People look to the US, again. And, "China is rising, but it is not catching up"

The Foreign Policy interview with Nouriel Roubini and Ian Bremmer re-affirms my own views, like this one :)

FP: Ian, what's the biggest winner of the coming year?
IB: United States.
FP: Really?
IB: Oh, absolutely. First of all, it's all a relative game. If you're concerned about the euro, the dollar looks really good, and that gives us a lot more flexibility in this country. I'm a believer in American entrepreneurship. I'm also a believer in quality of life, and when things start falling apart, people look to the U.S. more.

Daniel Drezer excerpts the following from this study:

The widespread misperception that China is catching up to the United States stems from a number of analytical flaws, the most common of which is the tendency to draw conclusions about the U.S.-China power balance from data that compare China only to its former self. For example, many studies note that the growth rates of China’s per capita income, value added in hightechnology industries, and military spending exceed those of the United States and then conclude that China is catching up. This focus on growth rates, however, obscures China’s decline relative to the United States in all of these categories. China’s growth rates are high because its starting point was low. China is rising, but it is not catching up.

The challenge will be to figure out how to make the US' economic might more inclusive than it is now.

I watched Nouriel Roubini on TV. Bad idea!

Flicking the channels in this part of the world where I have no idea about the lineup seems to be a version of Forrest Gump's "life's like a box of chocolates. you never gonna know what you're gonna get." :)

Earlier this afternoon, I got Nouriel Roubini.

In his unique voice and tone, Roubini delivered yet another variation of the same message that he has been delivering for, well, forever it seems like--it will get worse before it gets better.

While Roubini was being his usual Dr. Doom self, the ticker at the bottom quoted Joseph Stiglitz that the US economy might be shaky all the way through 2013.

Whatever happened to the two-handed economists that President Harry Truman complained about?

With the downgrading of quite a few Euro Zone countries' bond ratings, there is not much optimism on the economic front. So, ...

I decided that I needed to inflict more painful news on myself.

Off I went to another predictably bad news giver: Glenn Greenwald, who is really, really ticked off with the systematic killings of Iranian nuclear personnel.

I agree with Greenwald that it is terrorism; but, then, when have I not been able to agree with his analysis!

On the Iranian front, Google News brings this to my attention--a news item that quotes the Wall Street Journal:

"The US military is preparing for a number of possible responses to an Israeli strike, including assaults by pro-Iranian Shiite militias in Iraq against the US Embassy in Baghdad," the paper quoted a US official as saying.

According to the report, Washington has moved a second aircraft carrier to the Persian Gulf area and has stationed 15,000 troops in Kuwait as means to create deterrence in the region.

All right then, maybe the Mayan prophecy about 2012 will become true, after all, eh!

Meanwhile, my parents wanted an update on the cricket scores; more bad news, but, thankfully, not for me because I don't follow the game anymore and couldn't care about any outcomes there.  I suppose that is my good news for the day!

Imagine Nouriel Roubini forecasting the road ahead for India's cricket team :)

Pitchforks, the "Occupy" movement, and insecurities

Over to Nouriel "Dr. Doom" Roubini about Occupy Wall Street:

is a symptom of the economic malaise that we're facing not just in the United States, but all over the world. It started with the Arab Spring, and of course, poverty, unemployment, corruption, inequality eventually leads to people becoming restless. But now, you have middle-class people in Israel saying we cannot afford homes; you have middle-class students in Chile saying we don't have education; you have riots in London; people smashing Mercedes and BMWs of fat cats in Berlin and Frankfurt; you have an anti-corruption movement in India. It takes a lot of different manifestations, but we live in a world with a lot of economic insecurity, of worries about the future, of inequality, poverty, of concerns about jobs. And [Occupy Wall Street] is the manifestation in the U.S.

And, Roubini seems convinced that we are in for another recession--the only question being "whether it's going to be a plain-vanilla recession or one as severe as the last."

I can't see anything to disagree with the following that Roubini says:

The U.S. might not be Europe, but the U.S. is not used to having an unemployment rate so high -- and staying so high. Usually, when you get a recession the monetary and fiscal stimulus leads to a recovery of jobs in short order. But this is becoming chronic and longer term. Either the United States becomes like Europe -- and we've already extended unemployment benefits three or four times over -- or otherwise you have a much bigger social welfare state and safety net. Or you'll have people rioting in the streets. We have to do something either way. Either we'll have a fiscal problem or a social problem.

Well, maybe it is not "we'll have a fiscal problem or a social problem" ... we could have a third scenario, which is both fiscal and social problems.

