Posted on 08/03/2008 11:44:55 PM PDT by TigerLikesRooster
Hundreds of banks will fail, Roubini tells Barron's
Sun Aug 3, 2008 3:52pm EDT
NEW YORK, Aug 3 (Reuters) - The United States is in the second inning of a recession that will last for at least 18 months and help kill off hundreds of banks, influential economist and New York University Professor Nouriel Roubini told Barron's in Sunday's edition.
Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Roubini said -- at least $1 trillion and more likely $2 trillion.
The banks will become insolvent because of mounting losses as a result of the housing bust and because they have only written down their subprime loans so far, he said. Still in front of them are their consumer-credit losses, for which they lack the reserves, Barron's reported.
He also said there are hundreds of millions of dollars outstanding in home-equity loans that could be worth zero, too.
U.S. consumers, meanwhile, are "shopped out" and saving less, while the Federal Reserve's performance in handling the crisis has been poor, Roubini said, because it failed to see that the problem extended beyond
(Excerpt) Read more at reuters.com ...
Well the reason I ask, in some ways it makes sense to take money out of an institution before its overtaken by the FDIC, but why after?
Next, once the money is retrieved from, in this case, IndyMac, now what? If another bank, then there is still the risk of loss however theoretical. Did they cut you a check?
So whatever you can afford to buy now that will carry you for the next five years without addedd expense will probably be a good idea? If someone has no debt, only bill is taxes and living expense, then focus can be on economizing living expense.
What to save and how to save becomes the big question I suppose with currency at risk.
As you said, preserving the value of what you have should be the prime concern. This is not the time to go out and look for good return on your assets, but the time to keep their value from decreasing.
You can look for stable (or least unstable) currency and convert some of your assets in such a currency. Or convert your asset to some physical commodities (including gold,) or some-related items. They may not make you rich, but may keep you from becoming destitute. That is just my 5 cents.:-)
California.
Our Economic Dilemma
By MARTIN FELDSTEIN
February 20, 2008
Although it is too soon to tell whether the United States has entered a recession, there is mounting evidence that a recession has in fact begun. Key measures of economic activity stopped growing in December and January or actually began to decline. The collapse of house prices and the crisis in the credit markets continue to depress the real economy.
The sharp reduction in the federal funds interest rate and the new fiscal stimulus package may, of course, be enough to avert a downturn. Many forecasters still predict that the economy will just slow in the first part of this year and then rebound after the summer. But the hope that monetary and fiscal policies would prevent continued weakness by boosting consumer confidence was derailed by the recent report that consumer confidence in January collapsed to the lowest level since 1992.
If a recession does occur, it could last longer and be more painful than the past several downturns because of differences in its origin and character. The recessions that began in 1991 and 2001 lasted only eight months from the start of the downturn until the beginning of the recovery. Even the deeper recession of 1981 lasted only 16 months.
But these past recessions were caused by deliberate Federal Reserve policy aimed at reversing a rise in inflation. In those cases, the Fed increased real interest rates until it saw the economic slowdown that it thought would move us back toward price stability. It then reversed course, reducing interest rates and bringing the recession to an end.
In contrast, the real interest rate in 2006 and 2007 stayed at a relatively low level of less than 3%. A key cause of the present slowdown and potential recession was not a tightening of monetary policy but the bursting of the house-price bubble after six years of exceptionally rapid house-price increases. The Fed therefore will not be able to end the recession as it did previous ones by turning off a tight monetary policy.
The unprecedented national fall in house prices is reducing household wealth and therefore consumer spending. House prices are down 10% from the 2006 high and are likely to fall at least another 10%. Each 10% decline cuts household wealth by about $2 trillion, and this eventually reduces annual consumer spending by about $100 billion. No one can predict the extent to which the coming fall in house prices will lead to defaults and foreclosures, driving house prices and wealth down even further. Falling house prices also discourage home building, with housing starts down 38% over the past 12 months.
But the principle cause for concern today is the paralysis of the credit markets. Credit is always key to the expansion of the economy. The collapse of confidence in credit markets is now preventing that necessary extension of credit. The decline of credit creation includes not only the banks but also the bond markets, hedge funds, insurance companies and mutual funds. Securitization, leveraged buyouts and credit insurance have also atrophied.
