Nouriel Roubini wrote:> [Q: Observations about the one-year anniversary.]
> Well the first observation is that the interpretation if we'd
> only saved Lehman things owuld have been fine and the cause of
> these meltdown and financial crises was letting Lehman go.
> But I think people forget that by the time Lehman was gone, the
> housing recession had started two years befrore, the actual
> economic recession had started the previous November,
> We had a severe financial crisis, 300 plus non-bank mortgage
> lenders had gone out of business, ????? had gone out of business,
> Bear Stearns had collapsed, Fannie and Freddie had collapsed,
> Merrill Lynch had the same problem as Lehman, Bank of America and
> Citigroup had hundreds of billions of dollars of toxic assets,
> finance companies were in trouble, the interbank market had seized
> the year before, so we were already in the middle of a very severe
> So saying that if we'd only bailed out Lehman everything would
> have been ok is just nonsense. It's not understanding the
> difference between cause and effect. Lehman was a symptom, an
> effect of the crisis, not the cause of the crisis. If we'd bailed
> out lehman, we would have had to bail out everyone else.
> [Question: Didn't the crisis provide political cover to the
> regulators to put new tools into effect?]
> Yes, certainly, a wide variety of unconventional tools,
> monitoring credit policies and rescuing the financial system were
> implemented, some of the before Lehman, some of them after Lehman.
> The support and the backstopping of the financial system has been
> a commitment of at least 12 trillion dollars of resources. 3 out
> of 12 had already been spent. There's liquidity provision,
> recapitalization, guarantees, insurance, you name it. but many of
> these things occurred well before Lehman, many of them occurred
> after Lehman.
> [Q: Do you feel better or worse than you did pre-lehman? At the
> time, you said that a Depression was not an impossibility you
> think that's been taken off the table, but we're replaced it with
> an unimaginable amount of debt.]
> Yeah, that's one of my concerns about the economy ahead. That's
> why I see the risk. First of all, a U-shaped recovery that's
> going to be anemic, below trend, and then even a risk of a W.
> We still have all the leverage of the private sector, highly
> leveraged housing sector, highly leveraged corporate sector,
> highly leveraged financial system, and as a way of socializing
> some of the private losses, we've socialized them.
> And now there's a massive releveraging of the public sector, and
> that's why I see a situation in which many agents of the economy
> cannot borrow as much, cannot spend as much, there's not going to
> be consumption growth, there's not going to be as much capex
> [capital expenditures] spending, because of this burden of having
> to reduce the leverage by saving more, and because of that the
> recovery is going to be at best anemic for the next couple of
> [Q: But we need to delever, don't we? We need to spread it over
> a long period of time, so we can handle it all]
> Absolutely. The consumer has to deleverage, which means he has
> to save more and spend less. If consumption growth, which is 70%
> of the GDP, is going to be anemic, below growth of the economy,
> then the growth of the economy is not going to be as high as
> So that's part of the problem we're facing. we need to
> deleverage, we need to save more, because of that, growth is going
> to be weak for a while.
> [Q: Opinion of Bernanke, Paulsen, Geithner, etc.]
> On the first issue, I criticized Bernanke for many of the mistakes
> he made before the crisis, not understanding the nature of why
> this would become severe, but I gave him credit for the fact that
> his actions had led to avoiding another Great Depression. That's
> why I supported his reappointment.
> On the issue of the banks, let's be realistic about it. 350
> non-bank mortgage lenders have gone out of business more than 100
> banks have gone out of business. The banks that are on the list of
> the FDIC that are in trouble are already 400. So at the end of
> the day we might have over 1000 financial isntitutions, and even
> some of the big ones, like Fannie and Freddie, Bear Stearns, AIG,
> Lehman have gone bust.
> So this is a severe financial crisis. Now, how would I have
> dealt with the issue of the banks?
> My view of it is that there are still many losses that have not
> been acknowledged. There's now massive forebearance. For
> example, $2 trillion of commercial real estate is in trouble.
> They have default rates of 30%. But now the regulators have said,
> "Forebearance. Let's pretend that these assets are now worth face
> value. We're going to wait."
> And eventually, there's going to be trouble -- for regional
> banks, and for smaller banks.
> If you think about it, subprime went to near prime and prime.
> Now it's commercial real estate, credit cards, auto loans, student
> loans, leveraged loans, industrial and commercial loans, corporate
> bonds, muni bonds -- all these losses slowly slowly are adding up.
> It's going to be death by a thousand cuts.
> We're not going to have another blow-up like Lehman, because
> we've decided that nothing that's systemically important is going
> to be allowed to collapse again like Lehman.
> But the financial system is severely damaged. It's not just the
> banks. Most of the shadow banking system has completely
> disappeared. There is no securitization, there is no credit
> growth. So how is the economy going to grow?
> Let's recognize that things are much better than a year ago, of
> course, and I credit the policy makers and their strong actions,
> but there is still huge amount of damage in the financial system,
> and in the real economy.
> [Q: About interest-only mortgages]
> Absolutely. Right now, delinquencies are rising from sub-prime
> to near-prime and prime on the interest-only mortgages.
> There is now, by the way, a moratorium on foreclosure. Because
> of that, the excess supply of homes on the market has been
> limited, but eventually this moratorium is going to disappear, and
> people who looked at the data, they see a massive increase in the
> supply of existing homes that are going to come on the market in
> the next six to 12 months.
> So while the quantities in the housing market have now stabilized
> because they fell 80% from the peak demand and supply, the gap
> between demand and supply is so huge, you can stop producing
> homes for a year to get rid of the inventories. And about 1/3 of
> all existing home sales are distress sales, short sales or sales
> of foreclosed homes, and that's going to increase.
> So the price adjustment, in my view, is going to continue for
> another year, and on a cumulative basis, 40% reduction in home
> prices some time next year from the peak. That means that half of
> the people that have a mortgage are going to be under water, with
> negative equity in their homes. That's what we're facing right
> [Q: You expect prices to go down another 15%?]
> I would say 12%. It's gone down 28%, I see the cumulative down
> by 40%, some time next year.
> [Q: Why do you believe there won't be blowup like Lehman?]
> Extreme events can occur - you have to assign probabilities.
> Last year the G7 said that we're not going to let anybody that's
> systemically important collapse in a disorderly way, and they've
> not allowed it. They've backstopped the financial system in 20
> different ways, and therefore the blow-up of a major institution
> right now, even if it were to be insolvent, is unlikely. That's
> not going to happen.
> Now on the dollar, of course, there's a risk that if we're going
> to be using the inflation task as a way of wiping out the real
> value of public debt, and as a way of dealing with the debt
> deflation in the private sector, if this is the rap we're going to
> take down the line, eventually there could be the collapse of the
> dollar. That's why I'm worried about the dollar.
> The runaway fiscal deficits that are not being addressed are going
> to lead to the temptation of using monetization of this debt could
> lead to inflation. In that case, the dollar could collapse. But
> again, you have to assign probabilities, and to me, it's still a
> low probability scenario, but it's a risk we've got to be aware
last few years. He's flip-flopped on how deep the recession will be,
and on whether the recession has ended. He has absolutely no