About the Republicans:

They've taken a Leninist approach, you know, of the worse is the better. This is an election year. If the economy gets worse and they don't pass, this plan then the chance that Obama gets reelected is smaller. They think he'll be a one-term president. If so, they'll inherit not just a nasty recession, but something probably worse. But I think it's a political calculus they're playing -- even if it's going to hurt the economy. 

Paints quite a picture--Republicans taking a Leninist approach.

So, why the pitchforks in the title of this post?  Roubini reminded me of that:

In 2009, [President Barack] Obama told the bankers, "I'm the only one who's standing between you and the pitchforks." The bankers got the bailouts; they were supposed to extend credit, extend mortgages. They did pretty much nothing, and they went back to the same actions as before: making money through trading. At this point, I think people are fed up with it. Rightly or wrongly, there's a huge amount of anger.

Well, hey, prepare for an eventful Guy Fawkes Night!

Dr. Doom asks if capitalism is doomed. Was Marx right, after all?

No, Nouriel Roubini doesn't imply that we will soon return to the bad old days of the Soviet bloc, even though he reminds us that:

Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proved wrong).

So, Roubini's recommendations?

To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.
The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.

Didn't we have a wonderful series of opportunities, up until the recent debt deal, to do all these things?  And we didn't!  So, how high is the probability that we will come anywhere near this list? :(

The Greek (debt) Tragedy: A Euro Sirtaki

And here is Nouriel "Dr. Doom" Roubini's take on the Greek events and the global economy:

If what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending. And, unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy.
This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained. Another round of so-called “quantitative easing” by monetary authorities may not occur as inflation is rising – albeit slowly – in most advanced economies.
If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed. If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies.

Opa!

"Adrift" is the word. Not Grease!

First it was the academe that was characterized as being adrift.
Now, Nouriel "Dr. Doom" Roubini says the world is adrift:

We live in a world where, in theory, global economic and political governance is in the hands of the G-20. In practice, however, there is no global leadership. And there is severe disarray and disagreement among G-20 members about monetary and fiscal policy, exchange rates and global imbalances, climate change, trade, financial stability, the international monetary system, and energy, food, and global security. ...
A G-Zero world without leadership and multilateral cooperation is an unstable equilibrium for global economic prosperity and security.

So, why this state of a world that is adrift?  Roubini has a few reasons; I like this one the best of 'em all:

G-8 leaders share a basic belief in the power of free markets to generate long-term prosperity and in the importance of democracy for political stability and social justice. The G-20, on the other hand, includes autocratic governments with different views about the role of the state in the economy, and on the rule of law, property rights, transparency, and freedom of speech.

Ok, so, does this mean that we are screwed?  Hey, Dr. Doom, you are usually way more cut and dried than this ... You are leaving it to me to conclude that we are screwed?

"Dr. Doom" Roubini all tied up over unemployment

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
America's Got Nothing
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

And more here from that other political economic analyst, too:

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
The Word - The White Stuff
www.colbertnation.com
Colbert Report Full Episodes Political Humor Fox News

Stagflation cometh? Already here?

The next reading of the CPI comes out in mid-July. A negative number will mark the third straight decline and will surely inflate the volume of talk about deflation. (As the historical data show, we haven't seen four straight monthly declines in the CPI since the 1930s.) But when considering the risks of deflation, we shouldn't look at the CPI in isolation. The phenomenon of prices falling modestly at a time when the economy as a whole is growing at a 3 percent click, as it is today, isn't much to worry about. "The combination of slow growth or stagnation and deflation is the thing that's scary," says Michael Bordo. In other words, look out for stagflation.

That is enough to get me worried all the more about a disastrous combination of employment stagnation and deflation, about which I have blogged enough ... Here is a post from back in October 2008 where I quoted extensively from Dr. Doom himself!

Speaking of him, here is Roubini's comical response to Financial Times' quick survey of summer vacation plans:

Where are you going on holiday this year?Recently I have lived like the George Clooney character in Up in the Air (a film I watched on a plane). If I get a vacation this summer it would possibly be a tour of crisis-hit countries – if I am still allowed in them: Spain, Ireland, Iceland, Latvia, Greece and, maybe, the oil spill-ridden US Gulf Coast.

Worry about this quote on the economy :(

the United States and Europe are well on their way toward Japan-style deflationary traps.

