th, 2008 at 5:24 pm

m, the insurance industry and pharm. and legal industries have this mess locked in their glove compartments. you do a surgery and leave a scar or even kill someone and the court finds for the plaintiff 20 million? trash that. government insures or limits insurance claims or both. premiums cut in half. next, mark up on pharms. 5000%, 100,000%? no more. max it out at 1000% and everyone has health care and can afford it. oh yea, wall street just took a beating. what do you want? stupid and evil millionaires or health care? you choose. if they say no way! someone, has to go, let it be me.

WiseGuyNovember 28th, 2008 at 7:11 pm

Medic -How about this idea?(1) A national catastrophic insurance pool is set up and run by the U.S. government to handle individual medical claims in excess of $1 or $2 million.(2) The federal government could also fund individual Medical Savings Accounts that are to be used solely for preventive care reimbursements.(3) Health Insurance companies handle the remaining risk business.This still leaves health insurance companies shouldering most of the cost and risk. But it keeps them in the risk-based arena where they have the greatest expertise.It doesn’t make sense to pre-fund non-risk business (i.e. preventive care) through insurance premiums. This is a little like having an oil change benefit on your auto policy — you’d end up paying cost+admin for a service that you could have just paid cost for.For national health coverage to work, a national catastrophic pool would be a necessity to prevent any one health insurance company from going under because it happened to get a larger-than-normal share of large dollar claims than its peers.The presence of this catastrophic pool would allow health insurance companies to remove “lifetime maximums” from their policies. Thus, no longer would a person have to worry that they might surpass their lifetime maximum on a policy and be forced into bankruptcy due to illness.Just some starting thoughts. Obviously more details would need to hashed out.What do you think?

MedicNovember 28th, 2008 at 9:34 pm

Wise Guy-Let me think on that. I know you work in the industry and from your POV, this makes sense as a compromise, but the better systems have the national government essentially providing a plan for minimum coverage as I described above and that’s about it. If people want / require additional coverage, they then can purchase supplemental plans via private insurance companies.This sort of hybrid limits the insurance companies’ risk pool (they can turn people away) and the government has a limit on what it covers. Also, because there is limited funding, care is more appropriate and reasonable.It’s not just the insurance piece that’s broken. As I have discussed here before, legal issues regarding malpractice and silly claims need to be taken care of. We also need to stop spending large amounts of money on the lost causes with little to no chance for improvement. What we do needs to be in line with the expected outcome.There are many pieces to the puzzle – but keep thinking, because only with multiple sides making concessions will we be able to make a good system that is fair, effective and cost efficient.

WiseGuyNovember 29th, 2008 at 6:51 am

Medic -I agree that the end result will require a massive change in the whole healthcare system.(1) National insurance regulation (not state-based)(2) Litigation reform(3) Outcome-based reimbursement to providers instead of per-serviceHowever, I’m not sure that the federal government has demonstrated that it can handle this job. The actuaries in the federal government have been warning for years about the underfunding of Medicare. And yet, what is the action of our government? Each year, Congress over-rides the reimbursement cuts needed to keep Medicare afloat.Expand the Medicare program to the <65 age group and you end up with the same problem – only bigger – unless some very fundamental changes are made in Washington.So, yes, my bias is to modify the current system rather than impose a foreign system. The federal government seems to only operate in two modes: (1) crisis and (2) ineffective — sometimes simultaneously. When the government starts having a better track record for acting effectively, I’ll have more faith in the prospects for a federal health care system.

PeterJBNovember 28th, 2008 at 3:00 pm

“A question what exactly is Obama’s vision for America – I know it’s change – but what exactly is it”Change is definitely coming but change has nothing to do with Obama and or his policies; he is just being opportunistic in capitalizing on the word, “change”.If you don’t know what change is occuring – then it may be too late for you…Ho hum

REDNovember 28th, 2008 at 1:18 pm

The conspiracy theorists are putting forward the following at the momentGoing into the home stretch for the presidential election, McCain was closing in on Obama. The Democrats and Obama did a deal with Wall Street to put the Republicans on the backfoot. The deal was as followsA crises of confidence was manufactured around Lehmann’s and it was put down, creating a financial storm and mud all over the Republican party.Obama agreed to put Wall Street establishment people in charge of Treasury – not people committed to changeI don’t live in the States – could there be any truth to this??

PeterJBNovember 28th, 2008 at 3:12 pm

Absolutely,the plan is for the FedRes to become the centre of the Universe… as far as the economist religion and its pious goes.Ho hum

kilgoresNovember 29th, 2008 at 10:22 am

I have a theory, too. A confluence of factors over a number of years led to a financial and economic crisis throughout the world that leaders everywhere are finding hard to understand and address.There is no truth to the conspiracy theory you have described:1. Conspiracies happen between individuals, not huge diverse groups such as “the Democrats” and “Wall Street.”2. Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson — Republicans selected for their posts by the Republican Bush Administration — made the decision not to save Lehman Brothers.3. Mr. Paulson, was the head of Wall Street powerhouse Goldman Sachs immediately before accepting his current post as U.S. Treasury Secretary.I note parenthetically that like you, Peter JB — God love him — is not an American either (Peter, please correct me if I’m wrong about that — as I recall, you’re an Australian national, right?). I’m not discounting what he has to say, but only noting this in light of your comment that you don’t live in the U.S. and appeared to be seeking views from folks who do.SWK

MarkNovember 29th, 2008 at 4:53 pm

All organizations, governmental or religious, wish to spread themselves for the “betterment of the world.” The obstacle, other than the fact that there’s a bottleneck here (with more than one organization seeking this out), is that all would fail because their underlying premise is that they can spread indefinitely, with no regard to the physical restrictions of the planet: of course they are aware of the need to “acquire” more resources, this is what has brought about many genocidal activities throughout history.The “conspiracy,” then, can be one of ignorance. We all conspire to ignore the obvious, as it interferes in our ability to sell the program (organization).

kilgoresNovember 29th, 2008 at 9:49 pm

Well, it’s not really a conspiracy if it’s not communicated. I would think of what you are describing more in terms of the innate tension between our nature as social beings, which tends to cause us to conform and to engage in “group think,” and as individuals with our own needs, wants, thoughts, opinions, dreams and aspirations. I figure the instinct to conform accounts, in large measure, for the failure of economists and financiers to perceive and act on the myriad problems that gave rise to the instant crisis until it was too late.SWK

irving fphelmpNovember 28th, 2008 at 1:20 pm

the US needs to shift its manufacturing, what is left of it into gear. We also need to shift our misuse of the natural world cause there’s catastrophes a plenty in the making and occuring every day. Right here in my city the amount of petro chemicals and toxins spilling into our waterways from cars and tires is highly carcenogenic and is poisoning our waters. You can’t eat the fish without risk. The Arctic at last report is melting at alarming rates. As for me I look at the impact of this economic crisis along with global warming as the one two punch. We will never achieve economic health unless we build in support of a healthy environment. I also would look very carefully toward a dismantling of our military machine and towards nuclear disarmament. The military machine is what has drained this country of its sense and treasure over the last 30 yrs.

GuestNovember 28th, 2008 at 2:59 pm

@irving fphelmp “The Arctic at last report is melting at alarming rates.”1 October 2007Arctic Sea Ice Shatters All Previous Record LowsDiminished summer sea ice leads to opening of the fabled Northwest PassageNovember 10, 2008An expected paradox: Autumn warmth and ice growth:Sea ice extent for the month of October averaged 8.40 million square kilometers (3.24 million square miles). As of October 31, ice extent was at 9.27 million square kilometers (3.58 million square miles), more than doubling since the annual minimum of 4.52 million square kilometers (1.74 million square miles) measured on September 14, 2008.October ice extent was 0.89 million square kilometers (0.34 million square miles) less than for the 1979 to 2000 average, but 1.63 million square kilometers (0.63 million square miles) greater than for October 2007. Sea Ice – Northern Hemisphere (Arctic) Sea Ice – Southern Hemisphere (Antarctic) Sea Ice News And for those lucky enough to reside in the US Mid West and North East – be prepared for record Global Warming beginning the first week of December, NOT. It should be one of the coldest Decembers in years.I know this is Economics – but there is a climate angle just as there is a social angle – and with Global Warming front and center an expanding Ice Cap might be tough to spin…

irving fphelmpNovember 28th, 2008 at 4:32 pm

This from National Geographic, not really your radical green group.• The rate of warming is increasing. The 20th century’s last two decades were the hottest in 400 years and possibly the warmest for several millennia, according to a number of climate studies. And the United Nations’ Intergovernmental Panel on Climate Change (IPCC) reports that 11 of the past 12 years are among the dozen warmest since 1850.• The Arctic is feeling the effects the most. Average temperatures in Alaska, western Canada, and eastern Russia have risen at twice the global average, according to the multinational Arctic Climate Impact Assessment report compiled between 2000 and 2004.• Arctic ice is rapidly disappearing, and the region may have its first completely ice-free summer by 2040 or earlier. Polar bears and indigenous cultures are already suffering from the sea-ice loss.• Glaciers and mountain snows are rapidly melting—for example, Montana’s Glacier National Park now has only 27 glaciers, versus 150 in 1910. In the Northern Hemisphere, thaws also come a week earlier in spring and freezes begin a week later.• Coral reefs, which are highly sensitive to small changes in water temperature, suffered the worst bleaching—or die-off in response to stress—ever recorded in 1998, with some areas seeing bleach rates of 70 percent. Experts expect these sorts of events to increase in frequency and intensity in the next 50 years as sea temperatures rise.• An upsurge in the amount of extreme weather events, such as wildfires, heat waves, and strong tropical storms, is also attributed in part to climate change by some experts.and on and on…my point-believe what you want to. Me, our economy should shift from consumerism to a 10 year sustainable livingrevolution. 20 million for a 2nd baseman! what a sham.

