Aug 08 2008
Roubini: $ 2 trillion in losses, worst situation since Great Depression
Yesterday I arrived at my desk to find the most recent issue of the Investment News, the standard bearer weekly paper for those in the business of helping others with investments. Glancing across the front page, relegated to box on the lower left titled “Inside” (this issue), and under the subject “Newsmakers,” I see the following:
“Dr. Bear’s Diagnosis – After Nouriel Roubini’s dire predictions came true, Wall Street stopped laughing and started to listen. Now he’s predicting the worst crisis since the Great Depression. Page 10.”
Needless to say, this same paper offered virtually no heads-up to the problems we’ve talked about here since our inception early in 2005 (and going back to 2002 among our clients), and like most any part of the news media, the coverage started only “post implosion” — when we started to get meaningful coverage on the subject from most all sources, and then mostly the same, standard summary stuff. So, in our estimation, the fact that comparatively bearish Roubini is getting some mainstream coverage is a sign that the seriousness of the problem is reaching the masses in the broader investment community. When that community finally starts to believe it’s all for real, that’s when we’ll see substantial shifts in the investment landscape — making what we’ve seen so far comparatively modest.
For those interested in hearing some of Roubini’s sound analysis, consider his video linked to the image above, where he suggests credit losses will bear close to $2 Trillion. He explains why the recession is going to be deep and hard. And, listen to how those interviewing can’t seem to fathom what he’s saying. They keep trying to defuse what he is saying.
Nonetheless, while Roubini can hit the nail on the head, he still wears a contemporary, neo-Keynesian economic cap . Listen to the video, and you’ll hear a few gems that seem to expose, nonetheless, a fundamental misunderstanding regarding the cause of our problems, never mind that he’s summing up the likely consequences just around the bend very succinctly.
For example, he says policy makers won’t be printing money; they’ll be printing debt instead to fund the bailout. Well, that’s muddling the issue, in my opinion. Who will be buying the debt and with what money? Absent printing cold cash for the bailout, the anchor of yet more debt being a go-to policy tool seems simply ridiculous.
And then there are the final three answers in the Investment News interview.
As to what the government should be doing, says Roubini :
“You have to reduce the face value of their debt and the debt servicing. That’s the only thing that’s going to prevent foreclosure and a massive amount of people walking away.”
Regarding grading if either party is better than the other in solving the problem, Roubini not only says no, he chastises the actions so far:
The main government action so far has been a totally piecemeal approach of reacting. Every time something blows up, they try to plug one hole, and then two other holes open up, and they don’t have any logic or strategy to what they’ve been doing. This has been a total disaster. Both Bernanke and [Secretary of the Treasury Henry] Paulson have done a pretty lousy job. Action has to be taken today. If you wait six months from now or eight months from now, it’s too late.
Ironically, when asked if this will get as bad as the Great Depression, Roubini continues:
No. I don’t believe it’s going to be as bad as the Great Depression, and I also don’t believe it’s going to be as bad as Japan in the 1990s when you had an L-shaped recession — meaning a slump and then no recovery for a decade. People think of me as being one of the biggest pessimists about the economy. The size of the financial crisis is not going to be as bad as the Great Depression, but it’s the worst we’ve had since the Great Depression.
For a guy who comprehends much about the dislocations but still misses the big picture, that’s a huge concession. What’s my gripe with this assessment? Roubini is is doing what all conventional economists do: recommending yet more interventionism from the government, not realizing that the current crisis is already the consequences of too much intervention. That’s because all mainstreamers are quick to pin blame for this crisis on lack of oversight and insufficient regulation on the new era economy that blew the bubble through the roof. Absent these new innovations, they believe, the system as it was, was just fine and dandy.
But rare among contempary pundits is are those who will accurately distill the cause of the problems we’re now facing — The alpha problem, if you will, that enables all other problems to come into existence: the cartel-ized Federal-Reserve-based fractional reserve banking system. Mainstream analysts still give no respect to Austrian Business Cycle Theory, including time preference and capital theory. Instead most seem to be in love with productivity theory and scarcity / velocity on money theory.
The latter has lead us down the false path where somehow we thought to be best off if we consume ourselves to riches and indebt ourselves to wealth. If that seems outlandish, consider that the biggest concern of most economists regarding Bush’s stimulus package was that recipients would save it instead of spending it to help the economy. While this popularized way of thinking may seem absolutely normal to many folks reading this for the first time, it’s cart before the horse theory at its very best. Debt and consumption absent savings will only lead you to economic ruin.
For what it’s worth, a few colleagues have Roubini’s ear; he says he’s not had a chance to review Austrian theory previously. Let it suffice to say, a few books are on the way.
