Foros de la Plataforma por una Vivienda Digna

[billy]

Stand by for “generalised systemic financial meltdown”

“Gold is for optimists. I’m diversifying into canned goods.”

So said one reader on Felix Salmon’s Market Movers blog, in response to a post on crisis blogging.

The trouble with being the leading harbinger of doom is that, rather like crack, you’re going to need to keep pushing the limits to keep achieving the same highs. So Salmon notes that the über-bears, no longer satisfied with dire predictions of a US recession, have now moved onto heralding a full-blown financial crisis. Only an all-out, systemic meltdown will do.

The bear in question, Nouriel Roubini, has long been positioned firmly on the gloomy side of the outlook scale - but the past week’s batch of predictions has been ominous even by his own dark standards. In fact, they’re nigh on apolcalyptic.

After all, back in March, Roubini was clear - the US landing would be hard, or at best, a growth recession.

Enjoy that sentiment. That’s the good old days.

In July Roubini wrote that the “financial fallout of the worst housing recession in decades is only just beginning.” In August, he noted that in his opinion the market turmoil was “much worst” than the liquidity crisis following LTCM. By September, he had a confession to make: he’d been far too optimistic on housing. And last month, he approvingly relayed a comment from a “senior professional in one of the largest financial institutions in the world”, in whose opinion a “miracle is needed to avoid recession.”

The trouble is that Roubini has a habit of being right - uncannily so in his predictions on US housing.

And so to the latest batch of fun. On housing, the message is largely unchanged - this housing recession will be “worse than any in US history” and the “financial bloodbath” has only just started.

Economist coverBut here’s the catch. Roubini argues that the inevitability, or at least high likelihood, of a US recession is now becoming more widely accepted. He notes the Economist cover story, and that leading Wall Street analysts previously in the soft landing camp have shifted their stance. The debate, says Roubini, has now shifted from ‘if recession’, to ‘how deep, protracted and severe’ such a recession will be.

So for all the bears out there, crack pipes to the ready, here is your latest hit:

I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

Or in other words, a “generalized systemic financial meltdown.”

http://ftalphaville.ft.com/blog/2007/11/21/9066/stand-by-for-generalised-systemic-financial-meltdown/
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