GuestNovember 28th, 2008 at 5:42 pm

“Mini Ice Age” May Be Coming Soon, Sea Study WarnsJames Owenfor National Geographic NewsNovember 30, 2005Chilling new evidence from the Atlantic Ocean is raising fears that western Europe could soon be gripped by a mini ice age.Global warming is slowing down the ocean current that carries warm waters from the tropics to the North Atlantic, scientists say

kilgoresNovember 29th, 2008 at 10:38 am

Thank you for posting some actual facts about the impacts the very real phenomenon of global warming is having on our natural world. Of course, it won’t serve to disabuse the Senator Inhoff crowd from their entrenched positions, but it will help bring around those on the fence who may be confused by the pseudo-debate generated by global warming skeptics.SWK

PeteCANovember 28th, 2008 at 1:57 pm

Let’s inject some common sense here.Does anyone really beleive that oil was properly valued when it reached $150/BL a few months ago? Does anyone beleive that oil is properly valued if it sinks to $40-$50/BL now? Did everyone in China and India suddenly stop driving cars? Hardly.Clearly these price swings have much more to do with speculation on the futures markets, and the fact that deleveraging in commodities is causing massive mispricing of key items. Don’t you think the Russians realize this? Why should they allow their own economy to be held hostage to these ridiculous price swings. And in fact – how can the global economy even adjust to a change in energy production (which is vital) when such price swings are taking place? The situation is absurd.We are headed for major political instability, as a result of this tremendous volatility in pricing (I should say … mispricing).PeteCA

GuestNovember 28th, 2008 at 2:12 pm

Agree on the political outlook – How much longer before USD hits the wall e.g. days or weeks or months? and when it crashes, by how much?

MarkNovember 28th, 2008 at 2:21 pm

Both oil and gold are up. While not conclusive and, of only a small duration so far, it appears that the shift back toward commodities is starting to take place.Do people really think that the financial and automotive sectors are our future? No. And that’s what the markets have been trying to tell us; but, the government has been hell-bent on propping them up; the only reason why they’re not underground is because the insiders are feasting off the government handouts, handouts which will soon exhaust.

REDNovember 28th, 2008 at 2:52 pm

Large Cap Commodity stocks (BHP) have rallied very strongly in Australia over the last few days reinforcing your view on a move back to commodities. Could be the initial stages of a USD selloff

PeteCANovember 28th, 2008 at 1:48 pm

A nice article here by Nadeem Walayat on the economic course for the UK – and the real danger of currency crash and hyperinflation., most of the points he makes about the UK are equally valid for the USA. Worse still, it appears that in the immediate future Mr Obama is only going to continue on a course to increase deficit spending in America, and move overall Government spending (USA) to a much higher fraction of total GDP. As pointed out in the article, the end result is currency collapse and hyperinflation (and I would add … extremely low interest rates from the Fed and massive unemployment in America as well).We are in a very serious position now. Total bailouts so far for the “credit crisis” add up to something like $8 trillion in the USA. That is roughly 57% of the GDP of the United States (which is roughly $14 trillion). ALL of this money represents an enormous OPPORTUNITY COST. We are bailing out failed sectors of the US economy (mortgages, banking, finance, auto), and that money is not being poured into new economic activities that could generate real wealth and productive jobs for Americans. We are staring in the face at a collapse of wealth in the Western countries (USA, UK and some parts of Europe). This may be accompanied by a significant tranference of wealth to parts of Asia in the future.There is no point in asking the G20 partners to address this problem – because the interests of the individual participants are no longer aligned. The massive wealth transfer cannot be stopped at this point in time. It simply becomes a competition to determine who are the final winners and who are the losers.PeteCA

MarkNovember 30th, 2008 at 9:52 am

From Crowd Control? A refelction on holiday shopping violenceby lisamSaturday Nov 29th, 2008 1:50 PMI’ve been involved in countless demonstrations and protests that have been deemed “violent” by both the police forces assigned to control the crowds and the mainstream media who tend to use them as the primary source for their stories.But never in the years that I was involved in massive demonstrations against the corporate control over globalization, did I witness anyone getting trampled or ignored when they had been hurt. Even when the heavily armed riot police would charge a crowd packed in so tight you could barely move, people would find a way to escape and help others in the process. If someone fell to the ground because they had been peppered sprayed or tear gassed, someone would stop and help them, often at their own peril.Yet, the bar of whether or not a protest was worthy of people having bothered to demonstrate at all was whether or not it was “violent.” And if a window or piece of property was damaged, it absolutely overshadowed any chance of the remote possibility that the press may actually talk about the issues that got people into the streets in the first place. Crowds are scary, you see, and protest seems to come with the predetermination that you are automatically violent for stepping out of line in such a visible and audible way. The burden of proof is yours. It is possible to overcome the perilous label, but even then it will likely still carry the name and the notion – you were “non-violent.”But, it wasn’t a political or social protest that became violent yesterday in New York and it was no window or piece of property that was damaged. As the stores opened their doors to surging crowds of people in search of Black Friday bargains, 34 year old Jdimytai Damour was trampled to death as he opened a Wal-Mart store twenty minutes outside of Manhattan to a crowd of over 2000.Some of the bargains people were trying to get to? A 50-inch Plasma HDTV for $798, a Bissel Compact Upright Vacuum for $28, a Samsung 10.2 megapixel digital camera for $69 and DVDs such as “The Incredible Hulk” for $9.After the man was knocked down, people stepped on and over him uninterrupted in their relentless and deadly search for these and other bargains. When other employees tried to help him, they were being trampled too. Thousands of people had lined up the night before in anticipation of a low price shopping extravaganza and were actually angry when the store closed because of what had happened to Mr. Damour, who was pronounced dead at the hospital. The store remained closed for the rest of the day.These people crumpled part of the metal door frame like an accordion. The police spokesman declared that the crowd was “out of control” and described the scene as “utter chaos.” So far, the response has been pretty mild in terms of reactions to this tragedy. In other words, no one is being encouraged to calm down a bit with the sociopathic shopping behavior. No one is being warned to watch out for violent Black Friday shopper mobs next year. The police are, however, reviewing the surveillance video to see if they may press criminal charges, though they say that it’s difficult to identify anyone in the video in terms of culpability.Perhaps they should invite someone from a police force that has done well with identifying and singling out people from video tapes of large crowds who have gathered to bring attention to some issue, though admittedly it sounds like those “violent” crowds are probably a little less rowdy than the holiday shoppers.In all seriousness, however, this is a breathtaking display of which national values are nurtured and what can happen when taken to an extreme. After all, our very first post-911 instruction was to go shopping. With talk of the recession only getting worse, the media hyped up these Black Friday bargains with a passion, fanning the flames of an already determined holiday shopping crowd.Maybe if the values of some of the other “out-of-control” crowdsters, the people marching against war, racism, Wall Street bailouts and economic policies that depend on gross inequalities, were instead supported and embraced, Jdimytai Damour would be alive to celebrate the holidays with his family who, instead, will be planning for his funeral.What a tragedy. And what an important opportunity to talk about our consumption habits and values in this holiday season and beyond. The timing is right – even though we’re still being encouraged to spend, we know that the economy is only going to get worse. The vast majority of people, when asked directly, would see the absolute absurdity in valuing a bargain priced TV more than a human life.So, when you’re gathered around the table or the tree this year with friends and family, take a moment to remember and say a few words for Jdimytai Damour and his family. In doing so, you will remind everyone around you, in a very candid way, what really matters at this time of year and always.

GuestNovember 28th, 2008 at 2:11 pm

Obama means:bailing out wall street speculators and bankers whose recklessness and greed has pushed the economy to this point in the first place.keeping 10s of thousands of troops in iraq for the indefinite future.intensifying the war in afghanistanintensifying the war in … pakistaninitiating a draft so that the army will be able to wage these criminal wars (including a possible one in … iran)slashing social security and other social programs to pay for the debts incurred by the government via its bailout of the multi-millionaires and billionaires.these policies are more or less what mccain would have done and what bush would have done if he had been allowed to stay on for a third term ….because he is relatively young, popular with the young, from a different party than bush and black, he is more capable of getting away with this crap than bush or mccain would have been.capitalism is garbage.down with obama — the black george bushfor a real, from-the-bottom-up, democratic and internationalist socialism

Jason BNovember 28th, 2008 at 2:15 pm

PeteCA -I completely agree with you, in fact I may be even more pessimistic. 1) Leading indicators (consumer spending, bond markets, consumer sentiment, jobless claims) show the consumer economy, 70% of our economy, has crapped the bed. 2)There is absolutely no way that the US can fund its projected deficit next year. I believe the dollar will crash and no longer be the WRC in the second half of 2009/ early 2010, and consumers will endure shortages, price controls and hyperinflation. Probably eventually worse than the Great Depression. I believe there is no avoiding the outcome at this point, and we are best served by making preparations while the dollar is strong and imports are abundant.

irving fphelmpNovember 28th, 2008 at 3:03 pm

I should hope you’re wrong too. I only see a massive public works projects, urban, rural, arts, transit, schools as a way out. and we need a change of scene. Slasssh the military budget and tax hell out of fat rich baseball players and ceo’s. C’mon 20 million dollars a year for a 2nd baseman. Let’s put 10 of his million into ballparks for kids all across the country.

MarkNovember 28th, 2008 at 3:42 pm

Is that how you’d deal with your personal finances? If you were massively in debt? It’s my hope that people would understand that interest payments are killers and that one is best off getting out of debt.

irving fphelmpNovember 28th, 2008 at 4:40 pm

I am very far from being in debt. as for the big picture I’d begin by ending war and would stop making and buying war making material. I’d tax hell out of the oil companies and the upper 1 percent. I’d regulate the hell out of Wall Street and would repeal Glass-Steigel Act. I’d think about a maximum wage for this spoiled rotten wasteful magnificent populace. Cap it at maybe 10 million per annum max, rest goes to schools and healthcare and monorails.

