Mainstream media starting to understand depth of US financial crisis

Nouriel Roubini | Mar 11, 2008

In his Wednesday Financial Times' column Martin Wolf thoughtfully discusses my recent argument that financial losses of the order of $1 trillion (7% of GDP) may be only a lower bound and that such losses may end up being as high as $1.7 trillion or  even $2.7 trillion during this systemic financial crisis.

I agree with him that the highest estimates are "excessively pessimistic". They were provided as a way to show that, at this point, losses of the order of $1 trillion are only a lower bound - not an upper bound - to financial sector losses, not to argue that $2.7 trillion is "the" most likely outcome. Indeed, the most interesting development in the last few weeks is that estimates of financial losses of the order of $1 trillion - that only a month ago were considered way too pessimistic if not borderline crazy - have now become mainstream. As Wolf put it:

"On March 7, Goldman Sachs economists published an even higher estimate of mortgage-related losses, at $500bn, along with $656bn in other losses, for a total of $1,156bn. The mainstream has caught up."

So to paraphrase "The Devil Wears Prada" now $1 trillion "is the new size 6!", i.e. the new mainstream benchmark for expected financial losses. The mainstream has indeed caught up very fast.

we have gotten to the point that we need to pray that the Fed can rescue the economy and financial markets. But as argued here last summer the problems in the financial markets are not just of illiquidity that Fed policy can address; they are rather of credit and insolvency that no amount of monetary easing and liquidity injections can ease.