Sunday, December 06, 2009

Where is the economy headed?

Dubai's debt problems have many people asking whether the world economy is in for another downturn.

The Dubai crisis is related to the current downtrend in the commercial real estate market. We don't hear much about this in the mainstream news, which seems to be concentrating more on "good" economic news.

However, we have to remember there are still a lot problems there are still "on the books." For example, in the U.S. monthly mortgage rate hikes (resets) will begin climbing again in 2010. The resets will peak near the end of 2011 when the amount reset due to adjustable rate mortgages will exceed the level of sub-prime resets in late 2008.

Unfortunately a lot of the conditions that caused the economic meltdown of 2007-8 are also "resetting" as well. The higher end of the equities market is still largely unregulated and risk-taking is now back in style among the remaining big banks.

No lessons about risk seemed to have been learned because the people now in charge of financial institutions were all saved by the government and all of them have fattened bank accounts after giving themselves big bonuses.

They know that they can take risks because it makes them wealthier in the short-term, and when the cards fall, the government will step in to protect their interests.

Now getting back to commercial real estate, the cards are already starting to fall. There appears to be a lot of hidden debt out there. Much more than is declared publicly. I'm not making this up as it was the IMF chief who brought up the subject of this debt. Many corporations have been hiding the debt with accounting tricks in hopes that the financial environment will change.

However, this debt is now forcing its way to the surface. The Dubai debacle is just the first sign of this problem.

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Thursday, October 23, 2008

Nouriel Roubini: Hedge fund could vanish Darwin-style

In a speech before hedge fund managers in London today economics professor Nouriel Roubini predicted a run on hedge funds that could result in 30 percent of the hedge fund assets disappearing in a "fairly Darwinian manner."

The impact on the stocks could be so severe that the market would have to be closed for a week or more.

Roubini predicted the current crash in 2006.

He predicts the worse recession in 40 years that will last at least 24 months in the United States. Roubini sees a vicious cycle occurring between the financial sector and the "real economy." Because of the tsunami of mortgage foreclosures, he suggests that the government help homeowners as they did during the Great Depression.

He sees a 40 percent drop in home prices, which would be worse than the Great Depression. And he thinks at least $3 trillion will be needed in bailouts to prevent a systemic banking failure.

Nouriel Roubini on Bloomberg TV

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Tuesday, September 23, 2008

What if the bailout doesn't stop market meltdown?

Supposedly the idea is that by buying hundreds of billions of dollars of shares in failing financial companies, the U.S. government hopes to halt the down spin on Wall Street.

If we distill the meaning, the hope is mainly to stop the instability in the stock markets. By shoring up the investment companies, the idea is that confidence will be restored and the indexes will stop plunging or swinging wildly. This is an idea that seems to register on Wall Street itself, or at least among the day and swing traders. After news of the bailout, not only did the markets rebound but oil prices dropped sharply.

The drop in oil seemed to indicate that people thought the economy would rebound after the bailout and that demand in oil would go up.

However, long-time observers of stock markets will know that taking any drastic action based on perceived future action of these markets is very risky.

The markets themselves showed uncertainly when Monday stocks went in the opposite direction and oil prices experienced a record rise. And that was just over one weekend! What happens if taxpayers get stuck with half a trillion in toxic assets, but the market does not respond in the manner that the administration hopes it will?

There may be more to this economic crisis than appears on the surface. It may not be long before other companies from different sectors also show signs of failing en masse. Does the government keep borrowing money to bail out these companies also.

Supporters of the bailout claim the action is needed to prevent a "run on the banks" were people rush to withdraw money from retirement accounts and money market funds. The use of the phrase "run on the bank" probably is not being used accidentally. It's something most people understand from watching Hollywood movies.

However, one must ask whether the government's buying of bad stock can in any way stop people from relocating their assets to safer havens. In a free market, one has to consider that investors may not react in the way you are assuming they will.

However, with an election coming up in November, it is certain that Congress and the administration must do something to show that they are on top of the situation. Most experts agree they will pass some type of package. The details though could differ widely. They may decide, for example, to put more money into helping struggling homeowners.

Whatever they do, all eyes will be focused on the stock markets after the legislation goes into action.


Congress balks at banks bailout plan, UK - 2 hours ago

But the key problem not addressed by the bailout – a point also made by Krugman – is that some banks remain under-capitalised, ie they don't have enough ...

Bush offers $500 billion bailout Minneapolis Star Tribune
US financial rescue plan could cost one trillion dlrs: senator AFP

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