Dr. Doom

[TPS]

N. Roubini

 

Anyone se this in the NYT mag on economist Nouriel Roubini who called the current financial crisis? Note that he says two economists that have influenced him significantly are Keynes and Minsky.

[TPS]

N. Roubini

 

Anyone se this in the NYT mag on economist Nouriel Roubini who called the current financial crisis? Note that he says two economists that have influenced him significantly are Keynes and Minsky.

Sorry wrong site. Should've mentioned that Obama sucks or something...or all is well...or Bush is great...or Liberals suck...or...republicans cut spending...or ....whatever you dopes believe in...oh, yeah, liberals are the cause of all evil...good thing you have something to focus on, otherwise you might have to face up to the truth that the republicons are worse than dumbocrats. You dopes make sure that we keep divided enough so that we don't throw both m...f..ing parties out.

[JK2000]

Sorry wrong site. Should've mentioned that Obama sucks or something...or all is well...or Bush is great...or Liberals suck...or...republicans cut spending...or ....whatever you dopes believe in...oh, yeah, liberals are the cause of all evil...good thing you have something to focus on, otherwise you might have to face up to the truth that the republicons are worse than dumbocrats. You dopes make sure that we keep divided enough so that we don't throw both m...f..ing parties out.

 

99% of the people in this forum won't respond to any thread if they can't figure out a way to crowbar Obama messiah jokes, the word socialist, the phrase "but I thought Obama was different", or "Bush Bad". At least none of them pretended to read it like they do with most of the links.

[meazza]

Sorry wrong site. Should've mentioned that Obama sucks or something...or all is well...or Bush is great...or Liberals suck...or...republicans cut spending...or ....whatever you dopes believe in...oh, yeah, liberals are the cause of all evil...good thing you have something to focus on, otherwise you might have to face up to the truth that the republicons are worse than dumbocrats. You dopes make sure that we keep divided enough so that we don't throw both m...f..ing parties out.

 

 

I am actually in the process of reading Minsky's "Stabilizing an unstable economy".

 

I wonder if this mess will eventually hit hear as the housing market is still doing very well although i attribute it to the resource companies doing fairly well.

[Chilly]

Read the article this afternoon and passed it along to some friends - interesting stuff, enjoyed it.

[SD Jarhead]

Excellent article, thanks for posting. The last paragraph says it all and is a reality that we must be prepared for. The true question is, what will the US look like once we've gone through the cycle. History is not kind to Empires at the end of their shelf life.

 

EVERYONE knows that a private citizen would be homeless if they ran their personal finances the way our government runs theirs (ours). When do we begin to pay down our debt? How do we do it? All questions even the brightest and best have no answer for.

[Gavin in Va Beach]

Dr Doom has company...

 

The Great Consumer Crash of 2009

 

I hate to tell you, but the storm has reached your location and it is a Category 5 hurricane. The levees are leaking. Ignore it at your own peril. The 6,000 sq ft McMansion buying, BMW leasing, $5 Starbucks latte drinking, granite countertop upgrading, home equity borrowing days are coming to an end. The American consumer will not go without a fight. For the last seven years the American consumer has carried the weight of the world on its shoulders. This has been a heavy burden, but when you take steroids it doesn’t seem so heavy. The steroid of choice for the American consumer has been debt. We have utilized home equity loans, cash out refinancing, credit card debt, and auto loans to live above our means. It has been a fun ride, but the ride is over. We can’t get steroids from our dealer (banks) anymore.

 

After examining these charts it is clear to me that the tremendous prosperity that began during the Reagan years of the early 1980’s has been a false prosperity built upon easy credit. Household debt reached $13.8 trillion in 2007, with $10.5 trillion of that mortgage debt. The leading edge of the baby boomers turned 30 years of age in the late 1970’s, just as the usage of debt began to accelerate. Debt took off like a rocket ship after 9/11 with the President urging Americans to spend and Alan Greenspan lowering interest rates to 1%. Only in the bizzaro world of America in the last 7 years, while in the midst of 2 foreign wars, would a President urge his citizens to show their patriotism by buying cars and TVs. When did our priorities become so warped?

...

