Roubini; This will be the worst recession in 40 years

Bloomberg reports what Nouriel Roubini says about the coming recession:

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.''

Paulson made it clear today that he is being forced into recapitalizing the banks instead of just buying off the toxic loans, and he hates it. PRI's "The World" reports that Europeans have real doubts as to how effective the American actions to prevent/alleviate the credit crisis will be because of the slow and ideological reaction from Secretary of the Treasury Hank Paulson.

As Ezra Klein says, Pauson is not going to come out of the current crisis with much of a reputation for effective decision-making.

To say Hank Paulson has not done a good job during this financial crisis may be going too far. Since no one else has held this job during this period, there's relatively little compare him to. Maybe others would have made worse mistakes. But we can certainly say that he's proven eminently fallible. His decision to let Lehman Brothers collapse now looks like a catastrophic error. As Dani Rodrik says, "As bad as things were, what caused credit markets to seize up was Treasury Secretary Henry Paulson's refusal to bail out Lehman Brothers. Immediately after that decision, short-term funding for even the best-capitalized firms virtually collapsed and the entire financial system simply became dysfunctional." And Paulson made that decision over the objections of others, like Timothy Geithner, head of the New York Federal Reserve.

Whether it was Lehman's collapse that turned a crisis of liquidity into a crisis of capitalization, Paulson also didn't see that capitalization had become the nature of the crisis. The powers he now promises to use to recapitalize the banks were powers he didn't want. He wanted to buy assets and address a liquidity crisis. He didn't include -- and in fact opposed -- a provision for the possibility that capitalization was the problem. Democrats gave him capitalization powers because they were listening to economists like Jamie Galbraith and Nobel prize winner (it's so fun to say that!) Paul Krugman. Now those powers are central to his strategy and public statements.

Banking is a highly technical business. Political ideology is a risk bankers can afford only during very good markets. The political "free market" ideology as bought into by Alan Greenspan (an Ayn Rand Libertarian) and by Henry Paulson has led directly to to the current credit crisis because in large part Greenspan, depending on his Libertarian ideology, refused to apply the Federal Reserves' powers to regulate underwriting standards used by banks to issue mortgages. Similarly the bank bail-out bill demanded by Paulson only three weeks ago was inadequate because - for ideological reasons - it did nothing to recapitalize the banks. Neither of these poor decisions made for ideological reasons were the only reasons why the American and the international banking system are failing, but those decisions are strongly implicated in causing and delaying effective preventive regulatory reactions to keep the collapse from getting much worse than it had to.

When the honest history of the worst recession since the Great Depression of the 1930's is written it will begin with a statement "The predictable working out of the anti-regulation philosophy embodied in the Reagan Revolution led directly to the massive Recession that started in 2008."

An economy cannot be based on primarily banking and finance. Those functions are themselves derivative of the underlying real economy. This was proven first by the British Empire and now again by the collapse of the American Empire. America's effort to outsource or abandon the real economy and replace it with banking and finance as the leading functions of the economy have now failed. Only bankers, Libertarians and conservative deregulators should be surprised.

The prove it we are now going into the worst Recession in four decades or more.