NEW YORK - (Yahoo) -  ""I would tell audiences that we were facing not a bubble but a froth - lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy." Alan Greenspan, The Age of Turbulence.

      That used to be Mr Greenspan's view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University's Stern School of Business, founder of RGE monitor.

      Recently, Professor Roubini's scenarios have been dire enough to make the flesh creep. But his thinking deserves to be taken seriously. He first predicted a US recession in July 2006*. At that time, his view was extremely controversial. It is so no longer. Now he states that there is "a rising probability of a 'catastrophic' financial and economic outcome"**. The characteristics of this scenario are, he argues: "A vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe."

      Prof Roubini is even fonder of lists than I am. Here are his 12 - yes, 12 - steps to financial disaster.

      Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.

      Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks' ability to offer credit.

      Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from mortgages to a wide range of consumer credit.

      Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.

      Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.

      Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.

      Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt. Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.

      Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.

      Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.

      Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.

      Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices".

      These, then, are 12 steps to meltdown. In all, argues Prof Roubini: "Total losses in the financial system will add up to more than $1,000bn and the economic recession will become deeper more protracted and severe." This, he suggests, is the "nightmare scenario" keeping Ben Bernanke and colleagues at the US Federal Reserve awake. It explains why, having failed to appreciate the dangers for so long, the Fed has lowered rates by 200 basis points this year. This is insurance against a financial meltdown.

      Is this kind of scenario at least plausible? It is. Furthermore, we can be confident that it would, if it came to pass, end all stories about "decoupling". If it lasts six quarters, as Prof Roubini warns, offsetting policy action in the rest of the world would be too little, too late.

      Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis.

      The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce.

      The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

       *A Coming Recession in the US Economy? July 17 2006, www.rgemonitor.com; **The Rising Risk of a Systemic Financial Meltdown, February 5 2008; ***Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not, February 8 2008.."

      NEW YORK - (247wallst.com) -  "The evidence comes in in pieces. One bit of bad news here and one there.

      Today, the FT reported that US banks had tapped the Fed’s Term Auction Facility for over $50 billion in the last few weeks. As one analyst pointed out "The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

      The news that Credit Suisse (NYSE: CS) had "found" $2.85 billion in write-downs for asset-backed paper was not terribly encouraging. It is certainly an indication that banks are still having substantial problems valuing assets which are based on a weakening housing market and do not trade because of a locked-up credit markets. The banks can guess at the value of what they hold,  but have no way to know for certain.

      There is also an emerging body of analysis which says that large banks may have to write-down about $15 billion in LBO loans in the early part of this year. According to The Wall Street Journal "the extent of the damage is likely to emerge as banks file their annual reports next month and report first-quarter results in April."

      None of these calculations take into account the falling value of paper backed by student loans, credit card debt, or loans for car purchases. They also leave out a potentially massive hit if bond-insurers like MBIA (MBI) or Ambac (ABK) face cuts in their credit ratings.

      The total market in LBO debt now runs around $200 billion. The size of the mortgage-back and consumer-credit markets can only be guessed at. Write-downs for some of these securities have not begun in earnest.

      The debacles at AIG (AIG) and Credit Suisse are surely a sign that financial companies and their auditors are having trouble putting a dollar amount on assets for which there is not market.

      Every sign, and that is every sign, points to bank and brokerage write-downs in 2008 which will make 2007 seems like a picnic..."

      MINNEAPOLIS (UPI) -- "The cost of wheat surged to a record $19.80 a bushel this week on the Minneapolis Grain Exchange as grain supplies dwindle.

      The St. Paul Pioneer Press reported Saturday that with worldwide crop supplies reaching their lowest point during the last 60 years, the cost for a single bushel of wheat now sits at nearly 300 percent that of a record 1996 price.

      "This wheat market has given us a glimpse of the what-if -- what if we don't deliver the goods on the production side, because the demand is here," grain marketing specialist Ed Usset said.

      Wheat trading has been focused on the Minneapolis Grain Exchange as grain is a prevalent crop in Minnesota, along with North and South Dakota.

      The Pioneer Press said in addition to record wheat prices, the cost of both corn and soybeans also have increased for the upcoming spring..."

      WASHINGTON (Reuters) - "The U.S. military has been stretched dangerously thin by the Iraq war, according to almost 90 percent of retired and current military officers polled on the state of America's armed forces.

      Eighty percent said it would be unreasonable to expect the U.S. military to wage another major war successfully at this time, according to the poll by the Center for a New American Security think tank and Foreign Policy magazine.

      More than 3,400 serving and retired officers took part in the poll, organizers said. Around 90 percent were retired officers, a large majority had combat experience and about 10 percent had served in Iraq or Afghanistan.

      The findings reflect concerns expressed publicly, although usually in less stark terms, by top U.S. military officers, who say frequent long deployments to Iraq and Afghanistan have put great stress on both troops and equipment.

      "We are putting more strains on the all-volunteer force than it was ever designed to bear," Army Lt. Col. John Nagl, a prominent counterinsurgency expert, said at a panel discussion in Washington on Tuesday to announce the results of the survey.

