Who Predicted The GFC Global Financial Crisis: Nouriel Roubini, Steve Keen, Peter Schiff, Marc Faber; Harry Dent, Robert Shiller, Paul Krugman, George Soros, Jeremy Grantham, Dean Baker, Gary Shilling, Nassim Taleb
Tweet Topic Started: 14 Mar 2012, 07:46 AM (13,278 Views)
I think the mission of central banks needs to be expanded beyond just CPI and full employment to include preventing asset price bubbles. The banks need to be forced into tighter lending criteria when the market is booming to keep a cap on it. The most risky time for banks to lend is when house prices are over valued (ie. in a bubble) but this is when they loosen their lending criteria because the economy is going so well due to the wealth effect. After the bubble collapses, then they tighten up lending and make things even worse so people who can afford a now much cheaper house aren't able to borrow.
Unfortunately our country, like most western democracies is run by a bunch of muppets with law degrees that wouldn't understand simple economic principals if they were slapped around the head with a book titled Macroeconomics: 101. I would like to see the fiscal policy of this country handed over to a board of independent experts (like monetary policy was) who actually have a clue, and aren't swayed by public opinion. Now how is THAT for a good bit of policy!
I think the mission of central banks needs to be expanded beyond just CPI and full employment to include preventing asset price bubbles. The banks need to be forced into tighter lending criteria when the market is booming to keep a cap on it. The most risky time for banks to lend is when house prices are over valued (ie. in a bubble) but this is when they loosen their lending criteria because the economy is going so well due to the wealth effect. After the bubble collapses, then they tighten up lending and make things even worse so people who can afford a now much cheaper house aren't able to borrow.
Unfortunately our country, like most western democracies is run by a bunch of muppets with law degrees that wouldn't understand simple economic principals if they were slapped around the head with a book titled Macroeconomics: 101. I would like to see the fiscal policy of this country handed over to a board of independent experts (like monetary policy was) who actually have a clue, and aren't swayed by public opinion. Now how is THAT for a good bit of policy!
Are the reserve bank the people who should be regulating this? Maybe APRA? A really bad capital adequacy rating for high LVR loans might be a good start.
Right now, the Reserve Bank has one single lever to operate: the cash rate. (well, they do have one other lever - the reserve ratio, but I understand it is so long since it has been touched that even the reserve bank forget what it is set at, and it has more cobwebs on it than Wayne Swan's copy of macroeconomics 101.) Maybe that one really important lever is enough?
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
It's not maybe, it's a given, and the opportunities will be a "once in a lifetime event" - We won't even have to get the entry point exact to do quite well, but courage will let most people down.
"We" have been lucky enough to have years of advanced warning - if we aren't ready we have no one else to blame.
I'm cashed up, how about you?
I think that you will be fine Gen-X, but procrastination will beat some people.
Any expressed market opinion is my own and is not to be taken as financial advice
I think 'we' are a tiny fraction of the population, and in a democracy, tiny minorities don't count for much. I think disruption is coming regardless. Chaos is a good time to change things, so maybe there is an opportunity on the horizon.
It's not maybe, it's a given, and the opportunities will be a "once in a lifetime event" - We won't even have to get the entry point exact to do quite well, but courage will let most people down.
"We" have been lucky enough to have years of advanced warning - if we aren't ready we have no one else to blame.
Seems you are finally waking up Mr Fraser , sure took a while.
If you want to be scared, truly terrified, listen to Mark J. Grant. He might be right.
For the past two years, Grant, a managing director at a regional investment bank in Florida, has been predicting the bankruptcy of Greece and a cascade of chaos across the global economy, attracting quite a following on Wall Street in the process.
"Greece will be forced to return to the drachma and devalue, and the default will cause bank runs and money flowing into Germany and the United States as the only viable safe haven bets," he declared in the days before Sunday's Greek elections, irrespective of which party would win. "Greece will default because there is no other choice regardless of anyone's politics."
He then walked through the falling dominoes: "It will hit the [European Central Bank], the banks on the other side of the derivatives contracts, all of the Greek banks who are really in default at present and being carried by Europe as well as the nation, and the Greek default will spread the infection in many places that we cannot imagine because so much is hidden and tucked away in the European financial system."
Welcome to Doomsday, brought to you by Grant. He says he doesn't think of it as such; he calls it "reality". He told me on Monday, almost hopelessly, "There's only so much money to go around."
In a January 13, 2010, report Grant forecast that Greece would default on its government debts, one of the first to publish such a prognostication.
Grant could be the Nouriel Roubini (Dr. Doom) of the European crisis. Roubini, the New York University economist, said the subprime-debt sky was falling for a long time before it fell. Few people listened, in part, because nobody had ever heard of him. Then, of course, the sky fell. Now everybody has heard of him. Time will tell, but soon everybody could know Grant.
