The U.S. Financial System Is Effectively Insolvent

Forbes ^ | 03/05/09 | Nouriel Roubini

[TigerLikesRooster]

The U.S. Financial System Is Effectively Insolvent

Nouriel Roubini 03.05.09, 12:01 AM ET

For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.

There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:

First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.

For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.

[TigerLikesRooster]

Ping!

[dennisw]

Hide yo money under yo matress- YO!

||||||Doom and gloom ping list. Economics and geo-political economics. Freep-mail me if you want on||||||

[dennisw]

I have a new keyword I’m inserting in all my original postings. It is gloomdoom. You might like it too. Makes for an easy keyword search for the “economic realist” crowd

[TigerLikesRooster]

OK. I will try to use that along with MarktoZero.:-)

[ottbmare]

Hide yo money under yo matress- YO!

What money? Indeed, what mattress?

[dennisw]

Mark to zero???? That is just plain cruel!

[Darkwolf377]

I saw you use that in a posting the other night—what does MarktoZero mean? Is it a banking term?

[TigerLikesRooster]

No, it is a ‘satirical’ term for Obama’s economic policy. He will drive all economic value to ‘zero.’ Hence, ‘Mark to Zero.’ :-)

[dennisw]

I saw you use that in a posting the other night—what does MarktoZero mean? Is it a banking term?.........

It means crappy CDOs and crappy derivatives are marked (accounted for) on the banks ledgers at their true market value which is very low and close to zero. Like Czarist bonds from Russia

[databoss]

who can afford a nice wooden barrel like that? must be a Democrat....

[NoControllingLegalAuthority]

The term "mark to market" comes from the Sarbanes-Oxley law that requires lowering the value of an asset on the balance sheet if the market price falls. This accounting requirement effectively makes a huge number of banks insolvent because the assets being used as collateral for loans have been marked to below the balance of the loans made against them. Liabilities exceed assets = insolvency.

The so-called TARP money is supposed to inject additional capital into banks to allow them to lend. Many banks which have received TARP funds are apparently not lending because they are fearing further erosion of asset value. A bank is not legally supposed to be "upside down" where loans exceed market value of collateral.

[Darkwolf377]

Thanks, all, for the responses. I’m trying to educate myself about economics, have been for some years now, and any information is helpful.

[Darkwolf377]

requires lowering the value of an asset on the balance sheet if the market price falls

Your post was especially informative, thank you.

If this practice continues for the reasons you state, what can Obama do to encourage lending--anything? Or will the banks wait until their assets become more valuable on the market...which won't happen if the economy stays in its current state?

[Woodman]

The real term is Mark to Market. That means you revalue an asset at its current market value on your books. Mark to Zero implies that your assets are worth nothing.

[Darkwolf377]

Thanks!

I have a feeling we’ll be seeing this term a lot more. :(

[Son House]

You should get some food stamps

[nathanbedford]

Predictions of the Saul Alinsky wet dream.

If this should come to pass, and we cannot discount it, we will be facing not just an economic threat but an existential threat to our basic liberties. Make no mistake, if Obama can move as far as he already has with virtually no actual discomfort, disruption and despair among the people in subverting our capitalist system he will wreck it all together if he can get the chaos. With the chaos comes the man on horseback.

We are about to sustain two shocks, one coming out of the disintegration of Eastern Europe, and the other coming out of the unwinding of derivatives which is perhaps the most threatening of all. If they crash the system, grab your children, and your copy of the Bill of Rights and watch Obama.

[DB]

Well that was one of the more brutal depressing things I’ve read in awhile...

Thanks, I guess...

[RegulatorCountry]

0-pression.