Emergency Rate Cut Helpful But Not Enough

Believe it or not, there's an economist out there who saw this whole train-wreck coming: Nouriel Roubini of New York University. He stopped by Yahoo TechTicker this morning to give us his latest thoughts. As usual, he wasn't encouraging:

The coordinated global rate cut was helpful but not enough. The central banks should have cut at least 100 basis points. World governments should also immediately band together and put together a comprehensive plan:

* Guarantee all bank deposits (not just up to $250,000, not just in US)
* Triage the banking system: recapitalize survivors with equity injections, let the rest die
* Dump Bernanke and Paulson, who the public has lost confidence in
* Get ahead of the crisis instead of looking panicky and reactive
* In US, put together $300 billion fiscal spending plan (a new New Deal) to begin to replace the coming collapse in private spending

None of this will stave off a severe recession, unfortunately. It will merely head off a collapse of the financial system.

Roubini thinks the stock markets will fall 50% from the peak (vs. the current 35% and his original forecast of 40%), which actually doesn't sound so bad right now. Inflation is no longer a risk, says Roubini: In six months, we'll be worried about global deflation.

Nouriel's a great guest, but after interviewing him you always feel worse.

See Also: Silver Lining: Stocks Finally Close to Fair Value

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Comments

[doogiedude]

It appears the government bailout plan addresses only the supply side of the credit market while ignoring the demand side. I would argue that in the current climate, the credit issue has a lot more to do with demand than supply.

I think the origins of the economic crisis lay in the globalization of labor. Corporations, over the last decade, moved production out of America to lower production costs. Simultaneously, they continued to raise prices for their products in the name of revenue growth so valued by Wall Street. This exodus of labor has left earnings for the non wealthy on a downward trend, while prices have increased. The only way to get consumers to pay more while making less is with increased credit. Of course this bubble will ultimately burst, hence here we are.

To support this theory, I took a look at national data of tax returns from 1994 to 2006 via the IRS. The bottom 90% of taxpayer"s earnings growth has not exceeded inflation since around 2000. IMHO, until earnings growth eclipses price growth, the economic crisis will linger. This will only happen when non wealthy real earnings increase or prices decrease or both.

Programs such as infrastructure spending, tax cuts only for the non-wealthy, fair trade agreements (not free trade), housing relief (enhanced FHA) are some possible tools to accomplish this. America has to go back to being a production oriented economy as opposed to the consumer oriented economy it is today.

Just sayin

[proudem]

Well put!!
Side note: You remind me of an Econ Prof that I once had...Do you teach?

[doogiedude]

Thanks.

No, I don't teach, but I did stay at a Holiday Inn last night!

[Chavez08]

Mr. Blodget,

Lord knows I'm no economist but I can tell you one thing about this economic conundrum with 100% confidence:

If I don't have a ***secure job with decent income***, I'm not going to borrow a dime even if the lending rate is 0%.

I'm willing to bet I'm not alone on this.

[Bobotheclown]

I think it can be fairly said that ALL competent economists have seen this disaster coming for years. I have long followed Martin Weiss and he has been counselling moving into defensive positions to prepare for this downturn for two years. He feels the bottom of the DOW will be in the 7,000's. So most knowledgeable people have know about this for some time. The disturbing problem is why these warnings did not make it up the food chain to the Fed so that decisive action could be taken before this. Why wasn't the white house organizing and leading a rescue 2 years ago?
Unfortunately we have seen this particular leadership breakdown repeated before and we know where it comes from. It comes from the undisciplined American electorate who so cavalierly dismissed their duties in past elections and allowed incompetence to seep into every aspect of government until now government is essentially useless. There will not be a bailout that works. There will be instead a long painful adjustment as the market fixes itself. It took 26 years for the Great Depression to pass away. Good luck to us all.

[doogiedude]

Since Chairman Bernanke apparently didn't see this disaster comming, I guess we can conclude he is not in the competent economist group.

Just sayin

[iambusto]

Even a broken clock is right twice a day. this economist has been calling for a severe recession for quite a while, maybe a decade !! :)

[Yermammy]

I know that's right.

[MatoSka]

CORRECTION: Pumping more credit into the economy will bring down the dollar with it

[MatoSka]

My question is how will rate cuts that got us into this mess in the first place get us out of it. The fact is that there is a glut of currency out there already. Pumping more credit into the economy will not bring down the dollar with it and continue to have the Federal government step in and assume increased losses.

