Gloomy Gus

Despite the euphoria in the market today (due to what?), that professional pessimist extraordinaire, Nouriel Roubini sees the risk of a systemic breakdown as high as ever.

Why should we believe him? Because of his track record, obviously. When the rest of the economists were handing out high fives and proclaiming the final triumph of neo-liberalism, Roubini saw the storm clouds on the horizon and pointed them out.

But the high fivers are still in charge. Congress, in its infinite wisdom, tried to pass a bill that was pushed by sore-palm Paulson, no hearings were held that would allow anyone such as Roubini make his point that the plan "is totally flawed".

S0 what's next? According to Roubini:

The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates - as it may now - a total meltdown of the US financial system could occur. We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.

If I were Paulson or Bernanke, I'd be listening. But I doubt that they are.