Is Professor Roubini too much of an optimist?

For the past year or more Professor Nouriel Roubini (pictured left) has held the crown of super-bear but he now appears to have a rival in Roger Farmer, a member of the National Bureau of Economic Research.

He told Bloomberg last week that there is a 50 per cent chance of a depression in the US, while Roubini is only on the record as forecasting a severe recession. Fine lining the distinction between the two is difficult but the old adage is that a recession is when your neighbor loses their job and a depression when you lose your job.

Another down year

The UCLA’s Farmer thinks the recession will last ‘at least another year’ and ‘everything depends on business confidence, and what I see is declining confidence’.

With GM and the US auto companies narrowly avoiding bankruptcy last week with a seasonal bailout package, you do not need to be an economics professor to work that one out. He suggests the government start buying US equities to support stock prices.

New York University’s Roubini looks increasingly jet lagged from his constant conference hopping and perhaps needs a retreat to think through his position again. But it was only a year ago that economists debated for and against a recession. Times have moved on.

A lot is now expected of president-elect Obama. Farmer warns that a government stimulus package will have ‘questionable’ immediate effect on consumption and financial markets. To quote another old saying: you can bring a horse to water but you can not make it drink.

That is to say if you give people worried about their jobs and homes some money they may well decide to save it rather than spend, and the same might also well be true for corporations.

Infrastructure boom

Overtime what will most likely emerge is a huge infrastructure spending program of the FDR type from the 1930s. US roads, airports and basic infrastructure could do with upgrading, and this would provide real jobs and economic support.

But it would take a couple of years to wind up a program of any size and it needs to be big to make any impact. China has already committed itself to a huge infrastructure spending program to help offset crashing export orders from the USA.

So it is perfectly possible that the stimulus packages and bailouts of next year will fail to drag the US out of its recession and this could indeed become a depression. The impact will be felt by all US citizens and across the world in a massive ripple effect. Those worst affected will be anybody with debts or losing their job.

However, the US did manage to pull itself out of the Great Depression, and the seeds of a future recovery can already be seen in falling long-term mortgage rates, for example. But unfortunately just as the boom times went on for years until they stopped, so the bad times will not be over anytime soon.

Much as I hate to think of the gloomy Professor Roubini as too much of an optimist, I am afraid that might prove to be true.
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