Recession in 2008 - more from Roubini

Nouriel Roubini is now reasonably certain that we can anticipate a recession in 2008. His two question s now are whether the recession will be a mild one ("soft landing) or a bad one (hard landing), and whether the American recession will be isolated to the U.S. only (decoupled from the global economy) or whether it will trigger a worldwide recession (recoupling.)

First Richard Berner of Morgan Stanley started to talk about a "mild" recession in 2008; then yesterday Bill Gross of Pimco also argued that the US is likely to experience a "mild" recession in 2008.

Then today Larry Summers spoke of the high risk of a recession in 2008 and the possible risk that such a recession would be more severe than just mild unless the monetary and fiscal policy response to the current economic slowdown is not more forceful.

Add to the list Alan Greenspan that now believes that the odds of a recession are now about 50%; and Marty Feldstein (professor at Harvard, former CEA Chairman and head of the prestigious NBER) who thinks that a 2008 recession is certainly likely. And add to the list Rosenberg of Merrill Lynch who has effectively made a recession call, as well as Jan Hatzius who is one step short of formally calling for a US recession in 2008.

Also, while the consensus had been arguing until now that the rest of the world would "decouple" from the US the consensus has also recently shifted towards the "recoupling" view. Both Goldman Sachs and now Morgan Stanley are now referring to the 2008 as the "year of recoupling". This is not surprising; the decoupling view was always predicated on the view that the US would experience a soft landing. Now that a hard landing is becoming the more likely scenarios analysts are considering that trade, currency, financial, confidence, common shocks and other channels of interdependence will lead to a significant slowdown of global growth following the expected US hard landing, i.e. "recoupling".

Thus, at this point the debate is less on whether the US will experience a soft landing or hard landing but rather on how hard the landing will be, i.e. whether the coming recession will be "mild" or "severe".

Roubini is the professional. I'm not. But I still suspect that the Federal Reserve Board under Bernanke is going to try to delay the recession, which will lead to greater inflation. But back to Roubini:

As Summers pointed out today how severe the downturn will be will depend on how sensible the macro policy response - monetary, fiscal and regulatory - will be. So far it is not clear that US policy makers and other G7 policy makers are fully aware of the significant downward risks to growth. There is still the view among them that this is a soft patch of growth and that growth closer to potential will resume in the second half of 2008. That view increasingly looks like wishful thinking.

The problem that I see is that 2008 will be both the year the recession starts and also the Presidential election year - one in which the Republican Party is going got take a drubbing by an increasingly populist Democratic Party.

Right now that populism seems to frighten Wall Street more than what they think is going to be a mild recession. If the fed, reacting to the concerns of Wall Street, remains more concerned about the political threat against Wall Street than they do the economic threat, then we will see both stagflation by the time of the election and an even harder landing for the recession after the election.

I suggest that anyone reading this consider my opinions on political actions separate from Nouriel Roubini's economic opinion, and give his greater weight.