MORE TOXIC SHOCK

Professor Nouriel Roubini of New York University is often cited in these pages as being the foremost critic of US economic policy – if one could use that word to describe the absolute and total mess the clowns and crooks in charge in New York and Washington are inflicting on the nation and perhaps the world. Those that have watched as his terrifying economic predictions fall into place will be thoroughly distressed to discover his colleague and friend Charles Morris – author of several books on financial history and other topics – has just published “The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash” – that confirms all our worst fears. We watch hopelessly and helplessly as the entire leveraged system falls apart, proving you cannot manufacture economies from phony house prices and get away with it for long. Charles Morris estimates that the losses from this financial crisis may be as high as $1 trillion:
“$1 trillion is the amount of defaults and writedowns Americans will likely witness before they emerge at the far side of the bursting credit bubble,” estimates Charles R. Morris and that calculation assumes an orderly unwinding of the US credit market.
Either way Morris had finally put subprime in its rightful place as just one boulder “in an avalanche of asset writedowns that will rattle on through much of 2008.''
Roubini estimated and I reported $1 trillion of losses in February. He points out that this has now become conventional wisdom as George Magnus, Martin Wolf, Goldman Sachs and now Charles Morris are all coming up with a similar estimate.
A trillion dollars is the combined wealth of Warren Buffet, and Bill Gates multiplied by nine. The assets involved include all the suspects this column has noted in the past, subprime and higher graded mortgages, high yield bonds, commercial real estate, credit card debt, leveraged loans the entire family we have come to know so well. The Daddy of the family, credit default swaps is the great unknown. This is the insurance on bond holders and covers, or should cover some $45 trillion against default. That’s where the “orderly” aspect of the unwinding or the melting party of the meltdown may happen. It is the clear and present danger. Morris is considered an authority (by Bloomberg amongst others) on the subject of the complex inter action of the credit system that threatens to send the US economy into deeper toxic shock. For we have long road to how. Morris predicts we will spend 2008 watching this meltdown and therefore I suggest those returning to the market, especially the US market given it PE ratios, do so with extreme caution.
Like this columnist Morris apparently looks to Paul Volker, the man Democratic Presidential candidate Obama Barack has been talking to whose recommendations include forcing loan originators to retain first losses, requiring prime brokers to stop lending to hedge funds that don’t disclose their balance sheets and trading of credit derivatives onto exchanges. In fact shine the ever loving light on the entire game and then when the problem is known face it and begin the vast task of correction.
That this cannot be done under the current administration is now self evident. One searches in vain through Treasury Secretary Paulson’s proposed overhaul l of the regulatory system for references to the public spotlight or and other spotlight save that of Big Brother. Perhaps I missed it. It’s a huge report.