The Great Depression Online

Great Depression Online Archive Issue:

Some Essential Insights

Great Depression Online
Long Beach, CA
August 08, 2008

Inside This Issue You Will Discover…

*** The Headlines
*** Some Essential Insights
*** Your Thoughts
*** And More

The Headlines

First the headlines…

“Freddie Mac swings to $821 million loss in 2nd-quarter as more people with risky loans default,” says AP.

The Financial Times tells us “U.S. unemployment highest in four years.”

And back over at AP they report “Fed leaves rates alone for second straight meeting.”

What more could we say about these stories? 

Of course that’s rhetorical.  For we have opinions…and lots of them.  But we’d rather not weigh you down with our own claptrap today.  We’d rather offer you someone else’s.  Someone who may actually know what they’re talking about. 

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Some Essential Insights

So we’ll turn to Nouriel Roubini, Economist and Professor, New York University, for some essential insights.  Here are some highlights from an interview he recently did with Barron’s.


On The Economy

“We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year.  A systemic banking crisis will go on for awhile, with hundreds of banks going belly up.”

On Banks

“Their losses are mounting because they have written down only their subprime loans so far.  They haven't started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been.  The banks are playing all sorts of accounting gimmicks not to recognize them.  There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too.”

On The U.S. Consumer

“The U.S. consumer is shopped out and saving less.  Debt to disposable income has risen to 140% from 100% in 2000. Hit by falling home prices, the consumer no longer can use his house as an ATM machine.  The stock market is falling and (issuance of) home-equity loans (has) collapsed.  We have a credit crunch in mortgages, and gas is around $4 a gallon.  Everyone says, ‘yeah, that’s true, but as long as there is job generation there is going to be income generation and people are going to spend.’  But for seven months in a row, employment in the private sector has fallen.

“The most worrisome thing is that in spite of the rebates, retail sales in June were up only 0.1%.  In real terms, they were down.  If people were not spending their rebate checks in June, what will happen when there are no more checks?”

On The Genesis Of The Crisis

“The damage was done earlier, beginning when the Greenspan Fed lowered interest rates in 2001 after the bust of the technology bubble, and kept them too low for too long.  They kept cutting the federal funds rate all the way to 1% through 2004, and then raised it gradually instead of quickly.  This fed the credit and housing bubble.”

On Federal Regulators

“The Securities and Exchange Commission has accused others of trying to manipulate stocks, but the government itself is now the manipulator.  The regulators should investigate themselves for bailing out Fannie Mae (FNM) and Freddie Mac (FRE), the creditors of Bear Stearns and the financial system with new lending facilities.  They have swapped U.S. Treasury bonds for toxic securities.  It is privatizing the gains and profits, and socializing the losses, as usual.  This is socialism for Wall Street and the rich.”


“The FDIC (Federal Deposit Insurance Corporation) has only $53 billion of funds, and has already committed almost 15% of it to bail out depositors of IndyMac.  The FDIC’s deposit-insurance premiums weren’t high enough, and now it is asking Congress to raise them.  Plus, the agency claims only nine institutions are on its watch list.  IndyMac wasn’t on the watch list until June, the month before it collapsed.  Studies done by experts in banking suggest that at least 8% of U.S. banks are in big trouble.  Eight percent of the roughly 8,500 that the FDIC essentially is insuring equals about 700 banks.  Another 8% to 16% also are shaky, so some 700 potentially are going bust and another 700 eventually could join them.  Yet the FDIC is watching only nine institutions.  It’s a joke.”

And last but not least, you…

On The Cost To The Taxpayer

“The taxpayer’s bill is going to be huge.  I estimate this financial crisis will lead to credit losses of at least $1 trillion and most likely closer to $2 trillion.”

Your Thoughts

We always like to hear from our readers…even when they tell us we’re full of beans.

So let us know…  Are things really as ugly as Professor Roubini perceives?

Just hit the reply button, or shoot us an email at  And give us a piece of your mind.

Enjoy your weekend!


M.N. Gordon
Great Depression Online

P.S.  Do you, like most people, believe that the best way to invest is to follow the news about Iraq, oil prices, or the Fed’s next move?  If so, prepare to be challenged with the Independent Investor eBook.  Normally, you’d pay over $100 for the reports contained in the Independent Investor eBook, but today you can download them free.  Don't get caught running with the herd – learn to think independently by downloading the Independent Investor eBook here: The Independent Investor eBook.


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