Economist Nouriel Roubini has shared his views on America’s banking problems in a recently published opinion editorial. In the article, Roubini insists that “most US banks are technically close to insolvency and hundreds are already totally insolvent.”
Roubini: ‘Liquidity support cannot prevent this systemic fatal cycle’
Renowned economist Nouriel Roubini, also known as “Dr. Doom,” he shared a editorial opinion on April 1 via MarketWatch. The article discusses the turmoil in the US banking sector and Roubini highlights how banks in the US have unrealized losses on securities amounting to $620 billion. In addition, Roubini mentioned the US Federal Reserve’s rate hike, saying: “To make matters worse, higher interest rates have also reduced the market value of other bank assets.”
In light of this factor, says Roubini, “the unrealized losses of US banks actually amount to $1.75 trillion, or 80% of their capital.” Furthermore, Roubini emphasized that “the ‘unrealized’ nature of these losses is simply an artifact of the current regulatory regime, which allows banks to value securities and loans at face value rather than true market value.” Roubini continues his fierce criticism of the American banking system, stating:
In fact, judging by the quality of their capital, most US banks are technically close to insolvency, and hundreds are already in total insolvency.
Dr. Doom says “everyone should prepare for the coming stagflationary debt crisis”
In the opinion piece, Roubini discusses a concept called a “deposit franchise” and claims that depositors may feel the deterioration of deposit security, leading to a loss of confidence. “If depositors flee, the deposit franchise evaporates and unrealized losses on the securities are realized. Then bankruptcy becomes inevitable”, says Roubini. The economist also believes that the US economy may face a harder landing due to the credit crunch caused by banking stress and referred to this as a “house of cards”.
Roubini stresses that the world’s central banks “face not just a dilemma but a trilemma.” In addition, regional banks, which are vital for financing small and medium-sized businesses and households, are particularly affected, Roubini said. Thus, a trilemma presents itself for central banks, as interest rate hikes aimed at achieving price stability can lead to recession and higher unemployment, while increasing the risk of severe financial instability.
The economist nicknamed “Dr. Doom” concludes that the trilemma of challenges is exacerbated by negative aggregate supply shocks such as the Covid-19 pandemic and the war in Ukraine. Roubini’s opinion piece adds:
A severe recession is the only thing that can moderate wage and price inflation, but it will make the debt crisis more severe and that, in turn, will feed into an even deeper economic recession. Since liquidity support cannot prevent this systemic doomsday, everyone should be preparing for the coming stagflationary debt crisis.
What steps do you think should be taken to address the potential banking crisis and the trilemma facing central banks? Do you agree with Roubini’s opinion piece? Share your thoughts on this topic in the comments section below.
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