On October 9th, 2008, Nouriel Roubini, NYU Economist, spotlight bear, and proficient reader of the dire nature of events leading into last week, posted eight immediate/emergency steps to be taken to begin to right the wrongs of policy hesitation and missteps. As Warren Buffet said being approximately right is better than precisely wrong. Whether or not the steps taken so far, or the advice offered below will prove to have been perfect action and advice is overly optimistic, but having done nothing in a state of paralysis, while understandable, was and would have have been wrong to continue. Taking, egregiously from the RGEMonitor, with hope that I am not out of bounds doing so, are Roubnin’s eight steps below. I have colored green the steps that have been met, and colored in red the steps that have not.
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Roubini: At this point severe damage is done and one cannot rule out a systemic collapse 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. Urgent and immediate necessary actions that need to be done globally include:
1. another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
2. a temporary blanket guarantee of all deposits while 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 is made;
3. a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
4. massive and unlimited provision of liquidity to solvent financial institutions;
5. 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;
6. 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 government;
7. 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;
8. 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.
Whether or not the new announcement of capital injections are part of a larger plan to triage the less solvent banks remains to be seen. Economic stimulus and addressing the debt burden of households are more likely to become partisan topics, with less urgency until the next Minsky Moment or inauguration day, which ever comes first. However, government spending and household debt relief are more than likely to work themselves into the system in the months ahead. More rate cuts are inevitable, and number eight while not explicit, is growing more implied by the recent globally coordinated actions.
Severe Global Deleveraging Has Set In: Here’s What Needs To Be Done
Nouriel Roubini, RGE Monitor, October 9th, 2008