Roubini Interview with Time (helpful in understanding the depth of the financial crisis)

[RedEarth]

Economist Nouriel Roubini, chairman of New York-based research firm RGE Monitor, earned the nickname "Dr. Doom" by warning as early as 2005 that America's speculative housing boom could trigger an economic crisis. At the time, he was dismissed by many as a perpetual pessimist. Today, he's a sought-after analyst and a popular guest on financial news programs and websites — and he is as gloomy as ever. Over breakfast in Hong Kong this week, the New York University professor talked with TIME's Michael Schuman about the perils that lie ahead if governments do not do more to confront the myriad problems facing global financial markets and economies.

Where is the global economy heading from here?

My concern right now is that this U-shaped recession we are in could turn into something much uglier, meaning a Japanese-style L-shaped recession: near stagnation or stag-deflation. We're in the worst global synchronized recession in the last 60 years. Unless we take the right policy actions we'll end up in a near-depression. I did not want to use that term six months ago. At that time I said the chances of a near-depression were only 10%. But today those chances are 33% or so. (Read "25 People to Blame for the Financial Crisis.")

How can this be avoided?

You have to have a set of concerted, coherent policies done not just by the U.S., but Europe, Japan, China and everyone else. The credit crunch is just massive. One thing that's needed is much more aggressive monetary easing. The second dimension is that you need much more fiscal stimulus — in the countries that can afford it — that is front-loaded. The U.S. is $800 billion but only $200 billion is front-loaded. Of that $200 billion this year, half of it is tax cuts. That's going to be a waste of money because people are not going to spend it.

Why hasn't the banking mess been cleaned up?

You have to do triage between banks that are illiquid and undercapitalized but solvent, and those that are insolvent. The insolvent ones you have to shut down. You need more aggressive credit creation by the government or you have to force the banks to lend. We're in a war economy. You need command-economy allocation of credit to the real economy. Otherwise the incentive individually for every institution is to pull out, not extend credit. Not enough is being done. (See what businesses are bucking the recession.)

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What's the best-case scenario?

If you do everything right, you avoid an "L," and that's really good news. But you still have a situation in which global growth this year is negative. GDP growth in advanced economies is going to be negative through the fourth quarter of this year, and next year growth will be anemic, probably 1% or lower. Job creation is going to be negative. Even in the best scenario, there will be job losses through the end of next year. In the best of circumstances, we have a two- to three-year recession in advanced economies.

Is there a part of the world you are especially worried about right now?

I'm worried about every part of the world. People thought the rest of the world would de-couple from the U.S. That was nonsense. Emerging Europe is on the verge of a fully fledged sovereign debt, banking and currency crisis. I think China is in a near-recession right now. Many emerging markets, even those that are in better shape, are in severe trouble. I don't think there is any economy in the world right now that is safe.

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Any good news out there?

Honestly, as of now, I don't see any. Policy is moving in the right direction. My concern is this is too little, too late.

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http://www.time.com/time/business/article/0,8599,1882729,00.html

[bertman]

1. Thanks for the post, RedEarth. What does Roubini propose as the immediate action to

deal with this?

[RedEarth]

2. Based on what I've read, it seems that the most immediate step

that Roubini mentions is nationalizing the insolvent banks. Some people think it is better to refer to nationalizing the banks as preprivatization or reorganization....it seems to be easier to swallow. In essence, it would be the same thing the FDIC does when it takes over a bank, but it would be on a much larger scale. One thing to keep in mind, the 10 largest banks have approximately 70% of the deposits, so if a few of them were allowed to just crash the effects would be catastrophic. And as Roubini mentions, just doing what we're doing doesn't seem to be working, so nationalization or reorganization seems to be the only viable option available.

As Roubini mentions, coordinating with other countries is necessary as well as a larger more immediate stimulus, however it would seem those steps would take longer implement or pass congress.

Bottom line, this crisis is massive and global and we will be feeling the effects for many years to come.