18:50
The U.S. banking system is insolvent,
Roubini is once again cautioned against the risk of recession - or depression - L, which seems to be confirmed with a contraction in the fourth quarter of 2008 to 6% of GDP in the U.S. and Europe, 12% in Japan, and 20% in Korea. Like most economists, he believes that European authorities have not realized the seriousness of the issues and show a dangerous timidity in refusing to act decisively and quickly. The American situation was hardly better. Of the 800 billion recovery plan by Obama, only 200 will be allocated this year, which should disappear in a hundred household savings. In total, the effect of the stimulus would be less than 1% of GDP in 2009. But there's more, the global economy will not start again until deep conversions have occurred among both exporters and the U.S.. The system built on consumerism and the U.S. deficit on the one hand, and exporting economies other hand, will not start again in the state, as the deleveraging of U.S. households will be a long and painful process. In the immediate restructuring of the financial system in the United States is more necessary than ever. With the economic downturn, losses could reach 3.6 trillion dollars, he estimated. Conclusion: the industry is bankrupt, and nationalization is needed, otherwise the huge amounts provided by the state are only trying to protect shareholders and creditors for the time wasted.
by Nouriel Roubini, Forbes, March 5, 2009
The relative optimism of those who claimed that the rate of growth of economic activity would become positive again, the economy contracted, but at a slower pace than in the fourth quarter of 2008, have been belied by the figures latest. In the fourth quarter 2008, gross domestic product fell by almost 6% in the United States, 6% in the euro zone, Germany 8%, 12% Japan 16% to 20% in Singapore and South Korea. The situation is even more terrible in Europe and Asia and the United States
In fact, there is an increasing risk of depression L-shaped, which would be worse than the current global recession and painful U-shaped Here's why:
First, note that most indicators suggest that the trend [1] of economic activity is still strongly negative in Europe and Japan and close to a negative value in the U.S. and China. Some signals indicating that she was again positive for the United States and China have proved to be false information. United States, the indices of industrial production Empire State and Philly Fed are still in freefall, and the jobless claims are at frightening levels, suggesting an acceleration of job destruction. The increase in sales recorded in January is not significant - it shows more of a rebound in sales after a very aggressive very depressed in December rather than a sustained recovery.
On China, growth in credit is only motivated by the desire of companies to borrow cheaply to reinvest in more profitable investments but not by investing, and steel prices have resumed their fall. The most frightening of these figures are trade in Asia, with exports falling by nearly 40% to 50% in Japan, Taiwan and Korea.
Even taking into account the effects due to Chinese New Year, exports and imports are down sharply in China, with imports falling more (-40%) than exports. This is a signal of fear, because Chinese imports are mainly raw materials and intermediate inputs. Although China's exports have declined much less than in the rest of Asia, they could fall much more sharply in the coming months, as indicated by the sharp decline in imports.
With an economy that shrank in the first quarter of 2009 at the same pace in the fourth quarter of 2008, the U-shaped recession could turn into a quasi-depression (or stag deflation) much more severe, form of an L. The magnitude and speed of the synchronized contraction of the global economy is really unprecedented (at least since the Great Depression), with a free fall in GDP, income, consumption, industrial production, the employment, exports, imports, real estate and, more worryingly, investment worldwide. Now, many economies in emerging countries are about to cross a real financial crisis, starting with the emerging Europe.
The monetary and fiscal stimulus becomes increasingly aggressive in the U.S. and China, but is less in the euro area and Japan, where policy makers are petrified and remain behind. However, these raises are unlikely to lead to sustained economic recovery. The policy of monetary easing - even unorthodox - like the action of someone who - instead of push - pull on a rope.
The problems of the economy are those of the insolvency and lending rather than the lack of liquidity. There is an excess capacity in housing, automotive, consumer durables and massive excess capacity, due to years of overinvestment in China, Asia and other emerging markets. At the same time, businesses and households in debt does not react to lower interest rates, and it will take years to absorb this surplus. Deflation remains high real rates even if nominal rates are near zero. The spreads between investment-grade bonds and Treasury bills are still 20%, despite the policy of zero rates.
Fiscal policy in the United States and China also has its limits. Of the 800 billion U.S. stimulus plan, only 200 billion will be spent in 2009, the rest being hired in 2010 and thereafter. And those 200 billion, half consists of tax cuts that will result primarily in savings and not consumption for households worried about their jobs and paying their mortgages and consumer. Of the $ 100 billion tax cut granted last year, only 30% was spent and the rest saved.
Thus, given the collapse of five of the six components of aggregate demand: consumption, residential investment, business investment, inventories and exports, the government's stimulus will have a very small effect this year.
The recovery will also affect China much lower than might suggest the number that made headlines: $ 480 billion. Firstly, China's economy depends heavily on world trade, with a trade surplus of 12% of GDP, exports representing over 40% of GDP, and most investments (almost 50% of GDP) directed to increase the production capacity of goods exported. The rest of the investment goes toward real estate (down sharply today after the bursting of the Chinese real estate) and investments in infrastructure (the only component of investment that is rising).
With massive excess capacity in industry and manufacturing, with the closure of thousands of firms, why companies, whether private or public, they would invest more, even if interest rates are the lowest and cheap credit? Require state-owned banks to lend and businesses to spend and invest more would only increase the volume of distressed debt and excess capacity.
