Wednesday, 4 March 2009

New Roubini Interview

New Nouriel Roubini interview on the state of the economy in Time Magazine.

TIME: Where is the global economy heading from here?

Roubini: My concern right now is that this U-shaped recession we are in could turn into something much uglier, meaning a Japanese-style L-shaped recession: near stagnation or stag-deflation. We're in the worst global synchronized recession in the last 60 years. Unless we take the right policy actions, we'll end up in a near depression. I did not want to use that term six months ago. At that time, I said the chances of a near depression were only 10%. But today those chances are 33% or so.

How can this be avoided?

You have to have a set of concerted, coherent policies done not just by the U.S. but by Europe, Japan, China and everyone else. The credit crunch is just massive. One thing that's needed is much more aggressive monetary easing. The second dimension is that you need much more fiscal stimulus — in the countries that can afford it — that is front-loaded. The U.S. [stimulus package] is $800 billion, but only $200 billion is front-loaded. Of that $200 billion [in stimulus] this year, half of it is tax cuts. That's going to be a waste of money, because people are not going to spend it.

Why hasn't the banking mess been cleaned up?

You have to do triage between banks that are illiquid and undercapitalized but solvent and those that are insolvent. The insolvent ones you have to shut down. You need more aggressive credit creation by the government, or you have to force the banks to lend. We're in a war economy. You need command-economy allocation of credit to the real economy. Otherwise, the incentive individually for every institution is to pull out, not extend credit. Not enough is being done. (See which businesses are bucking the recession.)

What do you think of President Barack Obama's progress so far?

I have to give [the members of Obama Administration] credit. In about six weeks, they have done three major things: the $800 billion stimulus package, a mortgage program that is much more than the previous Administration did and a bank plan that, however flawed, at least has the benefit of not having another bailout of the banks. The glass is half full. But for each one, there are some flaws ... the bank plan wants to pretend that the government is half pregnant with the banks. The debate is between partial and full nationalization, not between nationalization or no nationalization. Go and do the job and do it right by taking over the banks and restructuring them and selling them back to the private sector.

What's the best-case scenario?

If you do everything right, you avoid an L, and that's really good news. But you still have a situation in which global growth this year is negative. GDP growth in advanced economies is going to be negative through the fourth quarter of this year, and next year, growth will be anemic — probably 1% or lower. Job creation is going to be negative. Even in the best scenario, there will be job losses through the end of next year. In the best of circumstances, we have a two- to three-year recession in advanced economies.

Is there a part of the world you are especially worried about right now?

I'm worried about every part of the world. People thought the rest of the world would decouple from the U.S. That was nonsense. Emerging Europe is on the verge of a fully fledged sovereign-debt, banking and currency crisis. I think China is in a near recession right now. Many emerging markets, even those that are in better shape, are in severe trouble. I don't think there is any economy in the world right now that is safe.

Is a breakup of the European monetary union possible?

I don't see that as being likely, but the probability of that eventually happening is rising. Right now, we are facing a situation in which many countries now have banking systems that are too big to fail and also too big to be saved. If Ireland or Greece go bust, then there is already a commitment from the Germans and French to, one way or another, bail them out — because they know that otherwise the monetary union is going to collapse. But if you have to rescue on top of them Austria and Italy, Portugal and Spain, and Belgium and the Netherlands, then that is not going to be possible. I am still of the view that we can avoid a collapse of the monetary union, but this is really the very first true test of its stability.

Many people are pinning their hopes on the Chinese government to stimulate demand. Is that justified?

I have to give credit to the Chinese. Their fiscal stimulus will contain the degree of economic contraction. But China is radically dependent on U.S. growth. Forcing state-owned enterprises and banks to spend more when you have overcapacity, or to lend more when there are already large [amounts of bad debt], is going to postpone a problem, maybe by a few months. But it will lead to a harder fall down the line. A hard landing is unavoidable, given what has happened to the rest of the world.

Any good news out there?

Honestly, as of now, I don't see any. Policy is moving in the right direction. My concern is this is too little, too late.

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