Dr. Doom Strikes Again

I’ve mentioned Nouriel Roubini in past postings.  The NYU economics professor was recently named the #2 public intellectual in 2008 with the following commentary:

The Economist noted last year that Roubini’s “commentary seems carefully calibrated to avoid any hint that economic disaster may be avoidable.” Sadly, the gloomy sage of the credit crunch has been right almost every step of the way. Dismissed as Dr Gloom (sic), Roubini is almost the only economist who can claim to have seen it coming. As one judge put it: “he has consistently marshalled arguments to demonstrate America’s fiscal imbalances-he was right; now his competition is out of business.”

In a recent Roubini column titled, Will Banks and Financial Markets Recover in 2009?, his short answer is “no”. This is an excellent overview article in an unlikely publication, one that I encourage you to read.  He touches on many of the themes I have been exploring for a while:

  • The nature of the credit crises and it’s fundamental roll in causing our current economic difficulties
  • The near-term threat of deflation
  • The severity and potential length of the current crisis (at least through 2009 in his view)

Unfortunately, according to Roubini,

But the worst is still ahead of us. In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.

While the risk of a total systemic financial meltdown has been reduced by the actions of the G-7 and other economies to backstop their financial systems, severe vulnerabilities remain. The credit crunch will get worse; deleveraging will continue, as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing more price falls and driving more insolvent financial institutions out of business. A few emerging-market economies will certainly enter a full-blown financial crisis.

So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.


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