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Can the U.S. Afford Another Stimulus Package?

November 18th, 2009 Comments off

I have previously predicted that the Obama administration will almost certainly push for a second stimulus package prior to the 2010 mid-term congressional elections. The upcoming White House  jobs summit, scheduled for December, is probably a set-up to create the PR context for promulgating a new instalment of the previous Economic Recovery Act.

In a recent op ed piece, NYU economist Nouriel Roubini warned that unless “bold action” (meaning more stimulus spending ) is taken, “the damage will be extensive and severe unless bold policy action is undertaken now.” He rightly fears that a continuing growth in the unemployment rate, which he believes will top out at 11% according to U3 measurements, will likely send the U.S. economy back into another recession, the feared “double dip” or W recessionary curve.

Of course, Roubini is correct. But as he himself has previously pointed out, the growing deficits and national debt of the United States in itself is a growing danger to the nation’s long-term economic future. With a staggering national debt, I do not believe the U.S. can absorb the additional debt load required to fund another stimulus package. Irrespective of fiscal realities, however, political expediency will undoubtedly triumph. Which means a new stimulus bill will be approved by Congress in 2010, a few hundred thousand temporary jobs may be created, but when the next banking crisis arises (and it will) a fiscal disaster will confront the U.S. economy, more than wiping out any small gains in employment that will result from allocating several hundred billion dollars of borrowed money for President Barack Obama’s version 2 of stimulus spending.

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com   

Nouriel Roubini Warns That the U.S. Federal Reserve Is Constructing a “Monster Bubble.”

November 3rd, 2009 Comments off

 

In the Financial Times Professor Roubini wrote a thoughtful and frightening piece on the implications of the U.S. dollar’s sinking value and its increasing role in the global carry trade. Given Nouriel Roubini’s track record  in offering a timely warning on the collapse of the subprime mortgage  bubble, his latest red flag should be looked at very closely.

In essence, the loose monetary policies of the Fed have  poured a tidal wave of liquidity into the world, in the form of U.S. dollars being offered at effectively zero interest rates while simultaneously being devalued. This explains the explosive role the American dollar is exercising on the carry trade. As Roubini points out, speculators can borrow cheap dollars at effectively negative interest rates, and plough this cheap currency into higher yielding assets available in foreign exchange. What Professor Roubini describes as the “mother of all carry trades” is building a global speculative bubble of vast proportions, and in a manner that is utterly unsustainable.

Roubini closes his sober article in the Financial Times with the following chilling warning:

“This unravelling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.”

 

 

* Global Economic Forecast 2010-2015: Recession Into Depression, now available. More information at:

http://www.createspace.com/3403422

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

Nouriel Roubini Speaks Truth to Power

July 21st, 2009 Comments off

When media reports surfaced last week claiming that the prophet of doom of the Global Economic Crisis, NYU economics professor Nouriel Roubini, had  “improved” upon his previously gloomy economic forecast and predicted the recession would end by the close of 2009, a stock market rally was ignited. It seems it does not take much to facilitate a bear market sucker’s rally on Wall Street at this time of global economic distress, including false rumours. To his credit, Roubini swiftly set the record straight with the following comment on his blog:

“It has been widely reported today that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook. Despite those reports – however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.”

Nouriel Roubini has consistently stated that he expected the current recession-by far the worst America has experienced since World War II- to terminate by the close of the year. This has been his longstanding forecast. Thus, when he repeated this consistent prediction of his, the media went wild with excitement, discarding the continuity of his forecast and presenting his belief that by the close of 2009 the recession would end as a surprise revelation. With business journalism like this, no wonder the Dow Jones is searching new highs even as employment numbers continue to plummet.

What is noteworthy about Roubini’s most recent insights on the economic situation are their increasingly gloomy tone related to the mid-term and long-term prospects for the American economy. This is largely predicated on the growing fiscal imbalance in connection with the public indebtedness of the United States. Though a supporter of the vast deficit-driven stimulus programs and expensive bailouts of the financial sector owing to his belief that to negate these policy responses would have resulted in the collapse of the global financial system and the free fall contraction of the U.S. economy, Roubini is not unmindful of the their consequences. In that sense, he parts company from other advocates of deficit-creating economic stimulus packages, including Paul Krugman, who prefer to discard the danger of the vastly-expanding debt of the federal government.

In addition to his concern about the ramifications of unprecedented levels of budget deficits, Roubini is also worried that the end of the recession he has long forecasted will now be only temporary, to be followed by a double dip recession during the latter half of 2010, interrupted by anaemic growth of less than 1%.

The forces contributing to what, at best, will be a weak recovery in 2010 are linked to the uniformly negative statistics on employment which, according to Professor Roubini, have a direct impact on an economy as highly dependent on consumer spending as America’s. According to Roubini, commenting on the latest employment numbers,  “these raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5 per cent. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income — the product of jobs times hours worked times average hourly wages — has fallen dramatically.”

