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  • Roubini's Steps for Avoiding a Depression

    In the period before the global economic crisis of 2008, Nouriel Roubini was tagged "Dr. Doom" by many media outlets. The label was often dismissive, but it became more of a badge of honor after crisis hit. Roubini has remained vigilant about the vulnerability of the financial markets. His concern now is a global depression. In order to avoid depression, Roubini says there must me a multi-national approach. While austerity measures in many countries are necessary, he argues that other nations must postpone austerity in order to inject stimulus into the global economy. Writing at Project Syndicate , Roubini outlines several other steps: Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures. Third, to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in a European Union-wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. Also, since the US and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential. Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency. Even with policy changes, it takes time for governments to restore their credibility. Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely. Agree or disagree with Roubini, by proposing specific steps, he does allow for a meaningful discussion. Two big questions raised by his proposals are 1) is a coordinated global policy possible in today's political climate, and 2) if so, then how might it come about? Read How to Prevent a Depression here .

  • Mark Thoma on the Output Gap

    Mark Thoma is no pessimist. He believes that the economy will recover, just as it has after past recessions, and even the Great Depression. He even points out that the US economy is now recovering at "trend rate"-matching the long, long term rate of growth of GDP from 1870-2008. BUT, Thoma points out that this recovery is still going to take a good bit of time. He shares this projection in his CBS Moneywatch column: Read Does This Ease Your Worries?: US GDP from 1870-2008 here .

  • Gallup Poll: Most Americans Believe US Still in a Recession

    Checking in with Gallup 's latest findings, we see that most Americans don't agree with what the Federal Open Market Committee expressed this week--that the economy is in a slow recovery. So never mind what the FOMC says, or for that matter, what the NBER says. And you thought economists were a negative group. More on the poll here .

  • Depression Talk

    The depression talk has ratcheted up over the last few days. On Friday, Robert Reich looked at the unemployment data, and concluded that, with one in every six workers either unemployed or underemployed, it is time to recognize that we are in a "depression." All this means that the real economy will need a larger stimulus than the $787 billion already enacted. To be sure, only a small fraction of the $787 billion has been turned into new jobs so far. The money is still moving out the door. But today's bleak jobs report shows that the economy is so far below its productive capacity that much more money will be needed. This is still not the Great Depression of the 1930s, but it is a Depression. And the only way out is government spending on a very large scale. We should stop worrying about Wall Street. Worry about American workers. Use money to build up Main Street, and the future capacities of our workforce. And in today's Wall Street Journal, Chapman University economists Steven Gjerstad and Vernon Smith (the 2002 Nobel Laureate in Economics) look at bubbles in asset markets and try to break down why some bubbles "do no damage to the financial system while another one leads to its collapse." In doing so, they find the events of the last 10 years are "eerily similar" to events in the years leading up to the Great Depression. And in their analysis, they focus on consumer debt. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge. Read Gjerstad and Smith's op-ed here .

  • WSJ March Forecast: Failing Grades and Little Optimism

    Economists polled in the March Wall Street Journal Forecasting Survey "see a nearly one-in-six chance that the US will fall into a depression." And they have pushed back their projection of when the current recession will end. In last month's survey, the magic month was August, now it is October, and only 13% of economists project the end to come before the third quarter of 2009: The forecast also shows unemployment climbing through the rest of 2009, with economists predicting another 2.8 million jobs lost. Overall, the 49 economists surveyed for the forecast are not happy with the Obama Administration. 42% of respondents gave President Obama grades below 60 on a 0-100 scale. Treasury Secretary Geithner scored a 51 average. The Journal's Phil Izzo and Kelly Evans share the grades in this video: You can access all of the March Forecast's data in useful multimedia charts here .