GuestNovember 28th, 2008 at 5:33 pm

Why stop at 10M? Why not 5M? ‘They’ don’t really need that money. Heck, as long as we are deciding who can make what, let’s just cap it at 50K. You can have a comfortable life in America on 50K per year. Just take the rest. Anything over comfortable just makes a ‘spoiled rotten wasteful magnificent populace’, right?

irving fphelmpNovember 28th, 2008 at 5:54 pm

look take it easy I’m just talkin’. how about salary caps on baseball players and basketball players? especially second basemen and right fielders- nothing over 15 million per annum? Rest goes to midnight basketball courts in inner cities. How about a limit on wall street bonuses? could y’all live with something like that? Like 10 mil rather than the 250 mil per annum bonus excluding private jet and all, for the ceo’s with the flowers in their lapels that have robbed us blind. sound silly? That sounds fair to me. Take the cash to pay for lives and ease for our old grandmas and blind kids. what about salaries for movie stars on one freakin movie 20 million! cmon. what the heck is going on? 8 million per pic. ok? anything else over goes to the common good.and common good ain’t weaponry but schools, libraries and investment in industry of the future an small biz and small farm.and heal oceans. I’m just sayin'(and savin’)

MarkNovember 28th, 2008 at 9:19 pm

My point is that we cannot look to take on more expenditures unless we:1) Cut out existing excesses (such as the military);2) Are able to actually pay for them.

AnonymousNovember 28th, 2008 at 2:40 pm

First Rate I think not, these are the people that trashed the russian Economy, Larry Summers did that in the early 90’s and Now they are responsable for ours mess when they deregulated the banks in the late 90’s. There is no change here these are same insiders as before, why will they do anything different this time. Its just the bigges rip off in history they will need 100 trillion to bail everyone out. When the next bomb hits they will want to bail out the major insurance companies.

GuestNovember 29th, 2008 at 8:33 am

I think the academic types like Jeffrey Sachs only provided the ideological cover; the theft of state assets, corruption and thuggery that followed in the former Soviet Union didn’t require outsiders to implode.

KJ FoehrNovember 28th, 2008 at 3:05 pm

Who to blame for the housing bubble, Clinton or Bush?IMO, it was George W Bush who took the good idea of increasing home ownership and turned it into a laissez faire disaster.But don’t take my word on it; see for yourself. is the Republicans first line of defense to spin their own failures as the fault of the Democrats. And they can fool some of the people some of the time, and even some of the people all of the time, but they can’t fool a majority of the people all the time, as the 2008 election results demonstrate.People have grown wise to their big lies.

GuestNovember 28th, 2008 at 5:03 pm

Are there any speeches from Mr. Geithner related to this? How about this nugget from May 2004:

Perspectives on the U.S. Financial System …Advances in risk management have also enabled firms to hedge risks more effectively and, in the aggregate, to disperse risk more efficiently across firms in the financial system. Given advances in data collection and risk modeling, banks and other financial firms are able to do better risk-based pricing. Firms now have the capacity to view credit and other key risks from a portfolio perspective rather than in isolation, leading to more efficient risk sharing and better capital allocation.In concert with better risk modeling, securitization and credit derivatives have facilitated the dispersion of credit risk across firms and across sectors of the financial system. These changes have led to significant risk transfers within the banking system, as well as a net transfer of credit risk from commercial banks to other financial intermediaries. As a result, we believe we are seeing a more efficient risk allocation within the financial system as a whole, since risks can be transferred to firms where they will diversify, rather than reinforce, risks arising from core businesses and to parts of the financial system that are significantly less leveraged than banks and securities firms, such as institutional investors and mutual funds.These risk management advances have been accompanied by the growth of key derivatives markets that have lowered the costs of hedging market-price-sensitive positions and activities. One important example of this is the growth of the market for long-dated swaps, which are now used by banks to hedge mortgage securities and whole loans. The notional value of long-dated interest rate derivatives (those with maturities of more than 5 years) has more than tripled since the end of 1998, considerably faster growth than for comparable shorter-dated instruments. The growth of these markets reflects a very substantial increase in hedging capacity, and this “wider pipeline” seems likely to facilitate the ease with which the market adjusts in conditions of stress.Growth in these OTC derivatives markets has been accompanied by welcome improvements in market practice. Since the turmoil of 1998, financial firms have made significant strides in the sophistication with which they assess and manage counterparty credit exposures arising from OTC derivative transactions. Rather than using the broad “rule of thumb” methods that were once the industry norm, OTC derivatives dealers now commonly assess counterparty exposures on a portfolio basis using more sophisticated approaches to capture both current mark-to-market exposures and the potential future exposure that could arise from changes in the contracts’ underlying rates and prices. These models make possible – but they cannot of course guarantee – an appropriately conservative assessment of the potential reduction in future exposure provided by netting agreements and collateral arrangements. Dealers have also made significant strides in developing and employing more sophisticated and exacting ways to stress test their exposures. Taken together, these approaches have resulted in more realistic measures of counterparty exposures and to better management of counterparty risk….

When I have time I’ll root through the archives from some Geithner Clinton era gems. While it would be nice to believe that we now have change and that this was all the fault of republicans, the reality is that Wall Street is as entrenched in the next administration as it was in those that preceded it both Republican and Democrat. In fact there are dangers of associating all of this with the Bush administration only, one being that people may believe that things have been cleaned up.

WiseGuyNovember 28th, 2008 at 7:33 pm

Part of me wonders how much was due to risk models not being able to adequately model this risk and how much was simply due to executives not listening to their risk modelers.

GuestNovember 29th, 2008 at 8:30 am

Aren’t statisticians and actuaries pretty conservative types? And aren’t they closer to the bottom of the totem pole than the executives that make the actual investment decisions? Add to that risk is a relative measure, I can picture the same glint in the CEO’s eye as there was at Chernobyl when the last control rod was pulled: “This isn’t the time for sissies, I want results!”

KJ FoehrNovember 28th, 2008 at 11:30 pm

To fail to see the housing and credit bubbles and the resulting financial crisis as a primarily a consequence of the Milton Friedman free-market philosophy, and to fail to see the free-market philosophy as a plank of the Republican party platform, not the Democratic platform, is to seriously misunderstand the Reagan Revolution and everything that has followed it over the past 28 years.

GuestNovember 28th, 2008 at 5:47 pm

And that is the critical point – by laying this at W’s feet people will be lulled into complacency thinking that we are in a new age. The appointments by Obama clearly suggest we will be getting more of the same.

MarkNovember 28th, 2008 at 9:37 pm

It wasn’t real clear what the republicans were wanting done: some generalizations about changing regulations, but how? It would be nice if they would time stamp these segments. Also, it’s not clear if some of the Dems’ remarks weren’t taken out of context, that they might not have been from statements from others to point out a particular outrage.The fact that this piece is clearly put out by a highly partisan person (all the other pieces are pro McCain) leads me to apply a discount.Disclaimer: I detest both parties!

KJ FoehrNovember 28th, 2008 at 11:36 pm

My question was who is to blame Clinton or Bush. And I didn’t say that they weren’t some Democrats complicit in blowing the bubble by allowing the dismantling of regulations and in passing the repeal of the Glass-Steagall Act, a bill that was introduced by Republicans***. etc.But it was the Republican appointed Alan Greenspan who kept interest rates too low too long, and it was the Bush administration that was responsible for overseeing financial activities through the FDIC, SEC, FTC, etc., but looked the other way in the 2002 to 2007 timeframe while financial companies used naïve homebuyers to create the paper they sliced and diced and overrated and defrauded investors with worldwide.***The bill that ultimately repealed the Glass-Steagall Act was introduced in the Senate by Phil Gramm (R-TX) and in the House of Representatives by James Leach (R-IA) in 1999.Also, see my reply comment to guest above.

MarkNovember 29th, 2008 at 10:14 am

Am I wrong in thinking that the president can retain the Fed chairman? Couldn’t Clinton have swapped out Greenspan?Gramm was backed by Rubin. And, the Dems overwhelmingly voted FOR this bill. Sure, more GOP votes for it, but no one ever expects the GOP to not screw the average guy; the Dems, on the other hand, are supposed to stick up for the average guy.

GuestDecember 1st, 2008 at 7:06 am

better to blame both republican and democrat, so history will not be repeated by both party again. lets face it, politician from both party are retards. it is hopeless for this country unless both party shape up.

PeterJBNovember 28th, 2008 at 3:22 pm

For all those “China will save the USA” pundits:”Yin Weimin, China’s Social Security minister, has revealed that employment is the Communist Party’s number one concern in the downturn and said the “situation is critical”. Unemployment is expected to rise from 4pc to 4.5pc by the end of the year and anecdotal reports have suggested that 3m people have already been fired in the industrial province of Zhejiang alone.”Ho hum

MandarinNovember 28th, 2008 at 8:08 pm

With respect PeterJB, consider this: those factory workers who become unemployed here are a drop in the ocean compared to the jobs that have been created in the past couple of years for perhaps 100 million migrants. Yes, some of these will become unemployed too. But the government can afford to spend the money to get them back to work, unlike back home. Here on the street I see GM cars! And in the stores there are products from Kraft, Gillette, Procter and Gamble! If we could do a deal with the Chinese and get them to buy more – they could spend their surpluses on our products and shift their production away from low tech manufactured products. Problem is, much of the US government does not want this to happen because then China would become more competitive with us in higher-end production. It would also probably start to build a global financial empire that would compete with ours. This meshes nicely with those in the Communist Party who would like to keep the Yuan undervalued.

