Is the next crash just around the corner?

From Open Economy

Professor Nouriel Roubini believes we are already pumping up the next financial markets bubble, whose collapse will dwarf that of 2008. If he’s right, we face an unthinkable political and economic disaster. Why does he think this? He explains in the Financial Times:

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

Are you hopelessly out of your depth? I was too; I am the worlds worst economist, but I am eager to learn. This graphic from the FT will get you started, but I had to listen to it twice before it began to make sense. This is the curse of modern times: we live in a world so complicated we can't understand even the basics. 

This article in the NY Times: Dr. Doom may help you understand how strange, but accurate, Professor Roubini is. He is definitely a pessimist, but his reasoning seems strong.

Comments

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Roubini is a great teacher; he teaches an economic class, and he has about a dozen stats he rattles off in his foreign-tongued english accent that is impressive in a Dr. Strangelove way. He is and was a "doomer" early on before anyone but a few others.

But yes, anyone can see what is happening. Obama is behind banks consolidating into super banks, and the mentality behind it reminds me of the Titanic...something so big and commanding that nothing could happen to it. The next failure could require a trillion dollars, not for "the economy" but for a couple large banks and their few thousand employees.