Tuesday, July 15, 2008

Roubini on Bloomberg TV

by Calculated Risk on 7/15/2008 04:47:00 PM

Video: Roubini on Bloomberg TV

Roubini provides a summary of his views "that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades ..."

Here are a few of Roubini's points:

  • This is by far the worst financial crisis since the Great Depression

  • Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust

  • Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust
  • I agree this is the worst financial crisis since WWII, but I think this crisis pales in comparison to the Great Depression.

    As far as the number of small banks that will fail, my guess is on the order of 100 to 200 over the next few of years, but Roubini's "hundreds" is possible. Clearly many small institutions are very exposed to Construction & Development (C&D) and Commercial Real Estate (CRE) loans. BTW, bank failures are a trailing indicator of financial problems.
  • Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

  • This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.

  • Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.
  • I disagree that this recession will be worse than the '73 to '75 and early '80s recessions - although a more severe recession is possible, especially if oil prices stay elevated, or there is a further collapse of the dollar, or a global recession. I agree with Roubini that there will be no quick recovery (no V-shaped recession).

    I need more details on the Paulson plan.