We have outsourced our savings to the emerging economies, along with our manufacturing jobs. The Chinese are saving the money we’ve paid them for flat screen TVs and the Middle Eastern countries are saving the money we’ve paid them for oil. You need savings in order to increase investment. The emerging markets are making the vast majority of the investments in the world. While the U.S. endlessly debates drilling and construction of nuclear plants (none built in U.S. since 1987) and oil refineries (none built in U.S. since 1977), China brought four oil refineries online in 2008 and plans to build 30 nuclear reactors in the next twelve years. The Asian Century has begun, but the U.S. has tried to keep up by using debt. It will not work. If anything, this has accelerated the shift of power to Asia.

...

In conclusion, the gathering storm has arrived. It will be long, painful and destructive. Those who prepared for the storm by not taking on excessive debt and living above their means, will ride it out unscathed. Those who built their house on sand by leveraging up and living the “good” life, will see their house swept out to sea. The storm will pass and we will rebuild. Our country is resilient. The purging of this massive debt will result in the creative destruction that is the hallmark of American capitalism. New opportunities, new technologies and a new attitude will put us back on course.

 

There has been and will be resistance to the inevitable deep recession that is coming. The American consumer is not cutting back willingly. They are being dragged kicking and screaming towards the joys of frugality. The “material generation” needs to dematerialize. My biggest concern is that our politician leaders and their cronies running our government will continue to try and reverse the normal capitalistic course of recession and expansion. Companies need to fail, housing needs to find its bottom based on supply, demand and price. Those who gambled must be allowed to lose and suffer the consequences. If the government attempts to shift the losses to those who lived lifestyles of thrift, an angry uprising will ensue. Government intervention in this natural process could lead to a decade long depression. Let’s hope that reasonable heads prevail.

...

[DC Tom]

Sorry wrong site. Should've mentioned that Obama sucks or something...or all is well...or Bush is great...or Liberals suck...or...republicans cut spending...or ....whatever you dopes believe in...oh, yeah, liberals are the cause of all evil...good thing you have something to focus on, otherwise you might have to face up to the truth that the republicons are worse than dumbocrats. You dopes make sure that we keep divided enough so that we don't throw both m...f..ing parties out.

 

I apologize. I read the article...but I didn't realize your post was a cry for attention, as well.

[/dev/null]

Sorry wrong site. Should've mentioned that Obama sucks or something...or all is well...or Bush is great...or Liberals suck...or...republicans cut spending...or ....whatever you dopes believe in...oh, yeah, liberals are the cause of all evil...good thing you have something to focus on, otherwise you might have to face up to the truth that the republicons are worse than dumbocrats. You dopes make sure that we keep divided enough so that we don't throw both m...f..ing parties out.

 

You forgot to attach a TPS report to your LAMP

[GG]

I apologize. I read the article...but I didn't realize your post was a cry for attention, as well.

 

Or, waiting for my opinion?

 

Let's just say that I'm more inclined to be in Banerji's camp:

 

True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me. “The justification for his bearish call has evolved over the years,” Banerji went on, ticking off the different reasons that Roubini has used to justify his predictions of recessions and crises: rising trade deficits, exploding current-account deficits, Hurricane Katrina, soaring oil prices. All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”

 

Roubini wasn't alone in ringing the alarm about rising home prices & exotic mortgages. But, I'd be more impressed if he had made the next step and tied the housing bubble to the evolution of finance and the potential pitfalls there. Since securitizations were never tested in a secular downturn and Roubini's forte is using historical precedent to shape his views, I can see how he'd miss that. Not saying that he should have picked it up, but that's a major omission if he's going to claim to be right in hindsight.

 

Interesting that he uses Asia collapses as examples, but doesn't say a peep about Japan's real estate bubble - to which this is a much closer proxy. Doubly interesting is that the financial crisis can be "fixed" in one day by changing accounting rules for banks to suspend mark to market treatment of mortgage holdings. Of course that wouldn't be the right move, but superficially it would suspend all the superficial losses that banks & financials had to endure in the last year.

 

In the end, you look at fundamentals, and while there was wholesale mispricing and underestimation of risk up to 2007, you're on the other side of the pendulum now where the risk is overpriced. Default rates are elevated, but the cost of debt reflects much higher levels.

