NYU Professor Nouriel Roubini
"Dr. Doom" or Economic Cassandra
by William Schmidt, Ph.D.
See Riubni's daily comments RGE
"This is clearly the worst financial crisis that the US and other advanced
have experienced since the Great Depression..."
stimulus package of $400 billionis needed immediately.. "That's
going to be the only way we're going to make sure that
this recession will be shorter and more
shallow." (This is from his
testimony Congress on October 31st. ) He predicted a sharp drop in
private sector jobs and spending amounting to $450 in 2009 from the weak 2008
A new fiscal stimulus between $300 billion and $400 billion must not wait until the new
Congress. The bailout of the banks is not enough by a mile.
"This fiscal stimulus should be voted on and spent as soon as possible as
delay will make the economic contraction even more severe. A stimulus package
legislated only February or March of next year when the new Congress comes
back will be too late as the contraction of private aggregate demand will be
extremely sharp in the next few months. Such policy action should be legislated
right awayin a "lame duck" session right after the electionto ensure
the actual spending is undertaken rapidly in the next few months. "
A Perfectly Terrible Prediction in 2006
Previously an obscure economist, his words are
to be taken seriously, since he was one
of the few that foresaw what has come to pass. He laid out a bearish scenario to the
Monetary Fund in the fall of 2006 that has proved remarkably prescient. His words
while most economists and network "talking heads" offered reassuring but very
His blog spoke of "hard landing", "equity market slaighter",
and the "coming US banking bust". He correctly predicted that the
Fed's easing of interest rates
would not prevent a recession; there will be a consumer burnout, a global recession
and commodity prices will fall sharply. The US current account deficit is
Foreigners will at some point not finance US deficits. (This prediction has not been
out. The Dollar is considered a refuge, as the world markets fall.)
(Source - his
entire speech to the IMF on September 7, 2006 is available on the internet: )
Phase 1 - The burst of the housing bubble
Phase 2 - Rising mortgage defaults, homes prices start
falling, sale volumes falls,
housing starts and permits decline.
Phase 3 - Home-builders bankruptcies, housing starts and permits crash,
substantial layoffs in construction and real estate-related fields (mortgage brokers,
mortgage lenders, etc.).
Phase 4: substantial price declines in major metro areas, large rise in defaults of prime
but low-equity mortgages. The stage we are now in, he
Phase 5: Large-scale government intervention to help households going bankrupt.
This is a political phenomenon, so the timing and nature of this cannot be reliably
(See - http://www.rgemonitor.com/blog/roubini/242290/
His Outlook Is Bleak
"I believe we're
going to have two years of negative economic growth. The last two recessions
lasted only eight months each ... This time around this is going to be three times as
three times as deep. This is going to be the worst recession the US has experienced
1980s." He could have said
1930's! But he predicted that hundreds of over-leveraged
hedge funds will be wiped out. A global recession will make matters much
and Plant Closings Rising in China - Nov 1,
As for the stock market, he predicts the worst lies ahead. There will not be a "V" bottom. It
will be "L" shaped. The recession will be long and drawn out, lasting 2 or
Offical unemployment will reach 9%. Its now 6.1%.
The government will need to double its
investments. Private investors will be frightened away by more bank failures. The
total credit losses will be 2 or 3 times higher than the $1. trillion estimated by the IMF
(Intenrational Monetary Fund) on October 7. (Source.)
If you can wait until 2012,
it will be descibed optimistially as a "U" bottom, if look out to 2012!
But, he assures us:
a 1930's, decade-long, Depression will be avoided.
Roubini's Prescriptions and Obama's "Economics Brain
His presecriptions are worth noting, as he has gained the ear of a powerful Obama
economics advisor, former Clinton Treasury Secretary and Harvard President,
Lawrence Summers. This former exponent of deregulated banker claims:
have in the last few months become more pessimistic than the consensus. Certainly,
Nouriels writings have been a contributor to that.
1) An immediate stimulus package of $300-$400 Billion.
2) It should go to lower income consumers and include much higher unemployment benefits.
3) There should be a moratorium on main-home foreclosures.
4) A massive public works program is badly needed.
"a massive direct government fiscal stimulus
packages that includes public works,
infrastructure spending, unemployment benefits, tax rebates to lower income households
and provision of grants to strapped and crunched state and local government."
5) Banks must be told to forego their dividends.
