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.
Has Mr Roubini allowed for the remarkable ability of politicians to Make Things Worse?