Predicting the crisis of 2011

So fast forward to 2010. Despite recovering economies and stock markets, Roubini said that the crisis was not over: “We are just at the next stage. This is where we move from a private to a public debt problem… We socialised part of the private losses by bailing out financial institutions and providing fiscal stimulus to avoid the great recession from turning into a depression. But rising public debt is never a free lunch, eventually you have to pay for it.”

Then, in May 2010, the first Greek debt crisis hit. Here was Roubini’s take on the situation: “We have to start to worry about the solvency of governments. What is happening today in Greece is the tip of the iceberg of rising sovereign debt problems in the eurozone, in the UK, in Japan (NYSEMCO – news) and in the US. This… is going to be the next issue in the global financial crisis.”

Roubini had called the financial crisis, the second leg of the Credit Crunch, that is just emerging at the moment.

So, what next?

So, you may be interested in hearing what Nouriel Roubini is predicting right now.

Firstly, is the US and Europe (Chicago Options: ^REURTRUSD – news) ‘s economic slowdown just a ‘soft patch’, or is it something worse?

Roubini is clear — we are likely to enter a second recession. “The first half of 2011 showed a slowdown of growth — if not outright contraction — in most advanced economies. Optimists said this was a temporary soft patch. This delusion has been dashed. Even before last week’s panic, the US and other advanced economies were odds-on for a second severe recession.”

What about the European debt crisis? “…the eurozone periphery is now contracting, or barely growing at best. The risk that Italy or Spain — and perhaps both — will lose access to debt markets is now very high. Unlike Greece, Portugal and Ireland (Berlin: IIK.BE – news) these two countries are too big to be bailed out.”

So what can we do? Well Roubini recommends short-term fiscal stimulus, rather than the fiscal tightening that is occurring in most countries, followed by medium-term fiscal austerity. He also recommends further quantitative easing and the European Central Bank cutting interest rates to zero.

Perhaps most revealingly, he says: “Another recession may not be preventable. But policy can stop a second depression. That is reason enough for swift and targeted action.”

Now, everyone is fallible, and Roubini has got some of his calls wrong in the past, but I am minded to agree with his view that things are going to get worse before they get better. I don’t know about you, but I am battening down the hatches.


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