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Tilting at Windmills

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October 3, 2008
By: Hilzoy

Cardiac Arrest

Nouriel Roubini is more than usually terrifying today:

"It is now clear that the US financial system -- and now even the system of financing of the corporate sector -- is now in cardiac arrest and at a risk of a systemic financial meltdown. I don't use these words lightly but at this point we have reached the final 12th step of my February paper on "The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster" (...)

So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely."

I can only hope he's wrong.

Hilzoy 10:24 PM Permalink | Trackbacks | Comments (36)

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this is only part one: the systemic freeze-up risk.

even assuming we can muddle through that one, we get to part two: the adjustment of the american household to living with less access to credit.

Posted by: howard on October 3, 2008 at 11:07 PM | PERMALINK

He is. Wrong that is. Just a we bit of hyperbole.

Posted by: Jeff II on October 3, 2008 at 11:09 PM | PERMALINK

A few questions:

1. I don't have a tenth of the economic knowledge Roubini does, but I understand, to an extent, what he's talking about. But I'd like to kmow, what are some solutions he might have?

2. To what extent is the administration responsible for not reassuring people that their deposits are safe? I don't know if Bush has made any statements that the system is sound, but if if he hasn't, you have to wonder if he did, or if he got someone who had more credibility with the public, would it make a difference? In other words, if he addressed the nation in prime time telling them their deposits are safe, would it ease part of the problem?

Posted by: Brian J on October 3, 2008 at 11:10 PM | PERMALINK

Hope is not a plan.

Posted by: steve duncan on October 3, 2008 at 11:13 PM | PERMALINK

So what are we supposed to do with our money? I just put a very big hunk of my retirement into money market pending a transfer to a IRA CD in an insured savings account (the paperwork will be completed in two weeks)?

He says some smll insured accounts aren't safe.

He says money markets aren't safe.

Stocks aren't unless you knwo which ones to buy and i don't.

I got the impression that bonds weren't safe either.

I don't want to make a forture. I just want to keep what I have.

Posted by: wonkie on October 3, 2008 at 11:31 PM | PERMALINK

oh shi-!

Posted by: schlep on October 3, 2008 at 11:31 PM | PERMALINK

oh shi-!

Posted by: schlep on October 3, 2008 at 11:31 PM | PERMALINK

jeff ii, sadly, roubini has an excellent track record at this point, possibly the best of any economist.

doesn't prove the absolute worst will happen, but we need to be getting past the point where it can so that we can deal with the recession that's coming on its own merits.

wonkie, the way i look at is: if the worst does happen, anything short of having actual gold on hand is going down the tubes; if you assume less than the worst, if preservation of capital is your issue, find a bank in your community that works the old-fashioned way, on a community scale, and that is unlikely to be caught up in any of the larger problems in the system, and put your money into an FDIC-insured account....

Posted by: howard on October 3, 2008 at 11:35 PM | PERMALINK

wonkie: please check this out before acting on it, since I am the last person in the world who should be advising anyone on what to do with their money. However: when Roubini wrote about money markets seizing up, I took him to mean that they were no longer playing their normal role as provider of loans to corporations. (What they do with your money after you put it there, to get those interest rates.)

I did not take him to mean that there was danger to people who had put their money into money market funds. The federal government has guaranteed "the holdings of any publicly offered eligible money market mutual fund both retail and institutional that pays a fee to participate in the program." I'd check and see whether your money market fund is participating, and whether your money is guaranteed, before getting worried about this.

Posted by: hilzoy on October 3, 2008 at 11:41 PM | PERMALINK

Now I'm really scared. What's the timeline on this? A month? two months? My bank is bank of America but Key Bank is across the street.

Posted by: wonkie on October 3, 2008 at 11:43 PM | PERMALINK

Oh thanks hilzoy, the "really scared" was not in response to your post, but to the previous one.

Posted by: wonkie on October 3, 2008 at 11:46 PM | PERMALINK

wonkie: we have a ways to go before the government's insurance guarantees are in danger, I think. When you factor in the risk that gold will be stolen, BofA with the government behind it looks pretty good. (Or maybe I just think that because the one and only bit of gold I ever owned-- other than e.g. little earrings -- was stolen. Smart burglar.

Posted by: hilzoy on October 3, 2008 at 11:51 PM | PERMALINK

A veteran trader on Wall Street said on CNBC that the only position that an individual investor or saver should be in was "cash and fetal." Witty but also astute for the individual investor. Federally insured accounts are as safe as cash. Your level of fear is up to you.

Posted by: EL on October 4, 2008 at 12:16 AM | PERMALINK

The bailout didn't stall because it lacked popular support. It just didn't have enough pork.



Posted by: Marc Schlee on October 4, 2008 at 12:24 AM | PERMALINK

Restructuring, a big restructure.

There is no other way to do it.

Theory predict, Krugman confirms the observation, that all economic sectors seek to restructure at the same time, including the government.

Doing it suddenly saves a lot of money, it is cost effective. Sorry about the suddenness, but you are better off going with a sudden restructure than trying to drag it out.

Posted by: MattYoung on October 4, 2008 at 12:27 AM | PERMALINK

Long ago I warned that after NYC and NOLA it appeared Bushies were going after "Democratic" cities. I said Boston, Cleveland, San Francisco and some other cities should beware. How did I ever forget that just because somebody hit NYC with 9/11 they could hit it again, right in the heart of their biggest industry, Wall Street?

There is no creative destruction here, just greed and destruction. These Republicans are truly disgusting.

John McCain is a Republican who likes George W. Bush and his policies. American can't trust him to do otherwise.

America needs to run as fast as it can away from Bush, McCain and any Republican.

Posted by: MarkH on October 4, 2008 at 12:58 AM | PERMALINK

Everyone says that the Government is trying to bail out Wall Street. But although the bailout will help some, a large chunk of Wall Street has already been destroyed, more is being destroyed, and another chunk will be destroyed.

Those who like their Schadenfreude can get plenty already, if they know where to read; the 'bailout' is a life preserver for those who were smart enough to survive this long. And there will be some benefits for the mythical Main Street as well.

Posted by: lampwick on October 4, 2008 at 1:03 AM | PERMALINK

In every bear market there's someone like Roubini - who's seen as a wise sage because he predicted the top and impending disaster before it happened.

The trouble is, these types sell the doom-and-gloom to a level that never pans out. They're right on for a couple of years, and then dead, dead wrong for years afterwards. Never listen to the perma-bears long-term (same goes for Dow 36,000 perma-bull types).

It's not to say they're idiots, but the economy is more resilient (in the long term) than the "this is the great reckoning" types can imagine.

Posted by: jcricket on October 4, 2008 at 2:15 AM | PERMALINK

I'm not to worry about my FDIC insured stuff at the moment. What the dollar will buy when it's all over is another story.

Posted by: M.B. on October 4, 2008 at 3:24 AM | PERMALINK

I made a nice tidy sum buying Wells Fargo options on July 15th after I received Roubini's overnight "everything but the kitchen sink" e-mail, pretty much identical to this. He's quite a good contrarian indicator.

Posted by: Tom on October 4, 2008 at 3:30 AM | PERMALINK

Posted by: jcricket on October 4, 2008 at 2:15 AM

It's not to say they're idiots, but the economy is more resilient (in the long term) than the "this is the great reckoning" types can imagine.

I'd take more comfort in that if we were operating under the same financial system that you're drawing conclusions from. But in fact, Bush and the Republicans have gutted the regulatory system we put in place after the last big crack-up. We are no longer in the calm waters of a safely-moderated financial bay; we're back out on the stormy ocean that was economics before the New Deal. Unless you're an historian of economics, everything you think you know is probably wrong.

A word we haven't heard for a long time is about to make a stunning comeback: the Great Panic.

Posted by: Bernard HP Gilroy on October 4, 2008 at 4:35 AM | PERMALINK

Roubini may simply be preaching a gloom-n-doom message without solutions because there ARE no solutions to be had. You just can't walk into the china shop after the bull has left, pull out your institutionally-sized, 700-billion-pack of super glue, and put all the china back together again. The Humpty-Dumpty economy of this planet---not just America, but the PLANET---had been pulverized by a level of greed that would have been answered during the First Great Depression by a howling, well-armed mob.

And yes---I Do refer to the catastrophic events of the 1930s as "the First Great Depression"---because whether we like to think of it or not, we are staring the Second Great Depression square in the eye.

We're already in a deep recession; industrial-output decreases have experienced a duality of negative factors, being (1) deflated demand, and (2) the inability to draw short-term cash infusions for inventory purchased and equipment changeovers. Retail facilities let go of their summer stock at fire-sale prices to make room for winter/seasonal merchandise, and they're already running deep-discount sales that would normally appear in the form of post-Christmas and January-white-sale clearances.

