Wednesday, January 28, 2009

Roubini & Soros on Bad Bank

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I'm 100% word for word with Nouriel Roubini here.... I've had multiple readers from other countries ask why there are not protests in the streets. Is it hard to explain to them that when new baby pictures of Angelina Jolie/Brad Pitt's kids are the #1 topic in America, that minor things like the socialization of losses onto generations of taxpayers is not that important to the majority of sheeple here. Most won't even realize what is being announced - American Idol is on tonight.

The video is worth the listen as the text below does not do justice to the fullness of what he says.

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US and global stocks are still likely to fall because the corporate and economic news will be worse than expected, Nouriel Roubini, RGE Monitor Chairman, told CNBC. Investors will be hit by the realization that many banks are bankrupt, that companies will have to rein in debt and sell assets and that emerging markets may get into trouble, Roubini said.

"I think that there's a 20 percent downside risk to US and global equities," Roubini told "Squawk Box Europe."

The transmission mechanism oiling the wheels of the banking system is broken, he said, adding that "banks are getting the money and they are hoarding it, they're not lending it," because they expect higher losses.

There is no safe haven from the crisis as all countries are affected, and the collapse in aggregate demand may bring about prolonged deflation, Roubini added.

"We have to worry today about not ending up like Japan. That's the risk for the global economy," he said.

The rise in the price of gold is a signal of fear that countries and corporations may default on debt rather than of worries about future inflation, and the precious metal is used as a "safety valve."

Falling stock prices and very low bond yields are signaling depression, while credit spreads are still very wide, indicating fear of defaults, according to Roubini. And even the fast-growing Asian economies aren't spared.

"If you look at the data in emerging markets and around Asia, East Asia, there is a hard landing," he said. "All the numbers out of China suggest… the manufacturing sector is already in a recession."

Protectionism is the next danger, as history shows that it prolonged the 1930s depression, he said, regarding remarks by U.S. Treasury Secretary Timothy Geithner that China was "manipulating" its currency to help its exports.

"Certainly starting a war with China on the issue of the currency is very, very dangerous," he said. "The US is relying on the kindness of strangers -- Russia, China, the Gulf States … to finance a huge, and growing, twin current account and fiscal deficit," Roubini said.

"If China were to pull the plug on financing the US dollar, then we'd have a freefall of the dollar," he added.

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George Soros also chimes in

Billionaire financier George Soros told CNBC he disagrees with plans to create a new government entity to buy up troubled bank loans and believes former Treasury Secretary Henry Paulson mis-managed the first rescue attempt of financial institutions.

"That (the "bad bank" proposal) will help relieve the situation, but it will not be sufficient to turn it around," Soros said during a live interview at the Davos economic conference in Switzerland. Instead, Soros said he would create a "good bank" and re-capitalize the good assets.

He admitted his alternative plan is not likely to get support because it too closely approaches nationalization. "The political will to do that is not there," he said.

As to Paulson's handling of the first half of the $700 billion Wall Street bailout fund known as TARP, Soros said the money was used "capriciously and haphazardly." He said half of it has now been wasted, and the rest will need to be used to plug holes.

Although Soros saw trouble ahead, he stresses he did not foresee how bad it was going to get after the "life-changing event" of the Lehman Brothers bankruptcy.

"The storm that started in the financial system has now spread, in a very big way, to the real economy," he said. "It has fallen off the cliff following the Lehman thing."

He believes still more must be done to turn the slowing of decline into real economic growth, including the reorganization of the mortgage system, and skillful handling of the international repercussions.


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