The Housing Chronicles Blog: "Dr. Doom" Roubini peers ahead

Thursday, October 16, 2008

"Dr. Doom" Roubini peers ahead

With an opinion piece published in the Toronto Globe & Mail entitled "Yes, Chicken Little, the sky is really falling," Dr. Noriel Roubini has some advice for a global financial system in crisis, and warns of what might happen if the right solutions are not applied (hat tip:

The rich world's financial system is headed toward meltdown. Stock markets have been falling most days, money markets and credit markets have shut down as their interest-rate spreads skyrocket, and it is still too early to tell whether the raft of measures adopted by the U.S. and Europe will stem the bleeding on a sustained basis...

The delusion that economic contraction in the U.S. and other advanced economies would be short and shallow – a V-shaped, six-month recession – has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the U.S. and close to two years in most of the rest of the world. And given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession – such as the one experienced by Japan after the collapse of its real-estate and equity bubble – cannot be ruled out...

As we have seen in recent days, it will take a big change in economic policy and very radical, co-ordinated action among all economies to avoid disaster. This includes:

Another rapid round of interest-rate cuts of at least 150 basis points on average globally;
A temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut are distinguished from distressed but solvent institutions that must be partially nationalized and given injections of public capital;
A rapid reduction of insolvent households' debt burden, preceded by a temporary freeze on all foreclosures;
Massive and unlimited provision of liquidity to solvent financial institutions;
Public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
A massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash- strapped local governments;
An agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors' surpluses to avoid disorderly adjustment of such imbalances.

Anything short of these co-ordinated actions may lead to a market crash, a global financial meltdown and worldwide depression. The measures adopted by the U.S. and Europe are a start. Now they must finish the job.

Now you all go out and have a nice day, ya hear?

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