Tuesday, October 7, 2008

Roubini was right

Oct 7 2008 11:38AM EDT

Roubini was Right

By: Felix Salmon

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.


  1. I don't understand why the "credit crunch". Is there a lack of money to lend? Or does some bank think that GE will default? Some other explanation?

  2. according to Roubini...
    "Goldman Sachs, Morgan Stanley, the other primary dealers and the banks that have access to the TSLF and PDCF (and discount window) have massively used these facilities in the last few weeks; but they are hoarding such liquidity and not relending it to other banks, to the thousands of the other members of the shadow banking system and to the corporate sector as they need such liquidity and don’t trust any counterparty. Thus the transmission mechanism of credit policy (the non-traditional Fed liquidity lines) is completely shut down now. Thus, on an emergency basis the TSLF and PDCF need to be extended to other non-bank financial institutions, especially those directly providing credit to the corporate sector such as non-bank finance companies and leasing companies."

    So yes the banks (GS,MS etc.) think either GE will default, or possibly that if they don't have the money themselves they themselves may collapse?

  3. >>>" . . .if they don't have the money themselves they themselves may collapse."<<<

    That's the issue. Various assets are so devalued that many lenders either cannot meet their capital requirements or will have balance sheets that show insolvency unless the cash is hoarded. None are worried that GE will default, at least that was true until perhaps today!


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