Dire Warning from Nouriel Roubini

When I got a newsletter today with a new article by Nouriel Roubini in my inbox, I nearly had a heart attack. Inside was an absolutely urgent warning.

In February of this year, Nouriel Roubini, Professor of Economics at the NYU Stern School of Business, presented a paper The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster.

Roubini's list of 12 steps has consistently nailed each stage of the economic crisis unfolding day after day in front of our eyes. Frankly, it's frightening how accurate Roubini has been to date. Known as Dr. Doom, he presented his ideas to the IMF in September of 2006. At the time, he outlined a series of devastating events:

homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt.

In 2006, his presentation was largely dismissed. By February 2008, people were starting to listen.

In today's article, Roubini spells it out in no uncertain terms. This is it.

THIS weekend is the LAST CHANCE to try and divert the crisis.

The world is at severe risk of a global systemic financial meltdown and a severe global depression
By Nouriel Roubini, October 9, 2008

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

  • another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
  • a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
  • a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
  • massive and unlimited provision of liquidity to solvent financial institutions;
  • public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
  • a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
  • a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
  • an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

At this point anything short of these radical and coordinated actions may lead to a market crash, a global systemic financial meltdown and to a global depression. The time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.

It's going to be a long weekend. And it's going to be an even longer week ahead.

Additional Reading

Nouriel Roubini's Doomsday Scenario
By Yves Smith, Naked Capitalism, February 2008

Nouriel Roubini gets a medal …
By Brad Setser, Follow the Money, Council on Foreign Relations, August 17, 2008

RGE Monitor
website of Nouriel Roubini

You can subscribe to Nouriel Roubini's newsletter here.

And a little something for Halloween...

Nouriel Roubini Halloween Mask
Incakola, October 7, 2008

Comments

According to this,

Falling economic dominoes. Friday is a big day. [POLL] by polecat

today (Friday) is significant because

Tomorrow is the CDS unwind for Lehman. Some $500B is going to be bandied around as various people have to cover one part or another of this huge deal. And it isn't clear that all of that money actually exists.

Polecat's piece has some other troublesome information in it too, and then there's news of trouble in Hungary, too.

The mess is rapidly acclerating.

Lehman default swaps may recover 9.75 pct area
By Karen Brettell, Reuters, October 10, 200

Banks, hedge funds and other sellers of protection on Lehman Brothers are facing losses in the area of 91.25 percent of the insurance they sold, based on the initial results of an auction on Friday to determine the value of the credit default swaps.

Via Jesse's Cafe Americain

After Japan's performance, it's not surprising to see US futures looking bleak

Delayed CME Globex Flash Quotes

We used to say that it's the little guys that make the open, the big guys make the close. Yesterday, the big guys crapped their pants as they stepped all over each other on the way out the door.

They gotta get a frigging floor under this somehow. I'm thinking a markets holiday is looking better all the time.

The infrastructure projects were already on the "Need to do" list, good to see Roubini mandates that point. Just don't make them "no-bid gift to Halliburton":

a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;



"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

-----
"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

Your points are crystal clear!

I like to think of luapt as our own "mad poet" of certain topics, but I think my definition of "mad" differs than yours.

I never thought of that "definition" of Mad...

Sincere apologies to Luaptifer ...

As did I, and as would anyone who knows you. ;)

I'd refer you to consider that thin line between madness and intelligence.

Instead, I'm just mad.



"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

-----
"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

Thanks for this, I was too fogged in last night to fully absorb the importance of the market torpedoing through 9000 -- but to me it was big.

I noticed the worst case scenario he paints is a ten year out recovery.

From where I am sitting, I am thinking that may be closer to the "better" case, and the real timeframe is much longer.

I can't quite get too excited by the next great expert telling me the sky will fall come Monday morning. The much-anticipated, too-often pimped "financial crash" has already occurred.

Roubini is a bit late to the party, and entirely too shrill.

Roubini has been one of the few who has tracked what was really going on with our economy and this joke of a financial system constructed over the shadow system that is now failing. People who have been reading him for the last 3-4 years are not surprised with what is occurring now. I would trust what he is saying before I would trust most of these talking heads on TV or any of our elected officials or civil servants.

