Anatomy of a Financial Meltdown
To commemorate its founding 25 years ago, PS will be republishing over the coming months a selection of commentaries written since 1994. In the following commentary, Nouriel Roubini predicted that the credit crunch in the US would lead to a systemic financial crisis and global recession.
NEW YORK – A vicious circle is currently underway in the United States, and its reach could broaden to the global economy. America’s financial crisis has triggered a severe credit crunch that is making the US recession worse, while the deepening recession is leading to larger losses in financial markets – thus undermining the wider economy. There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse.
The problem is no longer merely sub-prime mortgages, but rather a “sub-prime” financial system. The housing recession – the worst in US history and worsening every day – will eventually see house prices fall by more than 20%, with millions of Americans losing their homes. Delinquencies, defaults, and foreclosures are now spreading from sub-prime to near-prime and prime mortgages. Thus, total losses on mortgage-related instruments – include exotic credit derivatives such as collateralized debt obligations (CDOs) – will add up to more than $400 billion.
Moreover, commercial real estate is beginning to follow the downward trend in residential real estate. After all, who wants to build offices, stores, and shopping centers in the empty ghost towns that litter the American West?