A year from now we may look back on this column and thank heaven that not all of its grim predictions came true. But don't bet your kid's lunch money against Nouriel Roubini. A professor of economics at New York University's Stern School of Business and chairman of the consultancy RGE Monitor, Roubini in 2006 predicted the housing bust and an ensuing recession, among other on-the-money calls. And he says the worst is still ahead. Amar Bhid, a professor of business at Columbia University, is a former McKinsey executive, a staff member for the commission that investigated the stock market crash of 1987, and author of the new book The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. He, too, expects a trying year ahead. But beyond the black cloud hanging over America, he sees a country chastened and an economy strengthened by the ordeal.
MARIA BARTIROMOWhere are we right now in this economic slowdown?
NOURIEL ROUBINIWe are looking at the most severe U.S. recession in the last 50 or 60 years, both in terms of length and depth. Every piece of economic news that's come out in the last few weeks and months has been much worse than expected, from employment, holiday sales, capital spending by the corporate sector, the continued collapse of residential real estate, and a weakening even of the trade balance, so the rest of the world is also contracting.
You say we are looking at a deep and possibly multiyear recession in America; an additional 15% drop in U.S. home prices; painful recessions in Europe, Canada, Japan, and other established economies; a sharp slowdown in China, India, Russia, and Brazil; and possibly default by some emerging-market countries. Can anything stop this locomotive bearing down on us?
The only positive news I see is that the policy response, both in the U.S. and in other countries, is going to be quite aggressive. But in my view, that policy stimulus is going to have most of its effects in 2010. And the cost of issuing a huge amount of public debt will be trillion-dollar budget deficits this year and next, which eventually is going to have a crowding-out effect on private demand. So either we issue a huge amount of public debt to finance it, and that's going to push up interest rates, or we print a lot of money that eventually is going to be inflationary and again damaging to the economy. We have no choice but to have an aggressive policy response, but it's not a free lunch.
In a new article in Foreign Policy, you suggest that corporate earnings will shock any equity analysts still deluding themselves. Where will the Dow be at midyear?
I see it about 20% below current levels. Same for the S&P.
How many jobs do you think will be lost in 2009?
I expect job losses of at least 2.5 million.
How much confidence do you have in the new economic team that President-elect Obama has named?
I think folks like Tim Geithner, Larry Summers, and others are as good as you can get. But the problems they're facing are so vast that even the best economic team and the best economic policies are not going to start having an effect until the end of 2009 [or beginning of] 2010.
Do you think criticism of how Hank Paulson and his team have handled the crisis is fair?
It was a very tough situation, of course, but I think that the policy response by Paulson has been relatively confused, not credible, and inconsistent. So I give them a low grade in terms of performance.
As an investor, what do I do in this scenario?
Safe assets such as government bonds are the place to be until midyear when we see whether the fog of uncertainty clears in the direction of a recovery.
And keep as much of my assets as possible in cash for the near term.
Absolutely.
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