Everything that underlies the growth of the last 8 years was a scam used to suck us and other nations dry.

The news out of Iceland is really bleak. That's what's heading our way unless they can divert the last few blows.

I have to admit, it was surreal last night. There's a large monthly art walk in Los Angeles (one of several actually). Thousands of people were out partying and laughing and enjoying themselves. I guess life goes on. But I couldn't help but wonder how many would still be able to laugh two weeks from now.

I'm not optimistic. I don't think the IMF and World Bank have it together enough to do what they need to do this weekend.

As I said to Cho last night, suddenly the latest gadget just doesn't look like a must have.

I heard the news about Iceland on late on CNN when they broke in with coverage from their international channel. That is the second time they have done that this week. It was then that I clicked over to see what Roubini was saying and found the same post you had received in email. It didn't help me sleep any better last night.

And I still am amazed when I hear the man at the McCain rally yesterday. He was angry, but not about the economy. So what is he angry about? It's those "socialists taking over our country." How can these people be so uninformed and stuck in their little ideological jack-in-the-box.

in the list of six or seven, I heard moments ago, that had suspended trading in their markets.

The Russkies are closed indefinitely.



"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

-----
"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

That's what the folks at the IMF thought: Roubini's a downer...the economy is doing fine....what does he know? And of course, a bunch of folks just laughed.

Roubini has accurately predicted each and every step of the economic crisis.

Now, he's saying that this weekend, the parties assembled for the IMF and World Bank meetings need to lock themselves into a room and work their asses off to try to divert the crisis. That sure sounds like good advice to me. And funny thing, a number of economists other than Roubini are saying the exact same thing.

The time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.

So, panic? What would you do if you could see an absolutely devastating disaster coming unless a small group of people take immediate action?

my stocks. Should have done that a year and a half ago so will just ride another one out. But I do think it might be a good idea to visit the bank to have some greenbacks on hand just in case.

At this point, I am not confident the people meeting this weekend have enough in their bag of tricks to do the trick. I feel like a kid watching a Kerplunk game waiting for the wrong straw to be pulled that will send all the marbles falling.

Never hurt. I'm assuming if it gets bleak, I just need enough cash on hand to get through two weeks without access to a bank.

and for how long?

I come from somewhere in the middle regarding the Bank/IMF, actually was involved in a project or two.

But the fact has always been that their policies squeeze the majorities of populations in countries they're called to assist, the required austerity doesn't often seem to squeeze the financial interests involved (such as the banks we're now bailing out who are often the major financiers in such countries).

It might just be time for an extreme makeover of the models upon which WB / IMF base their assumptions, you think?



"So your party is the only party that can save the country from the mess that your party created?" - attrib. Jon Stewart

-----
"I hope we shall crush in its birth the aristocracy of our moneyed corporations which dare already to challenge our government in a trial of strength, and bid defiance to the laws of our country." - Thomas Jefferson

Seems like this is the weekend they prove themselves useful or not. Ideology in the face of disaster is useless. But they may not know that. Supply side economics seems to make one dumb.

Roubini makes his case for the two groups do or die makeover this weekend:

It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster.

It might just be time for an extreme makeover of the models upon which WB / IMF base their assumptions, you think?

Or perhaps it's well past time.

From his blog:

Failure of leadership, part LXXIV
Bloomberg:

Finance ministers and central bankers from the Group of Seven nations signaled reluctance to adopt a coordinated effort to shore up banks, risking a deeper crisis of confidence after this week’s crash in global stock markets.

Do these people have any idea how much is at risk?

And a second Krugman post.

Faustian bargains

I recommend following the links in Faustian Bargains to Across the Curve, a blog by John Jansen, a bond trader.

This is not looking good...

IMF warns of financial meltdown
By Lesley Wroughton and Francois Murphy, Reuters, Sat Oct 11, 5:08

The United States appealed for patience, but the International Monetary Fund stressed that time was running short after leading industrialized nations failed to agree on concrete measures to end the crisis at a meeting on Friday.

"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown," IMF chief Dominique Strauss-Kahn said.