A prominent American economist predicts that America will suffer a severe 18-month recession.
Nouriel Roubini, a professor of economics at the Stern School of Business at New York University and the chairman of RGE Monitor, has gained the nickname “Dr Doom” for his gloomy predictions on the American economy.
Last week he argued that the American stockmarket was being unduly optimistic in pricing in a six-month- long recession. Even if the Treasury’s $700 billion (£380 billion) bail-out plan is accepted, a banking crisis will not be avoided, in his view.
“The recession train has already left the station in the first quarter of the year and the financial/banking crisis will be severe regardless of what the Treasury/Fed [Federal Reserve] do from now on,” he says.
To resolve the crisis and avoid a multi-year “L-shaped” recession such as that suffered by Japan in the 1990s, Roubini says more must be done than just taking bad/toxic assets off the balance sheets of financial institutions.
He says: “It is also necessary and fundamental to reduce the debt overhang of insolvent households via a significant debt reduction on their mortgages and also recapitalise undercapitalised banks with public capital in the form of preferred shares.”
These are problems not addressed by the treasury plan, leading Roubini to describe it as a “disgrace”. He says: “It is a bail-out of reckless bankers, lenders and investors that provides little debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer.”