Nouriel Roubini (NR) has recently given a talk at IMF which is going to be talked about. The title itself would grab eyeballs: ‘The Risk of a U.S. Hard Landing and Implications for the Global Economy and Financial Markets’. He is quite a good economist and his views on global economy and financial markets are quite good.
The transcript of the talk is here and the summary is here. It is quite good, simply said and provides lots of food for thought. The moderator says NR made 3 predictions in his previous talk and 2 have come right:
1) Nouriel said that the U.S. housing correction would not go away quietly, but would go from bad to worse, and I think in this he has certainly been right on the nose.
2) He said that weakness in the U.S. subprime mortgage market would cause broader problems in the financial system, and here again Nouriel was certainly right, although for once perhaps not quite gloomy enough.
3) He put a high probability on the risk of a recession in the United States and a global hard landing. This has not happened yet.
As first 2 were bang-on target Roubini has many people wanting to hear what next. He says it simply that there would be a harder landing in US economy than what others might expect.
His analysis is house prices are going to decline much lower than expected, and as most consumption is funded via loans using housing as collateral, this would lead to lower consumption. As US is a consumption driven economy (C=72% of GDP), there is an impact on the economy.
Further, as value of collateral falls there would be an impact on all those financial instruments created and there is an impact on the entire economy.
The broad analysis is the same as other analysis, his justifying the facts is quite good. For instance, his take on Fed
This is also the reason why I believe that actually while of course the Fed can ease and they are going to ease significantly, I am not sure that the Fed easing is going to resolve the problem the way they did in 1998 because there is an element of insolvency rather than illiquidity. I do not think what the Fed is going to do is going to be enough because it is going to be probably `too little, too late’: too little because now they are worried still about inflation being on the upper limit of their comfort zone and because they are worried, rightly, about moral hazard issues. Therefore they are not going to aggressively ease the way they did in 2001.
And yes he assumed Fed is going to go for a 50 bps cut as 25 bps may not be enough.
Highly recommended reading!