In his recent observations on declining labor income and its relationship to the continuing financial and economic crisis, Roubini identifies how this factor will exacerbate several interlocking indices. Consumer loan defaults across the board-mortgages, students loans, credit card debt-will continue to increase, adding to the level of toxicity of assets on the balance sheets of banks, and extending the credit crunch. Government revenues will decline while the need to fund unemployment benefits and other social expenditures will grow, further increasing budgetary deficits. Professor Roubini summarizes the growing contradictions in utilizing fiscal and monetary policy responses as the primary sovereign means of countering the worst global economic disaster since the Great Depression as follows:
“The higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilisers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable U.S. fiscal path, with budget deficits above 10 per cent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse. This leads to a policy dilemma: rising unemployment rates are forcing politicians in the U.S. and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment. But, despite persistent deflationary pressure through 2010, rising budget deficits, high financial-sector bailout costs, continued monetisation of deficits, and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation — and thus to higher interest rates, which would stifle the recovery of private demand.”
This leads to what economists refer to as a “W” or double dip recession. In other words, the very policy responses politicians and their advocates claim are vital to restoring the economy may, by the end of 2010, become the principal enabler of forces that will unleash round two of the Global Economic Crisis.

Nouriel Roubini had warned for years that the subprime mortgage sector would bring about financial and economic calamity, and take down much of the investment banking industry. Today we would all be wise to listen carefully to Professor Roubini’s warnings on the growing danger of a double dip recession and the long-term implications of a fiscal roadmap being pursued by our politicians that, in Roubini’s prescient words, is “unsustainable.” Given his track record, we can only discard the truth of which Roubini speaks at our peril.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

World Bank Issues Gloomy Forecast on Global Economic Crisis

June 24th, 2009 Comments off
The World Bank has issued an updated forecast on global economic growth. Its previous report in March was dismal enough; it projected a decline in worldwide GDP of 1.7%. The IMF will shortly present its own report, and issue a somewhat rosier picture for the global economy. However, the World Bank is peering at the global economic downturn through a different set of lenses than more optimistic observers, who seem inclined towards finding “green shoots” amid the financial weeds. The World Bank’s June report is now showing a projected contraction in the global economy of negative 2.9%.

This is a disaster-laden forecast, which essentially describes a developed global economy mired in staggering contraction, while the developing world is experiencing a collective growth rate of just above 1%, which undoubtedly would have slipped into negative territory without the inclusion of China’s GDP, which received the only positive projection from the World Bank, which has upped its China GDP forecast to a growth level of just above 7%. However, China’s economic growth is almost entirely based on borrowed money; a massive stimulus program comprising nearly $600 billion to subsidize domestic demand as a counterweight to the sharp decline in Chinese exports.

In 2010, the global economy is projected to return to growth, though on a lackadaisical scale. Even in projecting growth for next year, the World Bank reduced its already weak forecast. What the data seems to reflect, on the macroeconomic level, is that global trade is in free fall, and with the severe contraction of export-driven economic growth, massive borrowing by the sovereign to fund domestic stimulus activity is about the only major economic expansion still occurring. Unfortunately, fiscal policy is only a short-term driver of growth. Even sovereign states eventually exhaust their capacity to borrow and engage in vast levels of deficit spending.

With the World Bank pointing towards more bad news for the global economy, the European Central Bank has come out with a wet blanket of its own. The ECB is warning that pump priming by governments as their primary policy response to the Global Economic Crisis must soon come to an end, or create unacceptable levels of risk to sustained economic development. In particular, the ECB is concerned about the danger of rampant inflation and uncontrolled fiscal imbalances, as national debts of major developed economies, especially within the Eurozone, comprise a growing proportion of their GDP. More alarmingly, the ECB is not alone; other central bankers and economists are also warning that economic policymakers must soon find what they refer to as an “exit strategy” from the massive fiscal deficits that are currently being accumulated with such reckless abandon.

The World Bank’s June forecast data presents economic decision-makers with a conundrum. With 2009 shaping up to be the single worst year for global economic performance since World War II, and 2010 being projected as a year of anemic growth at best, there will be immense pressure on policymakers to enact follow-up stimulus programs, with even greater levels of public borrowing. For example, Nobel Prize wining economist Paul Krugman has consistently called for a much larger stimulus package than the nearly $800 billion Obama package. The argument will be that without more deficits, the globalized recession will be prolonged, and create higher levels of unemployment. However, the fact that in this fragile economic environment some voices within the policymaking establishment are beginning to question the continuation of debt-driven public financing is a sign that there is no clear consensus on how to resolve the Global Economic Crisis.