That is Paul Krugman's line, from his NY Times column.  As I have noted many times over in this blog, this potential combination of deflation and high unemployment is a nightmare scenario that, for whatever reasons, most policymakers are not that much worried about--despite the loud cautionary notes from the likes of Krugman. Like this blog entry from two years ago quoting Roubini--though, that was in the context of oil prices!
So, who will get hurt the most?

The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

The Middle Eastern financial earthquake from Dubai

A few days ago, I told my colleague that we are only an event away from a double-dip-recession .... the much feared w-shaped recession and recovery. 

I thought that the second dip would result from an event in the Middle East--Iran, or the Israel-Palestine issue, or Iraq.  

But, could Dubai's sovereign default reverse any recovery and slide us down a second recessionary dip?  

What sayeth Krugman?

First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.
Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.
Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.
At the moment, I’m leaning to a combination of two and three. For what it’s worth (not much), US bond prices are up right now, suggesting that the Dubai thing hasn’t raised expectations of default.
Anyway, we continue to live in interesting times.

Horrible times.  If only our collective madness hadn't found it worthwhile to invest a gazillion dollars in crazy developments

9.7% unemployment. Jobless recovery sucks.

Krugman:

the purpose of stimulus is, first and foremost, to mitigate unemployment. The fact that the economy may be technically in recovery is irrelevant.

At Calculated Risk, which Krugman had linked to:

According to the BLS, there are almost 5.0 million workers who have been unemployed for more than 26 weeks (and still want a job). This is 3.2% of the civilian workforce.

The good news is there wasn't much of an increase from July. The bad news is many of these 5 million long term unemployed will start exhausting their extended unemployment benefits soon. According to the projections by the National Employment Law Project about 0.5 million will have exhausted their benefits by the end of this month (September) and about 1.5 million by the end of the year.

Meanwhile, Roubini warns about a possible "W" shaped recession:

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel.

In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession.

Awful.

And, Ken Rogoff (HT) writes that:

For now, the good news is that the crisis will be contained as long as government credit holds up. The bad news is that the rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years.

Most worrisome is America's huge dependence on foreign borrowing, particularly from China ― an imbalance that likely planted the seeds of the current crisis.

Asians recognize that if they continue to accumulate paper debt, they risk the same fate that Europeans suffered three decades ago, when they piled up U.S. debt that was dramatically melted down through inflation.

The question today is not why no one is warning about the next crisis. They are. The question is whether political leaders are listening.

The unwinding of unsustainable government deficit levels is a key question that G20 leaders must ask themselves when they meet in Pittsburgh later this month. Otherwise, Queen Elizabeth II and Detroit autoworkers will be asking again, all too soon, why no one saw it coming.

The worst is yet to come?

So, Circuit City is officially liquidating.  Bloomberg reports that

 Circuit City Stores Inc., the bankrupt consumer-electronics retailer, hired four liquidators to sell all the remaining merchandise in 567 stores before it goes out of business, the company said today.

Circuit City signed an agreement with retail liquidators Great American Group WF LLC; Hudson Capital Partners LLC; SB Capital Group LLC; and Tiger Capital Group LLC, the company said.

The announcement comes a day after the company held an auction it billed in court papers as its last chance to survive bankruptcy as an intact, though smaller, chain.

“We are extremely disappointed by this outcome,” said James A. Marcum, acting chief executive officer, in a statement. “The company had been in continuous negotiations regarding a going-concern transaction. Regrettably for the more than 30,000 employees of Circuit City and our loyal customers, we were unable to reach an agreement with our creditors and lenders.”

I shudder to think that this blood-letting will continue on throughout 2009, and maybe even into 2010.  

The latest issue of Foreign Policy has commentaries from five "doomsayers" whose bottom line is that it ain't over yet.  Looks like they want us to understand that this is a lull before the second and final storm blows through and levels out some of the structures made unsteady the first time around.

Excerpts from a couple:

Dean Baker:

once the financial situation begins to return to normal (which might not be in 2009), investors will be unhappy with the extremely low returns available from dollar assets. Their exodus will cause the dollar to resume the fall it began in 2002, but this time, its decline might be far more rapid. Other countries, most notably China, will be much less dependent on the U.S. market for their exports and will have less interest in propping up the dollar.

For Americans, the effect of a sharp decline in the dollar will be considerably higher import prices and a reduced standard of living. If the U.S. Federal Reserve becomes concerned about the inflation resulting from higher import prices, it might raise interest rates, which could lead to another severe hit to the economy.

Nouriel "Dr. Doom" Roubini:

The global financial pandemic that I and others had warned about is now upon us. But we are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst.