  • Bernanke on 60 Minutes

    Ben Bernanke let CBS's Scott Pelley inside the Federal Reserve for last night's interview on 60 Minutes , and the Fed Chair let Pelley in on his thinking about where the US economy is headed. Pelley's first question: "When does it all end?," to which Bernanke replied: "It depends a lot on the financial system," he replied. "The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time." Bernanke thinks that the Fed's and the federal government's actions steered us away from a new depression. But that doesn't mean he doesn't continue to have mixed feelings about some of the bailout action. He once again told of his anger at the rescue of AIG--a popular topic this weekend as the global insurance company was to give out hundreds of millions dollars of bonuses to top executives even as it was going back to the government for more billions in bailout dollars. Bernanke told Pelley it was "absolutely unfair that taxpayer dollars are going to prop up" AIG when it was "operating out of sight of regulators" and making dubious, "terrible bets." But he said it had to be done in order to save the US economy. And he explained the thinking in preventing Wal Street collapses for the good of the whole country: "Let me give you an analogy, if I might," Bernanke said. "If you have a neighbor, who smokes in bed. And he's a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, 'I'm not gonna call the fire department. Let his house burn down. It's fine with me.' But then, of course, but what if your house is made of wood? And it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, 'What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?' That's where we are now. We have a fire going on." Here's an excerpt from the interview. Watch the full interview, and read a transcript of the interview here .

  • How Bad Is It?: Three Economists Discuss the Severity of the Crisis

    Nariman Behravesh , Chief Economist at IHS Global Insight , Kenneth Rogoff , Professor of Public Policy and Economics, Harvard University; and Nouriel Roubini , Professor of Economics and International Business, New York University, and Chairman, RGE Monitor , spoke about the state of the economy recently at an event sponsored by CERA (Cambridge Energy Research Associates). The three were in agreement on most issues: they think the economy is going to remain bad for the rest of 2009, and they support the stimulus efforts of the US government, though economic recovery will depend on several other factors and the stimulus plan is not going to do the job on its own. Amid all the gloom, Behravesh takes care to point out that, as bad as things are, this is not the Great Depression, and it may not even be as bad as Japan's crisis during the 1990s. You can watch the full discussion here .

  • Odds of a Depression

    It is hard to get odds on whether we are heading into a depression ("decline in per-person GDP or consumption by 10% or more") by looking at US data because "the US macroeconomy has been so tame for so long." So writes Robert Barro , professor of economics at Harvard and a fellow at Stanford's Hoover Institution, in today's Wall Street Journal. So, in an effort to find the likelihood we are in for a depression, Barro and Jose Ursua looked at historical data from 34 countries, paying close attention to "linkages between depressions and stock market crashes." And he concludes that there is a 1 in 5 chance we will see a minor depression: Looking at all of the events from our 34-country history, we find that there is a 28% probability that a "minor depression" (macroeconomic decline of 10% or more) will occur when there is a stock-market crash. There is a 9% chance that a "major depression" (a fall of 25% or more) will occur when there is a stock-market crash. In reverse, the chance that a minor depression will also feature a stock-market crash is 73%. And major depressions are almost sure to have stock-market crashes (our data show the probability is 92%). In applying our results to the current environment, we should consider that the U.S. and most other countries are not involved in a major war (the Iraq and Afghanistan conflicts are not comparable to World War I or World War II). Thus, we get better information about today's prospects by consulting the history of nonwar events -- for which our sample contains 209 stock-market crashes and 59 depressions, with 41 matched by timing. In this context, the probability of a minor depression, contingent on seeing a stock-market crash, is 20%, and the corresponding chance of a major depression is only 2%. However, it is still the case that depressions are very likely to feature stock-market crashes -- 69% for minor depressions and 83% for major ones. You can read Barro's op-ed in today's Wall Street Journal here . For information on Barro and Ursua's working paper, Stock Market Crashes and Depressions, go to the National Bureau of Economic Research .

  • Nouriel Roubini: Risk of a "Near Depression"

    NYU Stern Business School Professor Nouriel Roubin i was one economic forecaster who predicted the credit crunch, and this week he has been predicting more dire economic news ahead in 2009. He's in Davos this week for the World Economic Forum, and he sat down with Bloomberg TV for an extended interview. In this clip, he says the US may eventually need to "nationalize banks."