Nouriel Roubini, the once obscure New York University economics professor who two years ago predicted the current global financial crisis, now says leaders of the world's major industrialized economies and developing countries must implement an 'all fronts' approach to avert a financial calamity and a global depression."It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging-market economies to avoid this economic and financial disaster," Roubini said on his web site, RGE Monitor.
Roubini urged that national policy makers take immediate action to end the crisis, which has dramatically tightened credit conditions worldwide, constraining the ability of corporations to undertake daily operations, which will hurt GDP growth rates in every region.
And, ironically or by coincidence, leaders will have an opportunity to dialogue and implement a common strategy: officials from the International Monetary Fund, World Bank, and Group of Seven (G-7) nations meet in Washington, D.C. this weekend for their previously-scheduled annual meeting.
Specifically, Roubini recommended (with some variants, depending on the severity of the problem in a specific country and its resources):
- another rapid round of policy rate cuts of at least 150 basis points on average, globally;
- a temporary blanket guarantee of all savings deposits, with a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital;
- a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
- massive and unlimited provision of liquidity to solvent financial institutions;
- public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
- a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local governments;
- a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
- an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.
Credit market liquidity and bank recapitalization must remain at the forefront: simply, corporations must have access to daily cash (commercial paper) that is critical for daily operations, and viable banks must be recapitalized to remain functional.
Close behind the above: a moratorium on home foreclosures and expanded mortgage refinancing efforts to keep more people in their homes, and the removal of toxic assets from the financial system. The former will end the bad mortgage bond cycle; the latter, remove bad bonds from the financial system, which should increase bank-to-bank trust/confidence.
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Reader Comments (Page 1 of 1)
10-10-2008 @ 2:55PM
Michael said...
And a global ban on the creation and trading of all "derivative" or "synthetic" securities. They are the root cause of the credit/liquidity crisis.
10-10-2008 @ 4:12PM
Lew B said...
I totally agree with courses of action outlined by Dr. Roubini. At the very least, they will soften the blow that is about to come which are going to catastrophic at best.
I also agree with your comment Michael concerning 'Derivatives' and 'synthetic securities'.
I also believe, as Agent Sadusky said in the National Treasure Movie, “Someone's got to go to prison, Ben.”
10-10-2008 @ 6:10PM
william lindblad said...
Better idea - Roubini for next Sec. of the Treasury. Seems like he is one of few that knows what the hell is going on - and has a specific plan to counter it.