Another 12-step program — to "financial disaster"

Professor Nouriel Roubini of New York University’s Stern School of Business says the U.S. economy is heading for a curl-your-hair catastrophe, as reported in the Financial Times. (Reading it requires free registration.)

Recently, Professor Roubini’s scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006. At that time, his view was extremely controversial. It is so no longer. Now he states that there is “a rising probability of a ‘catastrophic’ financial and economic outcome". The characteristics of this scenario are, he argues: “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.”

Roubini sees the economy collapsing in 12 steps, beginning with "the worst housing recession in U.S. history" and an end stage of "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices.”

I don't know whether his prediction will turn out to be right, partly right, or wrong, any more than he does. Still, whatever your own views and strategy, it's not a bad idea to think about the worst-case scenario.

Before you fall into a decline or commit pre-emptive suicide, remember that scare stories always draw better readership than agnostic ones. Not to minimize what seems to me a dangerous situation for the economy, but the stock market, at least, proverbially "climbs a wall of worry." That is, at any time, including a bull market with the afterburners on, all kinds of threats loom on the horizon. The institutional investors (mutual funds, hedge funds, money managers, etc.), who collectively set the direction of the market, are used to constant viewing-with-alarm and normally discount it, just as they normally regard a bear market as an opportunity to buy names they like at lower prices.

But what Roubini is talking about here is something more than a normal correction. He's describing the economy as a smoking hole. Even steel-nerved money managers can panic in that kind of situation. Equally important, such a disaster would hardly be limited to the stock market. It would frap everybody who has savings, and even many of those who just prefer to sleep with a roof over their heads.

[I am not a financial professional. Nothing here should be construed as financial advice.]

If something like Roubini's nuclear winter scenario comes to pass, there would be plenty of social and political fallout, depend on it.

Some bloggers suggest a silver lining to economic Armageddon: potential immigrants will discover the joys of home, immigrants will un-immigrate, and the American public, cured of their Candide-like optimism and in no mood for still greater job competition, will demand serious border control.

It's an ill wind that blows no good and all that, but if millions of people find themselves out of work and their savings binned, the silver will be lining a very dark cloud. Given today's ethnic, gender, and racial jockeying, I can see an even more intense blame game — perhaps most of it directed against the usual scapegoats, white males. That could be interesting: people struggling to keep body and soul together, being told for the millionth time that they are privileged oppressors. Maybe even the thickest of them will finally learn to add two and two, and stop making excuses for reverse discrimination.

And while one would hope that Americans, individually or in voluntary groups, would use their initiative and creativity to survive, it's more likely that 70 years of federal government programs supposedly answering every need have deeply embedded a belief that the government is mother, daddy, rich uncle, and psychotherapist. Think millions marching on Washington for more welfare. Except … if Roubini's End Times scenario comes true, the government won't have any largesse to give. There will be little left to tax for revenue, except the very rich, who can be safely assumed to make sure that doesn't happen; nobody to buy U.S. bonds, so the government won't get out of it by borrowing; and no use printing a storm of debased currency.

Perhaps the World Bank will consider grants in aid to the United States, predicated on U.S. pledges to reform itself.