 

If he goes on to blame securitizations and junk bonds for undermining capitalism, these items would have percolated much sooner - ie junk bond market never would have survived Drexel's collapse and securitizations never got off the ground. In the end, this is not a structural issue, but a pricing issue.

 

As for the obligatory fear that China et al will start dumping US$ - what better time than now? Yet, Treasuries continue to be the safe harbor. If sovereigns want to dump US$ or Treasuries, who is going to be the buyer and what else would you (as an investor) would want to own for long term safety that the US$? Yes, foreigners have been propping up the US current account deficit, but only because they need to - to feed themselves. The US/Fed can unleash an economic nuke by putting our economy into a recession and take down the developing world in a matter of months. That's why the Fed has been more complacent about flooding the market with dollars. If there was a legitimate alternative currency, there would be bigger inflation worriers at the Fed.

 

But at least Roubini acknowledges this: “These [financial markets] are things most economists barely understand. We’re in uncharted territory where standard economic theory isn’t helpful.”

[TPS]

I apologize. I read the article...but I didn't realize your post was a cry for attention, as well.

Haven't I been around here long enough for you to know that was an "iTPS" post?

Inebriation makes me post silly things... Burp!

[justnzane]

As for the obligatory fear that China et al will start dumping US$ - what better time than now? Yet, Treasuries continue to be the safe harbor. If sovereigns want to dump US$ or Treasuries, who is going to be the buyer and what else would you (as an investor) would want to own for long term safety that the US$? Yes, foreigners have been propping up the US current account deficit, but only because they need to - to feed themselves. The US/Fed can unleash an economic nuke by putting our economy into a recession and take down the developing world in a matter of months. That's why the Fed has been more complacent about flooding the market with dollars. If there was a legitimate alternative currency, there would be bigger inflation worriers at the Fed.

 

I think this is some scary sh-- that we are propped up so much by potential enemies. Now, the original post and the article were very informative, but god this is sad that we are now the United States of debt . Though, it would be crazy for the economic nuke to go off; it would be the Great Depression all over again.

[DC Tom]

Haven't I been around here long enough for you to know that was an "iTPS" post?

Inebriation makes me post silly things... Burp!

 

Actually, no...I don't have my "TPS Whiny Neediness To Inebriation Correlation Chart" handy.

 

 

But I forgive you nonetheless. And here I was going to go out and buy you a binky...no matter, I'll give it to JK2000.

[TPS]

Or, waiting for my opinion?

 

Let's just say that I'm more inclined to be in Banerji's camp:

Of course Pollyanna...

Roubini wasn't alone in ringing the alarm about rising home prices & exotic mortgages. But, I'd be more impressed if he had made the next step and tied the housing bubble to the evolution of finance and the potential pitfalls there. Since securitizations were never tested in a secular downturn and Roubini's forte is using historical precedent to shape his views, I can see how he'd miss that. Not saying that he should have picked it up, but that's a major omission if he's going to claim to be right in hindsight.

There have always been financial innovations --or evolution of finance--which support the continued expansion of debt (Minsky wrote about this some 40+ years ago). There have always been bubbles, speculation, crashes, recessions, etc (I mentioned a book by Charles Kindleberger on the long history of finacial crises). His analysis (as well as those of Keynes and Minsky) focuses on the macro variables. There have been real estate bubbles before securitization. For someone who's predictions haven't been all that great, you're being a bit picayune.

 

Doubly interesting is that the financial crisis can be "fixed" in one day by changing accounting rules for banks to suspend mark to market treatment of mortgage holdings. Of course that wouldn't be the right move, but superficially it would suspend all the superficial losses that banks & financials had to endure in the last year.

So all we need to do to end this is let banks carry their (mortgage) assets at historical values? And they are "superficial losses"? If someone (or a lot of somones) stops paying their mortgage, doesn't that also create a cash flow problem for banks? You believe the crisis is solely limited to housing too?

 

In the end, you look at fundamentals, and while there was wholesale mispricing and underestimation of risk up to 2007, you're on the other side of the pendulum now where the risk is overpriced. Default rates are elevated, but the cost of debt reflects much higher levels.

