Crisis Economics: A Crash Course in the Future of Finance. Nouriel Roubini and Stephen Mihm

Crisis Economics: A Crash Course in the Future of Finance. Nouriel Roubini and Stephen Mihm

Nouriel Roubini

Language: English

Pages: 368

ISBN: 0141045930

Format: PDF / Kindle (mobi) / ePub

In this myth-busting book Nouriel Roubini shows that everything we think about economics is wrong. Financial crises are not unpredictable 'black swans', but an inherent part of capitalism. Only by remaking our financial systems to acknowledge this, can we get out of the mess we're in. Will there be another recession, and if so what shape? When will the next bubble occur? And what can we do about it? Here Roubini gives the answers, and lists his commandments for the future.

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road to salvation. All it may do is foster a speculative bubble in China that will ultimately leave the nation’s banks with a bunch of nonperforming loans. As of 2010, China and the United States remain locked in what economist Lawrence Summers has described as a “balance of financial terror.” Neither side can make a move without upsetting that balance. China can’t stop buying U.S. debt, or its biggest market will collapse. Conversely, the United States can’t throw up protectionist barriers, or

themselves up for a catastrophic fall. When foreign investors panicked and refused to roll over short-term debts, overvalued local currencies collapsed. Worse, as the relative value of local currencies declined, the real value of debts denominated in dollars and other foreign currencies soared, making default all the more likely. In 1997 and 1998 emerging economies throughout the world fell prey to this kind of crisis. Investors from more developed nations plowed money into Thailand, Indonesia, 102 “I’m optimistic . . .”: George W. Bush, press conference, January 8, 2008, online at 104 banks found themselves stuck: Greg Morcroft, “Banks Have Sold Off About Half of Hung Loans,”, May 7, 2008, online at 109 a hero, the banker J. P. Morgan:

as their predecessors had done nearly two centuries ago. In the spring of 2008 the pressure to do something quickly mounted. By then the securitization pipeline had all but shut down, not only for ordinary mortgages but for credit card loans, auto loans, and other consumer credit products. The securitization of corporate loans and leveraged loans into collateralized loan obligation froze up, a victim of plummeting demand and growing aversion to risk. When the credit markets shut down, banks and

default swaps, they had insured several trillion dollars’ worth of CDO tranches, effectively transferring their own AAA ratings onto a range of structured financial products. As the tide of losses rose, it looked increasingly likely that the insurers would be forced to pay out. Unfortunately, they didn’t have the capital, thanks to being wildly overleveraged. The ratings agencies knew this and started to downgrade the monolines in the fall of 2007. These real and looming downgrades threatened to

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