To add to all the other bad news, economist Nouriel Roubini, the most astute observer of the global financial and economic contraction, is now warning that while a slight economic upturn is possible in early 2010, there is now a growing risk of a “double dip” recession towards the end of 2010, facilitated in large part by the fractured finances of sovereigns that have accumulated staggering levels of public debt.

Finally, even the most optimistic projections concur that global unemployment will continue to accelerate, well into 2010. With fewer wage earners and a continuing credit contraction, it is hard to see any tangible basis for a sustained economic recovery. Remove deficit spending from the equation, and we could see a second Great Depression. Maintain high levels of public borrowing, and the global credit and bond markets will impose their own will, leading to equally cataclysmic economic consequences.

The World Bank’s updated economic forecast does not present a clear roadmap for the future of the global economy. What it does provides is more evidence that the Global Economic Crisis is far from over, and that there is no clear answer to the question of how to bring this globalized disaster to an end, and restore healthy, sustained growth to a battered world economy.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

Paul Krugman is Wrong on Inflation

May 31st, 2009 Comments off
In an Alice in Wonderland column published in The New York Times on May 29, economist Paul Krugman launched an attack on those such as myself who have expressed concern that the profligate budget deficits being enacted by the Obama administration are laying the foundation for high inflation. In my piece published in the Huffington Post, “U.S. Economy Risks Dire Prospect of Hyperinflation,” I made specific reference to the possibility that the Obama economic team may be pursuing an inflationary course as a strategy to reduce the real value of the exploding national debt. It seems that this point in particular caught the ire of Professor Krugman.
There is one point in Krugman’s piece that I concur with; we are enduring an unprecedented economic crisis. This calls for thoughtful debate and deliberative argumentation. Unfortunately, even as distinguished an economist as Paul Krugman can at times slip into a mode of petty banalities. As such, his New York Times polemic adds nothing consequential to the discourse on critical issues such as the risks as well as benefits of massive fiscal and monetary intervention on the part of the Obama administration and Federal Reserve. There are, however, a number of points raised by Krugman that warrant a response.
One point promulgated by Professor Krugman is that the unprecedented level of quantitative easing by the Fed is not inflationary, and that those such as myself who have raised this concern are “just wrong.” This is what Krugman had to say on this matter, “Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices. But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them.”
So, Krugman agrees that quantitative easing in ordinary times is “highly inflationary” but in our present predicament those rules are suspended. What is left out of Paul Krugman’s rationalization is that banks are sitting on the infusion of liquidity they have received from the Fed because of their chronic need to shore up their balance sheets, which are saturated with toxic assets. However, it is the intention of the Fed to facilitate credit easing on the part of financial institutions through its quantitative easing, which leads to the possibility of future inflation, unless the Federal Reserve is a model of perfection in tightening up on the money supply when the credit crunch abates. Based on the overall performance of the Federal Reserve since the initial stages of the subprime mortgage meltdown, I would not be sanguine about their ability to inhibit the expansion of the money supply when inflationary pressures return.
Professor Krugman also adds that the primary concern currently is deflation, which I agree with in my Huffington Post piece, however, I disagree when he claims that there are currently no inflationary pressures. Due in large part to the falling value of the U.S. dollar, we have recently witnessed a substantial increase in the price of oil, despite weak demand due to the ongoing synchronized global recession. What appears to be an anomaly is actually a harbinger of future trends, in my view. Excessive deficit spending is contributing to the weakening of the dollar, which has price consequences for an economy as dependent on imported goods and commodities as is the case with the United States.

A major point made by others and me is that a high ratio of national debt to GDP creates a substantially elevated risk of inflation. Furthermore, I suggest that this may lead to a conclusion by decision-makers that the only policy response that can reduce this dangerous ratio of public indebtedness is to allow high levels of inflation, which in turn “grows” the nominal GDP not through higher output of goods and services, but through reduction of the constant value of the currency. Professor Krugman is dismissive of this point, making reference to the United States having a level of public debt that exceeded the GDP right after World War II, without severe consequences.

Let us look at the facts. The United States ended World War II with a labor force, including a substantial military, which was fully employed but had been restricted in the opportunities to spend disposable income. This was due to rationing on basic commodities such as foodstuffs, and the termination of production of major consumer durables such as automobiles owing to industrial mobilization in support of the war effort. After VJ day the pent-up consumer demand exploded, while consumer goods remained in short supply in the immediate post-war period. The result was a combination of real growth and high inflation, both dynamics contributing to the attenuation of the public debt to GDP ratio. Thus in 1946, the national debt ratio reached its highest level, 121%. By 1948, that ratio had declined significantly, at 93.7%. Now, let us observe the inflation rate during this period: 8.3% in 1946, a staggering 14.4% in 1947 and 8.1% in 1948. These figures clearly demonstrate that having a level of public debt exceeding 100% of the GDP does have inflationary consequences, and suggests that inflation in turn reduces the real value of the nominal public debt as a proportion of national GDP.