Consequently, without a recovery in U.S. and global economy, there can be no sustained recovery of growth in China. In the U.S., the recovery requires a reduction in consumption, an increase in private savings and reduced deficits. The U.S. recovery will therefore require the same time that growth in China and other surplus countries (Japan, Germany, etc.) depends more on domestic demand and less on the positive balance of exports. But growth in domestic demand is weak in these surplus countries for economic and structural reasons. Therefore, a recovery of the global economy can not occur without a rapid and orderly adjustment of current account imbalances worldwide.
At the same time, the adjustment of U.S. consumption and savings continues. Household consumption rose temporarily in January and anecdotal, and their savings rate increased by 5%. But this increase in savings is illusory. There is a difference between the definition of household savings in the national accounts (NIA), ie disposable income less consumer spending, and economic definition or it is calculated by taking into account not only the savings but also changes in asset value, like that of financial assets or the price of a property.
In years when the stock market and real estate were up, those who saw a positive view of the sharp rise in consumption and lower savings claimed that savings was underestimated because we did not account for the variation in the value of assets due to the increase in property prices and stock markets.
But now that the stock price has lost more than 50% and that property prices have fallen by 25% (and will fall another 20%), destruction of the net worth of households has reached crisis . In fact, if one takes into account the sharp decline in value of assets, the household savings rate is not 5% as suggested by the official definition of NIA, but remains fairly strongly negative.
In other words, given the massive destruction of household wealth since 2006-07, the measurement of saving the NIA will increase even more than it is today to restore the situation very compromised financial households. As a result, the contraction in real consumption will continue in future years, until the adjustment is completed.
For now, the Dow is below 7000, and U.S. stock indexes dropped 20% since the beginning of the year. I had said in early January that the 25% gain in stock markets recorded between late November and the end of the year was no tomorrow and collapse at the first announcement of bad economic news or financial shock. The same factors still push down U.S. stocks and world for the rest of the year, with the continuing recession in 2010 or beyond.
We can not of course exclude another upward rally in 2009, probably during the second or third quarter. It could be caused by the improving trend in economic growth and activity due to a temporary effect of stimulus Americans and Chinese. But after that will be dispelled at the end of summer the effects of tax cuts, and once the initial infrastructure work immediately achievable have been completed, the effects of the stimulus will fall during the fourth quarter, as most large infrastructure projects take years to start and be done.
The same way in China, the fiscal stimulus will boost short-lived production for the domestic market, while industrial exports will continue to shrink. But given the gravity of the macroeconomic imbalances in the balance sheets, household finance and business in the United States and worldwide, this stock market rally of the second or third quarter will be short lived, as the other five that took place over the last twelve months.
Meanwhile, the carnage on financial markets and among businesses continues. The debate on the "nationalization" of banks is borderline surreal when the U.S. government has already committed to the financial system 9000 billion in the form of guarantees, investments, recapitalization and liquidity - (and it has already spent a staggering $ 2 trillion of that amount).
The U.S. financial system is de facto nationalized since the Fed became a lender of first and only resort rather than last resort, and that the U.S. Treasury has become the customer and the guarantor of the first and only appeal. The only question is whether banks and financial institutions should be nationalized also de jure.
But even in this case, the distinction boils down to: full or partial nationalization. With 36% participation (and soon) in the Citi Bank, the U.S. government is already the main shareholder. What is this nonsense not to nationalize the banks? Citi is already partially nationalized in fact, the only question is whether it should be full.
Ditto for the insurer AIG, which lost $ 62 billion in the fourth quarter, 99 billion for the full year 2008 and already owns 80% of the state. With staggering losses as it should be held officially at 100%. Until now, the funds committed by the Fed and the Treasury to bail out the shareholders and creditors of AIG fell from $ 80 billion to 162 billion.
Because common shareholders of AIG have already ruined (the share price is worth nothing), the AIG bailout becomes a bailout by its creditors would be without him now bankrupt . AIG has sold more than 500 billion toxic contracts, which guarantees the failure credit (CDS). The subscribers of these contracts are major U.S. banks.
The press and analysis produced by banks suggest that Goldman Sachs has received about $ 25 billion out of the money allocated by government for the bailout of AIG and Merrill Lynch was the second largest benefactor of this largesse. It can not be taken as estimates because the government is trying to conceal who the beneficiaries of the bailout of AIG. (The Bloomberg should perhaps continue the Fed and the Treasury to compel them to disclose this information.)
But some elements are yet known: Lloyd Blankfein of Goldman was the sole ruler of a Wall Street firm to be present at the meeting of the New York Fed bailout of AIG when was discussed. Let us stop playing: the $ 162 billion bailout of the AIG bailout is a non-transparent, opaque and dark AIG clients: Goldman Sachs, Merrill Lynch and other domestic and foreign banks.
When the Treasury took shelter behind the excuse of "systemic risk" to engulf another 30 billion into AIG, this is a polite way of saying that without such a bailout (and another half-dozen government programs to rescue such as TAF, TSLF, PDCF, TARP TALF, not to mention a program that has awarded additional 170 billion of credit for banks, with full government guarantee), Goldman Sachs and all other major U.S. banks are today ' Today completely insolvent.
Even with the 2,000 billion allocated by the government, most of these financial firms are insolvent. With defaults on loans that increase - and given the macroeconomic outlook - this means that the expected losses on loans incurred by U.S. financial firms will reach 3.6 trillion. To put it simply, the U.S. financial system is effectively insolvent.
source : by Nouriel Roubini March 9, 2009
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