Whoopee we’re all gonna die. Roubini and Ritholtz on the financial crisis

Ok, maybe it’s not that bad. But Nouriel Roubini and Barry Ritholtz are not optimistic about what’s coming down the economic pike, as witness their comments on a conference call today.

Roubini is a perma-bear who used to be considered a crank about due to his predictions of a coming crisis. Now he’s considered more of a prophet.

His thoughts on the bailout:

– It’s a rush job. Legislation was written by the banks. It’s a scandal that no professional economists were consulted.

– The bailout as proposed won’t help much. The market knows this. That’s why it sold off today.

– The credit markets are currently seized up. No one is lending because no one trusts anyone or knows what the counterparty risk is. If this continues for another week or two, then there will be defaults in commercial markets and businesses won’t be able to borrow what they need. The Fed will be forced to extend lending to corporate entities in the near future.

– His solution: Drastic measures are needed. The government makes a blanket guarantee of all bank deposits of all size to prevent the “silent run on the banking system” that is happening now. They do triage. Recapitalize the banks that can survive and take the weak ones out back and shoot them in the head.

Barry Ritholtz blogs at The Big Picture, is a financial commentator, and author of the soon to be published “Bailout Nation. How Easy Money Corrupted Wall Street and Shook the World Economy”

His comments:

– Bailouts have unintended consequences, and can lead to the next bailout. When LTCM blew up, they got bailed out and “No one got stung” and the rules weren’t changed. Which inexorably led to the current crisis.

– On the current bailout: “What are the consequences of giving the most reckless players on Wall Street a pass?”

– The bailout won’t help because it solves a balance sheet problem not a capitalization problem.

The next cards to fall are commercial real estate, credit card debt, and car loan debt. What started in a seemingly isolated part of the financial markets, subprime, has spread its rot to the financial sector in general, and now to business at large. European banks are even worse than US banks, as they can be leveraged 60-to-1, rather than 30-to-1 like here.

So, things may well get even bumpier. Given the useless lame duck George Bush, it is probable that the presidential candidates will call for a blue ribbon panel of actual experts to determine what to do – which is what Congress should be doing now rather than rushing through a bad bill.


  • DJ

    I’m baffled at people’s reluctance to even comment on this most basic financial truth: You can’t make money loaning at 5% when inflation is running at 7%. Throw all the money you want at the credit markets, but unless they get inflation under control no one with any sense would loan it out. That’s a big duh.

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