It's only the beginning of October.

About the only sign of doom we haven't seen yet is in the local-banking sector. When the day comes that the amount you can get from your ATM is reduced; when the time arrives that your bank slaps a limit on debit-card purchases, rejecting transactions over a given amount that today seems sensibly normal---like a cart-full of groceries or Christmas presents---then we'll all be realizing that America---and the world right along with it---has slipped into its Second Great Depression.

No---there is nothing that you, I nor the righteous might of all the central banks and legislative endeavors and hyperwealthy philanthropical feats combined can do to stop it. An excess of greed and graft can only be quelled by an equal amount of regulation and retribution that must come through an elemental change in our philosophy---and that, in turn, must come from a prerequisite dedication to not a New Deal, but a New Ideal: That a global industrial, commercial, and agricultural base can produce enough for everyone, if it does so in a judicious manner that abandons the self-benefit of financial profit.

Yes---capitalism must die, but it needn't "die ugly...."

Posted by: Steve on October 4, 2008 at 6:21 AM | PERMALINK

1. I don't have a tenth of the economic knowledge Roubini does, but I understand, to an extent, what he's talking about. But I'd like to kmow, what are some solutions he might have?

Like the solution to the abortion dilemma, this one's simple. Don't get pregnant.

Which is to say, don't turn Col Sanders loose in the hen-house with an axe, a plucker and a deep-fryer, in the FIRST PLACE.

Which is to say, the solution was to have prevented it BEFORE it was 'too late.'

We didn't. So now, perhaps the best thing to do is stretch your credit cards to the max while you still can, on the (not irrational) premise that with so MUCH fiancial ruin, the Bigs will be so busy trying to collect from one another they won't have energy or resources to come after you...

Posted by: woody, tokin librul on October 4, 2008 at 8:40 AM | PERMALINK

If you read the RGE Monitor, Roubini does propose a solution similar to Sweden's bank nationalization, in which the US government would buy preferred shares to recapitalize banks. But they would also perform triage and decide which banks would e allowed to fail. Anyway, he details much better than that, but I think that's the main idea.

Posted by: Rock on October 4, 2008 at 8:41 AM | PERMALINK

Restructuring can be prevented in hindsight, but if we had hindsight we would have had computers in 1750.

The solution is is the restructuring. We are in a severe recession because our ability to measure economies has taken a leap forward with digital communications. We can all get on the web and look at very accurate measures of resource utilization, which we could not do even 10 years ago. So we all see inefficiencies, we see better ways to do things, so we are trying to restructure.

Posted by: MattYoung on October 4, 2008 at 9:15 AM | PERMALINK

Damn you Hilzoy. I was unable to sleep last night so I got up, and while surfing through the blogs came upon this post. Thanks for a sleepless night. Hopefully this is a bit more of the Cassandra for this guy and not the time he's right.

Posted by: NHct on October 4, 2008 at 9:18 AM | PERMALINK

The only solution is to nationalize the financial sector. The bailout should've been government cash in exchange for shares of stock in the banks with the government appointing most of the board members. The banks would be recapitalized and be able to loan again. What's going to happen with the bailout is the banks will sell their worst debt to the government and then hoard their cash.

Posted by: Jose Padilla on October 4, 2008 at 10:03 AM | PERMALINK

"The only solution is to nationalize the financial sector."

Well, nationalize 19.7% of the financial industry since 19.7% seems to be the long term share of the economy devoted to the federal government.

If the federales take over too much financial then, over the medium term, they will start to cut their share of education, medical and toy arrows.

The 19.7% comes from Hauser's Law who studied the average share of revenues that come in under any tax scheme. If Jose wants us nationalize a bigger share, then we will need a number of generations to slowly move us from the 19.7% mark to a larger equilibrium point. That takes time and patience; and flatter taxes I am afraid.

Posted by: MattYoung on October 4, 2008 at 10:53 AM | PERMALINK

And yes---I Do refer to the catastrophic events of the 1930s as "the First Great Depression"---because whether we like to think of it or not, we are staring the Second Great Depression square in the eye.

I feel like I'm in 1940 or so, about the time we first began hearing the phrase "Second World War" or "World War II" (and I'm pretty certain it came before Pearl Harbor).