Perhaps the most disturbing aspect of Paul Krugman’s piece, beyond superficial and trivializing dismissal of those he disagrees with on the question of high levels of deficit spending, is his marginalization of those he disputes by resorting to rhetorical generalizations. Thus, he issues this inexplicable diagnosis of those who hold economic views that are contrary to his own: “But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.”

One of the inflation fear mongers is a supporter of President Obama’s stimulus spending program, NYU economics professor Nouriel Roubini. This is what he had to say at a recent symposium on the economic crisis, which Professor Krugman also participated in: “…we have to worry about the long run. If we’re going to finance budget deficits by printing money, we may have high inflation, even risk of hyperinflation in some countries. That’s what happened in Germany in the 1920s during the Weimar Republic. We are having large budget deficits and increasing the public debt, we don’t know whether it’s going to be $5 trillion or $10 trillion of more debt. But there are only a few ways of resolving that debt problem: either you default on it as countries like Argentina did; or you use the inflation tax to wipe out the real value of the debt; or you have to raise taxes and cut government spending. And given the size of the deficits, over time that’s going to be a painful political choice to make. So we need the stimulus in the short run, but we need to restore medium-term fiscal sustainability.”

Another supporter of President Obama’s economic policies, who also opposed George W. Bush’s deficit-financed tax cuts, is billionaire investor Warren Buffet. This is what the oracle of Omaha had to say about the linkage between high public debt to GDP ratios and the risk of inflation: “A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt.”

In writing off those observers who are concerned about the inflationary dangers emerging from the exploding national debt, Paul Krugman resorts to paraphrasing Franklin Roosevelt, claiming the only thing we have to fear about inflation is the fear of inflation itself. It seems, however, that there is one authority that is of like mind with Professor Krugman. In December 2002, Treasury Secretary Paul O’Neill, about to be fired for opposing the Bush tax cuts, had a meeting with Vice President Dick Cheney. In response to O’Neill’s warning of the long-term implications for the nation’s economic health of escalating federal deficits, Cheney told the soon-to-be but prescient ex-Treasury Secretary, “You know, Paul, Reagan proved deficits don’t matter.”

I never thought I would witness the day when Paul Krugman and Dick Cheney agree on economic policy.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

 

 

 

Stress Test for U.S. Banks Are a Complete Fraud

May 12th, 2009 Comments off

The ancient Greek philosopher, Plato, constructed a political theory based on the royal lie or myth. As described in Plato’s Republic, the ruling elites of a political entity have the right to lie to their citizens-but not vice versa. The rationalization is that a royal lie and deception maintains social cohesion and prevents the collapse of the state. Thus platonic logic gives rise to the so-called stress test for American banks, the royal myth conceived by Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke, in order to deceive investors, market sentiment and the American people as to the true state of the nation’s financial institutions.

When Congress approved the massive $700 billion bailout of U.S. banks and Wall Street firms last October, the justification was that without this massive indebtedness being incurred by the American taxpayer, the U.S. and even global financial system would collapse. Yet, from this perilous state of only a few months ago, a stress test is concocted by the Obama administration to “prove” that these same banks are relatively healthy, well capitalized, with only a few banks requiring a collective total of $75 billion to cover probable losses that can be anticipated during the months ahead as unemployment continues to rise. Furthermore, this $75 billion capital infusion can be generated directly from private investors, without the injection of additional taxpayer support, so says Geithner & Company.

What is going on here? I think the prophet of doom of this unprecedented global financial and economic crisis, NYU economics professor Nouriel Roubini, summed it up best when he wrote recently, “Geithner’s hope is that he can subsidize banks long enough for them to earn their way back to health. But the public isn’t keen on more bailouts, so Geithner’s challenge is to convince us that banks are solvent.”

However, as Roubini and other economists and financial analysts have pointed out, much of the U.S. banking sector is functionally insolvent, stress test or no stress test. Roubini himself estimated that U.S. financial institutions will incur $3.6 trillion in losses from the ongoing economic crisis, while the IMF calculates that global exposure to toxic assets is over $4 trillion, more than half this sum related to losses in the United States. These figures far surpass the current capitalization of U.S. banks, making Geithner’s $75 billion figure a fantasy number, unrelated to actual economic and financial realities. In other words, a royal lie, straight out of Plato’s Republic, with suitable accoutrements customized for the Global Economic Crisis.

The stress test is a public relations exercise on a grand scale. Originally, word “leaked” out that all the major U.S. banks would pass the stress test. Markets reacted skeptically, leading Treasury and the Federal Reserve to come up with a compromise number; big enough to look credible yet not so large as to suggest there is an insolvency danger afflicting the nation’s banks.

