Three Top Economists Agree 2009 Worst Financial Crisis Since Great Depression; Risks Increase if Right Steps are Not Taken
Nouriel Roubini  
http://www.rgemonitor.com/roubini-monitor/255564/top_economists_agree_2009_worst_financial_crisis_since_great_depression

Three of the country’s most respected economists warned of a deepening economic crisis if the banking system is not quickly fixed in a wide-ranging conversation last night with Cambridge Energy Research Associates (CERA) Chairman Daniel Yergin and an audience of nearly 1,000 people who filled the Westin Galleria ballroom at CERAWeek 2009.

Nouriel Roubini, professor of economics and international business at New York University, Kenneth Rogoff, professor of economics and public policy at Harvard University, and Nariman Behravesh, chief economist and executive vice president for IHS Global Insight, all agreed that this is the worst financial crisis since the Great Depression.

Rogoff, formerly chief economist at the International Monetary Fund (IMF), described the current recession as “a once in a 50-year event.” He said that “2009 basically is a write-off” but added, “I’m ‘constructive’ about 2010 in that we’ll have tepid growth in the world economy. It’s unusual for a recession to last more than two years. However, it will be very slow coming out of it. The big growth will be in some of the emerging markets. It’s the developed countries where the biggest hurt is occurring.”

Rogoff argued that the $790 billion stimulus bill agreed to this week is only part of the answer. “It’s like giving a blood transfusion while the patient is still bleeding,” he said. “If we’re not going to fix the banking system at the same time, then it’s just a temporary boost in the economy. We have simply not taken the proper decisive action with the banks.”

Roubini, also chairman of RGE Monitor, said: “Even if we have positive growth next year, say one percent, it’s going to feel like a recession even if we’re out of it. If we don’t get the monetary part right, the fiscal policy right, if we don’t fix the banking system the right way, if we don’t deal with the debt burden of the household sector I see a one-third possibility of (an extended) L-shaped Japanese stagnation.”

Behravesh disagreed. “This is the Great Recession, not the Great Depression 2.0 and not Japan in the last decade,” he said. “We’re seeing a different policy response than what we saw during the Depression and Japan in the 1990s. It took Japan seven years to deal with its banking crisis. The U.S. has moved in a matter of months and it’s had some fiscal effect. Our fiscal stimulus may not be enough or the right kind, but it’s much different than the Depression or Japan.”

Behravesh forecasts a decline in gross domestic product for 2009 in the U.S. of 2.5 to 3.0 percent and a global decline in GDP of 1.0 to 1.5 percent.

Why did people not see the vulnerability of the U.S. economy to an economic bust? “Whenever you have an environment where there’s a giant influx of money into your country -- and here it was coming out of emerging markets -- it gives an illusion that things are better than they really are,” Rogoff explained. “You lose your judgment. At the heart of what happened is that we lost perspective on what was real and what was really fueled by these low interest rates, this influx of money.”

When asked by Yergin, Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money and Power, about the role that oil might have played in the economic downturn, Roubini, said: “The financial crisis would have led to a severe downturn in oil prices anyway. I would not be surprised if oil prices fell below $30 later this year. There could be even further weakness in oil prices unless OPEC is able to cut production even further.”

Behravesh, author of the recently published book Spin-Free Economics: A No-Nonsense, Nonpartisan Guide to Today's Global Economic Debates, pointed to China as having the ability to maintain some economic growth which could “help oil prices get to the $50-60 range sometime next year.” Rogoff added that oil prices could be “shooting back up when the downturn ends and economies grow. That’s what the historical record shows. The oil price will rise again as the developing world grows.”

All three agreed that the economic stimulus plan is needed, but it alone will not fix the nation’s economic problems. “If there is not an increase in government spending then the contraction will be more severe,” Roubini said. “However, tax cuts will not make a difference. Last year’s tax cuts were mostly saved. Infrastructure spending will take a long time as there are few projects ‘shovel ready’ so the overall impact of the stimulus may be smaller.

“People worry about the housing bust and the drop in consumption,” he added, “but the biggest story is the drop in capital spending. Corporations are concerned about whether they will survive so we’re seeing a global collapse of (capital) spending. That’s why something must be done on the stimulus side to diminish the contraction of economic activity.”

Behravesh added that the old relationship between a consumer-dependent U.S. and an export-dependent world would also need to change. “There is a pent-up demand on the part of businesses, consumers and households in terms of homes and consumer durables. Now everybody’s scared and they’re not spending. The question is ‘when does that pent-up demand get unleashed?’ That could come back very strongly. We tend to underestimate that. In boom times, there’s a tendency to think the business cycle’s dead. The same problem occurs in a bust – that we’ll never get out of this.

“There has to be a fundamental change in the debt-financed consumer spending in the U.S. and the addiction to exports of other countries,” he concluded.

From the Houston Chronicle:

Economists paint gloomy picture

In a freewheeling discussion about “The Great Recession” and energy, top economists painted dark scenarios that could be ranked as bad, worse and horrendous.

“2009 is basically a write-off,” Harvard University economics professor Kenneth Rogoff told a packed audience at CERAWeek, the annual Houston conference that has come to be known as the Davos of the energy world. The other economists agreed.

The good news: “All economic crises end,” he said.

The bad news: Rogoff’s forecast was the most optimistic .

Nouriel Roubini, an economist with New York University’s Stern School of Business, predicted an “L-shaped stagnation” similar to what Japan suffered in the 1990s when that country lost a decade of economic growth.

Roubini offered a caveat, though — when the financial crisis hit Japan it was a nation of savers with a current-account surplus. The U.S. has neither of those advantages.

Roubini, who’s been labeled “Dr. Doom” by some, said the stimulus package and bailout plan is needed but comes at a huge price.

“It’s not a free lunch. We have to finance it. Let’s not kid each other,” he said. “We need a stimulus, but the cost of it will be massive down the line.”

But Rogoff said the stimulus plan could turn out to be worse than doing nothing if President Barack Obama’s administration doesn’t get its act together and fix the banking system.

He likened the trillion dollars as giving a blood transfusion to someone who’s bleeding to death without fixing the reason they’re bleeding to death.

“It makes it easier to fix the banking system if they’re going to fix the banking system,” he said. “Otherwise it’s worse than nothing.”

Nariman Behravesh, chief economist for IHS Global Insight, offered the most positive outlook of the night, although it could hardly be classified as bright.

“This is the Great Recession. It is not the Great Depression 2.0, and it is not Japan’s lost decade,” he said.

Behravesh predicted a modest rebound starting in 2010 with the possibility that crude oil’s benchmark price could go back up to $50 or $60 a barrel.

Roubini would not predict where oil prices could go past 2009, but said a slump closer to $20 a barrel this year would not surprise him.

He scoffed at the idea that either $140-plus oil this summer or subprime mortgages could have caused the sharp downturn in the economy, citing myriad debt loads from over-leveraged banks to bad student loans to credit card debt and government bonds as the primary drivers.

Roubini predicted job losses have only just begun and will continue through 2010. Whether an economic turnaround is possible in 2011 or 2012 depends entirely on how policymakers do their jobs, he said.

Harvard’s Rogoff said the hubris of officials to think that the U.S. could continue to borrow two-thirds of the world’s savings year over year without ever having to deal with that debt was “utterly delusional,” adding, “The political system can’t get its head around the problem.”

“2009 is a lost cause. We’re working on 2010 here, but if they don’t do anything in the next couple of months, 2010 is going to be a lost cause, too.”