Quoth Dr. Doom: the Party has to End

Roubini: Laissez-Faire Capitalism Has Failed:

...it is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. While we are already in a severe and protracted U-shaped recession (the deluded hope of a short and shallow V-shaped contraction has evaporated), there is now a rising risk that this crisis will turn into an uglier, multiyear, L-shaped, Japanese-style stag-deflation (a deadly combination of stagnation, recession and deflation)...

To avoid this L-shaped near-depression, a strong, aggressive, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper cleanup of the financial system and reduction of the debt burden of insolvent private agents (households and nonfinancial companies) is necessary in the U.S. and other economies...

The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign. Among these liabilities are banks, other financial institutions and, soon possibly, households and some important nonfinancial corporate companies...

At some point a sovereign bank may crack, in which case the ability of governments to credibly commit to act as a backstop for the financial system, including deposit guarantees, could come unglued.

Thus the L-shaped, near-depression scenario is still quite possible (I assign it a 30% probability), unless appropriate and aggressive policy action is undertaken by the U.S. and other economies.

This severe economic and financial crisis is now also leading to a severe backlash against financial globalization, free trade and the free-market economic model.

To paraphrase Churchill, capitalist market economies open to trade and financial flows may be the worst economic regime--apart from the alternatives. However, while this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments...

Read it all. This was the man warning everyone 5 years ago what the speculative bubble would do.

But what are the Oborg doing? Trying to bailout the Chicago School model of markets, of course. The cowboys keep on making the deals, but you and I get to bankroll 'em and suck up the losses:

Banks have come to depend on selling mortgages and other loans to investors like hedge funds and insurance companies. This allows banks to make more loans and earn bigger profits.

But the market for these securities has collapsed, contributing to a freeze in lending.

To encourage new lending, the Treasury and the Federal Reserve would provide up to $1 trillion to finance private investment in these securities.


You want to stop the bleeding, Mr. Obama? Listen to Drs. Krugman and Roubini. End the rodeo circus for the Masters of the Universe, now or expect a generation(s)-long Depression.

I know they won't let you back into the faculty club at Chicago, but really, won't your kids respect you for it someday?