Roubini: "This Is a Crisis of Solvency ... But True Deleveraging Has Not Begun Yet Because the Losses of Financial Institutions Have Been Socialized" → Washingtons Blog
Roubini: "This Is a Crisis of Solvency ... But True Deleveraging Has Not Begun Yet Because the Losses of Financial Institutions Have Been Socialized" - Washingtons Blog

Monday, August 24, 2009

Roubini: "This Is a Crisis of Solvency ... But True Deleveraging Has Not Begun Yet Because the Losses of Financial Institutions Have Been Socialized"

In an essay entitled "The risk of a double-dip recession is rising", Nouriel Roubini affirms two important points:

This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest...

The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.

In other words, Roubini is confirming what Anna Schwartz and many others have said: that the problem is insolvency, more than liquidity, that the government is fighting the last war and doing it all wrong, and that we should let the insolvent banks fail.

Roubini is also confirming that incurring huge deficits in order to have the federal government itself act as a super-bank is causing a reduction in - and "crowding out" a recovery in - private sector spending.

As I have repeatedly pointed out, a recovery cannot occur until we move through the painful deleveraging process. But instead of allowing this to occur, the government is trying to increase leverage as a way to try to re-start the economy and save the insolvent banks. See this, this and this.

Of course, all of the massive government spending might also be putting governments themselves at risk . . . but that is another story.


  1. I agree with what you say here, but thought I'd note that Roubini also pointed out the solvency vs liquidity issue early on back in mid 2007.

    Best regards

  2. The horrible truth is that the US can absorb the debt. Yes, taxes will go up, but all-in-all not that bad of a trade off. The debt crisis was looming in the US with the continuation of two wars.

    Ending one or both of the wars will go far to correcting the debt... as for national security that remains the question.

    It has been the same story for a while -not many honest brokers... all political ideologues.

  3. How can the US absorb the debt? Taxes, eh? Certainly not on the middle class, as promised, unless we introduce a VAT tax, as has been bandied around. IF taxes - what revenues will you levy them against? Unemployment is up, salaries are on the wane, furloughs and salary reductions the order of the day.

    This sort of sanguine stance always mystifies me.

  4. Hey Anonymous...youre wrong. No way US can absorb the debt as it requires financing, which is nearing its end.


    The debt will default at some point...that point being when the market forces interest rates up which it must in response to QE. Interest costs will immediately crush the govt.

  5. We are going inside the bubble to find out what really happened...This home was bought with this money...was the realtor stupid? she got a commission...was the mortgage broker stupid? made a commission...was the bank stupid? because Wall Street investors bought the loans...Was the government stupid? because the Feds are buying up the toxic assets to save the banks...Hey look here comes a customer to deposit his paycheck at our bank...You must be stupid to continue doing business with us...Why do I have a French accent...because you are stupid!!!

  6. Government intervention has been a major theme since the very beginning. Banks threaten our congress with marshal law if they don't pass the bailout, yet behind closed doors they continue their survival by doubling the Federal Reserve's balance sheet and strapping the US with over 13 Trillion in debt. We will continue to see the deleveraging process continue to playout and then we will see the inflation cycle take control as the ever expanding supply of US dollars continue to dilute our existing currency value.


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