The prevailing conventional wisdom holds that prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that these assets have fallen sharply from their peaks of late 2007, they will likely fall further still. In the next few months, the macroeconomic news in the United States and around the world will be much worse than most expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that the economic contraction will be mild and short.

The recession train has left the station

This latest update from Nouriel "Dr. Doom" Roubini is one hell of a jaw-dropper. I have copied/pasted in its in entirety. What is his bottom line? we are screwed! According to him, the question is not whether it will be a world-wide shallow recession, but whether it will be a Japanese style decade-long recession, and with severe deflation to boot. OMG!

So, over to Roubini:

Nouriel Roubini: The world is at severe risk of a global systemic financial meltdown and a severe global depression

The U.S. and advanced economies’ financial systems are now headed towards a
near-term systemic financial meltdown as day after day stock markets are in free fall, money markets have shut down while their spreads are skyrocketing, and credit spreads are surging through the roof. There is now the beginning of a generalized run on the banking system of these economies; a collapse of the shadow banking system, i.e. those non-banks (broker dealers, non-bank mortgage lenders, SIV and conduits, hedge funds, money market funds, private equity firms) that, like banks, borrow short and liquid, are highly leveraged and lend and invest long and illiquid, and are thus at risk of a run on their short-term liabilities; and now a roll-off of the short term liabilities of the corporate sectors that may lead to widespread bankruptcies of solvent but illiquid financial and non-financial firms.

On the real economic side, all the advanced economies representing 55% of global GDP (U.S., Eurozone, UK, other smaller European countries, Canada, Japan, Australia, New Zealand, Japan) entered a recession even before the massive financial shocks that started in the late summer made the liquidity and credit crunch even more virulent and will thus cause an even more severe recession than the one that started in the spring. So we have a severe recession, a severe financial crisis and a severe banking crisis in advanced economies.

There was no decoupling among advanced economies and there is no decoupling but rather recoupling of the emerging market economies with the severe crisis of the advanced economies. By the third quarter of this year global economic growth will be in negative territory signaling a global recession. The recoupling of emerging markets was initially limited to stock markets that fell even more than those of advanced economies as foreign investors pulled out of these markets; but then it spread to credit markets and money markets and currency markets bringing to the surface the vulnerabilities of many financial systems and corporate sectors that had experienced credit booms and that had borrowed short and in foreign currencies. Countries with large current account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities and borrowings have been the most fragile. But even the better performing ones – like the BRICs club of Brazil, Russia, India and China – are now at risk of a hard landing. Trade and financial and currency and confidence channels are now leading to a massive slowdown of growth in emerging markets with many of them now at risk not only of a recession but also of a severe financial crisis.

The crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity where excessive leveraging and bubbles were not limited to housing in the U.S. but also to housing in many other countries and excessive borrowing by financial institutions and some segments of the corporate sector and of the public sector in many and different economies: an housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.

At this point the recession train has left the station; the financial and banking crisis train has left the station. The delusion that the U.S. and advanced economies contraction would be short and shallow – a V-shaped six month recession – has been replaced by the certainty that this will be a long and protracted U-shaped recession that may last at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the probability that the outcome could become a decade long L-shaped recession – like the one experienced by Japan after the bursting of its real estate and equity bubble – cannot be ruled out.

And in a world where there is a glut and excess capacity of goods while aggregate demand is falling, soon enough we will start to worry about deflation, debt deflation, liquidity traps and what monetary policy makers should do to fight deflation when policy rates get dangerously close to zero.

At this point the risk of an imminent stock market crash – like the one-day collapse of 20% plus in U.S. stock prices in 1987 – cannot be ruled out as the financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and the investors have totally lost faith in the ability of policy authorities to control this meltdown.

This disconnect between more and more aggressive policy actions and easings, and greater and greater strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March, the rally in equity, money and credit markets lasted eight weeks; when in July the U.S. Treasury announced legislation to bail out the mortgage giants Fannie and Freddie, the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the U.S. government, the rally lasted one day, and by the next day the panic had moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion, the market did not even rally for a day and instead fell 5%. Next
when the $700 billion U.S. rescue package was passed by the U.S. Senate and House, markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities.
Next, as authorities in the U.S. and abroad took even more radical policy actions between October 6^th and October 9^th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to
recapitalize banks, coordinated monetary policy easing, etc.), the stock markets and the credit markets and the money markets fell further and further and at accelerated rates day after day all week, including another 7% fall in U.S. equities today.

