Nouriel Roubini: Liquidity support can’t stop the doom loop called ‘banking’

In a recent editorial, economist Nouriel Roubini shared his thoughts on the problems in the US banking sector. Roubini emphasized that “the majority of U.S. banks are technically close to insolvent and hundreds of banks are fully insolvent”.

Nouriel Roubini

Economist Nouriel Roubini

Roubini: Liquidity support cannot stop this systemic cycle of doom

Renowned economist Nouriel Roubini, also known as “Dr. Roubini”. Doom,” an editorial shared on April 1. The article discusses the turmoil in the U.S. banking sector, with Roubini highlighting that banks here have suffered as much as $620 billion in unrealized securities losses. Additionally, Roubini referred to the Federal Reserve hike:

“To make matters worse, higher interest rates also reduce the market value of other bank assets. Bank of America’s unrealized losses actually amounted to $1.75 trillion, or 80% of its capital.”

Moreover, Roubini stressed that the “unrealized” nature of these losses is simply an artifact of the current regulatory regime, which allows banks to price securities and loans at face value rather than actual market value.

Roubini continued his scathing criticism of the U.S. banking system, saying:

β€œIn fact, most U.S. banks are technically close to insolvent in terms of capital quality. Hundreds of banks are completely insolvent.”

People should prepare for the coming inflation-driven debt crisis and recession. “

In the editorial, Roubini discussed the concept of a “deposit franchise” and asserted that depositors would perceive a decrease in the security of their deposits, leading to a loss of trust.

“If depositors run, the deposit franchise will disappear and unrealized securities losses will become a reality. Bankruptcy will be inevitable.”

The economist also believes the U.S. economy could face a tougher landing as banking stress leads to tighter credit, calling it a “house of cards.”

Roubini stressed that the world’s central banks “face not only a dilemma, but an impossible trinity”. In addition, regional banks (important in financing households and SMEs) have been particularly affected. Thus, an impossible trinity of central banks is presented, as raising interest rates to achieve price stability could lead to recession and higher unemployment, while increasing the risk of severe financial instability.

The economist concluded that negative aggregate supply shocks such as the Covid-19 pandemic and the war in Ukraine further complicated the impossible trinity. Roubini’s review added:

“A deep recession is the only thing that can calm wage and price inflation, but it can make the debt crisis worse, leading to a deeper recession.” With liquidity support unable to stop this cycle of systemic doom, everyone should brace for an impending recession-driven inflationary debt crisis. “

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