GuestNovember 28th, 2008 at 3:38 pm

What is “petrodollar recycling”?It refers to the use of dollars for the purchase of oil and the subsequent reinvesting of those same dollars by oil exporting nations back into the US financial markets.Many hundreds of billions of US dollars have flowed from its shores only to come back in the form of oil and purchases of Treasury and Agency debt.That mechanism is certainly wounded now…Crude falls on speculation OPEC won’t cut productionNov. 28, 2008 NEW YORK (MarketWatch) — Crude-oil futures fell Friday on speculation that the Organization of Petroleum Exporting Countries won’t cut its production at Saturday’s meeting. Crude for December delivery fell 73 cents, or 1.3%, to $53.71 a barrel in early electronic trading. OPEC has not ruled out cutting output at the meeting, but several delegates have said they were likely to only measure compliance of previous cuts and leave the decision on cuts till December.Making a rough assumption that 1/2 of the world’s oil that is produced is exported (I think this is reasonably fair), we can calculate the “loss” of extra dollars that are no longer available for oil exporting countries to use for such things as, say, buying all the new US Treasury issuances that are coming up.(86Mbd * 365 * $147) = $2,300 billion dollars [this is the peak amount](86Mbd * 365 * $53) = $830 billion dollars [this is the current amount]Subtracting these two, we find that there is a nearly $1,500 billion dollars ($1.5 trillion) difference between the rate of dollar accumulation at the Peak Oil price, compared to today.This is a massive difference, and it makes me wonder from whom it is exactly that the US plans on borrowing nearly $2 trillion this year. Certainly OPEC and Russia would be bad candidates, as they may find their export revenues barely sufficient to keep the lights on at home.This provides one more bit of confirmation that the most likely source for all the required US borrowing is going to come from printing out of thin air, as opposed to the much less inflationary source of honest-to-goodness production.More immediately (and more certain) is the loss of buying pressure for the US dollar that will result from oil exporting nations curtailing their purchases of US financial instruments because they no longer have the money to recycle. If it gets bad enough, they could even sell their existing holdings to meet local needs for funds.This will add pressure to the dollar.

Jason BNovember 28th, 2008 at 4:57 pm

Guantanamo should be kept open to imprison the crooked bankers, financiers and others who caused this mess.*

PeterJBNovember 28th, 2008 at 4:58 pm

From a heretic to the Obama ‘faith-full’:”Then, Shiller studied Geithner’s remarks during the bubble period and came to this conclusion:“He had no idea.”Ho hum

villagerNovember 28th, 2008 at 5:05 pm

To the authors of this article … if you are going to write economic analysis do so. Leave out material like the first paragraph. It is nothing but tripe, filler and posturing which are attributes that politicians and senior officials perform well without need of your cheerleading. Don’t devalue your economic analysis with political bias/rhetoric otherwise your analysis will be disregarded by those who are seeking objectivity.

villagerNovember 29th, 2008 at 10:45 am

Like others, I have high regard for Yves Smith. Evidently the commentary on Naked Capitalism was posted to the wrong site as explained by: “Cassandra here. Yves, didn’t post this – it was meant for CDT and I mistakenly submitted it in error to the wrong blog in my haste – a blogger’s “fat-finger error”. You surely know Yves has far more discretion (not to mention gravitas) than the quasi-satirical drivel I scrawl upon my walls. So apologies to all – especially Yves. That said, if it made you smile – great! If you were in some way politically offended, I also extend my apologies as I understand you didn’t sign on for it.”Economic analysis does involve subjectivity. Perhaps instead of “objectivity”, “neutrality” would have been a better choice of words on my part. To the authors, the fact is that Obama’s “team” has yet to perform. There is no reason for cheerleading.

blindmanNovember 28th, 2008 at 6:14 pm

v, half of economics, perhaps the better half, is not objective or in the head, it is in the gut, the heart and the spirit. all i ask is that you consider it. i offer this very non economic, economic metaphor..Child’s Christmas in Wales, by john cale.With mistletoe and candle greenTo Halloween we go.Ten murdered oranges bled on board shipLends comedy to shame..The cattle graze bold uprightlySeducing down the doorTo saddle swords and meeting placeWe have no place to go..Then wearily the footsteps workedThe hallelujah crowdsToo late but wait, the long legged baitTripped uselessly around..Sebastopol AdrianapolisThe prayers of all combinedTake down the flags of ownershipThe walls are falling down..A belt to holdColumbus too, perimeters of nailsPerceived the Mamma’s golden touchGood neighbours were we all………………as i imagine it the truth underlying the “utopia”program is that macro and micro players are irrational, so government intervention is ultimately arbitrary and counterproductive. maybe. the questions still remain, at what point is rationality relevant and what is the aim of production? what need be produced and for who must it be produced? “markets”, which means nothing without a description of the players and their needs and their capacities. the word “needs” implies rationality which in “utopia” is an unknown. the problem is so desperately incomprehensible that the only correct course is to get out of the way of the destruction and see what happens. this outlook suffers from generalizing the demand and needs side of the model. while luxury demand may be incomprehensible and require further investigation into the psychological and behavioural sciences, need demand is not so irrational. it seems they fail to separate needs from luxury. when luxury markets impact needs markets you invite systemic failure, exploitation and revolution. imo a reconsideration of certain commodity markets is called for. heresy? so what.the me me crowd needs to look around and ask the question, by whose graces do i see this that stands before me? heresy!fire fighters sometimes allow a burning building to burn as the potential cost of intervention is greater than the preservation effort. a strategy of containment. it is done from a distance and is therefore safer than actually battling the fire to extinguish it. this is seldom the approach when people are in the building though and the question becomes a very fundamental one. which people are to be saved. what tools are available to save the mostpeople in the shortest amount of time? who is saved? the ones on the top floor or the ones in the basement?if all the people can be saved then the question becomes, is the structure worth any further risk or is it too damaged to save. is it worth the cost of salvation efforts because of the structures proximity to other viable structures or is the whole neighborhood in need of overhaul?i hope our approach, first, doesn’t forget that their are people in the basement of this building, so lets not flood the basement to save the foundation so the evacuation of the upper floors can be comfortably accomplished. who are our firefighters? do they know there is a basement full of people. the people who dreamt the building into existence in the first place and, if not drowned, some would willingly risk their lives to save even a dog on the roof, even if they suspected the dog of starting the fire. people are crazy, thank god…”With mistletoe and candle greenTo Halloween we go.” john cale.

