The worst of the financial crisis is ahead of us. That’s what Nouriel Roubini told me the other day.
He should know. The NYU economics professor -- who has been nicknamed “Dr. Doom” -- predicted the financial mess we’re in way back in 2006. He gave a speech at the International Monetary Fund warning of an impending crisis: homeowners defaulting on mortgages, an oil price shock, the unraveling of mortgage-backed securities, the collapse of the global financial system, declining consumer confidence and a deep recession. The audience was skeptical. But as we all know now, Roubini was right.
Now everyone asks what does Nouriel think? When I met with Roubini at NYU’s Stern School of Business, he had already had a full day: he just returned from London, he did a 4 a.m. radio interview on Bloomberg, and taught a class. He was scheduled later in the day to participate on a panel discussion about the financial crisis moderated by Charlie Rose. “All I do is media, teach, media, teach,” Roubini sighed, although it was clear that he is enjoying his new-found celebrity status.
So what is this economic prophet forecasting now? He told me things will get much worse before they get better. He thinks the U.S. will avoid a depression, but he’s predicting a “severe recession” that will last two years. You can hear his complete analysis in the TV interview I did with him. But here are a few of his thoughts that didn’t make it on air.
Roubini says the economy will go through a “vicious cycle” between now and 2010: “as the real economy contracts that will increase credit losses, as there’s more tightening of financial conditions it will make the recession even worse. It’s kind of like a negative feedback loop from the real economy to the financial system back to the real economy.”
Is there a silver lining in this gloomy crisis, I asked. Here’s what Roubini said: “There’s talk about redesigning the financial architecture of how we supervise and regulate global financial institutions to make sure that crises of this severity don’t occur. So hopefully, they will create a new system that is less crisis prone.”
Throughout my conversation with Roubini, he didn’t smile once. His tone of voice was dreary and his facial expression had a pained look. I guess it will take a global recovery before we see Roubini crack a smile.
Comments
I am a small business owner and watch the economy and NBR every night and had to share something from a dream I had the other night. Everybody had stopped spending their money. So to stimulate spending again, the gov't created another stimulous package aimed at consumer spending. Every taxpaying homeowner got an interest free $5,000 loan broken up into several dated vouchers that could only be used to place things on layaway or buy a car, not pay existing bills. This kept the economy slowly moving forward and primed the pump instead of having it all spent at once. It created jobs. The voucher made the payments and the merchants weren't afraid to extend the credit because it was backed by the gov't and items didn't leave store until paid for. And people had incentive to buy a house so they could qualify. And those that didn't want it simply paid it back at tax time. My dreams don't usual make this much sense.
Professor Roubini gave a very revealing solution in how he would advise the next president in going about solving to the Current financial crisis. The multifaceted solution has one thing in common. First, re capitalization and rescuing of solvent financial solutions, while shutting down insolvent financial institutions, equates to giving money to banks, ether outright or in exchange for equity. The proposal of the government spending to boost demand is an other increase of spending by our government, and calling the Federal Reserve to cut interest rates further to stimulate the economy weakens our currency against other currencies. All these suggestions increases money into our financial system; much of it in the form of more money spent by the government, which is already laden with the largest fiscal deficit on record.
So the culminating result of all these proposed actions can be stated in one word; inflation. It will virtually limit our government to but one choice, that of debasing our currency with a wild expanse of monetary growth. As a nation we will simply pay off our obligations with greatly reduced money (worthless dollars). Bond holders beware.