Could anyone have foreseen the financial collapse?
Nouriel Roubini is arguably the single most sought after economist today as the world’s leading finanical gloom and doom soothsayer. In an article today he provides his “after the fact” analysis of the roots of the current crises:
Today’s global crisis was triggered by the collapse of the US housing bubble, but it was not caused by it. America’s credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans, and student loans. There was also excess in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will now suffer massive losses in a surge of defaults; in the dangerous and unregulated credit default swap market.
Wouldn’t it have been more helpful if some investment manager somewhere recognized the dangers and had the fortitude to sell before the stock market collapse?
On April 12, 2006 I wrote the following to my clients:
There are a number of serious concerns developing in the economy the most serious of which has been developing for many years, debt. Consumer debt, mortgage and home equity debt, corporate debt, government debt and now our trade deficit has ballooned more than previously thought possible. To make matters worse, the US savings rate has fallen to zero for the first time in more than 70 years, since the Great Depression. Consumers are spending more on consumer goods and durable goods from overseas than they are saving.
And again on July 19, 2006
The fundamental reasons include the many deficits and debts consumers and our government face, including the Federal deficit, trade deficit, corporate debt and negative consumer savings rates. The antidote for all of this debt at present is a stated preference at the Fed for inflation and a lower dollar which the Fed believes it can target and manage, an unproven proposition.
It wasn’t until early 2007 that the mortgage market collapse began and “sub-prime” entered the popular lexicon. In October of ’07 I sold every stock except precious metals holdings just as the stock market began an extended decline and gold began a volatile rise.
