AN ECONOMIST dubbed “Dr Doom” has warned that the dramatic downfall of a US bank could trigger a catastrophic global recession.
Nouriel Roubini, who correctly predicted the 2008 financial crisis, fears the collapse of the Silicon Valley Bank will provoke an “even worse” fiscal fiasco than fifteen years ago.
Nouriel Roubini said the effects of the US financial crisis would ripple across the world[/caption]
The collapse of banking giant Lehman Brothers sparked a global financial meltdown in 2008[/caption]
He said the ripple effect of the second-largest bank failure in US history will wreak havoc far and wide across the pond.
His concerns have already started to take effect in Europe, as bank stocks plummeted by 5.65 per cent on Monday – the biggest slide in more than a year.
Shares in UK banks were bruised during the SVB fallout, as a dramatic sell-off wiped almost £400billion from global financial stocks.
As nations across the globe teeter dangerously on the edge of recession, Roubini warned the meltdown of the US bank is creating the perfect storm for a credit crunch.
Roubini told Project Syndicate that the country’s financial crisis is “leading to larger losses in financial markets – thus undermining the wider economy.”
The economist, a former member of the White House’s Council of Economic Advisers during the Clinton administration, said there is a “serious risk of a systemic meltdown.”
A catastrophic combination of issues is putting incredible pressure on the US economy, which Dr Doom says will ultimately lead to international chaos.
He explained: “The problem is no longer merely sub-prime mortgages, but rather a ‘sub-prime’ financial system.
“The housing recession – the worst in US history and worsening every day – will eventually see house prices fall by more than 20%, with millions of Americans losing their homes.
“Moreover, commercial real estate is beginning to follow the downward trend in residential real estate.
“After all, who wants to build offices, stores, and shopping centers in the empty ghost towns that litter the American West?”
Roubini also said that consumer credit is now collapsing – leading to millions defaulting on credit cards and loans they just can’t afford.
Countries around the world are clutching their coins tighter as they assess the risk of the banking collapse becoming a global contagion.
Dr Doom said: “In a typical US recession, the S&P 500 index falls by an average of 28% as corporate revenues and profits sink.
“Losses in stock markets have a double effect: they reduce households’ wealth and lead them to spend less; and they cause massive losses to investors who borrowed to invest in stock, thus triggering margin calls and asset fire sales.
“There is thus a broader risk that many leveraged investors in both equity and credit markets will be forced to sell illiquid assets in illiquid markets, leading to a cascading fall in asset prices to below their fundamental values.
“The ensuing losses will aggravate the financial turmoil and economic contraction.
“Indeed, adding up all these losses in financial markets, the sum will hit a staggering $1 trillion.
“Tighter credit rationing will then further hamper the ability of households and firms to borrow, spend, invest, and sustain economic growth.
“The risk that a systemic financial crisis will drive a more pronounced US and global recession has quickly gone from being a theoretical possibility to becoming an increasingly plausible scenario.”
On Monday, Europe‘s Stoxx 600 index plummeted 2.34 per cent, Germany‘s DAX was down 3 per cent, while France‘s CAC 40 fell by 2.9 per cent.
The UK’s FTSE 100 declined by 2.6 per cent and shares of Switzerland‘s Credit Suisse hit a record low, tumbling by more than 12 percent.
Roubini added: “That’s the natural lag of the global contagion. That’s why even in Europe, stocks are way down, even though they had nothing to do with this particular [collapse].”
It has emerged SVB was brought down partly thanks to poor risk management and failing to hedge — or cushion — against rising interest rate risks.
Its investment in US government bonds fell dramatically in value as interest rates rose — causing it to lose $1.8billion (£1.5billion).
The Justice Department and Securities and Exchange Commission are now investigating the collapse in the US.
As the news emerged, Roubini slammed the lender – relied upon by thousands of burgeoning tech firms – for dabbling in cryptocurrency.
There had been warnings that the shock collapse of SVB would threaten the 14,000 UK tech jobs and some of the country’s most innovative companies.
Roubini wrote in a tweet: “All banks doing crypto biz are collapsing. Good riddance.”
The European stock market already took a beating on Monday after the collapse of SVB[/caption]
Dr Doom warned financial markets could take a hit of up to $1 trillion[/caption]