john gannonNovember 28th, 2008 at 6:39 pm

Bloomberg with Roubini 11/27/08Interviewer: You said on Oct 23 we have reached a situation of sheer panic. Have things improved?Roubini: Yes now situation where downfall in the market where things were becoming unhinged. Markets were falling day after day and there was no demand only supply. have somehow stabilized but I see still downside risk to financial markets because of weak earnings news and other financial shocks that are going to hit with deliberating from financial institutions continuing.Interviewer: so we are stabilizing now but it’s going to get worse how bad is it going to get?Roubini: In my view we are going to have the most severe US recession in decades and this is going to be the most severe global recession. Right now the recession is spreading fro the US to Euro Zone to UK to rest of Europe to Canada to Japan to Australia /New Zeeland. 60% of Global GDP, the one of advanced economy is contracting and now there is a beginning of a hard landing also in Emerging market Economy with a very sharp slowdown in Emerging Markets as well. So we are going to have a global recession in my view will last all through 2009 so its going to be a extremely severe recession affecting the global economy and not just the US and advanced economies.Interviewer: Economists say that confidence is the key; among banks, consumers, businesses. How do you get confidence back into the system?Roubini: The confidence is going to come back once we backstop the financial system providing liquidity and recapitalizing financial institutions that are severely undercapitalized. We are going to restore confidence when we create a financial system that is more transparent. Unfortunately last few years financial system has become less transparent: when you take advantage of mortgages and convert them into MBS’s and MBS’s into CDO’s and then CDO’s of CDO’s of CDO’s in the end you are creating new instruments that are complex, new, exotic, hard to price, illiquid, mark to model (not market) and mis-rated by the rating agencies and when people realize that you cannot convert a bunch of dodgy triple B mortgages into triple A securities panic occurs and you don’t trust the counter party because you don’t know who is holding toxic waste and you don’t know how much of it is out there and it causes panic. So you have to have transparency in the financial system in order to restore confidence as well.Interviewer: Tell me why so many people in govt and finical industry were not able to predict what is happening today.Roubini: When there is a bubble there is an element of irrational exuberance, of excessive mania, optimism, you know, in 2000 people were writing books titled “Dow at 36K” right before there was the collapse of the tech bubble. This same kind of euphoria of excessive was occurring during the housing and credit bubble and people’s assessment of real condition becomes distorted when there is this kind of euphoria. That’s why so many people got it wrong.Interviewer: If President Elect Obama calls today and asks “Nouriel, I want to know how we are going to get ourselves out of this mess” what would you tell him?Roubini: Well there are several policy measure he should implement and rapidly. The first I agree is a massive fiscal stimulus package because right now private demand, consumption, residential investment, Capex spending is literally in freefall. GDP growth in the fourth quarter could be negative 6% in US so the economy is freefall you need aggregate demand to be boosted by the govt massive fiscal spending, aid to state and local govt, unemployment benefits, food stamps and govt spending on infrastructure.Interviewer: How big does the fiscal package have to be $500bn, $700bn?Roubini: at least $500bn probably $700 over two years but the first year you have to do something over $500 because the fall in private aggregate demand that I estimate for next year is of the order of at least $700bn.Second step that has to be don e is the recapitalization of the financial system that has to be much more aggressive. $250bn is not enough practically all of the $700 bn of the TARP will have to be used to recapitalize financial institutions because if you don’t do it given the size of credit losses now already a trillion dollar soon enough two trillion dollar, there will be a massive reduction in lending and assets in the financial system and the credit crunch is going to become much worse.Third thing you have to do is to reduce the debt burden of the household sectors that are buried under a mountain of mortgage debt they are going to walk away or default or be foreclosed on their homes. You have to reduce the face value of that mortgage debt for the distressed household by at least 30% so they can start spending again.And fourth, the Fed has to more aggressively ease money supple and provide liquidity and restore some of the liquidity in the financial and credit markets.Interviewer: You have though said that global policy makers had lost control of financial markets, is that the case?Roubini: Well until recently it looked like things were becoming unhinged because the policy makers were always one or two steps behind the curve and easing but not easing aggressively, stimulating the fiscal policy or recapitalizing the banks but doing it too slowly I think now there is a recognition that the financial crisis is severe. It is severe in the US it is severe in Europe, I am here in Moscow where there is also a crisis, there is trouble in China this is a global financial crisis. So the policy response has to be aggressive and you have to err on the side of more aggressive action because the alternative is something that is going to lead us to an economic stagnation that will last much longer than otherwise.Interviewer: But the Fed has, some say embarked now on a series of quantative measures announced this week $700bn so do you approve of that? What other unorthodox measure s do we need to instigate? Are we talking about buying long-term govt bonds and long term govt debt?Roubini: Debt might be an option. Effectively through the support of the mortgage the $600bn to buy agency debt and MBS’s the Fed has already been able to reduce the mortgage rates and long term interest rates> If the Fed were to commit to keep the Fed Funds rate close to zero over a long period of time that could push down also interest rates on the long end of the yield curve and other quantive easing might have to be taken. The policy of trying to restart securitization in the consumer credit market: credit cards, auto loans, student loans are a step that was in the right direction. So much more of these activities, The Fed might be forced somewhere down the line to even buy corporate bonds at least high grade of not high yield if the spreads for corporate bonds remain as high as they are right now.Interviewer: Lets talk about the UK and Europe both areas have announced their fiscal stimulus packages, both areas have been slashing interest rates as well. Do you commend the actions by governments, by policy makers both here and in Europe?Roubini: Well there is a distinction between what the Bank of England has done and what the ECB has done, The BOE has been closer to slashing rates while in my view the ECB has been behind the curve they have not cut rate enough given the extent of the economic contraction. In Europe there has been the beginning of a fiscal stimulus, again more aggressive in the UK in the case of the Euro zone there are a number of countries like Germany that were resistant to a massive fiscal stimulus these are the countries that need it and can afford it so that is a disadvantage. And finally the process of recapitalizing the financial system especially in the Euro zone has to become more aggressive because there are many of these intuitions that are in trouble. The fact that there are individual countries policies rather than a Euro zone policy is also a problem because some of these banks have cross border activities so there may have to be cross border burden sharing like in the case of Fortis where three countries Belgium, France and Luxembourg had to recapitalize these banks. So much more aggressive action especially in the Euro zone.Interviewer: Could interest rates go close to zero here in the UK?Roubini: They might. In the US the Fed Funds rate effective, as opposed to target is already close to zero. In Japan the policy rate is close to zero. In the case of the UK I think that bubble was huge and is now bursting and the recession is going to be severe I would not be surprised if the BORE was going to push the policy rate close to zero.Interviewer: I want to start with Mr. Rogers view that the US Dollar is going to lose its position as the worlds reserve currency. Do you think that’s going to happen?Roubini: It can happen but its going to take a while its not going to occur overnight. Usually a great empire like the British empire when they had the reserve currency being the pound where net creditors and net lenders running current account surpluses and the decline of the pound occurred during WWII when the UK became a net borrower and a big net debtor because of the fiscal and current account deficits the same thing is happening right now in the Untied States the US is the biggest net borrower and the biggest net debtor in the world and if this trend were to continue with large twin deficits eventually the appetitive for dollar assets is going to fall among foreign investors that’s not going to occur overnight but that’s a risk that the US is facing.Interviewer: Does the level of debt that the US is getting itself into, such as the UK as well, does it worry you because we are talking about quite astonishing figures here, aren’t we?Roubini: Yes. In the next two years the US deficit might be at least a Trillion dollars each year, that’s going to add $2Trillion dollars to a stock that’s already over $6 Trillion dollars of public debt. Effectively also the US has nationalized Fannie and Freddie the two mortgage giants so that gets added to the public debt and another $6 Trillion of there liabilities of course the net increase in the debt is less because the value of the asset is also somehow below $6 Trillion but that’s another liability for the Govt. And now through all these guarantees and assurances and bailout of financial institutions there is another added implicit liabilities for the US Govt.Interviewer: I know that you see a downside risk for commodities for the next 6 months but is the long term picture for commodities a good one?Roubini: in the short term I see a downturn because of the global recession. In the medium term especially for non-reproducible commodities like oil and energy prices may go up. Why? Because as the global economy is going to go back to potential growth, demand is going to rise also sharply because of the industrialization and urbanization of China and India. Unfortunately the supply is going to come from relatively unstable Petro-States. Troubled countries like Nigeria or Venezuela or Iran or Iraq or in the case of Russia the creeping renationalization of the energy sector might lead to not as much investments into production of new oil and energy. Even the Gulf States might decide to keep some of the oil in the ground for future generations. So supply might not increase fast enough compared to demand so you can be Bullish in the medium term about oil and energy but in the short run commodity prices can fall another 20% in my scenario of a severe global recession.Interviewer: You touched on the Ruble and I know you that you say that the Ruble needs to devalue, by how much?Roubini: The recent fall oil prices very sharp imply that the Ruble should be 10%- 20% lower than it is right now. There has to be a weakening of the currency. In most commodity currency, like in Canada and Australia when the price of commodity falls the currency automatically weakens instead the central bank in Russia has been aggressively intervening losing over $100bn in reserves in the past four months alone to try to prop the value of the currency. At this point it’s better to let the currency depreciate gradually to a more equilibrium value.Interviewer: Emerging Markets from a wider scope, I know your forecasting some dark times ahead, but you do say that Emerging Markets will rebound quicker than Developed Markets. What’s the reasoning?Roubini: The potential growth rate of Emerging market economies is high of the order of 6% plus. Many of these economies have fundamentals that are sound that are being hit by this global financial crisis, this global financial tsunami of the US financial crisis but as long as they stick to sound policies, to macro reform, to Financial reforms and to liberalize their economies the potential growth rate for them is strong and therefore over the medium term a bullish case for the BRIC’s Brazil, Russia, India and China and for other Emerging markets as well.Interviewer: You are a noted economic forecaster as well because of your forecasts of what’s happening today. Many of our viewers will be fascinated to know where would you put your money right now? Is it just safe to put it into cash? Where would Nouriel Roubini put his money right now?Roubini: I would stay away for the time being from risky assets. Equities have fallen a lot US and globally but I see downside risk in my scenario of a severe recession. Credit spreads are very wide right now for high yield and high grade but they could widen a little bit more given the shocks to the economy and rising defaults. Commodity prices have fallen but they could fall even more the dollar could weaken even further. I would stay in cash like instruments, in Govt bonds, and even in TIPS because those give you real interest rates that are positive both when there is inflation and when there is deflation. Still time to stay in more safe assets for the next six to twelve months until asset prices really bottom out for risky assets.Interviewer: You paint a dark picture but is there some light out there in years to come?Roubini: yes there is. I am very pessimistic in the short run that we will have a severe global recession next year but probably the very aggressive policy actions that are undertaken by many countries, monetary and fiscal are going to lead to economic recovery by 2010 and 2011.Interviewer: Mr. Roubini thanks very much for joining us today.

JimmyTheBankerNovember 28th, 2008 at 7:00 pm

Be careful out there, this rally could have legs to 1014 on the S&P or there-abouts. With the big drop in inflation and the big drop in interest rates the last week, that has raised the fair value to that level. There are a few favorable tailwinds for stocks right now but don’t be folled. ANALysts are still looking at 20% earnings growth in 2009. At 0% growth for 2009 earnings (generous?), fair value drops to around 730.

GuestNovember 28th, 2008 at 7:38 pm

Thanks for the heads up – how has volume been this week ( I suspect light ) – I understand that 920 is a major point of resistance – I also got trapped a week or two ago in the last rally – (one never learns) – I suspect that the S&P 730 level will be visited again ( I have actually heard that Dow 7385 is a key level, as well) – but here is my question: How will the cost of the bailouts manifest themselves? dollar collapse; inflation; … I would be interested in your and others thoughts.Thanks

PeteCANovember 28th, 2008 at 8:06 pm

Some analysts have been taking hallucinogenic drugs lately. Esp. when it comes to 2009 earnings projections. Maybe the Fed is passing them out as part of the TARP Program.PeteCA

jugglingcdosNovember 28th, 2008 at 8:22 pm

my generation’s songJohn MayerWaiting On The World To Change lyricsme and all my friendswe’re all misunderstoodthey say we stand for nothing andthere’s no way we ever couldnow we see everything that’s going wrongwith the world and those who lead itwe just feel like we don’t have the meansto rise above and beat itso we keep waitingwaiting on the world to changewe keep on waitingwaiting on the world to changeit’s hard to beat the systemwhen we’re standing at a distanceso we keep waitingwaiting on the world to changenow if we had the powerto bring our neighbors home from warthey would have never missed a Christmasno more ribbons on their doorand when you trust your televisionwhat you get is what you gotcause when they own the information, ohthey can bend it all they wantthat’s why we’re waitingwaiting on the world to changewe keep on waitingwaiting on the world to changeit’s not that we don’t care,we just know that the fight ain’t fairso we keep on waitingwaiting on the world to changeand we’re still waitingwaiting on the world to changewe keep on waiting waiting on the world to changeone day our generationis gonna rule the populationso we keep on waitingwaiting on the world to changewe keep on waitingwaiting on the world to change

irving fphelmpNovember 29th, 2008 at 9:40 am

I see that Mayers theme here is that by waiting the world will change. This is undoubtedly true. Its getting hotter, and the ice is melting and by staying silent it will only change to drought and dust bowls in this country. I have been arrested numerous times, storming the Pentagon, Chicago ’68, NYCity and Washington DC against the wars in Iraq and Vietnam. waiting is not an option for me or my kid. there was over 2 million people demonstrating in NYCity alone against the war in Iraq before it happened.Did that stop the Masters of War? NO. Did we end the war in Vietnam by demonstrating? Yes and No. How about the massive protest against the 700 billion bailout? That worked..for a while.