A mythological approach towards the Global Economic Crisis, especially as it relates to financial institutions, will insure that an already dire situation becomes inevitably calamitous. The most dangerous flaws in the U.S. and global banking system are not even hinted at with Treasury’s stress test. They have to do with a volatile man-made financial toxin, otherwise known as derivatives.

The oracle of Omaha, billionaire investor Warren Buffet, once described derivatives as “financial weapons of mass destruction.” As regards the world of credit and finance, he is absolutely correct. What exactly are these nefarious derivatives? Though conceived of as complex financial instruments, in essence they are private contracts between financial counterparties, which have the characteristics of a bet, in effect gambling on a range of financial and economic activity. This can include price direction of commodities, equity markets and global currencies, among many other “derivatives” of financial and economic activity. Banks, investment firms and insurance companies loaded up on derivatives until their balance sheets choked on them, driven by what was seen as an easy way to generate cash flow-and significant cash bonuses for the supposed geniuses who devised these monstrosities. Then came the collapse of the subprime mortgage market in the United States, and the fragile derivatives empire began to unravel.

AIG was the first demonstration of how dangerous derivatives had become to the global financial system. A small branch of the insurance giant, based in London, bet heavily on a form of derivatives paper known as a credit default swap, in effect insurance based on gambling about the stability of securitized mortgages. When the U.S. housing market collapsed, AIG lacked the capital to pay off the bets it had lost heavily on with its CDS paper, forcing the U.S. government to come to the rescue. The tab so far, just for this one company, is nearly $200 billion. I would not be surprised if AIG’s credit default swap losses ultimately top half a trillion dollars, all of which the American taxpayer will be expected to make whole. And by no means is AIG the only derivatives bomb waiting to explode, a terrifying truth completely veiled by the mythology of the stress test.

How dangerous is the derivatives toxin to the U.S. and global banking system? To give just one example, Geithner’s stress test claims that Citigroup, the country’s third largest bank, only requires a mere $5 billion in additional capitalization to maintain its financial health under the worst anticipated economic storms that may still arise. However, Citigroup has a derivatives exposure equal to nearly three times its total assets

of $1.2 trillion. Most of the other U.S. banks have equally threatening levels of derivatives exposure; in the case of J.P. Morgan Chase its exposure is nearly four times its assets of $1.7 trillion.

 

What makes derivatives so frighteningly dangerous is that they are almost totally devoid of government regulation. Their opacity makes it virtually impossible to gauge the exposure of U.S. and foreign banks to these destructive financial instruments with any degree of precision. However, it is currently estimated that the combined value of all derivatives contracts in the world equals a sum of money that seems impossible to fathom: $1.2 quadrillion! That number exceeds the total GDP of the entire planet by many dozens of times. In effect, the developed world, led by the United States, has created a vast, unregulated shadow economy based entirely on risky paper and exotic casino-style capitalism, with actual bets being placed by the major actors within the U.S. and global banking system as though they were roulette wheel patrons in Las Vegas.

It is the fear of the derivatives toxin that has frozen credit markets, leading to the Global Economic Crisis. Geithner’s stress test, along with the phony Q1 “profits” reported by these same insolvent U.S. banks, can in no way alter the darkening truth about the calamitous state of the U.S. banking sector.

It appears, unfortunately, that the Obama administration has bought into the royal lie as the best solution to the nation’s perilous financial and economic crisis. They are desperately playing for time, hoping somehow that markets will be fooled into regaining confidence, and that things will revert to some level of normalcy, without the added expense of further bank bailouts and nationalization of key financial institutions. Sadly, by taking what appears to be the easy way out, I fear that the economic policymakers in Washington have embarked on path that can only offer a financial and economic apocalypse that may defy our worst nightmares.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

 

U.S. Banks Doomed To Fail

April 22nd, 2009 Comments off
Within days after the legalized accounting fantasy masquerading as first quarter earnings for several of America’s largest banks and financial institutions were released, the markets began to catch on. After several days of a sucker’s rally on Wall Street, the Dow Jones went into retreat as more savvy investors caught on to the charade. That is when Timothy Geithner, U.S. Treasury Secretary, ran to the rescue, ready-made script in hand.
In advance of the so-called “stress test” that is supposed to establish the fiscal health of U.S. banks, Geithner released a sneak preview. “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” boasted Obama’s Treasury Secretary. With Pavlovian instincts, the market bought Timothy Geithner’s fiscal fantasy, at least for a day.