Love the terminology--"wholesale mispricing and underestimation of risk." That's the definition of a speculative bubble, yes? 99% of the people are believers. Interested in hearing your take in retrospect. Was the the 1 out of 8 years of above average growth under Bush2 a supply-side success?

 

If he goes on to blame securitizations and junk bonds for undermining capitalism, these items would have percolated much sooner - ie junk bond market never would have survived Drexel's collapse and securitizations never got off the ground. In the end, this is not a structural issue, but a pricing issue.

Again, it's not the innovations that are the cause. Innovations from profit-driven institutions are a natural occurence in the market system. As Minsky (and Keynes) would argue, the "pricing issue" is an "expectations" issue. Pricing is based upon our expectations of future cash flows (or asset appreciation) and the future is uncertain. At the time, who is to say the "pricing" was wrong? It's easy in hindsight isn't it?

 

As for the obligatory fear that China et al will start dumping US$ - what better time than now? Yet, Treasuries continue to be the safe harbor. If sovereigns want to dump US$ or Treasuries, who is going to be the buyer and what else would you (as an investor) would want to own for long term safety that the US$? Yes, foreigners have been propping up the US current account deficit, but only because they need to - to feed themselves. The US/Fed can unleash an economic nuke by putting our economy into a recession and take down the developing world in a matter of months. That's why the Fed has been more complacent about flooding the market with dollars. If there was a legitimate alternative currency, there would be bigger inflation worriers at the Fed.

As I argued elsewhere, China attacking us economically will be as a consequence of a political crisis between the two countries. And why would the US cut off its nose to spite its face? Purposely putting the economy into recession to take down the developing world? I think you've lost it here...

 

But at least Roubini acknowledges this: “These [financial markets] are things most economists barely understand. We’re in uncharted territory where standard economic theory isn’t helpful.”

You don't seem to understand what he's implying here. He's essentially saying that the bull sh-- macro theory, which believes markets are self-equilibrating, can't explain this crisis. Rather, people need to understand Minsky's "financial instability hypothesis," which explains how a modern capitalist economy is inherently unstable.

[Pine Barrens Mafia]

Wow, if he isn't just a ray of sunshine.

[GG]

There have always been financial innovations --or evolution of finance--which support the continued expansion of debt (Minsky wrote about this some 40+ years ago). There have always been bubbles, speculation, crashes, recessions, etc (I mentioned a book by Charles Kindleberger on the long history of finacial crises). His analysis (as well as those of Keynes and Minsky) focuses on the macro variables. There have been real estate bubbles before securitization. For someone who's predictions haven't been all that great, you're being a bit picayune.

 

But that's the whole point. He was predicting based on the historic model of banks & brokers being distinctly different. That did not turn out to be the case. Of course the bubbles are omnipresent. Always have, always will be due to human nature. Minsky is great in acknowledging the obvious. The separation between him, and let's say, Greenspan, is that the latter camp lets the bubbles fester, because you shouldn't play god with asset values. The collateral effect of a centrally controlled asset valuation is far worse than letting occasional bubbles fester and burst.

 

So all we need to do to end this is let banks carry their (mortgage) assets at historical values? And they are "superficial losses"? If someone (or a lot of somones) stops paying their mortgage, doesn't that also create a cash flow problem for banks? You believe the crisis is solely limited to housing too?

 

Banks do carry the mortgages & loans at cost if they're in the hold book and not in the trading book. The only hit to income is when they revise their loss estimates. Everyone else has to mark to market. So don't tell me that accounting is consistent across every player.

 

And read again, I said it wouldn't be the right thing to do, as it would temporarily fix the issue of ongoing writedowns, but if wouldn't fix the falling values of housing. But if the concern is to stop the paper losses among financials and restore some sense of stability, changing accounting is a very quick "fix." But I'm glad Congress hasn't picked up the rally cry, yet.

 

Of course this shows your understanding of the markets again. You can make a valid argument that financials should have more freedom on accounting treatment. Sure, let's talk about people not paying their mortgages. Right now, subprime defaults are back to their historic range of 15%. The later vintages (2006+) in some areas are over 25%. Still that is small relative to overall debt. Two weeks ago Merrill old a chunk of its subprime holdings at $0.22, which indicates about an 78% loss on the entire portfolio. Square that with 15% defaults in subprime.

