Monday, September 22, 2008

Nouriel Roubini explains the current financial crisis

Nouriel Roubini (professor of economics at the Stern School of Business, New York University) summarizes the collapse of the shadow banking system and predicts where it is going. Here is the summary of his article:
We are observing an accelerated run on the shadow banking system that is leading to its unravelling. If lender-of-last-resort support and deposit insurance are extended to more of its members, these institutions will have to be regulated like banks, to avoid moral hazard. Of course this severe financial crisis is also taking its toll on traditional banks: hundreds are insolvent and will have to close.

The real economic side of this financial crisis will be a severe US recession. Financial contagion, the strong euro, falling US imports, the bursting of European housing bubbles, high oil prices and a hawkish European Central Bank will lead to a recession in the eurozone, the UK and most advanced economies.

European financial institutions are at risk of sharp losses because of the toxic US securitised products sold to them; the massive increase in leverage following aggressive risk-taking and domestic securitisation; a severe liquidity crunch exacerbated by a dollar shortage and a credit crunch; the bursting of domestic housing bubbles; household and corporate defaults in the recession; losses hidden by regulatory forbearance; the exposure of Swedish, Austrian and Italian banks to the Baltic states, Iceland and southern Europe where housing and credit bubbles financed in foreign currency are leading to hard landings.
Roubini's article gives a good, step-by-step description of how the current financial crisis has built up.

1 comment:

Catherine said...

Your article does a great job of talking about the effects of the crisis, but does not mention a solution for it. I have read several articles from people on both sides of the issue, and they all have their own ideas of how to 'fix' the problem. However, in order to correct any problem, no matter how big or small, one first has to determine the underlying cause. The current economic situation in America has definitely had an effect on the rest of the world. This is a perfect example of "cause & effect". Every decision made effects something else, that effects something else, and so on. The financial sector is no different. The real underlying cause of all of humanities problems is GREED...Ego. So how do you solve this problem if it is the root of all other problems? Michael Laitman provides some great insight!