Oct. 14 (Bloomberg) — Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, driving the stock market lower after it rallied the most in seven decades yesterday.
“There are significant downside risks still to the market and the economy,” Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. “We’re going to be surprised by the severity of the recession and the severity of the financial losses.”
The economist said the recession will last 18 to 24 months, pushing unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.
``This will be the first round of recapitalization of the banks,” Roubini said. “The government has to decide to intervene much more directly in the provision of credit and the management of these companies.”
The Standard & Poor’s 500 Index rallied the most since 1933 yesterday, rising 12 percent, on the government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars. The S&P 500, which has fallen 36 percent since its October 2007 record, dropped 0.5 percent today.
`Really Tanking’
“The stock market is going to stop rallying soon enough when they see the economy is really tanking,” Roubini added.
The U.S. unemployment rate stood at a five-year high of 6.1 percent last month. Home prices in 20 U.S. metropolitan areas fell 16 percent in July from a year earlier, the most since records began in 2001, according to the S&P/Case-Shiller home- price index. Bank seizures may push home prices down further, scaring away buyers in coming months, after U.S. foreclosures rose at the fastest rate in almost three decades in the second quarter, according to the Mortgage Bankers Association.
Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be “closer to $3 trillion,” up from his previous estimate of $1 trillion to $2 trillion.
The International Monetary Fund estimated $1.4 trillion on Oct. 7. Financial firms have so far reported $637 billion in losses, according to data compiled by Bloomberg.
To contact the reporters on this story: Eric Martin in New York at [email protected]; Rhonda Schaffler in New York at [email protected].
Last Updated: October 14, 2008 16:24 EDT
By Eric Martin and Rhonda Schaffler
Sopurce: Bloomberg
Money does not DISAPPEAR it just changes position, and I would like to know where in Hell it went! Something really stinks here, and the truth, however harmful should out – even if it means anarcy and riots in the streets! The whole country of Iceland has been destroyed – WHY? Hard working American citizens have been robbed through their 401k Where did the money go? Who has it now? I do not want lynchings in the streets, I want a map of who, where, when and how be made public so this never happens again! The American Empire is worth more than a few swift swindles – We need to know the truth and perhaps change a few key laws. Fool us once, shame on us, pull our pants down and have your way with us the second time around, shame on George Bush and his crooked cronies! The truth will out, we don’t know who killed JFK, but we are still looking, and George, we will find out exactly what happened, you will run, but you cannot hide forever, not even in Dubai!
Hi Nadine,
I accidentaly deleted your comment. Still had your comment in my email account.
Nadine said:
“Where is the money, the Iraqi war, bush should pay off all the debts, he is a crook.”
Thank you for your comment.