Rep-Off", says Roubini
The Administration's top-down trillion dollar give-aways - bailing out banks by loaning
them billions and buying their "toxic" mortgages - are vastly too expensive and
prevent a deep recession. He says the obvious: namely, that the
policies now are simply a huge subsidy for banks who have made greedily reckless decisions
and want their powerful Republican allies, Paulson and Bernanke, to rescue them.
Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System?
It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured
Bad (toxic) debts should not have been purchased Injections of public capital
could have more effectively and less expensively taken the form of the
buying common shares. Roubini reports this is the conclusion of an IMF study of
42 similar banking crises around the world. What the US has done is follow the
example of Paraguay, Jamaica, Bolivia, Maylasia and Mexico. (Not a very
encouraging set of parallels.)
"Thus the claim by the Fed and Treasury that
spending $700 billion of public
money is the best way to recapitalize banks has absolutely no factual basis or
justification. This way of recapitalizing financial institutions is a total rip-off that
will mostly benefit at a huge expense for the US taxpayer - the common and
preferred shareholders and even unsecured creditors of the banks. Even the late
addition of some warrants that the government will get in exchange of this massive
injection of public money is only a cosmetic fig leaf of dubious value as the form and
size of such warrants is totally vague and fuzzy."
Read the Roubini's entire condemnation here:
See Riubni's daily comments RGE Monitor.
Financial Panics, Recessions and
Severe financial panics do not always produce a recession. The Bunker
Hunt-Silver Bubble Collapse in early 1980 saw a "V" bottom and new
highs were made only 4 months after the March 1980 low. The Ocober 1987
34% drop in the DJI owed to Greenspan's reckless tightening of interest rates
and reckless program trading in derivatives and futures. It did not lead
to a recession and the DJI recovered all it lost in 23 months, by September 1989.
Greenspan reversed course and provided all the liquidity that market makers
But recklessly laissez-faire financial policies produced a Depression
from 1930 that continued until the start of World War II. The stock market
what lies ahead, I would suggest A second set of new lows by the DJI was a bad sign
in October 1930. By this thinking, it would be extremely bearish, and likely lead
to a sustained recession, for the DJI to make a new set of lows below the
lows of this year.
In addition, "normal" bear markets do last more than 24 months.
The 1973-1974 bear market was 23 months in duration. That marks the
outer boundaries, unless there is an exogenous event, as the 9/11/2001
attack on the US and we are cursed again by having a recklessly aggressive
war-initiating President. (The DJI peaked in January 2000 and under Bush
there was no final bottom until March 2003, 39 months!)
The DJI in 1973-1974 fell from 1250 (January 1973 high) to 580 (December 1974 low),
about 44%. A DJI decline of more than 44% must also be considered very
The DJI's 2007-2008 decline is 43%, so far. The SP-500, howver, has fallen 46%
from its highs to its lows.
The 1929-1933 bearish experience stands out. In October 1930, the DJI
started making lows below ts lows of 1929. That proved to be very bearish
for stocks and the economy. So, a DJI close much below 8000 would run
that risk. As a warning, that we are not out of the woods yet, I must
note that Paul Volcker has been designated by Obama to be his chief
economic advisor. Volcker was associated with stratosphere-high interest
rates and repeated stock market collapses, October 1978, October 1979,
February 1980 and the 1981-1982 bear market. He is credited with killing
inflation, but the cost to investors in these years was very high. One had
be very agile. Our Peerless Stock Market Timing did
very well in this
period. Investors would, I think, be smart to employ it. You can see how
well it did by studying the charts of bear markets since 1915.
The Biggest U.S.
Stock Market Declines: 1915-2008
ECONOMY, JOB LOSSES, JOBS, EMPLOYMENT, MARKETS
CNBC.com | 10 Nov 2008 | 09:48 AM ET
The economy will worsen in the coming months and caus e the market to fall another 20 to
25 percent in the Un ited States and abroad, said Nouriel Roubini, a New Yor k University
business professor, on CNBCs Squawk Box on Monday.
There's going to be negative growth all the way to t he end of 2009," he said.
The surprises from now are g oing to be on the downside, for the economy, for earnin
gs, for the financial system." (See video of Roubini, l eft.)
Job losses will accelerate in the next months, Roubin i said, and he expects a weak
economic recovery in the short and mid-term.
There's going to be a very slow recovery, because yo u have the financial system
that's impaired; earnings a re not going to grow very fast, and therefore the stock market
will go sideways for quite a while, he said.
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