"Greece will be forced to return to the drachma and devalue, and the default will cause bank runs and money flowing into Germany and the United States as the only viable safe haven bets," he declared in the days before Sunday's Greek elections, irrespective of which party would win. "Greece will default because there is no other choice regardless of anyone's politics."
What a load of nonsense.
Greece can't save itself that way because would still have to borrow in Euro anyway. Nobody in their right would contract payment from Greece in anything other than Euro.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
(Reuters) - Perhaps the biggest investor shock of the second half of 2012 would be if everything turns out OK and the world doesn't fall apart at the seams.
As stock and bond markets hit the half-way point in yet another year of bank stress, euro crisis and disappointing global growth, early-year optimism has dissipated just as it did last year and the year before that.
But this year the gloom is already pervasive. Europe's inability to draw a line under the euro bloc's debt crisis has been the chief frustration but there's also a weary suspicion the already five-year-old credit crisis may have ushered in a western economic funk that could last a decade.
Global growth and earnings forecasts have been slashed again; euro breakup scenarios are now commonplace in investment thinking, if not positioning; hard-landing fears for the giant emerging economies of China and India are rife and nerves abound about the impact of built-in U.S. budget tightening next year.
Few could accuse strategists and fund managers of being over-optimistic.
Punch-drunk from a credit crunch most didn't foresee, investors have now become obsessed with hedging against negative "tail risks" - or events of statistically low probability, but high impact.
But is the relentless pessimism already reflected in markets and are investor positions overly skewed to now negative real returns of cash and top-rated government debt?
"Bear in mind that tail risk is a two-way concept and we focus only on the negative at our peril," said JP Morgan Asset Management strategist David Shairp, flagging an increase in equity exposure relative to bonds in JPMAM's multi-asset funds and a shift to overweight European equity from underweight.
The twists and turns of the euro crisis and fiscal debate surrounding the U.S. presidential election may be difficult to second guess. But, assuming worst-case scenarios are avoided, Shairp said there are other potential positives on the horizon.
One was declining, but still positive inflation rates worldwide as a commodity price retreat and a 20 percent year-on-year drop in crude oil prices feeds in. Assuming this disinflation allows further monetary easing by central banks while putting more spending power in consumer pockets, the outcome could prove surprising for an unsuspecting market.
"At a time when investors are nervous and running low levels of risk exposure to the asset class, any positive catalysts could prompt a shift back into equities," Shairp said.
POSITIVE SURPRISE?
So how skewed is market positioning?
Equity prices tell a story of stasis. When you strip away the euphoric leaps and gut-wrenching lurches, the MSCI all-country index of global stocks .MIWD00000PUS is back where it started 2012. And that's also where it started 2010.
The fear factor and tail-risk hedging, however, is more obvious in bonds. At paltry, sub-inflation rates of between 1.5 and 1.7 percent, U.S., German and British 10-year government borrowing costs have fallen yet further this year and have now more than halved since early 2010.
Repeated central bank bond buying, regulatory pressure on commercial banks to buy more domestic government bonds and the "de-risking" of pension funds are all big factors depressing yields. But investor shifts are more widespread.
Cash positions in global investment portfolios have surged again to more than 7 percent and are already back to levels not seen since the aftermath of the Lehman Brothers collapse, according to Reuters May poll of asset managers.
And the retreat from stocks has been steep, with aggregate holdings of equity in global portfolios falling below 50 percent in May to lows not seen since the bleak post-Lehman recession.
But the bit that gets many fund managers is what this does to relative valuations, particularly in Europe as the euro crisis drives outside investors away and depresses the regional economic outlook. The implied future returns on equities over top-rated government bonds, the so-called equity risk premium, remains way above historical averages.
What's more, ThomsonReuters Starmine data shows western European equity prices currently imply a decline in earnings per share of more than 4 percent per annum for the next five years and a drop of more than 10 percent a year for eastern European equities over the same period.
"Investors generally have become caught up with an awful lot of the short-term volatility and noise. But if, as history tells us, we're in mean-reverting world, then there are a lot of attractive valuations now out there," said Philip Poole, investment strategy head at HSBC Global Asset Management.
"A risk rally from here is perfectly conceivable. It's hard to see the catalyst right now but you have to think an awful lot of negativity is already in the price."
MARTIN Wolf has not got every call right in the global financial crisis, but it's hard to think of a significant one he's got wrong. In an uncertain world, he is now probably the most trusted commentator on the global economy.
When Europe's leaders decided their top priority should be to cut deficits, he warned this would condemn the European Union to a long recession, making deficits bigger, not smaller. Each time leaders declared they had found the solution to its problems, he shredded their PR bluff with relentless logic.
If governments, banks and companies all pursued contractionary policies at once, he asked, where would the growth come from?
