How bad will the coming recession be? Roubini writes.

Nouriel Roubini discusses the coming recession that analysts now all agree is nearing.

It is increasingly clear that by now that a severe U.S. recession is inevitable in next few months. Those of us who warned for the last 12 months about a combination of a worsening housing recession, a severe credit crunch and financial meltdown, high oil prices and a saving-less and debt-burdened consumers being on the ropes causing an economy-wide recession were repeatedly rebuffed the consensus view about a soft landing given the presumed resilience of the US consumer.

But the evidence is now building that an ugly recession is inevitable. Thus, the repeated statements by Fed officials that they may be done with cutting the Fed Funds rate are both hollow and utterly disingenuous. The Fed Funds rate will be down to 4% by January and below 3% by the end of 2008.

More revealing of the change in mood the financial press and some of the most prominent market analysts are coming to the realization that a recession is highly likely. The Economist has a cover story and long piece arguing that a US recession highly likely (and citing this author's work with Menegatti and our views on the inevitability of such a recession).

More importantly, on Wall Street some of the leading analysts that had been in the soft landing camp for the last year have now moved their forecast in the direction of hard landing. It is not just David Rosenberg of Merrill Lynch who has been informally in the hard landing camp and is now explicitly talking about a consumer recession. It is not just Jan Hatzius of Goldman Sachs who was always more bearish relative to the soft landing consensus and is today explicitly talking about a US recession and a credit crunch reducing lending by $2 trillion.

Roubini has a pretty good feel for what the Wall Street analysts are saying, and he recognized the danger of the credit crunch before Countrywide announced its problems last Spring.

I have been posting a few articles about investors who appear to be trying to put a pretty face on the anticipated financial future, because their very actions to avoid investigating the problems that can be expected from bad sub-prime loans strongly indicates that they are very afraid of what they will find if they go looking. This is the source of my suspicion, voiced yesterday that Merrill Lynch does not want to be the first company to dig into those hidden issues. They want to wait until they are in the middle of the pack. The first company to demonstrate they are in real trouble will very likely be allowed to go bust It won't be until the entire industry is in trouble that they can expect a government bail out, and companies right now are just looking for trouble they won't be helped with if they go looking at their own portfolio and discover monsters.

On another note, the reason I expect severe trouble for the economy is that every trend is currently down, and there are no - I say again NO - positive trends on the near term horizon. On top of that, the Bush administration has a philosophy that the government cannot do anything effectively to ameliorate the problems that a severe recession will cause. That was Herbert Hoover's belief, also, and he was not only wrong, he was paralyzed. As I wrote last Monday, I think the recession is going to be a bad one.

I've also written about the bind the Federal Reserve is in. Ordinarily the fed would lower interest rates to keep the recession from getting too severe, but at the moment the over-extended dollar is dropping against foreign currencies, and the price of oil (in dollars) is climbing rapidly. Those two things are already adding inflationary pressures to the economy, and the fed will be asked to raise interest rates to prevent inflation. Ordinarily the fed acts to please Wall Street and the bond traders. This time they are not going to be able to, because the economy is already tanking. That's why Roubini thinks they will continue to lower interest rates no matter what that does to inflation.

So I expect a slowed economy with a sharp increase in inflation, at least through the end of 2008. If the government will accept greater deficits, this will be the perfect time for Keynesian-prescribed increases in government spending to stimulate the economy. With the currently paralyzed government that is not going to happen because the Republicans will use it to retake Congress. Expect to see it killed by either Republican filibusters in the Senate and/or Bush vetoes as he tries to rebuild his legacy as a deficit hawk. I trust Bush to time it wrong, as he has done so many other things, and I trust the Congressional Republicans to try to place the Democrats in the worst possible light in order to regain control of the Congress. Which means that the recession will continue past the end of 2008.

I'm not borrowing any more money right now (drive the old truck - no new one for a while), I have no credit cards, and I hope to pay off my fixed-rate mortgage with inflated dollars (Sorry countrywide.) With those things under control, income is the only remaining problem.

Since 2/3rds of the economy is driven by consumer purchases, you will notice that if a lot of people do as I am, the economy will get weaker. But it is not the cause of the recession. It is a result. Wall Street and government financial leaders will urge people to spend more because they will slow the damage to the economy. People who listen to them are going to be thrown under the bus. Such spending won't stop the recession, and in the end, it won't reduce its severity. The damage now is inevitable.

This is bad news, but if acted on quickly, some middle class individuals will be prepared for it. The wealthy don't get hurt by the economy. The damage of this recession will be borne (as usual) by the working class and most of the middle class, especially those who are trapped by their credit card debt.

You have been warned.