NEW YORK, Aug 3 (Reuters) – The United States is in the second inning of a recession that will last for at least 18 months and help kill off hundreds of banks, influential economist and New York University Professor Nouriel Roubini told Barron’s in Sunday’s edition.
Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Roubini said — at least $1 trillion and more likely $2 trillion.
The banks will become insolvent because of mounting losses as a result of the housing bust and because they have only written down their subprime loans so far, he said. Still in front of them are their consumer-credit losses, for which they lack the reserves, Barron’s reported.
He also said there are hundreds of millions of dollars outstanding in home-equity loans that could be worth zero, too.
U.S. consumers, meanwhile, are “shopped out” and saving less, while the Federal Reserve’s performance in handling the crisis has been poor, Roubini said, because it failed to see that the problem extended beyond subprime mortgage debt.
Now, Roubini told Barron’s, the government is overregulating, bailing out troubled participants and intervening in every market.
“The regulators should investigate themselves for bailing out Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities,” he told Barron’s. “It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich.”
He said that sometimes it is necessary to use public money to rescue institutions, but in a way that does not bail out the people who made the mistakes. “In each one of these episodes, the government bailed out the shareholders, the bondholders, and to some degree, management,” Roubini told Barron’s.
As for the banks that will go bankrupt, they will include community banks that finance homes, stores, downtown areas, commercial real estate and other mainstays of U.S. towns and cities, Roubini said.
“Of three dozen or so medium-sized regional banks, a good third are in distress,” he told Barron’s, saying half of the group could go bankrupt. Some big banks could wind up insolvent, he added, but said they might be deemed too big to fail.
Nouriel stressed that he is “quite bullish” about the state of the global economy and that he is positive about the medium and long term.
(Reporting by Robert MacMillan, editing by Martin Golan)
Sun Aug 3, 2008