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The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps toFinancial Disaster
by Nouriel Roubini
To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession:
1. this is the worst housing recession in US history ...
2. losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. They are now spreading to near prime and prime mortgages ...
3. the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans.
4. the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses.
5. the commercial real estate loan market will soon enter into a meltdown similar to the subprime one.
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