Gee, I wish Yip Harburg was still with us -- he could write updated lyrics for his classic (and our new national anthem), "Brother, Can you Spare A Dime." Say, where's the nearest soup kitchen?

Posted by: Vincent on October 4, 2008 at 11:51 AM | PERMALINK

Will some of you share what you're doing to protect your families, survival and assets and otherwise prepare?

I wonder if I should buy lots of hard good, get a green house, what?

Posted by: Considered on October 4, 2008 at 12:42 PM | PERMALINK

For every economist there is an equal but opposite economist. They are useful mostly for confirming one's own political leanings, or for a fun scare like a rolly coaster ride or horror movie. If you want real economics, you have to use common sense, like if you support tens of millions of illegal aliens as does Mexifornia, or transfer gobs of your wealth and wealth generation to China, or waste trillions on Israel and fighting its wars, or...well, 82% of the people who think we're on the wrong track know what I'm talking about, and Washington just doesn't care. Total corruption and isolation. De facto one party rule as one hand washes the other. Dictatorship right around the corner.

Posted by: Luther on October 4, 2008 at 1:48 PM | PERMALINK

just wonderin' when the other parts of the fire sale come start to come into play ??

the oil/transportation hiccup may get worse, now the financial/credit squeeze, are the innertubes/communications lines next ?? (and to think, we won't have kyle around to reboot the router if it ever happens)

Corporate Neo-Liberal Economic Theory: It's like Santa Claus, only with more 'splosions

(text after the : from Attaturk)

Posted by: tofubo on October 4, 2008 at 2:09 PM | PERMALINK

IF you are the kind of person who wants to prepare for the "absolute worst," to potentially protect yourself and your family if all the worst possible things happen, the answer is always the same. You may recall it from '99, too, when wild-eyed doomsayers warned us of the imminent Y2K collapse.

1) If possible, achieve ownership of actual survival-related assets. A small house in sparsely-populated region or a hunting cabin, a generator and fuel for same, rations of nutrition-dense foodstuffs, and durable and efficient clothing/bedding. (Yes, regardless of your personal leanings on the issue, firearms are not a bad idea.)

2) Develop a "get outta Dodge" plan of action, in case the comet hits Earth and the zombies rise from their graves. The purpose of the plan is to have a concrete method of bolting to safety (ideally the house above) in case things get really dangerous wherever you are.

3) Seek out others with similar concerns and interests, preferably people you have good reason to trust. Talk about how you might work together if everything bad happens.


As for money, I don't have any, and I'm sure few folks would listen to me anyway, so don't bother assaulting me over this...

Get it out of the stock market, and out of the bond market. Break it into $100,000 blocks (or $250,000 if you believe in that bailout bill that just passed) and distribute it in several different banks' most secure CDs, accounts, or hard assets.

Withdraw as much cash as would be required to execute your "get outta Dodge" plan, maintain it somewhere secure, and make sure that it doesn't get touched except in the worst-case events.


Remember, if you fail to plan, you're planning to fail!

Posted by: blunderdog on October 4, 2008 at 2:22 PM | PERMALINK

> A small house in sparsely-populated region or
> a hunting cabin, a generator and fuel for same,
> rations of nutrition-dense foodstuffs, and
> durable and efficient clothing/bedding.

You'd rather be surrounded by hungry rednecks with guns than by hungry neighbors on your own block?

I spend a lot of time in those kinds of woods myself, I get along with my fellow rednecks just fine thanks, but you should be aware that any little pocket of wealth tucked away by some rich guy and visited occasionally is _very_ well known by the people with little money who live nearby.

Trust me, you're a lot better off getting on good terms with your current neighbors.

There are lots of ways.

For example: Try getting to know some old person on your block who's there watching the street all the time and would really appreciate a ride to Safeway once a week, and maybe help with some library books and a hand getting the trash out to the curb. Others will notice you helping.

Don't run for the cabin. You'll find the locals are already there, if the world's gotten that bad.
And they'll feel more entitled to what's there than they think you are.

Posted by: me on October 4, 2008 at 5:20 PM | PERMALINK

Should there ever have been a "shadow banking system"?

Posted by: Neil B on October 4, 2008 at 7:37 PM | PERMALINK

Roubini has been right on the Money for over two years. We now have a Global credit contraction plus a de-leveraging process which is accelerating.

Cash ( T-Bills) is King and so is Gold!!

Posted by: Fishy on October 4, 2008 at 7:52 PM | PERMALINK



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