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  1. #1
    Atomic Punk
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    12.11.17 @ 04:37 PM
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    Default America's economy risks the mother of all meltdowns

    "I would tell audiences that we were facing not a bubble but a froth - lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy." Alan Greenspan, The Age of Turbulence.

    That used to be Mr Greenspan's view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University's Stern School of Business, founder of RGE monitor.

    Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome"**. The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."

    Prof Roubini is even fonder of lists than I am. Here are his 12 - yes, 12 - steps to financial disaster.

    Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

    Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks' ability to offer credit.

    Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from mortgages to a wide range of consumer credit.

    Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.

    Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

    Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

    Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt. Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.

    Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

    Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

    Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

    Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices".

    These, then, are 12 steps to meltdown. In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

    Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about "decoupling". If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

    Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.

    The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.

    The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

    *A Coming Recession in the US Economy? July 17 2006, www.rgemonitor.com; **The Rising Risk of a Systemic Financial Meltdown, February 5 2008; ***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008
    "Watch what people are cynical about, and one can often discover what they lack.” -- Gen. George S. Patton

  2. #2
    Eruption Dr5115's Avatar
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    12.11.17 @ 10:32 PM
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    Great news.............thanks for sharing

  3. #3
    Damage your reputation seenbad's Avatar
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    11.30.17 @ 06:15 PM
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    There is always going to be points and counter points and hypothesis galore in any kind of market. This is just one more. In my eyes, he's capitalizing off of being right....once before and milking it out. Is there logical sense that draws his conclusions? Sure. But you could easily make an argument to swing the other way and create 12 steps that knock his out of the water.

    Even if the economy sucks for a year and a half, many would view it as an opportunity to invest and we'd spring right back up in the end. It's how we're built, and there will always be cycles.
    sheepa latta peepah dabba looka foh a moopy

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  4. #4
    Forum Frontman It's Mike's Avatar
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    12.12.17 @ 03:49 AM
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    Default

    not sure if this has been brought up in the press at all in the States but has there been any talk of changing bankruptcy laws down there to ensure that people don't walk away from their mortgages?

    I think the single biggest threat to the housing market are financially well off people simply walking away from mortgages when they are in the situation where they have no equity in the home due to dropping house prices. Has this been talked about at all? If there isn't much of a negative impact on people to do this I think the housing market could be set for a potentially amazing crash over the next 12 months.

    Companies like www.youwalkaway.com seem to be paving a very scary road to an outsider observer.

  5. #5
    Eruption hotforteacher921's Avatar
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    06.20.12 @ 10:40 PM
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    pardon the dumb question (i'm only 15 and don't have a social studies class currently) but are they saying this'll be a second Great Depression or something?

  6. #6
    Forum Frontman It's Mike's Avatar
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    Quote Originally Posted by hotforteacher921 View Post
    pardon the dumb question (i'm only 15 and don't have a social studies class currently) but are they saying this'll be a second Great Depression or something?
    even the most negative of analysts are not predicting anything that severe.

  7. #7
    Atomic Punk bsbll4's Avatar
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    12.11.17 @ 01:56 PM
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    Nightmare scenarios are always popular to talk about, but not very realistic.

    The problem with "just walking away" from your mortgage is the hit your credit takes. You will never be able to buy a home again--especially after the banks have learned their lesson the first time around (at least you would think, but apparently they don't do much of that). It would be financial suicide to default on your debts that badly and would make more sense to sell your home (even if it is far less than what it is worth) because losing a few thousand in investment is much better than filing for bankruptcy.
    CNN may think my opinion matters, but you shouldn't.

  8. #8
    Good Enough vanzefflin's Avatar
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    10.26.17 @ 04:07 PM
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    Quote Originally Posted by bsbll4 View Post
    Nightmare scenarios are always popular to talk about, but not very realistic.

    The problem with "just walking away" from your mortgage is the hit your credit takes. You will never be able to buy a home again--especially after the banks have learned their lesson the first time around (at least you would think, but apparently they don't do much of that). It would be financial suicide to default on your debts that badly and would make more sense to sell your home (even if it is far less than what it is worth) because losing a few thousand in investment is much better than filing for bankruptcy.
    He was talking about wealthy people. If you have a couple of mil or more in any bank,the bank couldn't give two shits about what you did to some secondary lender. However, if one is in the financial bracket that barely allowed the purchase in the first place;You would be correct.
    EDDIE IS THE ULTIMATE ROCK DOG!

  9. #9
    Atomic Punk bsbll4's Avatar
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    12.11.17 @ 01:56 PM
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    If you have a couple million, you can't file for bankruptcy without paying off your debts, right?
    CNN may think my opinion matters, but you shouldn't.

  10. #10
    Good Enough vanzefflin's Avatar
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    Quote Originally Posted by bsbll4 View Post
    If you have a couple million, you can't file for bankruptcy without paying off your debts, right?
    Ask Donald trump. He's been very successful at just that.
    EDDIE IS THE ULTIMATE ROCK DOG!

  11. #11
    PM Goo with your concerns OLO's Avatar
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    12.12.17 @ 12:17 AM
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    Trump has never filed bankrupcy, some of his companys have though.
    ((Just My Two Cents))
    And thats about what its worth.

  12. #12
    Baluchitherium Guitar Shark's Avatar
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    03.01.10 @ 10:22 AM
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    Quote Originally Posted by seenbad View Post
    There is always going to be points and counter points and hypothesis galore in any kind of market. This is just one more. In my eyes, he's capitalizing off of being right....once before and milking it out. Is there logical sense that draws his conclusions? Sure. But you could easily make an argument to swing the other way and create 12 steps that knock his out of the water.

    Even if the economy sucks for a year and a half, many would view it as an opportunity to invest and we'd spring right back up in the end. It's how we're built, and there will always be cycles.
    Perhaps, but our pattern of deficit spending is just not sustainable long term. At some point, we are going to have to collectively make some hard choices.

  13. #13
    Damage your reputation seenbad's Avatar
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    11.30.17 @ 06:15 PM
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    like?
    sheepa latta peepah dabba looka foh a moopy

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  14. #14
    Atomic Punk MikeL's Avatar
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    Quote Originally Posted by seenbad View Post
    like?
    Like whether we acquiesce to China welcoming Taiwan home, for instance.

  15. #15
    On Fire SecretWind's Avatar
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    Quote Originally Posted by Guitar Shark View Post
    Perhaps, but our pattern of deficit spending is just not sustainable long term. At some point, we are going to have to collectively make some hard choices.
    Agree with Seenbad's original post, and yours as well. It seems logical that sooner or later the spending and credit habits of US society as a whole will have to change. A major paradigm shift, I guess. Probably won't happen overnight.

    But what do I know...I'm not an economist. However, I'm always skeptical reading these types of 'doomsday' predictions.
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