A few weeks before these antics a more sober assessment of America’s banking health was delivered at the National Press Club in Washington by Dr. Martin D. Weiss, the head of Weiss Research, a global investment research firm. Previously, Weiss had accurately forecast the demise of Bear Stearns and the implosion of the U.S. investment-banking sector. However, at the National Press Club he offered a more chilling prediction: 1,568 U.S. banks and thrifts risk failure. Included in that number are several of the largest American banks, including J.P. Morgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Sun Trust Bank and HSBC Bank USA. The numbers and depth of the banking problem highlighted by Dr. Weiss are far larger and much more ominous than has been portrayed by the Federal Reserve, Treasury Department and FDIC. He backed up his dire analysis with documentation and precise mathematical modeling. For example, he refers to the government’s justification for a hideously expensive taxpayer bailout of AIG, based on the firm’s exposure to the fragile investment vehicles known as Credit Default Swaps, or CDS. The policymakers maintain that AIG’s $2 trillion in CDS exposure represented an unacceptable systemic risk, meaning AIG was “too big to fail.” However, Weiss points out that Citigroup alone holds a portfolio of $2.9 trillion in Credit Default Swaps, while J.P. Morgan Chase possesses a staggering $9.2 trillion of these toxic instruments, about five times the exposure that led AIG to demand that the government rescue it, or see the global financial system implode.

The essential point Dr. Weiss made at his press conference is that the degree of exposure U.S. banks have to a variety of toxic assets is beyond what the U.S. government and, by extension, the American taxpayer is financially capable of rescuing. Continued bailouts of insolvent banking institutions will not repair a broken financial order, but may very well cripple the overall economy.

Earlier, NYU economics professor Nouriel Roubini had already gone on record as declaring that much of the U.S. banking sector was functionally insolvent, and that bailing out zombie financial institutions would only replicate the Japanese “lost decade” of the 1990s, when Tokyo’s preference for keeping alive insolvent banks instead of closing them down led to a prolonged L-shaped recession. Roubini and other critics of both Bush and Obama administration policies on bank bailouts have looked to the Swedish model for resolving a profound banking crisis, which involved temporary short-term nationalization, closing down insolvent banks, while those banks that can be salvaged are cleaned up of their toxic assets, recapitalized and then sold back to the private sector. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail,” Nouriel Roubini has argued.

According to the International Monetary Fund, the global financial and economic crisis has already created more than $4 trillion in credit losses due to toxic assets. If nothing else, the IMF estimate on the scale of the economic and financial disaster thus far should compel the Washington political establishment to face the painful yet necessary truths regarding America’s precarious situation. However, it appears that fantasy is preferred over reality within the corridors of power.

The procrastination of policymakers in Washington in facing dark reality, and preference to avoid any public takeover of troubled banking institutions while simultaneously subsidizing these financial dead men walking with almost unlimited taxpayer funds, at the same time maintaining the fiction, as Timothy Geithner has just done, that all is basically fine with the “vast majority” of U.S. banks, is to insure the inevitability of a systemic banking collapse in the United States. The conglomeration of reckless, greed-induced banking practices by the oligarchs of finance and inept, reality-denying policymakers is sending much of the American banking sector on a Wagnerian death ride into a financial apocalypse. Many of the U.S. banks are in fact doomed to fail, and no contrived stress test or Geithner speech can alter that outcome. And that isn’t even the worst part. For when mass banking failures occur in the United States and overseas, a global economic depression will be an irreversible outcome.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

 

IMF Nightmare Forecast: Economic Crisis Creates $4 Trillion In Toxic Assets

April 9th, 2009 Comments off

The International Monetary Fund is set to release an updated report on the scale of toxic assets that are sitting on the balance sheets of financial institutions and banks worldwide. To characterize the IMF revised numbers as jaw dropping would be a severe understatement; the International Monetary Fund will indicate that toxic assets now amount to a staggering $4 trillion. If there are any doubts as to the severity of the Global Economic Crisis, this most current estimate of the rot eating away at the global financial architecture should set them aside.

It was only back in January that the IMF had estimated that toxic assets tied to the United States stood at $2.2 billion, while NYU professor of economics Nouriel Roubini provided a more sobering analysis that placed a figure of $3.6 trillion regarding toxic garbage sitting on global balance sheets, half that figure being directly tied to U.S. financial institutions. The revised IMF numbers, in my view, tell us two things: 1. The erosion in asset values across the world is accelerating and 2. No

 

one knows for certain how catastrophic this financial cancer is; the only certainty is its virulence.As expected, the United States is the major component in the IMF scenario of horrors, being the source of three-quarters of the $4 trillion nightmare forecast. However, nearly a trillion dollars of bad assets are, according to the IMF report, tied to Europe and Asia. That latter figure is actually a portent of much worse news, as all the macro-economic indicators from Europe and Asia are deteriorating. The Eurozone is in deep recession, Eastern Europe is defaulting on massive debts and the banking sector in the U.K. is for all intents and purposes insolvent. The world’s second largest economy, Japan, is in free fall collapse, with catastrophic contraction of its critical export trade. China’s export market is shrinking, in the process shattering Asian economies on her periphery. The OECD (Organization for Economic Cooperation and Development) is projecting that the economies of its thirty member countries will collectively contract by 4.3%, while global trade is reduced by a savage rate of 13%. These numbers suggest that the fundamentals that have facilitated the erosion in global asset values will be even more destructive in the months ahead.

