Roubini: Slowdown Brings Forward New Financial Crisis

Bloomberg

By Scott Hamilton - Sep 6, 2011 7:28 PM GMT+0300

Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC, said the current slowdown in the world economy has brought forward the timing of a new financial crisis.

“I thought a few months ago that the perfect storm would be 2013,” Roubini said in an interview in London today. “But now, the economic weakness in the U.S., euro zone and the U.K. is front loaded. So we’re going to double dip earlier. The climax of it could be 2013, or it could be already earlier. It depends on what policy tools are available.”

Three years after the collapse of Lehman Brothers Holdings Inc., financial shares in Europe are under assault and the cost of insuring bank debt is at records as the global recovery falters and the euro-region crisis weighs on the economy. There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support, said Roubini, also a professor at New York University’s Stern School of Business.

“You need to restore economic growth, not five years from now, you need to restore it today,” Roubini said. “In the short term, we need to do massive stimulus, otherwise there’s going to be another Great Depression. Things are getting worse and the big difference between now and a few years ago is that this time around we’re running out of policy bullets.”

The economist said another financial crisis “is already manifesting itself” in developed economies.

Cash Holdings

Roubini said if he had large amounts of money to invest, he would “mostly keep it in cash,” especially in dollars, as the U.S. currency tends to strengthen during financial crises. He said he would also favor government bonds of countries with small budget deficits and low public debt, such as Canada and Australia, and avoid stocks and commodities.

“If we see a nasty global recession, then risky assets, starting with equities, are going to hurt and going to hurt big time,” Roubini said.

Roubini predicted a bubble in U.S. housing prices before the market peaked in 2006. His forecasts haven’t all been accurate. When the Standard & Poor’s 500 Index fell to a 12-year low on March 9, 2009, he said it probably would drop to 600 or lower by the end of that year. Instead, the U.S. equity benchmark gained 65 percent for the rest of 2009.

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; John Fraher in London at jfraher@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net