Roubini, Bremmer and Whalen: Fixing the Financial System and Double Dipping

Below is the video of Chris Whalen of Institutional Risk Analytics, Nouriel Roubini and Ian Bremmer of the Eurasia Group giving their assessment of the financial system and the overall economy. The group was on CNBC earlier this week talking about the impact of the financial reform bill on the financial sector and the overall economy. It was mostly Whalen making calls during this video.

It was interesting to see Chris Whalen doing macro because he comes at this from a banking perspective.  He sees a double dip because of a lack of good earning assets for bankers to lend against and continued balance sheet pressure at lending institutions. His view is that the reform bill and its increased capital requirements will be negative for credit growth going forward. He also thinks that bringing all of the shadow banks under the fed’s regulatory umbrella will also be negative for credit growth because of shadow banks’ inexperience in dealing with regulators. He uses GE as an example.

Whalen notes that a senior Fed official told him there have been very few quarters over the past 15 years when the financial sector hasn’t benefitted from extraordinary fiscal stimulus or extraordinary actions by the central bank. We are in one of those quarters right now – and Whalen believes this bodes ill for economic growth in the real economy.

More than that, Whalen thinks the Federal Reserve is in a policy cul-de-sac of its own making and suggests increasing rates now because the time value of money has skewed investing decisions away from "real collateral."  Whalen also indicates he believes that there is a lack of political and financial leadership in this crisis. He says we have run out of ideas. His contacts inside the Fed are "as depressed and lacking in leadership" as he has ever seen them.

Pretty strong words which Roubini and Bremmer take issue with – both in terms of the global leadership and increasing interest rates because of the negative impact higher rates could have on the overall economy. Whalen’s view is that although we have a the steep yield curve now, lenders are soon going to be in a world of hurt as many loans are now rolling over. The new lower interest rates will reduce net interest margins at lenders and hurt earnings – therefore reducing credit.

Watch the last minute for comments on how the reform bill deals with too big to fail.

Interesting conversation. Feel free to add your thoughts in the comments?


Update: Given Chris’ questioning of the zero interest rate policy of the Fed, it occurred to me that the Fed is applying the same medicine it always has. The last time we went through this exercise, the Fed was also worried about a double dip and deflation. So I have started a poll asking whether the economy would have double dipped in 2003 without the low rates. Please see Would The U.S. Economy Have Double Dipped If The Fed Raised Rates in 2003? to participate.

  1. raphicle says

    He’s coming at the problem from the same perspective as the fed even though he’d like to do things differently. His (and the fed’s) focus on credit expansion seems to be ignoring the capacity problem. If everyone is already levered up there’s no way to add debt capacity. Making it cheaper to borrow only pushes out the problem at this point. As he quoted from someone from the fed “they’ve been doing this for 15 years.” I think it’s been 30. In any case, at this point you can’t give the money away without dealing with the existing debt burden.

  2. PhilB says


    I think there are a couple of points you should weigh in on with your own insights.

    Chris made some fine points, but two points I think are clearly debateable if not some what less than acceptable logical deductions:

    1) Fed should raise interest rates: Rather than coming at this from the point of view of potential asset bubbles and other problems with ZIRP, Chris seems to be arguing from the point of view of financial repression (ie. the savers are financing the borrowers in a form of wealth transfer) and the desire to end it.

    Roubini’s point about the steepness of the yield curve is correct. Raising rates would flatten the yield curve at this point, and hence reduce the carry for banks.
    Chris is correct that resetting loans will be at lower yields, but raising short-term rates is not a sollution. The curve will flatten, and loans that reset on short-term rates are mutually offset by the increase in banks short-term financing costs.

    There is a fault here in Chris’s thinking that you should weigh-in on.

    2) Germany-Russia love affair: Chris is clearly an American. I dont think i need to point out that Germany and Russia are as likely to form a strong alliance as Japan and China.

    Did someone forget the wars Germany and Russia have fought? They dont like each other. Period.

    As pointed out, Russsia and American realignment of interests is now and could be in the future a more likely scenario. Obstacles are there, but a true denouement between the US and Russia would have tremendous positive results.
    (think realignment of military priorities, aid in Afghanistan, Iran, access to Russia resources and reopening of its capital markets, tapping a very educated but underutilized work force). The mutual benefits would be huge.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More