Worst Financial Crisis Since the Great Depression

Longtime bear Nouriel Roubini is out today with this bit of apocalyptic, headline grabbing prognostication. Roubini, you'll remember, predicted recession for 2006 and 2007 before claiming prescience in 2008. I wish I could write him off as a perma-bear, but there's too much actual data supporting his argument. In his latest media alert, Roubini mixes some valid (and scary) points with plausible conjecture and oddly placed policy opinions (I wish he'd leave out the last group, they detract from the compelling facts of the situation).

The facts are:

• Small banks have massive exposure to real estate (the average small bank has 67% of its assets in real estate)
• Dozens of large regional/national banks (a la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust
• The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone
• Losses are spreading all the way up to prime mortgages and commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); ... to corporate bonds ... to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds
• In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis

Implications of the facts:

• FDIC will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient
• The collapse of many [risk] counterparties will lead to a systemic collapse of this market. Municipalities will go bust, hundreds of small banks, some major money center banks, the entire independent broker-dealer sector will evaporate along with $1-$2 trillion of credit losses.
• Equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.
• Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster
• The rest of the world is in for the pain too and as a result, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.

Dire stuff indeed. The skeptic in me can't help but ask why, in a severe global recession and with the subtraction of trillions of dollars of leverage, commodities that are up 500% in a few years would only pull pack 30%.