The dysfunctional character of the credit markets means that a Fed policy of reducing interest rates cannot be as effective in stimulating the economy as it has been in the past. Monetary policy may simply lack traction in the current credit environment.
The collapse of the credit markets began last summer when the subprime mortgage crisis demonstrated that financial risk of all types had been greatly underpriced, that the market prices of complex financial assets overstated their true values, and that the credit scores provided by rating agencies are not to be trusted. Because market participants now lack confidence in asset prices, they are unwilling to buy existing assets, thus preventing current asset owners from providing credit to new borrowers.
The lack of confidence in asset prices also translates into a lack of confidence in the creditworthiness of other financial institutions, impeding the extension of credit to those institutions. And because financial institutions do not even have confidence in the value of their own capital and in the potential availability of liquidity, they are reluctant to make new lending commitments.
It is not clear what can bring back the confidence in asset prices that is needed for credit to flow again. Some analysts suggest that confidence would return if the financial institutions declare the true market value of their assets by restating balance sheets at the depressed prices at which they could be liquidated today. But this is not a practical solution, since many complex securities are no longer trading in the market. Forcing an actual sale of these securities at fire-sale prices in order to establish market values could also create unnecessary bankruptcies that would further impede credit flows.
The current situation has the elements of a Catch-22: The credit flows needed for economic expansion require confidence in the values of existing financial assets, but market participants may not have such confidence while the risk of recession hangs over us.
There is plenty of blame to go around for the current situation. The Federal Reserve bears much of the responsibility, because of its failure to provide the appropriate supervisory oversight for the major money center banks. The Fed’s banking examiners have complete access to all of the financial transactions of the banks that they supervise, and should have the technical expertise to evaluate the risks that those banks are taking. Because these banks provide credit to the nonbank financial institutions, the Fed can also indirectly examine what those other institutions are doing.
The Fed’s bank examinations are supposed to assess the adequacy of each bank’s capital and the quality of its assets. The Fed declared that the banks had adequate capital because it gave far too little weight to their massive off balance-sheet positions — the structured investment vehicles (SIVs), conduits and credit line obligations — that the banks have now been forced to bring onto their balance sheets. Examiners also overstated the quality of banks’ assets, failing to allow for the potential bursting of the house price bubble.
The implication of this for Fed supervision policy is clear. The way out of the current crisis of confidence is not. We can only hope that those who predict nothing worse than a temporary slowdown are correct.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal’s board of contributors.
http://online.wsj.com/article/SB120347007609178711.html
I opened a CD 3 weeks before the bank became insolvent. I did not think that they would let it go under.
On on a Friday, immediately after the market closed [1PM here in Los Angeles] it was announced that the bank had been taken over and was now IndyMac Federal Bank.
I could have kept my money there with the same CD terms but I just wanted to get out and do something else with the money rather than being concerned about who was buying it, etc.
So, yes, it would have been great to get out beforehand but I would have taken a big hit with a penalty. Regardless, I didn’t think it would go under.
There was no risk of loss ... IndyMac Federal Bank is FDIC insured up to $100,000.
But, interestingly, the FDIC said if you have $100,000 in one bank [let’s say Countrywide Bank] and it is taken over by another bank [let’s say Bank of America] where you also have a $100,000 investment. If Bank of America folds with your 2 $100,000 CDs, you are only insured for $100,000.
There is no threat of a further loss at IndyMac. Customers who had oevr $100,000 got $100,000 back and 50% of the amount over the limit. They all become creditors in the settlement.
I wanted to go to Treasuries because they are always insured by the US government no matter the amount. I’m not sure, however, about how easy it is to deal with Treasury Direct. I’m heard both bad abd good things.
Thank you for sharing what must be a somewhat gut-wrenching experience! The treasury direct idea is a great one - there are no commissions of course, and they recently lowered the minimums required to open an account. The correct address has a .gov ending, http://www.treasurydirect.gov ; I opened one years ago and didn’t really do much with it, but I did buy a one-year T-bill. I still have the account open, and they are currently in the process of mailing out information that adds yet another layer of security through some kind of continous login site verification.
