Innovating Our Way to Financial Crisis
By Paul Krugman

The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance. How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world. This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.

[more]

  thanks to dangerousmeta!

"A Generalized Meltdown of Financial Institutions"

"It is increasingly clear by now that a severe U.S. recession is inevitable in next few months...I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets... massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks; ..ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe knock-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate...; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed's lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized." (Nouriel Roubini's Global EconoMonitor)

[more]

America's Back Is About To Break

America's back is about to break. And since the US consumer has been carrying the Asian economies, that means a world wide recession at best, and a depression as the worst case (but not necessarily unlikely) scenario. China is not going to "decouple" from the US and suddenly have enough consumer demand to see this through, especially not when they also have out of control inflation and massive exposure to the bad debt. The production that does sell to the US is the margin that makes for the explosive economic growth, and when it's gone, so goes the Chinese economy. This is also going to be true pretty much everywhere else, including Japan (whose free money policy was responsible for the Yen carry trade and thus much of the financial bubble), India and the Asian tigers. And what happens when your back breaks? You become a cripple. The US has lived far beyond its means, on borrowed money, for some time. Rather than either trying to fix the problem, or trying to adjust slowly to reduced circumstances, America is now in danger of having to adjust in one abrupt, sickening crash--from 100 mph to 0--courtesy of hitting a brick wall while Bernanke's foot is on the accelerator, with Congress's foot jammed on top for good measure, as it approves huge amounts of stimulus by way of "war funding." America and Americans have lived well beyond their means for too long. Soon the credit card is going to start bouncing. Smart people cut it up and see a counselor at that point. Bernanke? He prints more money. Should be interesting.

[more]

Magic Wand Finance
by Jim Kunstler

Whatever else you think of it, there is an awful lot at stake in manipulating the collective mood of those who traffic in capital. Beneath the momentary fugue of triumphalism, markets have never been so distressed in the lifetimes of most of us living. It's not just the folks in charge of things whose legitimacy is at stake, but the system itself. When the markets really do start to manifest their true state of extreme disorder, many will blame "capitalism," not the swindlers who have been gaming it in recent years.

[more]