When one schedules an interview with NYU Economics Professor Nouriel 'Dr. Doom' Roubini, it's usually best to be prepared for grim news. And on Thursday, "Dr. Doom" did not disappoint, predicting that the United States government will nationalize selected big banks amid an economic contraction he sees continuing through the end of 2009.
"The stock market is a bit ahead of the real macroeconomic and financial news," Roubini, a professor at NYU's Stern School of Business and the chairman of Roubini Global Economics, told Bloomberg News in London Thursday. "We'll have some major banks going belly up that will need to be taken over." Roubini, who called the current stock advance a "bear market rally," did not name which major banks he thought would fall under government control.
(A few) big guns disagree
Roubini's stock market forecast conflicts with some high-profile market analysts, such as Templeton Asset Management's Mark Mobius and Traxis Partners' Barton Biggs, who argue that U.S. stocks are likely to continue their young rally as fiscal stimulus and quantitative easing add dollars and commercial activity to counteract the nation's worst recession in more than two decades.
Other notables who have scrutinized the U.S. Treasury's toxic asset removal plan, though, are more in line with the doc's less cheerful prognosis. Nobel Prize-winning economist and New York Times (NYT) columnist Paul Krugman has expressed serious reservations about the toxic asset plan, arguing that it simply delays inevitable nationalizations of selected major banks. DailyFinance's Peter Cohan also has outlined several drawbacks in the plan.
The three critiques by Roubini, Krugman and Cohan all paint the picture of a political culture simply unwilling to implement nationalization in one fell swoop. Read that way, the government's current actions are merely a step in preparing the American public for the massive policy changes and costs that will occur when a major bank is seized. The risk, as Krugman has noted, is that this could actually drag the economy down even deeper by putting off the normalization of credit that cannot truly take place until the most ailing banks are finally put out of their/our misery.
And he has more
In addition, Roubini told Bloomberg News he now expects U.S. loan and securities losses will total $3.6 trillion. He also sees housing prices dropping another 20 percent in the next 18 months with deflationary forces lasting as long as three years.
Once an obscure, little-regarded academic, Roubini rose to prominence in late 2007 after he successfully predicted -- two-years in advance -- the current global financial crisis and recession. Prior to the crisis, Roubini's views were considered extreme, even fringe. Now he's widely considered our version of Nostradamus.
Economic Analysis: Here's hoping Roubini, Krugman, and Cohan are wrong this time. However, the sense here is that they probably aren't. More than likely, additional public resources will be needed beyond the U.S. Treasury's current effort to clear the financial system of toxic assets, and a major bank or two will have to be nationalized, at least temporarily, probably as a public/private partnership.
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