Incidentally, while I have never found my TreasuryDirect account information in my credit history file I think it might help ones FICO score? Can’t hurt anyway, and costs nothing to open. Another avenue for better heeled depositors is to look into a CDARS, at http://www.cdars.com in this way each depositor is protected up to $50,000,000 although the rates might not be the highest.
Which leads me to my next question - the lines of people stretching around the bank - my deduction is they are people who had more than the 100k FDIC limit in their accounts? Some have said they “knew” they were covered, but wanted to make sure, etc.
Thanks for sharing your experience with Treasury Direct. Now that you mention it there was a big deal about security. That’s why I opened an account with HSBC [which is great to work with BTW] ... I am only keeping money in there I’m “playing with” not my regular funds.
I work in the market as an equities trade and I just didn’t want to increase my exposure in the market and decided to get into time deposits. What I am learning too is that so many bank personnel give out wrong information. Really wrong so it’s best to inform oneself not rely on them.
I was in a bank last week and the girl told me that I was insured to $100,000 in my checking, up to $100,000 in savings and up to $100,000 for each CD. That is simply wrong and some people may unwittingly put over the amount in a bank due to wrong info.
BTW, I’ll check out those CDARS.
Sounds like you invest. :)
It is evident to those whom study economics that the country has been in recession since January. Q4 2007 numbers were just revised .-02%. Hedonics are applied to our GDP numbers in CPI and PPI. BLS birth/death model of new business is largely a forecast. I began extensive number crunching last June of 2007 when I noticed big money guys pulling out of mortgage securities. In July of 2007, my small business was denied an increase our Line of Credit, even though the business was profitable, we were bank customer 7 years, paid off other LOC’s. The sales rep for the local branch of the bank was blowing us off. Management called the underwriter for this regional bank. He asked me if I knew the difference of terms between a credit crisis and a solvency crisis.
It appears there were two three sections of GDP to watch this last year, Government, Multinationals and Small Business. One of these got creamed early on which is of course Small Business. The other two had hedges, many but won’t mention them all here. Bottom line, Main St. will ALWAYS take down Wall St. It didn’t help we had complete crooks in Washington and at iBanks as of late. For some, it’s a depression. For others, we’re now truly in recession and for some, it’s ‘what the hell are you all whining about’.
The nation is undegoing deflation. In June 2007 numbers I forecasted a total -20% GDP number by 2011. That was BEFORE we had this six month recent oil spike.
In April of this year I, forecasted $130 oil price by summer. It went to $147. There is a 50/50 chance of a black swan event of dollar collapse in the 2011 period now.
Worse case scenerio, we all eat government ratios of wheat pasta and yellow cheese for a year. In that scenerio of dollar collapse your biggest short term problem would be looting and riots.
I recommend becoming armed, have 90 days of food and water at all times and purchase small amounts of gold and silver coins to trade as currency for a short period of time. The good news is we will recovery very quickly. As Ben Franklin once said: ‘It’s better to have it and not need it then need it and not have it.’
Yes, a buyers bonanza. But I would wait until the middle of 2009.
We put some extra cash in Chinese Yuan just to set aside some savings there. Turned out to be a good move but wonder if that will hold. Some of the same problems now happening in China as U.S. Our house is at the same price as what we paid for it about six years ago. It had gone up quite a bit.
Oh...phooey.... The podubk backwater bubbas are not going to sink the ship. Look at the fast-track, BMW-types in currency trading or swapping debt instruments...those Frat-boys will knock a hole in the hull pretty quickly.
Oh...phooey.... The podubk backwater bubbas are not going to sink the ship. Look at the fast-track, BMW-types in currency trading or swapping debt instruments...those Frat-boys will knock a hole in the hull pretty quickly.
People cross a line. They thought they were being clever. There's no turning back for many of them.
I am glad I learned my lessons in the 80's. Pffft to you Boomer Bashers who got sucked in. It's you turn to learn the lesson.
you probably have a point
So, do I pull out all money, and put it into steel, lead, and copper? (Specifically a nice M1A that I would love to get!)
Lets be honest; this clown is trying to scare people into pulling their money out of the banks, thus promulgating a bank run.
He is actively trying to destroy our economy. (a Soros operative?)
You weren't counting on Chuck Schumer, huh?
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