Roubini Sees `Silent' Run on Banks, Urges `Triage': Bloomberg Radio Interview

You can listen here to an audio of a 44 minutes interview that I gave on Bloomberg Radio yesterday September 30^th. I will elaborate later today on the rising risk of the "mother of all bank runs", i.e. the risk of a run on the uninsured deposits in the US banking system. In Q2 of 2008 the FDIC reports $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits are not insured.

Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000. Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits.

Particularly at risk are the cross border short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $1 trillion. I will also discuss later today the appropriate emergency policy responses necessary to prevent this "mother of all bank runs" (i.e. the need for a temporary blanket guarantee on all US deposits combined with a rapid triage between insolvent banks that should be quickly closed and distressed but solvent – conditional on liquidity and capital injections – banks that should be rescued).

Roubini Sees `Silent' Run on Banks, Urges `Triage': Audio (click on the “Play” button in the attached link)

Sept. 30 (Bloomberg) -- Nouriel Roubini, chairman of Roubini Global Economics and an economics professor at New York University's Stern School of Business, talks with Bloomberg's Ken Prewitt and Tom Keene about the government's $700 billion plan to revive the credit markets, the state of the banking system and the outlook for the economy and financial markets. (Source: Bloomberg)

00:00 "Complete breakdown" of interbank lending

01:09 Treasury's rescue plan "completely flawed"

03:04 "Good thing" that House rejected plan

05:50 "Silent" run on banks, need for "triage"

07:53 "The recession is going to be severe."

08:50 Temporary "blanket guarantee" on deposits

12:21 Lehman's collapse; bank crisis; hedge funds

16:43 European banks; credit-default swap market

20:57 Outlook for congressional action on rescue

22:53 "At this point, anybody can collapse."

24:22 Need for "massive consolidation" among banks

26:03 Effects of bank crisis; market regulation

32:59 Mortgage rates; household debt; inflation

36:00 Bush's remarks on financial rescue

38:14 Need to "rethink" financial system

39:26 Investment strategy; European banks

41:20 Banks' exposure to Fannie, Freddie

42:16 Central bank monetary policy

Running time 43:51