Unless someone bought more goods and services, there could be no growth. Unless someone borrowed, there was no benefit in saving. The common euro currency meant countries could not devalue as a short cut to raising competitiveness. And while one country in trouble could adopt austerity as the way out, a continent could not.
Wolf's critique was resisted by the Bundesbank, the European Central Bank, the British government and the bureaucrats in Brussels. But time proved him right. Years that should have been used to get Europe out of trouble instead have dug it deeper into it.
He says it is still not clear what the final outcome will be. ''Europe's choice is between staying in a very bad marriage or embarking on an utterly horrible divorce,'' he quips. ''On the optimistic view, we will come out of this, in five or 10 years. But it is quite possible that it will end up destroying the European Union project.''
Martin Wolf lives in London and is chief economics commentator for the Financial Times. But this week he was in Melbourne to give the Corden lecture at Melbourne University in honour of his old teacher and friend, Professor Emeritus Max Corden, now 85, and still influential in economic debate.
Professor Corden, the intellectual driving force behind Australia's decision to abandon high protection, taught him at Oxford in 1969-70. Wolf was then a child of Jewish refugees, a left-of-centre idealist who joined Britain's Labour Party, then went to work for the World Bank.
Since then his intellectual journey has taken him from the Labour left to the Thatcherite right, and back to the centre. Now at 66, his political independence is one of his strengths, along with relentless logic, an imposing grip on the data - and a habit of getting it right.
Pimco's chief executive, Mohamed El-Erian, summed him up as ''by far the most influential economic columnist out there''; many on the economics A-list have said much the same. He knows most of them, some very well: but when he is writing his column, friendships are cast off and only the issue matters.
Corden's writing style is gently persuasive; Wolf's sweeps you along, in an insistent, even flamboyant, way. He writes for the intellectual elite. He does not suffer fools gladly.
He flew here from the annual meetings of the World Bank and International Monetary Fund Committee in Tokyo, where Singapore's Finance Minister, Tharman Shanmugaratnam, closed with the upbeat declaration: ''IMFC members all agreed that we are in a better position today than six months ago.''
It seems a good place to start our conversation. Is that true? Are we further from the cliff now, or edging closer to it? Wolf considers a moment, then says both are right.
''The economic situation is clearly not better than it was six months ago - in fact it's worse. But the economic policy situation is better. I think the ECB gets it now, and certainly Mario Draghi [the ECB president] gets it.''
The IMF, he points out, has just downgraded its growth forecasts for the second time in six months, especially for the eurozone.
''There are some very large risks out there, particularly the US 'fiscal cliff' and the stresses in the eurozone; Spain and, to a lesser degree, Italy. There is austerity fatigue, very high unemployment, continuing economic decline, real threats to political stability.''
But he also points to the EU's path-breaking decision to set up the European Stability Mechanism to bail out governments and banks and commit to a banking union. ''Most important, the ECB under Mario Draghi has shown a new flexibility and a willingness to intervene to make the eurozone work and survive.''
That is exemplified, he says, by its decision to buy government bonds, which will cut their interest rates and strengthen public finances and banks' balance sheets. What makes it ''most extraordinary'', he says, is that on the ECB council, only the Bundesbank president, Jens Weidmann, opposed it. Until now the Bundesbank has been driving European policy. Now it's isolated as hardline allies and the German Chancellor, Angela Merkel, embrace it.
But he is still wary about what happens next, warning there is no consensus on other key issues. While he thinks the US may now be entering a recovery, and Britain may follow by 2015, he expects another five long and painful years before Europe is out of the woods.
''There remain substantial disagreements about the nature of the crisis and the remedies,'' he says. ''The creditor nations don't want to pay; the debtor nations don't want to adjust too much. The creditor nations think all adjustment should be by the debtors; the debtor nations think - rightly, in my view - that adjustment has to be symmetrical.
''But the important thing is that the German political system is run by people who are strongly pro-Europe and pro-euro. They have shown a willingness to do whatever is necessary, even if it tends to be too little, too late. They are constantly on the back foot, but they manage to keep the ball out of their stumps.''
Spain and Italy, not Greece, are the biggest risks to the eurozone, he says. ''You can imagine the eurozone surviving without Greece, but Spain and Italy are central parts of it. Their survival is an issue of a different order of magnitude.''
Will Spain seek a bailout for its banks? Yes, he says, but it might take until Christmas to get a deal.
The ECB will want the IMF to police it, which raises political sensitivities. The Germans want to sort out the Greek bailout before embarking on another, and the Greek Prime Minister, Antonis Samaras, wants an extra two years to meet Greece's budget deadlines.
Greece, he says, needs less fiscal austerity but more structural reform and ''massive debt relief''. Even after the recent write-off, Greece's debt remains ''utterly unviable''.
