America's economy risks the mother of all meltdowns

[UpInArms]

http://news.yahoo.com/s/ft/20080219/bs_ft/fto021920081334359078

"I would tell audiences that we were facing not a bubble but a froth - lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy." Alan Greenspan, The Age of Turbulence.

That used to be Mr Greenspan's view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University's Stern School of Business, founder of RGE monitor.

Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome"**. The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."

Prof Roubini is even fonder of lists than I am. Here are his 12 - yes, 12 - steps to financial disaster.

Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

...more...

[Warpy]

1. Scary because he's absolutely right

although I think his order of events is off. The shadow market, meaning the derivatives market in which securities with absolutely no intrinsic value are traded at top dollar, a casino on steroids, will likely be one of the first few markets to fail. Trillions are tied up in this market, mostly banks, brokerages and pension funds, and trillions will simply evaporate. No economy can take that big a loss, even though those trillions never existed anywhere but on paper and in the fevered minds of hedge fund managers.

He's also right about the "toxic qualities" of most loans written from 2005 on, especially the "liar's loans" that were ARMs and interest only loans that were extended to people with shaky or no work history to present and no down payment. Those loans will never be collected. Also toxic are the prime loans written in the bubble markets, especially the ones out west.

Otherwise, he's spot on. I think we can even make an educated guess as to which megabank will fail.

What he doesn't say is that if the GOP gets in again, this process will be unstoppable. The only way to stop it goes against the GOP's screwball economic theory, theory that hasn't changed since Harding, Coolidge and Hoover led us into the last Great Depression.

If McInsane manages to cheat his way in, we are fucked.

[truedelphi]

2. McINsane doesn't need to cheat his way in - the media are there to

Frame everything so that the swiftboating of Kerry looks like child's play.

One other DU'er just created an OP that denotes that the "crawl" beneath CNN's programming tonight reads "Al Queda calls to congratulate Obama"