Attack of the killer zombies
There’s a great new piece by Nouriel Roubini, the economist nick-named Dr Doom for his early prediction of the extent of the losses in the US banking sector – he said $2 trillion a while back, which initially no one agreed with, though now even Goldman Sachs does.
Well, now he thinks losses may be as much as $3.6 trillion, half of them owed by US banks and half by overseas banks. However, the assets of the US banking system only amount to $1.4 trillion, so ‘the US banking system is effectively insolvent, most of the UK banking system looks insolvent too, and many other banks in continental Europe are also insolvent’.
They are what are sometimes called ‘zombie banks’ – banks that are insolvent, dead, finished, but kept in a state of living deadness by state support, when really the plug should be pulled.
Roubini, like everybody else, is a critic of the US Treasury’s new bank bail-out scheme, saying that if the government over-values toxic assets, it’s a rip off for tax-payers and an unfair bail-out of shareholders. However, if the government accurately values the toxic CDOs of banks like Citigroup, then the banks would be rendered insolvent.
He suggests the only way out might be a widescale nationalisation of the banking system, with banks cleaned up and then sold back into the private sector (to the Middle East probably. Consider this – the entire market capitalisation of the US commercial banking system is less than half the sovereign wealth fund of Abu Dhabi).
However, the ‘N Plan’, as he calls it, is ‘not yet politically feasible’ because many people still believe banks like JPMorgan and Wells Fargo are solvent. Roubini says that in the next 6-12 months, ‘the sharp rise in delinquencies and charge-off rates we are experiencing now on mortgages, commercial real estate and consumer credit’ mean that even these apparently stronger banks will also be rendered ‘near insolvent’.
Roubini concludes: ‘You can expect a similar path and an eventual government takeover of most financial institutions in other countries – such as the UK’.
Centrally planned economy, here we come.