Friday, April 17, 2009

Roubini Says Financial Gloom Not Going Anywhere

There has been a lot of positive momentum lately in the markets, and people are starting to think that the end is near for the financial crisis. However, Nouriel Roubini warns that this optimism is not based on facts. The facts say that we still have much longer to go with this recession, and getting one's hopes up that the end has arrived will just lead to disappointment, and likely a loss of capital. For more on this, read the following blog post from Mark Thoma that looks at Roubini's latest article.

Nouriel Roubini cautions not to get your hopes up too high:

End of economic gloom?, by Nouriel Roubini, Project Syndicate: Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. ...

Investors are talking of 'green shoots' of recovery... As a result, stock markets have started to rally... This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow ... in the last two quarters, US growth will still be negative .... in the second half of the year... Moreover, growth next year will be so weak ... and unemployment so high ... that it will still feel like a recession.

In the euro zone and Japan, the outlook for 2009 and 2010 is even worse... Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world. ...

By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses. ... So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.

Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel -- no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. ...

Let's hope the end is near, but if you are a monetary or fiscal policymaker, it's far to soon to let down your guard and declare victory. You have to assume it won't be over for some time yet, and plan accordingly. If things turn out better than expected the plans can stay on the self, and existing programs can be scaled back accordingly, but that can't happen until we are certain that recovery is around the corner and we are nowhere near that point yet.

[Also see the commentary surrounding the IMF's World Economic Outlook from Yves Smith, Dani Rodrik, and Real time Economics.]

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