Larry Summers: Oh, I see. And most blogs go up to ten?
Nouriel Roubini: Exactly.
Larry Summers: Does that mean it’s grimmer? Is it any more bearish?
Nouriel Roubini: Well, it’s one grimmer, isn’t it? It’s not ten. You see, most blokes, you know, will be playing at ten. You’re on ten here, all the way up, all the way up, all the way up, you’re on ten on your blog. Where can you go from there? Where?
Larry Summers: I don’t know.
Nouriel Roubini: Nowhere. Exactly. What we do is, if we need that extra push over the cliff, you know what we do?
Larry Summers: Put it up to eleven.
Nouriel Roubini: Eleven. Exactly.
What will be the consequence of losses of over $1 trillion and, possibly, as high as $2 trillion? That would wipe out most of the capital of most of the US banking system and lead most of US banks and mortgage lenders – that are massively exposed to real estate – to go belly up. You would then have a systemic banking crisis of proportions that would be several orders of magnitude larger than the S&L crisis, a crisis that ended up with a fiscal bailout cost of over $120 billion dollars…
No wonder that some serious observers are already considering a new future scenario – however unappealing – where most of the US banking system and housing will be nationalized.
Update: By popular demand, the original.