Nouriel Roubini is the New York University professor who predicted the collapse of our financial system, as early as 2007, that led to the “Great Recession” in late 2008-early 2009 and in the process earned the name, “Doctor Doom.” In a recent article he now says that the free-fall in the economy has ended. I said this had happened in April of this year. So score one for Roubini, the collapse of the financial system, and score one for Cecchini, we hit bottom in the second quarter of this year.
Roubini now warns that the present recovery will be “U” shaped instead of “V” shaped, i.e. the recovery will not be as rapid as many say, rather it will take longer for our economy to recover. He even warns that we could even see a “W” shaped recession in which, after a brief spell of upward movement, the economy takes a nose dive again.
One of the reasons he says the recovery is weak is that, “the financial system … is still severely damaged.” He obviously did not read the front page of the paper in which his article appeared. A story there reports that the US Government earned large fees from banks that used the TARP program and who have already repaid all the funds they took last fall. Even more revealing, the Fed’s shares in the one bank still on the plan, Citibank, have netted Uncle Sam a $11 billion paper profit in the last few weeks. These banks also passed the famous “stress test” administered to them earlier this year.
Roubini’s more troubling prediction, the “W” shaped recession, rests on what he calls the dilemna facing the Feds. If the Feds raise taxes and/or cut spending to cover the massive deficits they are running, they could cause a second drop. However, if they maintain the large deficits, they will eventually drive interest rates up, thereby frustrating recovery and causing a second drop.
Well Roubini missed the “bottoming out” of the recession, so one should be leary of his predictions of where the economy will go now. He is still convinced that the “toxic assets” are a major drag on the overall economy. His conviction comes from his still sharp devaluation of these assets to the depressed value of collateral property. However, since the home market has bottomed and prices are now moving up again, Roubini and his ilk are now focusing on the value of commercial property, where such terms as “subprime mortgages” and “negative equity” are not relevant. Here one looks at occupancy rates and they are indeed down.
Well I say that the recovery is well underway and the now ending third quarter will be even better than the second quarter of this year. The recovery, led by the Feds spending, will be a “V” and we will not have a “W.” Moreover, the Feds stimulus will be replaced by a renewal of the “securitized debt” market that provided the largest single increase in credit in history.
Watch this space.