[MiddleClass2008]

Yes, MANY of us saw this coming. Really no surprise.
The criminal cabal at the top creates bubbles every few years.

I wouldn't "dump" Paulson and Bernanke... I would charge them as the CRIMINALS they are.

And yes, the correct way to recover from a down economy is to create jobs, to put money into the hands of the consumer, because without demand there is no business. Throwing money at banks has never worked.

[Chavez08]

Absolutely!!!!

[Rule Of Law]

Ok, Henry. I usually like what you say, so let's go one step further: Let's have a rate cut for the working class people of America. Let's see that cheap FED money flow down to consumers at REAL lower interest rates. Let's see rollbacks on mortgage and credit card loan rates, too. Let's see that cheap money come down to where most of us live and get into our hands so that we can stimulate the economy from the bottom up. I guarantee you, that if they make it available to us, that it will be back in the market ASAP! We'll use it to buy gas, pay for heating and food, and clothes for our kids. And if the banks offer us the kind of rates you see in other civilized countries, we could even be induced to begin actually Saving some of it.

But what will happen instead is that the financial Titans of Wall Street will get essentially Zero interest (once inflation is factored in) money from the FED to bolster their bottom lines, while the rest of us just sink to the Bottom!

[BubbaG]

And in Belgium, workers are striking to force wage increases to be indexed to inflation:
http://www.eurointelligence.com/Eurointelligence.901.0.html.

Can workers everywhere be far behind? There hasn't been a major workers' strike in the US in decades. How will the government respond? As they did to the protestors in Seattle? (Or even in St. Paul?)

[BubbaG]

There were riots in Hong Kong today after the markets closed. Read about it here: http://www.rte.ie/news/2008/1008/hongkong.html.

I sure hope that this thing gets tamed down before the election, or I fear we may not have an election.

[DaOne]

Let's be fair here. Roubini has been calling for the sky to fall for , well, forever so I wouldn't be trumpeting his success unless you call him no ignoring some real successes of the past years too.

Also cutting rates is inconsequential in an environment where credit, not liquidity, is the issue. The banks have more than enough money, they are just loathe to lend it to each other for fear of not getting it back.

The Fed should follow what the UK is suggesting in terms of honoring all interbank loans so that institutions will lend to each other more easily. It would have a far more dramatic impact rather than the rate cuts, IMO.

[paixa3]

''''' The banks have more than enough money, they are just loathe to lend it to each other for fear of not getting it back.'''''

Wow, someone actually 'gets it'. Kudos. I am called 2 times a week, at least for loan offers. You may be getting them as well.

[Heavy]

As long as millions are losing jobs and homes and savings, this band aid will do nothing. Get ready for soup lines.

[Heavy]

As long as millions are losing jobs and homes and savings, this bandaid will do nothing. Get ready for soup lines.

[vooter]

Oh, come on, Henry--lots of sound-money people have been predicting this train-wreck for years. And more liquidity ain't gonna do a thing--it's just more of the ol' pushing-on-a-string strategy. We need to abolish the Federal Reserve and get the U.S. back on the gold standard--even if that means setting the gold price at $3,000 or $4,000 or $5,000 an ounce (where it should be). There is NO getting around the fact that the Federal Reserve has devalued the U.S. dollar by about 97% since its underhanded founding in 1913, and there's no getting around the fact that the destruction of the U.S. currency has accelerated since Nixon closed the gold window in 1971. What's it gonna be, Henry? Print more and die, or clean out the infection once and for all? I know that you (and all the rest of the supply-siders) will choose the former, so it's up to the American people--perhaps by force, unfortunately--to choose the latter.

[LostintheFlood]

Geez!! Henry pump up the market last time. I don't know why anyone listens to him now. How has he redeemed his reputation? Seriously, Ben is running out of bullets. You can cut rates to zero as Japan did ten years ago and suffer stagnant growth, as they have. Aren't their rates still at zero(or like 1%?).

[avraamjack]

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Sounds like great ideas but if they want credit restored immeditely the best way is to use the .7 trillion to create new banks.
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The existing banks can work through their bad assets at their leisure.
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If 20 new banks were created, credit availability would be immediately restores. The shares of those banks could be sold to the public in 5 years.
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The FED would not have to buy short term paper nor would the government have to buy illiquid securities if the true purpose of those actions is to restore credit availability.
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