Friday, October 17, 2008

Nouriel Roubini continues predicting gloomy future

"Worst recession in 40 years"

Will last 18-24 months, says Prof. Roubini

From the New York University professor's blog:

Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to ``sputter.''

``There are significant downside risks still to the market and the economy,'' Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. ``We're going to be surprised by the severity of the recession and the severity of the financial losses.''

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

``This will be the first round of recapitalization of the banks,'' Roubini said. ``The government has to decide to intervene much more directly in the provision of credit and the management of these companies.''

. . . .

``The stock market is going to stop rallying soon enough when they see the economy is really tanking right now,'' Roubini added.

Three responses: First, if Prof. Roubini is right about the "40 years" thing, that means the current contraction will be worse than anything that happened in the 1970s. Yikes. For me, that raises questions about inflation in addition to weakened growth. When the credit markets finally unfreeze and the liquidity that the central banks have injected into the system begins to work, will the result be inflation?

Second, Prof. Roubini's prediction is unemployment will hit 9 percent. Unemployment is currently at 6.1 percent, meaning that the professor's prediction is that unemployment will rise by about 50 percent from where it is now. Yikes.

Third, Prof. Roubini's voice can be added to Prof. Paul Krugman's -- the recent Nobel Proze winner -- who recently "confidently" predicted a "nasty, brutish, and long" recession.

These two men are not blowing smoke. They do not have a vested interest one way or the other. What I mean is, they are scholars with data-driven (rather than political) agendas. Listen to them. Businesses, individuals, and families should begin preparing ourselves now, if we haven't begun already.

No comments: