A nightmare economy (Headlines from the Meltdown)
Seeing Signs of ‘Systemic Failure’ – The New York Times, Jan. 23
“This is not a normal crisis,” George Soros, the hedge fund pioneer turned philosopher, said today to a group of reporters he had invited to lunch at the World Economic Forum. “It is the end of an era.”
It was the “era of superleverage,” he said, and regulators have not appreciated how serious it is. “Systemic failure,” he said, may be taking place.
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Roubini: ‘Serious risk’ of global systemic financial crisis – The Daily Davos (Wall Street Journal blog about World Economic Forum), Jan. 22
Last year, Nouriel Roubini was the lone pessimist on Davos‘ five-person opening economics panel. His colleagues predicted the world economy would continue to grow strongly without overheating, a rosy scenario economists dubbed “Goldilocks”….
“2008 will be an ugly year,” he says. The question of whether the U.S. will fall into recession is stale: “Now the debate is, how bad will it be? I think it will be extremely severe.” Financial-market conditions will get much worse: “When you add all the losses, not just subprime but also soon enough on auto loans, credit cards, student loans, leveraged loans and corporate bonds, we’re looking at $1 trillion of losses in the financial system.” These massive losses, he contends, mean “there’s a serious risk of a systemic financial crisis. Not just in the U.S., but globally.”
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Roubini: Fed got it wrong for too long, can’t stop a long and ugly recession now – Roubini’s Global EconoMonitor (excerpted at AlexWhalen.com), Jan. 23
The US has already entered into a recession and this recession will be much uglier than the mild recessions of 1990-91 and 2001 as a shopped out, saving less and debt burdened consumer is on the ropes and faltering.
The world will not decouple from the US hard landing; there will be significant recoupling and a sharp global economic slowdown. When the US sneezes the rest of the world catches the cold; and today the US will not experience just a simple common cold but rather a protracted and severe case of pneumonia; thus, the real and financial contagion to other economies will be severe.
Whatever the Fed does now is too little too late; the Fed had a wrong diagnosis of the economy and was behind the curve for over a year. The Fed claimed that the housing slump would bottom out a year ago; instead we have the worst housing recession in US history still getting much worse now. The Fed claimed that the subprime would be a niche and contained problem; instead we have had massive contagion to the entire financial system as a credit bubble and excessive debt and leverage occurred throughout the economy and the financial system. The Fed claimed that the housing problems would not spread to the rest of the economy; instead we had had real and financial spillovers and now a fall of most components of aggregate demand.
….Losses in the financial system will be greater than $1 trillion; thus there is a serious risk of a systemic banking and financial crisis.
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Fed’s rate cut sends worrying message – The London Telegraph, Jan. 23
If yesterday’s market meltdown left any doubt in investors’ minds that we are living through extraordinary times, the 0.75pc emergency rate cut by America’s Federal Reserve has dispelled them.
The Fed’s cut comes before the opening bell in New York, deliberately so as it was designed to steady a dangerously listing ship.
….It says things are really looking very ropey indeed for the US and by extension the global economy.
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Washington Whispers: In Private, Bernanke Tells Horror Stories – U.S. News & World Report, Jan. 22
People wondering why Federal Reserve Chairman Ben Bernanke suddenly moved to reduce the bank borrowing rate by three quarters of a point should know that in private he has expressed growing pessimism about the economy. Whispers has learned that Bernanke has told people in recent weeks that the economic situation some see falling into recession will be much worse than he has admitted to publicly.
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Bernanke presses the panic button – Salon.com, Jan. 22
Cool and collected — the very model of a careful academic — Ben Bernanke is not the kind of man who, in his constant stream of public speeches, addresses to Congress, and regular updates on the state of the economy, expresses himself with hyperbole or irrational exuberance. He is the antithesis of CNBC’s rabid mad dog of stock speculation, Jim Cramer, forever frothing over with bug-eyed babble.
But the hyperlinked global markets of the 21st century measure a Fed chairman by his rate cuts, not his über-rational reasoning. And when you shock the world with an emergency three-quarters of a percentage point cut in the Fed Funds rate that is larger than anything the U.S. has seen in 23 years, your image as Mr. Calm is bound to take a beating. Wasn’t he telling us just a few months ago that the housing bust was “contained”?
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Dobbs: Our leaders have squandered our wealth – CNN.com, Jan. 23
There is no question that Bush, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid will quickly come up with an economic stimulus package simply because they can no longer ignore our economic and financial crisis.
….Bush, Pelosi, Reid and the presidential candidates of both parties have an opportunity now, and I believe an obligation, to adjust the public policy mistakes of the past quarter-century that have led to this crisis. And only through courageous policy decisions will we be able to steer this nation’s economy away from the brink of outright disaster.
….We all have to acknowledge that our problems were in part brought on by the failure of our government to regulate the institutions and markets that are now in crisis.
….All Americans will soon have to face a bitter and now obvious truth: Our national, political and economic leaders have squandered this nation’s wealth, and the price of this profligacy is enormous, and the bill has just come due for all of us.
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The politics of an economic nightmare – Salon.com, Jan. 23
How much worse can it get? The housing bubble drove home prices up 20 to 40 percent above historic averages relative to earnings and rents. So now that the bubble is bursting, you can expect prices to drop by roughly the same amount, and new home construction to contract. The latter plunged last month to its lowest point in more than 16 years. A managing partner of a large Wall Street financial house told me a few days ago the scenario could get much worse. He gave a 20 percent chance of a depression.
….In reality, the crisis is both a credit crunch and the bursting of the housing bubble. Wall Street is in terrible shape and Main Street is about to be in terrible shape. And there’s not a whole lot that can be done about either of these problems — because they are the results of years of lax credit standards, get-rich-quick schemes, wild speculation on Wall Street and in the housing market, and gross irresponsibility by the Fed, the Treasury and the Comptroller of the Currency.
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Foreclosures Prompt Cities to Make Plea for Aid – The New York Times, Jan. 24
Facing a collapse in the subprime mortgage market that has pockmarked their cities with vacant houses and crippled their budgets, the nation’s mayors pleaded Wednesday for a huge infusion of federal aid.
As more than 250 mayors gathered in Washington for the winter meeting of the United States Conference of Mayors, many agreed that the collapse of the subprime market had left a growing problem of vacant houses, depressed property values, tighter credit, and a need to cut services to close municipal budget gaps.
“It’s an economic tsunami that is hitting our cities,” said Mayor Douglas H. Palmer of Trenton, the president of the conference. “We need federal action not six months from now, but within the next 30 days.”
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The Coming Financial Collapse of America: Today’s Market Bloodbath Is Only a Taste – Mike Adams at Speaking Truth to Power (reprinted from NewsTarget.com), Jan. 23
My prediction for 2008 – 2012 is a massive wave of municipal bankruptcies, state bankruptcies and escalating national debt. We are going to see cities and states go belly up, pension programs terminated (or watered down), and financial institutions teetering on the brink of disaster.
….This financial situation won’t head straight down. The Plunge Protection Team in Washington (and at the Fed) will do their best to keep propping up this economy like a Weekend At Bernie’s. So you’ll see short-term recoveries and stock prices jumping up and down probably all year. The markets may even reach new highs as the Fed hyperinflates the currency by injecting easy money into the system. As usual, it’s all a scam. The unavoidable trend is the ultimate downfall of the debt-ridden U.S. economy and a massive recalibration of this nation’s economic behavior, which may or may not include the dissolution of the nation itself. American may somehow survive this unprecedented debt crisis. Then again, it may not.