GuestNovember 28th, 2008 at 9:25 pm

@PeteCaIf you missed this article I think you will find it quite interesting – including talk of currency devaluation (which makes sense). Also note the links both in and at the end of the article.Some Anomalies Some Anomalies

I am puzzled by some recent market anomalies, which are breakdowns of established patterns:1. Long dated Treasuries rising (a deflation signal) as stocks stage a dramatic rally2. Dollar weakening while long dated Treasuries rise (the dollar and bonds usually go together)3. Oil stocks rallying more than the S&P (28% versus 18%) when oil prices continue to weaken and heating oil looks primed to fallNow there are explanations for the appreciation in long-dated Treasuries that do not reflect just deflation worries. When the drop in CPI for October appeared to send a deflationary signal (and some analysts disputed this reading), Treasuries rallied disproportionately due not just routine short covering (ie. by point of view speculators), but the fact that the alchemists of certain complex products had used Treasury shorts to lower the cost of the product. The additional rally this week was due the announcement of the program for the Fed to buy GSE paper directly. That bond investors who held MBS assume that the duration of their MBS would shorten due to increased refis and they bought long maturity bonds to maintain duration.The outlook for the dollar is very much in dispute. Macro Man thinks we are years away from serious dollar weakness:So in Macro Man’s view, any dollars “created” by the Fed to expand its balance sheet (and let’s not forget, they have yet to really crack out the printing presses by not sterilizing their asset purchases) will merely partially offset dollars lost through de-leveraging and the implosion of the shadow banking system, rather than finding their way into new the purchase of fresh turds.This comment from EconoSpeak supports MacroMan’s point:…

PeterJBNovember 29th, 2008 at 4:40 am

@ Mark”No, I ASSUME nothing. I have quite an understanding of what it’s like outside of the USofA. (and I understand rural life)”Well, with respect, I look at it in another way – most of the rest of the World, the biggest part – where most people on $3 per day reside – are not as sick as the Americans Australians and Europeans; hence, not the same amount of stress; pun intended.Ho hum

GuestNovember 29th, 2008 at 6:56 am

$3 per day statement of course is very relative to the cost of living in different countries. On the surface $3 dollars a day is a very emotional statement but it’s meaning is relative.

MarkNovember 29th, 2008 at 10:24 am

No it’s not when we’re talking about modern medicine, and that IS what we’re talking about!As I said, I UNDERSTAND the rural life. I understand the term “land rich and cash poor.”People not as sick? Maybe not suffering from obesity and cancer (though cancers are increasing thanks to toxic dumping), but there are other just as traumatic ailments, like AIDS.And, while I have to question the actual performance of it (such as whether it’s really only a mechanism to dump expiring products to allow large write offs), there’s a LOT of foreign aid flowing into these third world countries: an economic contraction in the contributor nations will mean sizable falloffs in aid.

g AntonNovember 29th, 2008 at 6:19 am

Never Was A Horse That couldn’t Be Rode; Never Was A Cowboy That Couldn’t Be TrowedThe above title aphorism (which is one of my favorites) is about to be given the lie by the current economic situation (which is a horse that no cowboy can ride). Our next president is creating a team of the best financial cowboys in the world, but they are doomed (to change the metaphor) to go down in flames (or, if you insist on consistency of metaphor, to be thrown sky-high). I think that I can say this with a high degree of certainty.Why do I say this? What is the financial problem? There are many characterizations of the problem: “credit crunch”, “insolvency”, etc., etc.. I will tell you in one word what I think the problem is: derivatives. Yes, unregulated, bought and sold over-the-counter derivatives. And I read in the bog of a very respected and knowledgeable economist that the value of outstanding derivatives is sixteen times the yearly GDP of the entire planet! (I might not have the number exactly right, but obviously in this instance we don’t need three decimal point accuracy).I don’t think I have to say an more, but I will anyway. I think when people propose these exceedingly expensive programs, they ought to define cost/effective measures and predict for us what the benefit will be. For example, “within one year, I will reduce the percentage of underwater mortgages from the current X% to Y%”, or “within one year, I will reduce the unemployment rate from X% to Y%”, etc..

ptmNovember 29th, 2008 at 7:32 am

Nice aphorism showing how either side of a dynamic system can gain control over the other, but only for some unpredictable moment.And yes, it would be nice to isolate one economic factor as the cause, but the more one analyzes the problem the more difficult it is to identify exact causes. The basic problem is that we do not know how much credit is out there, much less the real counterparty risks. For example in late 2007 the BIS said total CDSs were $550 trillion. Then in the summer of 2008 BIS said the total notational value if CDSs were $1,000 trillion. Now in late 2008, BIS says it only around $56 trillion!?! is why NR and many others are calling for transparency in credit creation. Many are calling for a governing body to regulate international credit-creation. I also suggest making our Congress directly responsible for managing the money supply, or if they are too weak to do that, tie the amount of money in supply to something that cannot created by man such as gold.

g AntonDecember 2nd, 2008 at 10:47 pm

RE:”it would be nice to isolate one economic factor”If someone were to offer you free twenty shares of GM stock as a gift (“don’t look a gift horse in the mouth”), you would know exactly what you are getting (= 0); But if someone were to gift you with a “derivative” of second mortgages from real estate properties in Sourthern California; Reno, Nevada; Salt Lake City, UT; and New New York city; how would you discern it this were a valuable gift, or a joke in very bad tast?What? Get rid of Bernanke? All those years studying the 1929 depression, and for what purpose? Give him another ten or fifteen years, and he’ll eventually get it right!

R WeitzNovember 29th, 2008 at 6:58 am

Could you please factor in what the presence of 10 – 12 million illegal aliens will have on job creation for American citizens, especially considering that the single largest industry in which illegal aliens are employed is construction / infrastructure and that illegal aliens often send large amounts of money to their families in other countries?.

R WeitzNovember 30th, 2008 at 10:53 pm

Mark, I’m not an economist and unfortuntately I don’t have the time to do a quantitative analysis. But I do have common sense. I know that illegal immigration, and immigration generally, is high on Americans’ list of important issues (according to numerous polls), and that regardless of this it is often ignored by media elites (not a single question on immigration in the 3 presidential debates). I also know that illegal aliens are not allowed to work in America legally. With a severe economic downturn looming it appears that their presence in my country will seriously impede any stimulus package that targets infrastructure/construction, unless they are effectively prevented from taking jobs that such a package would create.I just think Roubini and others should consider and discuss this possibility publicly, unpopular though it may be to do so.

Jason BNovember 29th, 2008 at 7:13 am

Warren Buffet has a great quote that is very applicable to Obama’s economic team tackling the economic crisis:When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.Warren Buffett

Robert S. LeeNovember 29th, 2008 at 8:57 am

Rubin says not to blame for Citi’s troubles: WSJ – Friday November 28, 9:04 pm ETNEW YORK (Reuters) – Former U.S. Treasury secretary Robert Rubin said the near-collapse of Citigroup Inc (NYSE:C – News), where he is a senior counselor, was due to the buckling financial system and not his own mistakes, according to an interview published on The Wall Street Journal’s website on Friday.Rubin, who is also a director at Citigroup, acknowledged he was involved in a board decision to ramp up risk-taking in 2004 and 2005, according to the paper, and said if executives had executed the plan properly, the bank’s losses would have been less.The Journal said Rubin has earned $115 million in pay since 1999, excluding stock options. “I bet there’s not a single year where I couldn’t have gone somewhere else and made more,” said Rubin, according to the Journal.The paper reported that Rubin said of the current crisis: “what came together was not only a cyclical undervaluing of risk (but also) a housing bubble and triple-A ratings were misguided,” he said. “There was virtually nobody who saw that low-probability event as a possibility.”================================Who could have forecast that if you buy mortgages guaranteed by people you don’t know, granted by people you don’t know, on real estate you have never seen, that you could get in trouble doing that? Who could have known? Well not buying whole mortgages, exactly. That would be stupid. Everyone knows that. You buy little pieces of a million mortgages. That changes it all. That spreads the risk and who the hell cares that there is one unknown borrower and a thousand unknown lenders?It used to be the people who used to run this country were no smarter and no dumber than we. No more.Moral: If you cannot explain it to the guy who fixes your car, don’t do it.

theadrNovember 29th, 2008 at 10:14 am

What a big, fat L-I-A-R, Rubin is. Wall Street is over. Check this out from Michael Lewis:'s a choice quote:”That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

jomosNovember 29th, 2008 at 9:06 am

A vision of America: Energy is the catalyst of change. Freedom of choice is inately placed in the hearts of all people. Making people more independent from the present managed electrical grid by investing in stand alone electrical units of solar clean energy would create a common purpose and vision. America the beautiful, could become the theme of a new green industrial base. Efficiency replacing cumsumption much like the space station. A model home for the world to enjoy and for us to showcase the possibilities of a common purpose. Hydrogen powered cars, electric powered monorails, independent water runoff recovery systems, 100,000 individually based social experiments of locally planned communities could empower the creative ideas and vision of millions of americans. The future of America is found in helping individuals succeed, instead of consume. Having the choice by selecting which community you prefer to live in will weed out poorly planned idea. The market place of ideas will be made manifest for all to see. What say you ?

irving fphelmpNovember 29th, 2008 at 11:25 am

What say I? I like what I read in your post. this would put America back to work. Decentralized power! mass transit of the space age variety. A model(and product) indeed for us to export.I’d like to hear more about farming. The strength of our country comes from our agricultural base. In a dream world of possibilities the idea of supports for smaller family farms that consider the environment and the soils, water usage. What about reinstating the families that were robbed of their farms at the point of a fountain pen by the men in the suits. They stole the farms from the families who farmed them for generations. these reinstated farms peppered all over the US are the real strength of our nation. We might have to jackhammer away some of those suburbs to get those farms back. As for those large mass farming operations like Archer daniel midland and Monsanto I hope they should wither on its depleted topsoils and their crappy genetically engineered seeds.