When in markets that are clearly way oversold, even the most radical policy actions don’t provide rallies or relief to market participants. You know that you are one step away from a market crash and a systemic financial sector and corporate sector collapse. A vicious circle of
deleveraging, asset collapses, margin calls, and cascading falls in asset prices well below falling fundamentals, and panic is now underway.

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

• another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
• a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
• a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
• massive and unlimited provision of liquidity to solvent financial institutions;
• public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
• a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
• a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
• an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

At this point anything short of these radical and coordinated actions may lead to a market crash, a global systemic financial meltdown and to a global depression. The time to act is now as all the policy officials of the world are meeting this weekend in Washington at the IMF and World Bank annual meetings.

Bailout is a "financial coup d'etat"

Earlier I blogged about the economic martial law that is now governing us. Well,:

[Here] is the truly offensive section of an overreaching piece of legislation:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.
Nouriel Roubini does not think it passes the smell test:
`He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''

From Naked Capitalism, via Greg Mankiw. Mankiw also points to this one from Luigi Zingales:

The decisions that will be made this weekend matter not just to the prospects of the U.S. economy in the year to come; they will shape the type of capitalism we will live in for the next fifty years. Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded?

Roubini says it is "socialism for the rich"

[The] transformation of the US into a country where there is socialism for the rich, the well-connected and Wall Street (ie, where profits are privatised and losses are socialised) continues today with the nationalisation of AIG.
This latest action on AIG follows a variety of many other policy actions that imply a massive – and often flawed – government intervention in the financial markets and the economy: the bail-out of the Bear Stearns creditors; the bail-out of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk, toxic, illiquid private securities); the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of "liquidity" to distressed, illiquid and insolvent mortgage lenders; the use of the SEC to manipulate the stock market (through restrictions on short sales).
Then there's the use of the US Treasury to manipulate the mortgage market, the creation of a whole host of new bail-out facilities to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions.
This is the biggest and most socialist government intervention in economic affairs since the formation of the Soviet Union and Communist China. ...
Like scores of evangelists and hypocrites and moralists who spew and praise family values and pretend to be holier than thou and are then regularly caught cheating or found to be perverts, these Bush hypocrites who spewed for years the glory of unfettered Wild West laissez-faire jungle capitalism allowed the biggest debt bubble ever to fester without any control, and have caused the biggest financial crisis since the Great Depression.
They are are now forced to perform the biggest government intervention and nationalisations in the recent history of humanity, all for the benefit of the rich and the well connected. So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA.
Zealots of any religion are always pests that cause havoc with their inflexible fanaticism – but they usually don't run the biggest economy in the world. These laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades.

Ouch! As one who often blogged appreciating Roubini's warnings, it will not surprise anybody (is anyone reading this? ha!) that I absolutely love this frank criticism.
(I excerpted it from the Guardian)

And a similar opinion from William Greider at The Nation:

historic swindle of the American public--all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics--exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.
Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: "The joyous reception from Congressional Democrats to Paulson's latest massive bailout proposal smells an awful lot like yet another corporatist lovefest
between Washington's one-party government and the Sell Side investment banks."

Nouriel Roubini says we are not done yet :-(

The NY Times magazine has a lengthy piece on Nouriel Roubini and his bearish forecasts. Despite Roubini's continued pessimism, I am not going to change my mind that the worst of the crisis here in America is over (my earlier post). The essay also ends with some ideas that are similar to the sentiments I expressed in an oped in Planetizen: The United States of Gordon Gekkos.

The concluding paragraphs in the NY Times article:
“Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”

Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”

The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”

Report from Nouriel Roubini: OMG, we are in deep shit!

The email (you too can sign up at his blog) says that this will be the worst ever since the Great Depression. Read for yourself:
This is by far the worst financial crisis since the Great Depression

Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust

Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust

Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly.

In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.

The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression

Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.

This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.

This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.

Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.

The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.

The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.

But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 20-30% will further reduce inflationary pressure. The Fed will have to cut the Fed Funds rate much more – as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.

The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for it existence.

Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008

Recession, Stagflation, or Depression?

You name the pick :-(

Nouriel Roubini warns about the coming global stagflation:
Today, a stagflationary shock may result from an Israeli attack against Iran’s nuclear facilities. This geopolitical risk mounted in recent weeks as Israel has grown alarmed about Iran’s intentions. Such an attack would trigger sharp increases in oil prices – to well above $200 a barrel. The consequences of such a spike would be a major global recession, such as those of 1973, 1979, and 1990.