      Eighty-eight percent of respondents said the U.S. military had been stretched dangerously thin by Iraq. Sixty percent said the military was weaker than five years ago, 25 percent said it was stronger and 15 percent said it was about the same..."

      NEW YORK - (New York Times) -  "Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like  subprime mortgages, may become a household term.

      Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

      The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

      No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.

      It is entirely possible that this market can withstand a big jump in corporate defaults, if it comes. But an inkling of trouble emerged in a recent report from the Office of the Comptroller of the Currency, a federal banking regulator. It warned that a significant increase in trading in swaps during the third quarter of last year “put a strain on processing systems” used by banks to handle these trades and make sure they match up..."

      WASHINGTON (AP) -- "Air Force officials are warning that unless their budget is increased dramatically, and soon, the military's high-flying branch won't dominate the skies as it has for decades.

      After more than seven years of war in Afghanistan and Iraq, the Air Force's aging jet fighters, bombers, cargo aircraft and gunships are at the breaking point, they say, and expensive, ultramodern replacements are needed fast.

      "What we've done is put the requirement on the table that says, 'If we're going to do the missions you're going to ask us to do, it will require this kind of investment,"' Maj. Gen. Paul Selva, the Air Force's director of strategic planning, said in an interview with The Associated Press.

      "Failing that, we take what is already a geriatric Air Force," Selva said, "and we drive it for another 20 years into an area of uncertainty."

      An extra $20 billion each year over the next five -- beginning with an Air Force budget of about $137 billion in 2009 instead of the $117 billion proposed by the Bush administration -- would solve that problem, according to Selva and other senior Air Force officers.

      Yet the prospects for huge infusions of cash seem dim. Congress is expected to boost the 2009 budget, but not to the level urged by the Air Force. In the years that follow, a possible recession, a rising federal deficit and a distaste for higher taxes all portend a decline in defense spending regardless of which party wins the White House in November.

      "The Air Force is going to be confronting a major procurement crisis because it can't buy all the things that it absolutely needs," said Dov Zakheim, a former Pentagon comptroller. "It's going to force us to rethink, yet again, what is the strategy we want? What can we give up?".."

      NEW YORK - (iht.com) -  "While the world frets about a possible U.S. recession, global inflation has quietly climbed to historic levels, confronting policy makers with tough choices that could end up hurting the euro and lifting Asian currencies.

      The dollar, meanwhile, could stabilize after two consecutive years of steep declines, caught between strength against European currencies and weakness versus Asia.

      The dollar's descent accelerated, particularly against the euro, in the second half of 2007 as falling housing prices, volatile equity markets and slack consumer spending pointed to a possible recession in the United States. Now, concerns about growth have moved across the Atlantic.

      The euro fell 2 percent against the dollar last week, the biggest fall since June 2006, as markets began betting that the European Central Bank would have to cut its own borrowing costs, even with euro-zone inflation at unprecedented levels.

      In China, officials are dealing with a different dilemma: keeping growth solid and inflation contained by slowly allowing the yuan to strengthen. Government data there show that consumer inflation remains near an 11-year high.

      At a time when global growth is slowing and prices are rising, a strengthening currency can help protect consumers by increasing their buying power.

      The conventional wisdom says countries with relatively weak currencies will have an easier time battling inflation in 2008 if growth remains stable, because there is more room for them to rise.

      Countries and areas with strong currencies, like the euro, will most likely have fewer anti-inflation tools at their disposal because higher interest rates will risk choking off growth by pushing the currency even higher and crimping exports.

      Asia may be in the best position because central banks there have the most room to let their relatively weak currencies rise to counter price pressures, making them attractive to investors.

      "I see the United States as the deflationary epicenter of the world because of the housing issue and everything that's associated with that," said Martin Schulz, director of international equities with Allegiant Asset Management Group in Cleveland. "I see the reflationary forces in the world coming from Asia.".."

      NEW YORK - (AP) -  "Cereal stockpiles are expected to hit their lowest level in over two decades, contributing to keeping their prices high, a U.N. food agency said.

      The low stocks combined with continuously strong demand - also driven by the growing biofuels industry - to keep prices elevated, the Food and Agriculture Organization said in a report on the global food situation, which was being released Wednesday.

      By the close of the current season, stocks are expected to fall to 405 million tons - down 22 million tons, or 5 percent, from the start of the season, the Rome-based agency said. It would be the lowest level since 1982.

      The food-and-supply demand remains tight, despite an increase in cereal production in 2007 and favorable prospects in 2008, the agency said.

      "We do not anticipate a major downturn in prices even if production rises, because the increase would have to take into account the lower stocks," said Abdolreza Abbassian, an agency official who was part of a team working on the report.

      The report said that "it may require significant increases in production of more than one season's cereal crop for markets to regain their stability and for prices to decline significantly below the recent highs."

      In recent years, food prices have soared amid rising oil prices - which have increased food shipping prices - and growing demands for biofuels..."