Nouriel Roubini of RGE Monitor (aka prophetic doomsayer extraordinaire) is known for his gloomy outlooks, but his latest missive seems somewhat gloomier than most.
Reading through the commentary you can’t help but feel Roubini is quietly preparing to wave goodbye to the idea of a protracted U-shaped recession for good. The ‘big L’ scenario, he says, now has a 30 per cent chance of coming true.
Here are some choice paragraphs from the post (our emphasis)
It is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. While we are already in a severe and protracted U-shaped recession (as the deluded hope of a short and shallow V-shaped contraction has now evaporated) there is now a rising risk that this crisis will turn into an uglier multi-year L-shaped Japanese style stag-deflation (a deadly combination of stagnation, recession and deflation).
The latest data on Q4 2008 GDP growth (at an annual rate) around the world are even worse than the first estimate for the US (-3.8%): -6.0% for the Eurozone; -8% for Germany; -12% for Japan; -16% for Singapore; -20% for Korea. The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production, employment, exports and imports is accelerating rather than decelerating.
And who’s fault is it? Well, according to Roubini it’s Europe which hasn’t done enough in terms of stimulus and rate cutting. Of course, the US could still do more. As he explains:
The U.S. has done more (with its aggressive monetary easing and large fiscal stimulus putting it ahead) but two key elements are key to avoid a near-depression and still seriously missing: a proper clean-up of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks, even some of the largest ones; and a more aggressive and across-the-board reduction unsustainable debt burden of millions of insolvent households (i.e. principal reduction of the face value of the mortgages, not just mortgage payments relief).
But here’s the clincher — the crisis may actually have got too big for government to handle:
Moreover, in many countries the banks may be too-big-to-fail but also too- big-to-save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system. Traditionally only emerging markets suffered — and still suffer – from such a problem. But now such sovereign risk — as measured by the sovereign spread – is also rising in many European economies whose banks may be larger than the ability of the sovereign to rescue them: Iceland, Greece, Spain, Italy, Belgium, Switzerland and, some suggest, even the UK.
The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign: banks, other financial institutions and, soon enough possibly, households and some important non-financial corporate companies. At some point a sovereign bank may crack, in which case the ability of governments to credibly commit to act as a backstop for the financial system — including deposit guarantees — could come unglued.
He concludes:
It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on self-regulation that, in effect, meant no regulation; on market discipline that does not exist when there is euphoria and irrational exuberance; on internal risk management models that fail because — as a former chief executive of Citi put it — when the music is playing you gotta stand up and dance.
Related links:
The Worst Economic and Financial Crisis Since the Great Depression Reveals the Weaknesses of the Laissez Faire Anglo-Saxon Model of Capitalism – RGE Monitor
Roubini: Not even halfway there - FT Alphaville