 

So there are factors in play that are greater than the underlying default rates, such as Merrill's not worrying about continuing deterioration of its its capital base that is now driven more by the lack of liquidity in anything related to mortgages rather than the underlying quality of those mortgages.

 

Love the terminology--"wholesale mispricing and underestimation of risk." That's the definition of a speculative bubble, yes? 99% of the people are believers. Interested in hearing your take in retrospect. Was the the 1 out of 8 years of above average growth under Bush2 a supply-side success?

 

It is one of the definitions of a bubble, yes. But on the flip side, you now have overestimation of risk as spreads to Treasury are above historical levels for all corporate debt.

 

Cool, another Bush Bad reference. Care to enlighten me how a Cinton presidency, with Greenspan at the Fed and Rubin in Treasury would have headed off the securitization crisis. (The answer should be obvious given Rubin's stellar work at Citi)

 

Again, it's not the innovations that are the cause. Innovations from profit-driven institutions are a natural occurence in the market system. As Minsky (and Keynes) would argue, the "pricing issue" is an "expectations" issue. Pricing is based upon our expectations of future cash flows (or asset appreciation) and the future is uncertain. At the time, who is to say the "pricing" was wrong? It's easy in hindsight isn't it?

 

Thanks for making my argument. Even though all signs point to a bubble, you have absolutely no idea whether you're in one until after the fact. If you did, then you would be God. But until He comes down to smite all market makers, I'd prefer the boisterous insane risk takers to carry on their merry way.

 

As I argued elsewhere, China attacking us economically will be as a consequence of a political crisis between the two countries. And why would the US cut off its nose to spite its face? Purposely putting the economy into recession to take down the developing world? I think you've lost it here...

 

That's not what I'm saying. US isn't suicidal. But that would be the response if China et al start dumping US dollars. Of course they have much more to lose than US, and that's why Treasury & Fed aren't as concerned about it. As an aisde, let's see how China behaves in the next 6-9 months as it deals with its first bout of inflation and western companies defect to Vietnam & other SE Asian countries.

 

You don't seem to understand what he's implying here. He's essentially saying that the bull sh-- macro theory, which believes markets are self-equilibrating, can't explain this crisis. Rather, people need to understand Minsky's "financial instability hypothesis," which explains how a modern capitalist economy is inherently unstable.

 

What in the world is a modern capitalist economy? The fact that capitalism is spreading to many parts of the world?

 

Of course financial markets are unstable. But I'll take this system with its 10-year floods, dispersed with 100-yr floods over anything else that's been tried anywhere.

[TPS]

Actually, no...I don't have my "TPS Whiny Neediness To Inebriation Correlation Chart" handy.

 

 

But I forgive you nonetheless. And here I was going to go out and buy you a binky...no matter, I'll give it to JK2000.

I understand. It must be difficult when all you have room for is the "I'm arrogant prick chart."

[DC Tom]

I understand. It must be difficult when all you have room for is the "I'm arrogant prick chart."

 

It's not like it takes up much room. It just says "Yes".

[TPS]

Cool, another Bush Bad reference. Care to enlighten me how a Cinton presidency, with Greenspan at the Fed and Rubin in Treasury would have headed off the securitization crisis. (The answer should be obvious given Rubin's stellar work at Citi)

Oh boy, your response is "what would the other guys have done." Put the onus on me, because you can't explain it.

 

Well...you and I have been debating the efficacy of "supply side" economics forever. You were touting how great things were for that one, maybe two, year(s). Given the 7+ years of Bush2's (SS) economic policies, please enlighten us on how "successful" they have been. Where has all the "capital formation" gone? You are so quick to criticize everything but your own beliefs. Please explain why the Bush2 tax cuts didn't create more than 1 year of above 3% real gdp growth. And 3% is the average, which means every other year was below average. All you other homers can chime in too....

[TPS]

It's not like it takes up much room. It just says "Yes".

Christ...you've disarmed me...no, you are not christ...it was an expression...