MarkNovember 29th, 2008 at 11:27 am

Fine until one wakes up to reality, reality of our debts. And debt aside, we’d also have to acquire the extra capital: remember that most capital is currently keeping the existing system going; trying to bootstrap another huge system in parallel will be nearly impossible; not until the existing system’s value is trashed will we be able to even begin to contemplate moving forward.

irving fphelmpNovember 29th, 2008 at 11:54 am

MarkNo i’m wide awake to the debts. but we’ve got more than two trains running here. So we’ve got to be wide awake to the other realities. one is the environment. It is near the breaking point, cities choked with traffic, depleted topsoils, china poisoning in green water slime, our oceans in very bad shape our planet heating up at an alarming rate. That too is a reality. Debt- we could get out of it in short time if people would be willing to sacrifice for a couple of years. You know like rich people and upper middle class folks. Instead of buying stuff we off alternatives-chip in and buy factories of the future, farms of the future. Instead of 10 million a year they get 5. Cut military spending by half, no more weapons of mass destruction development, end the war in Iraq, tax the well to do some more. tax the corporations who don’t pay taxes. that’ll go a long way to paying off the debt and building factories of the future. What’s another alternative? I’m a beginner when it comes to economics but jeez the writing is on the wall.

MarkNovember 29th, 2008 at 1:09 pm

Irving,I agree with you more than you are probably aware (you’d have to read my many postings).What I am doing, however, is challenging the way to get where we’re talking.I see collapse as the most probable way there: sure, I’d like if people could rationally work together to get out of this, but if history is our guide I’m not seeing this as very likely. Trying to operate within the existing structure will only result in similarly contorted and doomed-to-failure solutions as their creation will be controlled by the very same minds that gave us what we currently have.I’m actually going a step further into the future than you. Sustainability never has or ever will be comprised of “efficient” propulsion of ourselves all over the place: energy is precious; nature doesn’t squander it, that should be our big hint.Debt reduction will be tough when there’s contraction happening. And as much as it sounds good to go after the rich, the reality is that much of their wealth is actually tied up in the system; their money will also contract.Any good budgeting, however, requires that non-essential expenditures be jettisoned first. When we’ve done a lot on this front then that is when we should start looking at what we really have, what our debt levels are at, and whether we can take on new debt/spending.

irving fphelmpNovember 29th, 2008 at 4:27 pm

points well taken and yeah a collapse in 1929 led to the New Deal. A massive program of public works FOR the public good that helped lift millions out of poverty. I want Obama to go in that direction but like you say the financiers he’s chosen are the same crowd that got us here.”Any good budgeting, however, requires that non-essential expenditures be jettisoned first.”I’d go straight to the military budget and have the armies come home.we have enough firepower to destroy the earth.I’d put a freeze on the whole damned rotten business.Look I’m not into beating up on rich people. they’re just like me only different in some ways. so I don’t wanna demonize nobody. i know some great rich people. But hell, from where I sit I think some people have too much! More than they’ll ever need. I don’t know. its all an opinion. I mean can’t we work something out for a few years to rebuild and retool our factory base?

MarkNovember 29th, 2008 at 5:11 pm

Irving,I think that you’re really close, but just need a small evolution in your view…Concentrating on agriculture (farms) is, as you note, essential: and I thank you for making this point (more people need to get this!).Start from this point, agriculture and then work out from there. If you think about it anything else starts to place a burden (read “negative”) on this foundation: remember: Food, Shelter and Water.Mass transit? We have it. We actually have too much transit. As I’ve argued for years, we need to think about propelling ourselves around LESS: conserve energy. The entire transportation meme is a mechanism to control the food supply. Those who control the food supply control the people. To be truly free this control needs to be broken: and this is why I’m not high on transportation.An anecdotal: there was a proposed initiative in my neck of the woods for light rail. I was discussing this with a woman who was “liberal;” she supported it because it would allow her to get to the airport. Yes, let’s be more green by making it more convenient to get to the airport! But what about the millions who cannot afford to fly who would be saddled with extra (hidden) taxes so that the few could?My thought process evolved after riding public transit (bus) into a larger city for work. I was paying more taxes for this so that I could work farther from home, which in turn would result in paying more taxes so that I would then have to look to work farther from home to make more money to pay more taxes… Better would be to take all this money and invest in local businesses hiring local workers: this would build up local economies and reduce the need to transport people all over the place.

MandarinNovember 29th, 2008 at 9:09 am

People are looking at this crisis from 2 basic viewpoints. The first is Keynesian. It may criticize the shortcomings of the bailouts but basically supports them. The second is the von Mises/Hayek monetarist, which favors letting deflation take its course and replacing the monetary system. (There are also occasional comments of the Marxist/Anarchist/ variety). I’d like to suggest a third viewpoint.During the last Depression, the financial pyramiders, flim flammers and predatory speculators really were hauled before Congress and though few went to jail the reputations of many were destroyed. And remember – they managed to get away with this fraud while the country was nominally on the gold standard! The New Deal that followed was a qualitatively different system that repudiated laissez faire, limited speculation, and encouraged government deficit. The gold standard was not repudiated explicitly but it was effectively undermined.The system worked well from 1932 until 1971 and was expanded to the whole capitalist world by Bretton II. In 1971 the role of gold in the world economy was eliminated and a pure fiat dollar standard followed. While the results in the USA were disappointing the system worked well internationally and many previously poor countries advanced rapidly.For the US to get out of this crisis it is going to have to transition to a new political economy.Bailouts may be part of it, but are obviously not enough. Pain and some austerity is inevitable, but it isn’t enough, we can’t go back to a system where money is scarce and depressions, though not Great, are regular. There is simply going to have to be some agency that evens out the disparities in trade that allows a debtor country like the US to overconsume and pile on deficits. It is this carte blanche that makes the curse of debt-bloat possible personally and nationally.This country isn’t ready for a generation of austerity, and the players in the rest of the world won’t demand it, I think. At the same time the global system has to be regulated in terms of currencies, trade balances, and investment trading practices. In general, that’s what’s required and that’s what is necessary to restore confidence and the basis of global growth. Because like it or not, it is one world and one world economy.

MarkNovember 29th, 2008 at 11:30 am

Central planning doesn’t work long-term. Short-term anything can be said to work. Due to the real world -i.e. the physical world- we have no other option than to scale back. I don’t see adding more non-productivity (more bureaucracy) as any solution.

GuestNovember 29th, 2008 at 9:22 am

Some folks should be prosecuted for the mess they made of parts of this system. But others, well – they can redeem themselves not by continuing their own tricks but by seeing the error of their ways and working for a new system that will not repeat the errors of this one. These imbalances that are now collapsing have been building for 25 years, it’s not just the mortgages or credit cards or derivatives.

GuestNovember 29th, 2008 at 9:39 am

There is nothing inherently wrong with moderated greed!We must recognize that its pathological cousin, unmittigated greed can be deleterious if it runs rampant in the corridors of power. We have reached the nadir of unmittigated greed and we must reform the whole financial system to tame it. If we proceed on our present course of Corporatism, we will create a disaster. The problem with this pathology is that millions of people are starving as collateral damageto unmittigated greed. We must return to moderationthrough participatory democracy and hard work!There must be limits to the excesses of the financial system. Financial Parasitism that does not put fowardproductive changes for society will stifle the future.

GuestNovember 29th, 2008 at 9:53 am

From The FT November 26The outlook for the dollar is poor.”… There are two distinctive policy choices for an overly indebted economy when confronted by a breakdown in the financial system. Which is chosen can have a significant impact on the long term outlook for the currency…”

blindmanNovember 29th, 2008 at 10:47 am

i like that phrase “the nadir of unmitigated greed”. coincidentally, in today’s newspaper runs a story of some of the u.s. citizens who have been accused, convicted or pled guilty to crimes in these united states and are seeking presidential pardon. it seems odd to me that one of them was the attorney general, alberto gonzales. if that doesn’t lend comedy to shame i don’t know what does. talk about nadirs. he hasn’t even been charged, yet. but the water shed prize has to go to michael milken.what is he seeking a pardon for? to have his guilty plea overturned?yes, i think that is it. the case was closed 20 years ago or was it not? what is with the timing? zenith, nadir … go figure?it’s a case of what goes down always comes back up. the chickens have, indeed, come home to roost.