Placed in context, the IMF revised estimate on the meltdown in the global financial architecture is merely a pointer in a very dangerous direction, and not a final estimate on toxic assets. It is likely that the ultimate number goes beyond $4 trillion. How much worse can it get? A secret document leaked from the European Commission suggested that European banks alone hold up to $24 trillion in “troubled” assets. If one quarter of those assets are indeed toxic, it is not beyond the realm of possibility that the actual scope of financial toxicity on global balance sheets may be in the range of $8-9 trillion. However, even worse than any apocalyptic forecast is the realization that no one knows with certainty how massive the financial contagion really is. In the final analysis, it is the uncertainty being wrought by the Global Economic Crisis that is most destructive to the world’s financial system, even more than the appalling statistics, as frightening as they are in the abstract.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

Timothy Geithner Proposes A “Cure” For Toxic Assets: Take A Poison Pill

March 24th, 2009 Comments off
In scientific terms, toxins are regarded as compounds that, if ingested in small quantities, can cause severe organic damage and even death. There are in the natural world, however, compounds which in small quantities are harmless; taken in large doses the same compounds can prove lethal. Such is the case with financial toxicity.
Our modern financial system is the creation of fallible human being, meaning there will be encountered in any modern economy a certain degree of mischievous speculation, outright fraud and chicanery. Often these activities lead to the creation of asset bubbles. If the proportion of inflated or fraudulent assets is a trivial proportion of the gross aggregate assets held by the major institutions in the financial system, the damage can be contained. However, when asset bubbles constitute a significant proportion of the paper wealth of a major economy and then deflate, they become toxic in the truest sense of the term. With our current Global Economic Crisis, it is the size of these deflating assets that contributes to their toxicity. However, their impact on the global credit system is virtually identical to that of chemical toxins on biological mechanisms; they are the penultimate monkey wrench that jams up the whole works. The toxic assets sitting on the balance sheets of financial institutions throughout the world have paralyzed the economic heart of the global economy, starving it of the blood and oxygen of normal flows of credit. The result has been economic paralysis more severe than anything experienced since the Great Depression. However, instead of an antidote, or at least a well conceived therapeutic response, U.S. Treasury Secretary Timothy Geithner has offered up more toxicity.
Perhaps toxicology is too clinical for the Wall Street clique that has dominated policy making in Washington as it applies to the economy. By training and experience Geithner is a creature of Wall Street, and has proposed a solution to the disease of toxic assets that is nothing more than the original brainchild of former Treasury Secretary Hank Paulson. Yet, even Paulson retreated from his original idea of buying up the toxic assets on the balance sheets of U.S. banks, choosing instead to purchase equity in these institutions, an approach that was just as ill conceived.
There are many weaknesses to the Geithner plan, not the least being that it is simply Paulson redux. It pretends that U.S. banks are essentially healthy except for the fact these toxic assets are not really toxic but are in fact “under-valued” by the market. Accordingly, Geithner wants to use taxpayer money to re-inflate the value of these assets, by encouraging private investors to buy them through auctions, thus bidding up their price. This will be accomplished by Treasury using the balance of the TARP money, $75-100 billion, to match private investors direct stake in the purchase of such assets, and then provide cheap loans to the private investors through the Federal Reserve and FDIC to buy up to $1 trillion of the toxic assets. The private investors will only risk the small proportion of their own capital being utilized in the transactions, as the U.S. taxpayer loans will be “secured” by these same toxic assets, which will be the collateral.
Rather than toxicology, Geithner is resorting to folktales and alchemy in providing this witches brew of a curative. The Geithner plan is not only bad in terms of its philosophy; have the taxpayers take almost all the risks, with the private investors subsidized to the tune of nearly a trillion dollars, while these same investors are assured of the great bulk of any upside. There is an even more fundamental problem. Most of the U.S. banking system, and much of Europe’s, is effectively insolvent. Other than radical surgery, which recognizes that maintaining on life support zombie banks can only prolong the Global Economic Crisis, any other solution is doomed to failure.
Geithner is proposing to place U.S. taxpayers at severe risk, by in effect borrowing money to purchase these toxic assets on behalf of hedge funds and other private investors. Yet, as massive a sum as Geithner’s plan envisions, it is not nearly adequate towards addressing the full dimensions of the problem. NYU economics professor Nouriel Roubini has estimated that the U.S. financial system is sitting on $3.6 trillion of bad assets. A leaked document from the European Commission assesses that banks across Europe hold up to $24 trillion in bad assets, suggesting that even Roubini’s gloomy analysis may be unduly optimistic. It is already clear that the banking system in the United Kingdom is comatose. Yet, Geithner asks that we suspend disbelief, accept that the U.S. financial system’s toxic asset exposure is limited to $1 trillion, and we should allow the private sector to do its thing, subsidized by the American taxpayers. Far from being thoughtful, insightful and analytical, Timothy Geithner offers a dish of warmed-over free market cliches and Hank Paulson inanities, avoiding at all costs even a hint of bank nationalization and radical financial surgery.

