In a recently published op-ed, economist Nouriel Roubini offers his views on the US banking problem. In it, Roubini argues that “most U.S. banks are technically close to insolvency, and hundreds are already fully insolvent.”
Roubini: “Liquidity support will not prevent this systemic doom loop.”
Renowned economist Nouriel Roubini, also known as “Dr. Doom,” published an opinion editorialvia MarketWatch on April 1. In the article, which discusses the turmoil in the U.S. banking sector, Roubini highlights that U.S. banks have unrealized losses on securities amounting to $620 billion. In addition, Roubini referred to the Federal Reserve’s interest rate hikes and said, “Worse, the rise in interest rates has also reduced the market value of banks’ other assets.”
In light of this factor, Roubini said, “The unrealized losses of U.S. banks are actually $1.75 trillion, or 80% of their equity capital.” Roubini further emphasizes that “the ‘unrealized’ nature of these losses is merely a product of the current regulatory regime, which allows banks to value securities and loans at par rather than at their true market value.” Roubini continues his scathing criticism of the U.S. banking system, stating:
In fact, judging from the quality of capital, most U.S. banks are technically near insolvent, and hundreds are already completely insolvent.
Dr. Doom says that “everyone should prepare for the coming stagflation debt crisis”
In his editorial, Rubini discusses the concept of the “deposit franchise” and argues that depositors will sense a decline in the safety of their deposits, leading to a loss of confidence. He writes, “If depositors flee, the deposit franchise evaporates, and unrealized losses on securities become a reality. And bankruptcy becomes inevitable,” Rubini noted. The economist also believes that the U.S. economy could face a tougher landing due to a credit crunch caused by bank stress, which he calls a “house of cards.”
Roubini emphasizes that central banks around the world are facing “not just a dilemma, but a trilemma.” Moreover, regional banks, which are essential for lending to small businesses and households, will be particularly affected, Roubini opines. Thus, a trilemma is presented for the central bank: raising interest rates to stabilize prices may lead to recession and higher unemployment, while increasing the risk of serious financial instability.
An economist called “Dr. Doom” concludes that the trilemma of the challenge is further exacerbated by negative aggregate supply shocks such as the Covid-19 pandemic and the Ukrainian war. Roubini’s editorial adds:
Only a severe recession can curb price and wage inflation, but it will make the debt crisis more severe, which will feed back into an even more severe recession. Liquidity support will not prevent this systemic doomsday loop, so everyone needs to prepare for the coming stagflationary debt crisis.
What steps do you think should be taken to address the potential banking crisis and the trilemma central banks face? Do you agree with Mr. Roubini’s editorial? Share your thoughts on this topic in the comments section below.
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