In his latest post, “Forbes Reporting on the Financial Meltdown Scenario,” Nouriel Roubini clarifies his views towards the economy. He recently posted a 12 step meltdown scenario which appears to have focused a few minds.
As Roubini elaborates, he thinks a financial train wreck is reasonably likely, but the outcome will be a short, nasty recession (think a worse version of 1990-1991).
From RGE Monitor:
The idea that I presented in a recent article that we face the risk of a “financial meltdown” is becoming more mainstream. Today Munchau in the FT discussed it by analyzing the risk of a Great Depression style of debt-deflation; he argued that such a scenario – or a Japanese style decade long stagnation – is unlikely.
I do agree that such a scenario of a protracted economic US stagnation is unlikely and have been quoted to say so in a NYT article over the weekend that discussed the risk of a Japan style stagnation in the US: “Still, even Mr. Roubini sees scant chance of the United States following Japan’s path. “I’m very pessimistic, but I don’t think it will be anything like Japan,” he said.”
But I believe that cannot rule out a severe short-term (as opposed to long-term) financial meltdown that will lead to a severe and painful US recession and global near recession. While the chances of ending up in a Great Depression or Japan decade long stagnation scenario are very low, the chances of a severe recession and a systemic financial crisis more severe than we have had since the 1980-82 recession are now high. And my view is that the ability of the Fed and policy makers to avoid such as systemic financial crisis is highly limited.