ex VRWCNovember 29th, 2008 at 11:03 am

These are some quotes from prior articles by Dr. Roubini. I have observed a change in his tone that puzzles me.Then he says (Sept 16th)Worst of all policy authorities are now running out of bullet and going towards desperate measures that will end up being counterproductive.Now that the collapse of Lehman is leading to the risk of the generalized run on the shadow banking system (the other independent broker dealers, the broker dealers that are part of larger commercial banks such as Citi and JPMorgan, hedge funds, private equity funds, the remaining SIVs and conduits, money market funds, other smaller broker dealers) the policy reaction is to try to build a new set of levies while the financial perfect storm of the century has destroyed the first sets of levies. This reaction includes the following steps.First, the Fed is accepting even more toxic collateral for the TSLF and PDCF, including even equities; so now after having nationalized the mortgage market via the takeover of Fannie and Freddie the government is also starting to manipulate directly the stock market (a step that started with the SEC restrictions on naked short sales of the primary dealers; so the process of turning the US market system in a socialist system controlled by the government is now in full swing. And the Fed takes massive credit and now market risks by its effective purchase of equities. Now he saysDebt might be an option. Effectively through the support of the mortgage the $600bn to buy agency debt and MBS’s the Fed has already been able to reduce the mortgage rates and long term interest rates> If the Fed were to commit to keep the Fed Funds rate close to zero over a long period of time that could push down also interest rates on the long end of the yield curve and other quantive easing might have to be taken. The policy of trying to restart securitization in the consumer credit market: credit cards, auto loans, student loans are a step that was in the right direction. So much more of these activities, The Fed might be forced somewhere down the line to even buy corporate bonds at least high grade of not high yield if the spreads for corporate bonds remain as high as they are right now.Lets throw trillions at the problem. Buying secutities for bad credit cards and consumer loans? Yup. More of that. Lets buy corporate bonds while we are at it. Anything to keep those banks afloat. Speaking of banks…Then he says (Oct 9th)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 madeNow he saysSecond step that has to be done is the recapitalization of the financial system that has to be much more aggressive. $250bn is not enough practically all of the $700 bn of the TARP will have to be used to recapitalize financial institutions because if you don’t do it given the size of credit losses now already a trillion dollar soon enough two trillion dollar, there will be a massive reduction in lending and assets in the financial system and the credit crunch is going to become much worseUh, what happened to the triage of the zombie banks? As I recall this had to be done rapidly and ruthlessly. There has been no triage of the banks, no recognition of the insolvent ones, no shutting them down. There has been, instead, a more of a blanket bailout approach to avoid stigmatizing some, and bailouts all around.Dr. Roubini, Many of the ‘students’ here are extremely worried about the ‘hope and pray and throw all of the money we got at the problem’ approach being taken now, fearing it will devalue the dollar and cause other completely unforeseen problems, even if it ‘works’. I think we should be urging that these necessary first steps be taken, especially the shakeout in the banking sector.Can you enlighten us, Dr. Roubini?

AnonymousNovember 29th, 2008 at 11:21 am

You got it my friend: every expert’s answer appears to be very similar: cover their losses one way or another and keep on printing money; we’re only approaching 80% of GDP, we can keep going! If you want your PHD in economics then memorize the answer to the one and only test question: “How does our government solve any financial problem involving bad debt?” Answer: keep on throwing money at the problem, that’s it!

Mike G.November 29th, 2008 at 11:24 am

@SWKLet’s be realistic. There are many regional bank leaders who avoided toxic assets. They run sane healthy banks. Obama should let the bond and stock holders eat the losses. Healthy assets from the megabanks can then merge with the regionals to recreate a healthy lending system with minimal taxpayer risk. Obama’s “dream team” is doing what Paulson did: privatize profit and socialize loss. This plan is more of the same.

kilgoresNovember 29th, 2008 at 12:11 pm

I definitely agree with you that stockholders should absord losses first. Bonds are a bit touchier, because bondholders are essentially creditors, but anybody who has found themselves on an unsecured creditors list in a bankruptcy proceeding know that they, too, are vulnerable to loss when a company fails.I’m a bit leery of the idea of merging megabanks with regionals. Frankly, I think many of the problems we have are related to the fact that too much economic power, particularly in the critical banking sector, is concentrated in too few hands. This works well when the economy is growing, but in a serious downturn, the adverse effects are magnified.The whole premise of free market capitalism, at least as contemplated by Adam Smith, is that there are a virtually infinite number of suppliers and consumers for goods and services. When the number of suppliers (or consumers) is substantially curtailed, prices go up, supply goes down, and society is worse off. As I have stated before in one or more previous threads, I believe it is high time we think about finding a way to restrict companies from becoming “too big to fail,” such that they have the potential alone to compromise our economic security by creating systemic risk. It is becoming apparent that whatever efficiencies may be gained through monopolistic or oligopolistic power are more than offset by the potential for catastrophic failure of the entire financial system.As for the Obama folks, I think we need to give them a chance. He hasn’t even been sworn in yet, and people are already dismissing his plan before it has even been enunciated fully, much less implemented.SWK

blindmanNovember 29th, 2008 at 12:37 pm

k, i hate to ask but, how does the fact that the industrial complex of the u.s. , military, fit into any sane economic model that strives for efficiency? it seems you would need some EXTRA leveraging to portray an appearance of fiscal health considering the extreme costs both short and long term. or some financing by other means? again, i apologize.

kilgoresNovember 29th, 2008 at 1:09 pm

Well, it doesn’t really, does it? Eisenhower recognized the problem, but didn’t suggest a solution. I’m afraid I’m not sure how that problem can be tackled, any more than the overarching problem of what I believe to be the undue influence of large corporations in our government which (in my view) has its genesis in the unprecedented and unjustified extension of constitutional rights to corporations by the U.S. Supreme Court, beginning in the late 1800s.All I can offer is a twist on the old prayer: God grant us the serenity to accept for the moment the things we cannot easily change; the courage to change the things we can begin to change now; and the wisdom to know the difference.SWK

aerial viewNovember 29th, 2008 at 11:35 am

The fundamentals of a solution:1. Total transparency to identify the full scope of the problem2. Temporary freezing of all company failures, mortgages, etc3. Settlement of all debt (i.e. 50% on the dollar)4. Redesign of the financial and mortgage system and leverage.5. Accountability and reparations by those who were involved.6. An impartial and honest regulatory and enforcement agency.

GuestDecember 1st, 2008 at 7:11 am

We have to find a more viable approach than this. The last thing we want is for the economy to be forced back into a semi-operable condition, without the root causes resolved, only to have it all go down the toilet again a few years from now.

GuestNovember 29th, 2008 at 12:00 pm

Some current articles on the topic of Quantitative Easing and its implications:Revenge of the Money Supply (Morgan Stanley) Double jeopardy for financial policymakers (FT) Quantitative Easing Has Begun (BNP) Is there a Fed funds target? (Merrill) On the Fed’s Shift to Quantitative Easing (Yves Smith) The Unthinkable (FT Alphaville) The Unthinkable has Happened (FT Alphaville) Hold On There Volcker Fans, Don’t Forget The Past (Contrarian News) The Fed Is Out of Ammunition A discredited dollar is a likely outcome of the current crisis. (WSJ)

RogerNovember 29th, 2008 at 2:59 pm

Does anyone else feel like there is not enough discussion about the risk – if not probability – of future serious inflation? Besides new terms like “stag-deflation” and “market meltdown,” I think we should add some new ones, such as, over-stimulation or hyper-stimulation.There is a full transcipt of NR’s interview in Russia at 2008-11-28 18:39:33, yet there were no questions relating to future inflationary risks due to the current fiscal stimuli. Shouldn’t there be a holistic vision about the risks of the cure eventually becoming worse than the disease?Do we remember Carter’s last years in office with 18% interest rates, 12% mortgage rates, and a real estate recession as a result?

MarkNovember 29th, 2008 at 5:20 pm

What goes up must come down. I suspect that if the markets had been truly free and open that they’d have made similar adjustments then (that the government made).But, now does it really matter what these numbers are when the same results occur? People can’t get loans, in which case the published interest rates are moot.And, a real estate recession (some would say depression- how does this stack up to that of the Carter era?) currently exists.The real point is what mechanism is better to regain an equilibrium point? Slow or fast adjustments? My opinion is that a fast correction would probably have resulted in a full blown collapse. The slow adjustment that’s taking place will produce the same final result, only we’ll get there through a thousand cuts…

GuestDecember 1st, 2008 at 7:16 am

There is not enough discussion about solutions!!!! As far as inflation is concerned, isn’t this just a question of who pays the costs of the current mess and how?I don’t have solutions, but one way to redress the housing price bubble is via inflation – a period where incomes rise while housing prices remain steady.

DavidNovember 30th, 2008 at 1:34 pm

Credit is the problem. An addiction to fulfilling wants which can only be achieved by using credit. Until every consumer is cured of what has become at the very least a dependency -there can be no solutionThe dealers got greedy with their power but the addicts gave them the power

g AntonDecember 4th, 2008 at 7:33 pm

Most everybody is optimistic about Obama’s newly formed team. I am skeptical, but hopeful.I have reservations for two main reasons. The first is that the problems facing the world economies are immense and poorly understood. Maybe (and maybe not) Obama should watch some of those old Clint Eastwood movies, where Clint says: “A man has to understand his own limitations”.My second concern is that Ben Bernanke will remain as President of the Fed for at least another year. Here is a man responsible for giving economic advice to congress, and for implementing economic programs that involve spending trillions of dollars of taxpayer’s money.Two examples of Ben’s Bernanke wisdom that he shared with congress:1. About a year ago, Bernanke told the congress, “The Fed stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of the markets”. What “liquidity” and what “orderly funtioning of of the markets”?2. In October of 2005, Ben Bernanke told the congress that they didn’t have to worry about the housing bubble busting because the increases in housing prices was based on “very strong economic fundamentals”.As far as economic programs go, Ben has often expressed very little faith in the capabilities of the free market and of what he calls “the private sector”, and he assures us that the federal government (i.e. Ben himself) can do a much better job. (In fairness, I will state that these days, the recipical is also true i.e. the “private sector” has very little faith in Ben Bernanke.) However, none of Ben’s efforts have borne other than bitter fruit. But Ben is a stubborn man, and keeps trying different things. For example, Ben has just recently jumped on President Obama’s “help the homeowners” bandwagon. Watch out, Pres. With helpers like Ben, who needs enemies?