Wednesday, October 15, 2008

Breaking Down Nouriel Roubini's View on the Economy

How hot is Nouriel Roubini? It appears even the possibly clueless have a clue.

Back to business, Henry Blodget has broken down Roubini's take on the economy from comments he made on Bloomberg TV, our comments are in italics:

The $250 billion bank recapitalization is only the beginning. The government will soon have to re-up (because it hasn't dealt with the huge writedown problem), and it will eventually have to take a much more active role in bank management. Otherwise, we'll just have a plague of zombie banks, like Japan.

Given that $125 billion of the first $250 billion went to healthy banks, that more money will be needed if you take a Hank Paulson view of the world, instead of a Jeffrey Miron view, should not come as a surprise.

As for the the strings attached to the money and government's active role n management, it will distort the economy, politicize the bankng industry to an even greater extent and possibly ruin the banking industry forever. If Roubini is in favor of this, he is nuts.

House prices will fall 40%, worse than the Great Depression. (Sounds horrifying, but we're more than halfway there).

Given the supply of housing, this is not an out of the ball park forecast. However, one eye must be kept on Fed money printing activities. If there is strong money printing, it will limit the decline.

Worst recession in 40 years, now projected to last 18-24 months.

I just can't see how Roubini makes this forecast, given the erratic monetary policy of the Bernanke Fed. Unless, you know what the Fed is going to do, there is no way you can make forecasts out 18 to 24 months.

Stock market rally will sputter Economy is "really tanking".

Again, tell me what the Fed is going to do and I will tell you what the stock market is going to do. Otherwise, this forecast is nothing more than a Tarot Card forecast.

Total bank losses from crap debt will be "closer to $3 trillion" (up from previous estimate of $1-$2 trillion). This compares to about $650 billion of writeoffs so far.


Our new $1 trillion annual deficits will likely cause Russia, China, and the other countries who are funding our spending spree to say, hey, wait a minute, why are we funding this banana republic. Raise our interest rate or we're history.

A very accurate and very likely scenario. Viciously rising interest rates is the ticking time bomb.

If you listen to the full Bloomberg interview, it's clear that Roubini is a Keynesian, inflationist and interventionist. He calls for further cuts in interest rates,an active fiscal policy, and intervention in the management of banks. Karl Marx would be proud.

Not surprisingly, he also has adopted the popular but wrongheaded view that laissez faire has caused the current crisis, and completely ignores the Fed money manipulation and clearly doesn't understand Michael Rozeff's important insight into how too much regulation is hampering the recovery.

Maybe, it's not all that surprising he gets along with the clueless.

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