Another Economic Crash: Reserve Bank of India Governor Raghuram Rajan

Reserve Bank of India Governor Raghuram Rajan says another economic crash is probably in the

books.  Dont dismiss him as just the RB India Governor.  Raghuram Rajan is also a Professor of Finance at University of Chicago and one time chief Economist at IMF.

I personally keep track of Raghuram Rajan and Satyajit Das, both great names in the Finance world but also critical of current Financial Instruments.   Raghuram Rajan had paper out in 2005 "Has Financial Development Made the World Riskier? which I came across in a Salon article in 2006 (see below). 

Based on Raghuram Rajan's article and what I knew working in (Fixed Income) Bonds and Derivatives (till 2009) had a  discussion with a Grad school Colleague also in Derivatives (he worked for a Hedge fund) in 2006. I kept on betting against the trend and made some money with PUT options in late 2007 collapse. I used only money I could afford to loose, so made a little money, 1:10 returns or more.)

Date: Fri, Apr 28, 2006 at 5:29 PM
Subject: Re: Credit Derivatives: Wall Street bets on a housing bubble

http://www.salon.com/tech/htww/2006/04/18/credit_swaps/index.html

Wall Street bets on a housing bubble

I think could be optimistic if things are given time to play out. Maybe the time is to equilibrium is a little faster now, than in the past simply because of the "global village" thing.

However, the pessimist in me wonders if two  or three of the pivots of instability give way at the same time.

e.g. In no particular order (Italics: Current additions to explain to non-technical)

1. ARM's ((Adustable Rate Mortgages) start to collapse (default)

The Lehman defaults kicked in defaults, then mortgages (MBS) and Credit Derivatives defaulted. If the US govt had not stepped in and backstopped the Banks, complete collapse. Anyway that was the end of Investments Bank. The thinking at that time a couple would fail; instead all failed.

2. Iran requires payment in Euros
3. China starts pull out of the Treasury Market
4. Some nut creates a virus that just freezes the net for a few weeks (that would give a run on the banks.)

To me whats scary is that the whole world is so tied together that

instead of it becoming stabler, its created more points of instability not

just for the US but for the world.

I guess the converse also holds in that as everyone is tied together

that there is a vested interest to keep things as stable as possible.

Anyway, the underlying issues of the 2007-2008 Financial Collapse have not gone away. The huge debt loads, by Govts (e.g US: $12.6 Trillion 104% of GDP see post on GDP calculations) and personal debt (US $99,000 103% of Disposable Income) have not decreased.  This can only happen by write off (debt forgiveness) and restarting the clock.  It cannot be decreased by earnings  taxes or austerity, the debts are too large. (see US cant tax its way out of deficits).

Note: Actual liabilities of the US Govt, when Social Security, Medicare, and federal employees' future retirement benefits are included is $86.8 trillion, or 550% of GDP.

The debt in turn is the basis of many Financial Instrument, from simple Bonds to complex Mortgage Backed Securities and CDO's.   These Instruments in turn are the basis of the Asset side Investments of many balance sheets. So when defaults occur it cascades into loss of value in instruments which in turn trigger balance sheet funding requirements.

Triggers can also be political/social turmoil.  Think Ukraine. Ebola or Iraq.

So something has to give, its not a question of IF but WHEN.   If you knew when, you would be a $ millionaire with a small investment against the trend.