Economist Nouriel Roubini shared his thoughts on US banking problems in a recently published opinion piece. 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 catastrophic systemic loop”
Renowned economist Nouriel Roubini, also known as “Dr. Doom,” shared a editorial notice on April 1 through MarketWatch. The article discusses turmoil in the US banking sector and Roubini highlights how US banks are carrying unrealized losses on securities amounting to $620 billion. Additionally, Roubini mentioned the US Federal Reserve’s rate hike and said, “To make matters worse, rising interest rates have also reduced the market value of other bank assets.”
In light of this factor, Roubini says, “the unrealized losses of US banks actually amount to $1.75 trillion, or 80% of their capital.” Moreover, Roubini pointed out that “the ‘unrealized’ nature of these losses is just an artefact of the current regulatory regime, which allows banks to value securities and loans at their face value rather than their value. true market value”. Roubini continues his virulent 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 totally insolvent.
Dr Doom says ‘everyone should prepare for the next stagflationary debt crisis’
In the op-ed, Roubini discusses a concept called a “deductible,” and he says depositors may experience a deterioration in deposit security, leading to a loss of trust. “If depositors flee, the deposit allowance evaporates and unrealized losses on securities are realized. Bankruptcy then becomes inevitable,” said Roubini. The economist also believes that the US economy could face a harder landing due to the credit crisis caused by banking stress and called it a “house of cards”.
Roubini points out that central banks around the world “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. Therefore, the trilemma for central banks is presented, as interest rate hikes aimed at ensuring 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 compounded by negative global supply shocks such as the Covid-19 pandemic and the war in Ukraine. Roubini’s op-ed adds:
A severe recession is the only thing that can temper price and wage inflation, but it will deepen the debt crisis, which, in turn, will feed into an even deeper economic downturn. Since liquidity support cannot prevent this systemic catastrophic loop, everyone should prepare for the next stagflationary debt crisis.
What steps do you think should be taken to deal with the potential banking crisis and the trilemma facing central banks? Do you agree with Roubini’s editorial? Share your thoughts on this topic in the comments section below.
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