One on One with Nouriel Roubini of NYU
Monday, April 13, 2009
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SUSIE GHARIB: Joining us now to talk more about GM, the financial system and the economy, Nouriel Roubini, economics professor at New York University's Stern School of Business. And welcome back to NIGHTLY BUSINESS REPORT.
NOURIEL ROUBINI, ECONOMICS PROF., NYU STERN SCHOOL OF BUSINESS: Pleasure being with you.
GHARIB: Let me first talk to you about Goldman Sachs. They come out with these stronger than expected earnings. Last week Wells-Fargo came out with strong earnings. Do you think the worst is over for the banking sector?
ROUBINI: No. My estimate suggests actually that expected heavy losses for U.S. banks are going to be something like $3.6 trillion this year and the IMF is now coming with estimates of $3.1, $4 trillion for the global economy. I think in the case of Goldman Sachs, you have a bank holding company now still behaving like the hedge fund. They are borrowing from the government at 0 percent. They got $12 billion from the government for AIG exposure and they're doing lots of very high, risky trading activities and giving the (INAUDIBLE) spreads, they are making money, but it is kind of like gambling on public's money.
GHARIB: The last time we talked, you thought that nationalizing banks was the best solution. In the meantime, the Treasury's come out with this plan to buy back toxic assets. What is your view on that plan? And do we still need to nationalize the banks?
ROUBINI: In my view, the Geithner plan can work for those banks that are going to be found after the stress test to be solvent. They still have toxic assets. You have to buy them. That is a good plan. But if some banks are found to be insolvent beyond pale, then that plan doesn't work because then the write-down implies insolvency. For those banks, I'm still of the view that you would rather take them over, rather than keep them as zombie banks, clean them up and sell them back to the current sector.
GHARIB: Let me move along to General Motors. You heard our report. What impact do you think a GM bankruptcy would have on the economy?
ROUBINI: It depends on the type of the bankruptcy. If it goes into Chapter 11 and it's disruptive, I think the effects will be more serious than if there is a prepacked (ph) bankruptcy in which they agree on the terms of the haircut and so on, and the government is going to put (INAUDIBLE) financing. So depends which kind of bankruptcy. The effects on the economy in either case for a quarter can be about 1 percent of GDP in terms of effect. So we're going to survive them but I think it could be disorderly if it goes on for many years., the bankruptcy.
GHARIB: When you think of bankruptcy and the ripple effect that might have on auto suppliers and whatever, you also think about job losses. To what extent do you think that the job market just will continue to deteriorate. The last time we talked you were talking about an unemployment rate of something like 10 percent next year. Is that still your forecast?
ROUBINI: Well, at the rate at which we are losing jobs right now over 600,000 per month, I think we are going to have an unemployment rate of 10 percent or above already by June or July of this year. We are losing about 600,000 jobs per month. There is no reduction in the trend. If you add up the number in three months we're going to be already 10 percent. By year end we'll be at 11 percent and next year it will be at 12 percent.
GHARIB: So you don't see job growth happening any time soon?
ROUBINI: There is absolutely no evidence. Job losses are accelerating, not decelerating. Initial claims for employment benefits are as high as ever. The continuing claims are as high as ever. There is absolutely no indication there is any improvement in the job market.
GHARIB: So then what is your outlook for the economy? When will we see recovery in the U.S. economy?
ROUBINI: The optimists say by the second half of this year, we're going to go back to 1 to 2 percent growth. You might see that. We're going to still have negative growth of the order of minus 2 percent by year end. That's better than minus 6 in the last two quarters, so the rates have slowed down and contractions will become smaller. Next year the growth is going to be well below 1 percent. The consensus says about 2 percent, so it's going to feel like a recession (INAUDIBLE) because we'll have unemployment rate at 11, 12 percent next year.
GHARIB: So what else does Treasury or the Obama administration have to do to turn this around? Do you think that another stimulus package is needed? What needs to be done?
ROUBINI: I would have had the stimulus package was more front-loaded this year. A lot of it is going to be next year. I would attack much more aggressively, (INAUDIBLE) the banks in the credit crunch by taking over institutions that are having problems, recapitalizing the other ones faster and we need to do more to avoid the tsunami of foreclosures in mortgages.
GHARIB: Thank you so much for coming. I wish you had better news for us.
ROUBINI: Pleasure being with you tonight.
GHARIB: My guest tonight, Nouriel Roubini, economics professor at New York University's Stern School of Business.
