In a recent article, Mr Richard Posner, tries to understand the most disturbing with this global economic crisis: "How come we didn't see it coming?" It is still disturbing but since it happened, Mr Posner argues we should be better prepared next time, perhaps with a CIA-type financial institution which will gather information from disperse places and shield markets against such kind of disasters.
However, Mr Posner is fair. Not all of us didn't see it coming. There were many warnings, the most notable coming from a teacher in the University of New York, Mr Nouriel Roubini (photo), who has been predicting for years and with 'uncanny accuracy' what has already happened: housing bubble burst, oil shock, consumer confidence decline and recession..And this is where our story begins.
Mr Roubini got his PhD from the Harvard University studying international markets and concentrated on recessions of emerging economies, which were typical in 90's. His methodology is distinguished for taking history and cultural evidence into account. Along the way, Mr Roubini defined the fundamental and common characteristics of these economies at the peak of the recession: huge deficits (spending more than production), borrowing, exposed banking system, and government corruption. These were the clues he was looking for in the next economy to suffer a crisis. And guess what: it was US' turn!
Still in 2006, Roubini predicted the abandonment of the dollar and its decline, the burst of the housing bubble, the meltdown of hedge funds and ...well all what we are seeing now. When the first bailouts for Federal Reserve were announced in Spring of this year, there was no doubt for Mr Roubini: crisis was upon and the worst were yet to come. The days of dismissive comments towards Roubini, like perma-bear (always predicting the worst), or pessimist have gone, and people are listening sharp of what he has to say.
So what really happened? Mr Roubini talks about the biggest asset bubble and credit bubble in the history of humanity, not only on the US but in many other countries as well, and not only in one sector (mortgage) but across many different sectors. So, in fact, we can talk about a housing bubble, a mortgage bubble, an equity bubble, a credit bubble,etc, all breaking at once!
What is Roubini's view of the bailout plans? He is really making a point I can really understand. Before pouring money into these companies, you first have to wipe out corrupt managers and shareholders. Just throw them out. Otherwise it is just a scandalous way to waste taxpayers' money buying for gold the very (toxic) trash that these guys invented.
This was as far as I could go. For your further information just follow the articles linked here. I am also embedding a highly interesting interview of Mr Roubini on Bloomberg TV, talking about the coming recession, shot on July 2008.
Roubini's blog - Roubini Global Economic Monitor: http://www.rgemonitor.com/blog/
Article in NY Times - Dr. Doom: http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html