In his column in The New York Times, Nobel prize-winning economist Paul Krugman summed up the fallacy of Timothy Geithner’s toxic assets rescue plan as follows, “But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus-for that is what the Geithner plan amounts to-will change that fact”

Unfortunately, hocus-pocus is exactly what has been proposed by Geithner, to the delight of Wall Street. It will prove as effective an antidote to our economic and financial crisis as the toxins injected through the fangs of a cobra.

 

 

 

 

 

 

Nouriel Roubini Predicts Global Economic Crisis May “Crack” Sovereign Bank

February 20th, 2009 Comments off
When NYU economics professor Nouriel Roubini offers his prophetic visions of economic gloom, the world of finance has learned at great cost the wisdom of not ignoring him. A year ago, Roubini went beyond warning about the looming catastrophe stemming from the sub-prime mortgage meltdown in the United States. He envisioned the financial world being brought to the edge of total systemic collapse, and in which the model that enabled five investment banks to exist in the U.S. would become absolutely dysfunctional. The credit crunch implosion that occurred in the fall of 2008, preceded by the extinction of all the American I banks, either through bankruptcy, shot-gun absorption or transformation into bank holding companies, cemented Nouriel Roubini’s reputation as the preeminent analyst on the unfolding global financial and economic crisis. Now, “Dr. Doom” is at it again.

In his latest blog posting, Roubini offered the following dire pronouncement: “The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign…at some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system-including deposit guarantees-could come unglued.”

If what Nouriel Roubini has prophesized is in fact about to occur, the inevitable consequence will be global financial and economic Armageddon, a danger that I have also warned about on this blog. However, let’s put Roubini’s gloomy warning in context.

Last fall, the world’s financial system did indeed come to the brink of total systemic meltdown. The Libor rates and Ted Spreads were at sky-high levels, reflecting a global financial architecture that had just entered the Ice Age. The arteries of global finance simply froze solid, leading to U.S. Treasury Secretary Hank Paulson demanding that Congress grant him $700 billion virtually within hours, no strings attached, or witness the global economy implode. Even after the TARP Wall Street bailout was approved, Roubini warned that it was not nearly enough to stave off disaster. Apparently, only the intervention of the treasuries and central banks of the U.K., Eurozone, China and Japan, combined with the American TARP, prevented the world financial order from falling off a cliff. This was done through a variety of extraordinary means, including direct taxpayer injections of cash into virtually insolvent banks, quantitative easing, monetary policies that brought central bank prime rates to historic lows and raising the level of sovereign guarantees for depositor’s insurance. In effect, governments in the major economies acted as a backstop, putting their sovereign credit potential on the line to preserve a measure of confidence necessary to prevent a total run on the banks and unsustainable levels of deleveraging.

All the steps outlined above have the appearance of panic-driven improvisation. As this crisis has already proven, improvisation in never a substitute for thoughtful and strategic policy response. It appears, based on what Roubini is now suggesting, that in the year 2009 we will witness the futility of the debt-driven mania to socialize the losses incurred by private risk-takers. If a sovereign bank does indeed crack wide open, Nouriel Roubini seems to be suggesting that this may be the final nail in the coffin of a mindless policy whereby governments offer virtually unlimited financial backstops to cover the losses of banks that accumulated massive quantities of toxic assets on their balance sheets.

Which sovereign bank may crack? At this point, Roubini is not saying, however it seems clear that it must be a significant institution to have the potential of generating the apocalyptic ramifications being suggested. There are undoubtedly many candidates. To take just one example, Royal Bank of Scotland has already accumulated $40 billion in losses in just the past year, and has only been kept alive through a 70% equity stake being funded by the British taxpayer. Yet, the worst is still to come in the U.K. economy, which must certainly bring further massive losses to RBS as well as other British banks. It may be that the losses to come will be of such a stratospheric character, not even the deficit-crazed politicians will be able to cobble together the promissory notes required to avoid bankruptcy.

As the Global Economic Crisis worsens, comparisons with the Great Depression of the 1930s are being made more frequently. What must be remembered about our last great global economic disaster is that while the stock market crash of 1929 precipitated the Great Depression, it was the collapse of a single bank, the Kreditanstalt of Austria in 1931,that began a chain reaction that crippled the global financial world. It was that bank collapse which made the depression of the 1930s the Great Depression, leading to systemic economic collapse, massive GDP contraction and previously inconceivable levels of unemployment.

As with his previous warnings, Professor Roubini again provides us with a glimpse into the future, and it is indeed filled with gloom and doom.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com