On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed ”” and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”
Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism.
Even a stopped clock is right twice in a day.
The Gold standard has its problems but it sure looks good most of the time.
Don
He hasn’t called the Trifecta yet, but he’s getting close. We cannot ignore the commodities bubble, because when it goes there’s really no place left for all that liquidity to flow for a return.
a) Real Estate Bubble. Burst.
b) Equities and Finance Bubble. Bursting.
c) Commodities Bubble. Will Burst.
Near simultaneous collapse of [i]three[/i] bubbles is quite rare. For example, before the 1930s collapse there was no commodities bubble. In fact, the last time three bubbles burst was going into the 1836 to 1843 Depression … by far the worst in American history.
3. Bart Hall (Kansas, USA):
I do not doubt your current overview as it is happening before our eyes. No problem.
But when you say: “before the 1930s collapse there was no commodities bubble”, I am puzzled. I am familiar with both grain and Zinc prices in the 1920s and as the 1930s approached there was a dramatic and steady drop in both grain and Zinc prices. This had to do with the world situation following WWI but, no matter, there was to me a commodity bubble that burst. It might depend upon definitions and perhaps you do not place the late 1920s in your timeframe. Actually, to my estimation, it was the drop in commodity prices that caused the Great Depression. (A nation of Farmers could no longer afford to buy radios, bathtubs, and autos with such abandon)
Or, we could just blame Herbert Hoover…:-)
Don
One wonders just who this gentleman hob-nobs with. I am actually surprised the oil bubble popped before the election.
It doesn’t take an economics genius to see that crippling debt – on a national scale and at the personal level – is going to cause problems. Just how big and when are the questions.
Commodities will drop (a lot), however this will be because of deflation due to the gigantic deleveraging of credit. (Also because of the selling of paper shares of commodities that never were covered (naked shorts). However physical commodities (precious metals) will retain more value than paper assets such as stocks, bonds, bank CDs etc given the decline in the dollar due to the fruitless attempt of the US government to print its way out of the upcoming deleveraging/deflation.
Cash is king in a deflation. But I would hedge with commodies despite the fact that they will indeed fall (along with everything else) in a deflation. (And yes, inflation will turn to deflation within the next year or two. However food and oil and medical care will stay expensive or simply get scarce).