Nouriel Roubini was right. Nouriel Roubini was wrong. You read that correctly. In the business of market forecasting, being right but being early is to be wrong. Years in advance, Roubini argued that the housing boom was a house of cards and that when the inevitable bust came all the cards would be flat on their backs. But if you exited the stock market when he started to broadcast his views, you left a lot of money on the table. Such is life in financial circles.
Now, Roubini is hardly alone is predicting hard times. He goes somewhat further than most, however. In his Financial Times column, he says that avoiding another severe recession may be mission impossible:
All advanced nations need a weaker currency, but they cannot all have it together – if one is weaker another has to be stronger. This is a zero sum game which risks only the resumption of currency wars. Early skirmishes are beginning as Japan and Switzerland try to weaken their exchange rates. Others will soon follow.So can we avoid another severe recession? It might simply be mission impossible. The best bet is for those countries that have not lost market access – the US, UK, Japan, and Germany – to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity. The US downgrade will hasten demands for fiscal reduction, but America in particular should commit to look for significant cuts in the medium term, not an immediate fiscal drag that will worsen growth and deficits.
Most western central banks should also introduce further QE, even though its effect will be limited. The European Central Bank should not just stop rate hiking: it should cut rates to zero and make big purchases of government bonds to prevent Italy or Spain losing market access – the outcome of which would be a truly major crisis, requiring doubling (or tripling) of bail-out resources, or debt workouts and a eurozone break-up.
Finally, since this is a crisis of solvency as well as liquidity, orderly debt restructuring must begin. This means across the board reduction on the mortgage debt for the roughly half of America’s households that are underwater, and bail-ins for creditors of banks in distress. Greek-style coercive maturity extensions, at risk free rates, must also come for Portugal and Ireland, with Italy and Spain to follow if they lose market access. Another recession may not be preventable. But policy can stop a second depression. That is reason enough for swift and targeted action.