If macro-pru polices fail central banks face an ugly trade-off: kill recovery to avoid risky bubbles, or go for growth and risk fuelling next financial crisis
As below-trend GDP growth and high unemployment continue to afflict most advanced economies, their central banks have resorted to increasingly unconventional monetary policy. An alphabet soup of measures has been served up: Zirp (zero interest-rate policy); QE (quantitative easing, or purchases of government bonds to reduce long-term rates when short-term policy rates are zero); CE (credit easing, or purchases of private assets aimed at lowering the private sector's cost of capital); and FG (forward guidance, or the commitment to maintain QE or Zirp until, say, the unemployment rate reaches a certain target). Some have gone as far as proposing Nirp (negative interest-rate policy).
And yet, through it all, growth rates have remained stubbornly low and unemployment rates unacceptably high, partly because the increase in money supply following QE has not led to credit creation to finance private consumption or investment. Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves. There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.
As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy. Near-zero policy rates encourage "carry trades" – debt-financed investment in higher-yielding risky assets such as longer-term government and private bonds, equities, commodities and currencies of countries with high interest rates. The result has been frothy financial markets that could eventually turn bubbly.
The US stock market and many others have rebounded more than 100% since the lows of 2009; issuance of high-yield "junk bonds" is back to its 2007 level; and interest rates on such bonds are falling. Moreover, low interest rates are leading to high and rising home prices – possibly real-estate bubbles – in advanced economies and emerging markets alike, including Switzerland, Sweden, Norway, Germany, France, Hong Kong, Singapore, Brazil, China, Australia, New Zealand, and Canada.
The collapse from 2007 to 2009 of equity, credit, and housing bubbles in the US, the UK, Spain, Ireland, Iceland, and Dubai led to severe financial crises and economic damage. So, are we at risk of another cycle of financial boom and bust?
Some policymakers – such as Janet Yellen, who is likely to be confirmed as the next chair of the Federal Reserve – argue that we should not worry too much. Central banks, they argue, now have two goals: restoring robust growth and low unemployment with low inflation, and maintaining financial stability without bubbles. Moreover, they have two instruments to achieve these goals: the policy interest rate, which will be kept low for long and raised only gradually to boost growth; and macro-prudential regulation and supervision of the financial system (macro-pru for short), which will be used to control credit and prevent bubbles.
But some critics, like the Fed governor, Jeremy Stein, argue that macro-pru policies to control credit and leverage – such as limits on loan-to-value ratios for mortgages, bigger capital buffers for banks that extend risky loans, and tighter underwriting standards – may not work. Not only are they untested, but restricting leverage in some parts of the banking system would merely cause the liquidity from zero rates to flow to other parts of it, while trying to restrict leverage entirely would simply drive the liquidity into the less-regulated shadow banking system. According to Stein, only monetary policy (higher policy interest rates) "gets in all of the cracks" of the financial system and prevents asset bubbles.
The trouble is that if macro-pru does not work, the interest rate would have to serve two opposing goals: economic recovery and financial stability. If policymakers go slow on raising rates to encourage faster economic recovery, they risk causing the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis, and a rapid slide into recession. But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage. So, unless macro-pru works as planned, policymakers are damned if they do and damned if they don't.
For now, policymakers in countries with frothy credit, equity, and housing markets have avoided raising policy rates, given slow economic growth. But it is still too early to tell whether the macro-pru policies on which they are relying will ensure financial stability. If not, policymakers will eventually face an ugly trade-off: kill the recovery to avoid risky bubbles, or go for growth at the risk of fuelling the next financial crisis. For now, with asset prices continuing to rise, many economies may have had as much soup as they can stand.
Nouriel Roubini is the chairman of Roubini Global Economics and professor of economics at New York University's Stern School of Business
Legendary investor Jeremy Grantham says the US Federal Reserve is killing the recovery of the world's biggest economy and the ''next bust will be unlike any other''.
Mr Grantham, co-founder and chief investment strategist at $US112 billion ($123 billion) Boston-based fund manager GMO, said he would not invest his clients' money in US stocks for at least the next seven years because of the Fed's ''misguided policies''.
Mr Grantham has an impeccable record, having called both the internet bubble then the US housing bubble. In November he said he believed the US sharemarket could rise another 30 per cent, although he believed it was overvalued, before crashing again.
''We invest our clients' money based on our seven-year prediction,'' Mr Grantham told Fortune.
''Over the next seven years we think the market will have negative returns. The next bust will be unlike any other because the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before.
''Assets are overpriced generally. They will become cheap again. That's how we will pay for this. It's going to be very painful for investors''.
Mr Grantham said the Fed's $US85 billion-a-month bond buying program had failed to stimulate the economy, saying there was no proof more debt creates growth.
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