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23 Sep 2008 01:05 pm
No Tough Love, Please
Megan argues against seeing the financial crisis as Americans living on borrowed prosperity. She also details why we need a bailout:
There is no benefit from a "tough love" strategy for anyone that even begins to approach the catastrophic consequences, for everyone, of a massive and rapid contraction.
My fear is that a massive and rapid contraction is now inevitable, and that this bailout won't stop it. It will merely throw even more of our money down the drain. Roubini:
We are observing an accelerated run on the shadow banking system
that is leading to its unravelling. If lender-of-last-resort support
and deposit insurance are extended to more of its members, these
institutions will have to be regulated like banks, to avoid moral
hazard. Of course this severe financial crisis is also taking its toll
on traditional banks: hundreds are insolvent and will have to close.
The real economic side of this financial crisis will be a severe US recession.
Financial contagion, the strong euro, falling US imports, the bursting
of European housing bubbles, high oil prices and a hawkish European
Central Bank will lead to a recession in the eurozone, the UK and most
advanced economies.
European financial institutions are at risk of sharp losses because
of the toxic US securitised products sold to them; the massive increase
in leverage following aggressive risk-taking and domestic
securitisation; a severe liquidity crunch exacerbated by a dollar
shortage and a credit crunch; the bursting of domestic housing bubbles;
household and corporate defaults in the recession; losses hidden by
regulatory forbearance; the exposure of Swedish, Austrian and Italian
banks to the Baltic states, Iceland and southern Europe where housing
and credit bubbles financed in foreign currency are leading to hard
landings.
Thus the financial crisis of the century will also envelop European financial institutions.
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