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Roubini Was Right

by: Felix Salmon October 07, 2008    
Felix Salmon

Felix Salmon

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I asked Nouriel Roubini this morning whether there was any way of getting institutions to start lending to each other, rather than the Fed being the only game in town. I got this in response: Savor it, it's probably the shortest thing by Nouriel you'll ever read.

We are near total financial and corporate meltdown dude.
At this point the ony institution able and willing to lend is the Fed. That is why I suggested last week the CPFF to avoid this meltdown.

First you avoid a systemic collapse that was literally a couple of days from occurring. Once things have calmed in a few weeks you can start thinking about ways to restore lending among private institutions.

Yep we have reached the point where the Fed is the only bank in the land or, better, in the globe as the huge swap lines now allow the Fed to lend dollars to non-US banks outside the US.
That means that the Fed will now lend to banks, to non-banks in the shadow banking system, to corporations and to state and local governments. There is no one else lending now as counterparty fear is extreme.

Read my February 12 steps to a financial disaster paper. We are now as I predicted at step 12

Sorry if I now say I told you so...

Feeling a little chastised for giving me so much shit on your blog for the last year and siding persistently with those who missed the boat and said all wil be fine? Should I expect a public mea culpa?
It would be useful if you would publicly admit you got it totally wrong for the last year.

I'm happy to oblige: Nouriel was right, and I was wrong. The more apocalyptic you were, the more correct you were. And there were precious few people as apocalyptic as Nouriel.

And so, at this point, I'm liable to trust Nouriel -- who has been right so far -- about the necessity of the CPFF, rather than trust someone like TED, who says that the non-financial CP market was just fine as of October 1, and that therefore there's nothing to worry about.

At some point, Nouriel will be too bearish. But that point hasn't arrived yet, and I'd much rather prepare for the worst and be pleasantly surprised on the upside, than hope for the best and get my legs cut out from under me. There's no doubt that Paulson and Bernanke have been consistently behind the curve so far, because they just couldn't conceive of things getting as bad as they did. So maybe it's long past time to start listening to someone who not only conceived such things, but went so far as to actually predict them.

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This article has 17 comments:

  •  
    Oct 07 04:56 PM
    Big deal! Ron Paul and Austrian economists predicted this for decades.
    Reply
  •  
    Oct 07 04:58 PM
    The worlwide banking system is totally frozen. This may last 4-5 months.

    This will cause a worldwide recession. Emerging market economies will be savaged be this depression. China and India will be especially hurt with no country to export their products to. These two countries will see their economies pushed back 20 years.
    Reply
  •  
    Oct 07 05:01 PM
    Net-Net: Buy Gold. Bernanke's helicopters are warming up now.
    Reply
  •  
    Oct 07 05:26 PM
    Yes, and all the insta-gurus who predicted the tech stock crash were totally wrong two years later when they were still bearish. At that time, the gurus who hyped tech stocks in the 90's were right, if they were still around.

    Being a guru disciple doesn't get you very far. Even a dead clock is right twice a day. Let's see this guy call the bottom now!
    Reply
  •  
    Oct 07 05:59 PM
    "Even a dead clock is right twice a day."

    Yeah, Chris B is right on --Dow 36,000 here we come!!
    Reply
  •  
    Oct 07 06:47 PM
    We all saw what unfolded in Congress...does anyone make allowance for the possibility that the situation HAD to get that bad before Paulson and Bernanake could get them to address the situation???
    Reply
  •  
    Oct 07 07:05 PM
    Broken clock is right twice a day.

    Guess what? Its high noon.
    Reply
  •  
    Oct 07 08:04 PM
    "Big deal! Ron Paul and Austrian economists predicted this for decades"

    Link?
    Reply
  •  
    Oct 07 08:27 PM
    Felix, do you have an idea what Nouriel has to say about the next steps to recovery?
    Reply
  •  
    Oct 07 09:35 PM
    Your writing is entertaining Felix. I'm a fan of Portfolio, and enjoy your pieces regularly.

    But this qualifier attached to your quasi-apology makes it completely worthless:

    "At some point, Nouriel will be too bearish."

    What does that mean, exactly? If the S&P dives another 40% over the next 12 months, will he have been too bearish? So far it looks like he foretold this crisis pretty damn well, and took a lot of heat from journalists like yourself in the process.

    At this point I'm in favor of handing over the reigns of the bailout to Roubini and a hand-picked group of economists he trusts. Better him than the all-Goldman team currently in charge. No conflict of interest with investment bankers in charge of bailing out the investment bankers, no sir....
    Reply
  •  
    Oct 07 10:00 PM
    Adam Sharp , I agree with you . I have read that the IMF bank has even called on Roubini for his opinion , shame thay didn't listen to him years ago . He is right on with his predictions ! TIMBER !
    Reply
  •  
    Oct 07 11:18 PM
    It is not that Roubini was right or wrong, per se. He was indeed right, but he was right for the right reasons. Right? Right! Roubini analyzed the economic fundamentals and saw through the debt-induced hallucinations which were skewing everyone else's perceptions. He is not a broken clock; he is simply a smart, honest guy.

    The rest of the crowd (with big shout outs to the Bubbleheads at CNBC and Alan "Bubbles Don't Exist" Greenspan) kept on hyping and lying and promising it would be green grass and higher numbers forever. Even on the way down, they picked bottoms out of their asses, declaring that 20% was a bear market and therefore it would rally. Or that housing had fallen enough (just because). Or that it was a liquidity or confidence crisis. In fact, they are still claiming the last two.

    It's nice to see a Bubblehead like yourself admit to being wrong, wrong, wrong, but I sense you still fail to admit that you were not wrong just on a chance bet. You were wrong because you drank the Kool-Aid and spent seven years in a state of cognitive dissonance.

    Roubini is not a stock picker. He is not calling for bottoms. He has been, if anything, too optimistic about housing and stocks, which is unfortunate because he is the biggest of the bears. If he has underestimated this thing, just how bad will it get?
    Reply
  •  
    Oct 07 11:22 PM
    As of a few days ago Roubini was offering free limited access memberships to his site. Worth checking out.
    Reply
  •  
    Oct 08 09:12 AM
    OK, everybody Google "Derivatives.&quo...

    These are what have the Big Boyz soiling themselves and what they are referring to when they talk about "counterparty risk."

    You need to understand several things. They have ZERO underlying real assets. They have HUNDREDS OF TRILLIONS OF DOLLARS (more than the annual GDP of the entire freaking planet) in notional "value". They were COMPLETELY unregulated and as opaque as mud.

    Nobody knows for sure how much or who has the liability but ALL the financial institutions have a mountain of this toxic crap shoved under the carpet. THIS is what has them hoarding cash and eyeing each other with distrust.

    It was derivatives called credit default swaps (CDS) that made AIG go bankrupt. They "insured" billions of dollars of mortgage backed securities (MBS) without adaquet assets to pay up when the realestate market went bust. POOF!

    $700 billion is a drop in the bucket for this amount of liability and won't thaw the credit markets. Either the people who took on the risk go bankrupt or the rest of the world does. (Lest you think I exagerate, please think Iceland or ponder the fact that European governments are now insuring bank deposits that are in some cases triple their annual GDP.)

    Reply
  •  
    Oct 08 10:49 AM
    For what it's worth, Roubini didn't "call a top". He simply stated that the market couldn't keep going like it was and that things would get much worse based on the current underlying conditions. He was right, the bull is dead.

    Until the underlying conditions warrant a change of opinion nobody can "call the bottom". Conditions still warrant correction of imbalances so the bear lives on.

    The only way to change those conditions is for somebody to "take one for the team". So far BS, LEH, AIG, WM and Iceland but that hasn't been enough.
    Reply
  •  
    Oct 08 11:21 AM
    quote:
    "At some point, Nouriel will be too bearish."

    Exactly as Adam Sharp says..

    So you're saying Roubini will be wrong then and you in your infinite wisdom will see through it *again*..and actually know better.

    This is *no* apology and in your heart you know better..
    ..he just got lucky.
    Reply
  •  
    Oct 08 04:29 PM
    What's with all this piling on crap? "Let He Who Is Without Sin Cast The First Stone".

    I regularly monitor Felix's articles, along with others. Whille I don't always agree with him, I always appreciate his willingness to share his thoughts. FYI, I got completely out of the market last Nov, partly as a result of the insights I obtained reading Felix's blog.
    Reply
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