Roubini revisits his 2006 prediction of 2007 Recession

Back in 2006 economist Nouriel Roubini predicted the following for 2007:

1. The U.S. would experience its worst housing recession in decades;
2. home prices would follow sharply (at least 20% in the next few years);
3. the housing troubles would start in the sub-prime mortgage market and lead to move severe problems and a credit crunch in broader mortgage and credit markets;
4. housing woes would spillover to the rest of the economy and to other components of demand - including consumption - via a variety of channels;
5. multiple bearish factors (housing slump, credit crunch, spillovers of housing to other sectors, high oil prices) would lead to a hard landing of the economy in 2007;
6. the world would not decouple from such a U.S. hard landing.

So far he has been correct about items 1, 2, and 3. The housing recession has only just started. Only his timing was off, and apparently no one realized how slowly a financial collapse centered on the mortgage markets would take.

I was unaware of the extensive lag time involved in a housing recession, which is why it seems like a slow-motion train wreck. It can take six months or more of non-payment of the mortgage to result in a listing for foreclosure, and with the market for housing what it is today the mortgage lenders are not going to rush it to add to the stock of unsold houses on the market. Then there is the overhang of adjustable mortgages which are set to jump to a much higher interest rate this Fall and Next Spring. Like the train-wreck analogy, we can see these events rolling down the track at speed headed into the already existing pileup of defaulted mortgages, and there is nothing that can be done to stop them. The lenders are all sitting back waiting for someone else to start revising their mortgages and take the big hit financially, while those who sit back now will get bailed out without losing money. so no one is going to be first unless the government passes legislation making everyone act all at once. Only - no one even knows what that legislation should look like right now.

Item 4 - "housing woes would spillover to the rest of the economy and to other components of demand - including consumption - via a variety of channels" - is the big one at the moment. The reason why Greenspan let the housing bubble grow as large as it did was to keep consumption demand high as Bush went into reelection in 2004. Without the money from increasing mortgage values (refinancing, second mortgages) to pay off credit card debt the economy would have slide into recession in early 2004, dooming Bush's reelection. So instead of facing the the financial problems early when they would have been smaller and a lot more manageable, Greenspan let them build into the current world-shaking financial disaster.

That's where we are headed right now. Which is what Roubini predicted in items 5 and 6 above.

So what do we do about the financial train wreck which is obviously rolling down the track?

Dunno. I'm hoping that I can stay an observer and not find myself riding on the train. The Libertarians will say that the markets will work it out. Which is true. When the train wreck passes its worst point and the wreckage is lying around in the fields, people will come out of the forest and start picking up scrap to sell in markets. But that is after the wreck is finished and the fires have gone out.

It takes effective long term management of such massive markets by the government to prevent these really bad problems, as the Depression of the 1930's proved. Movement conservatives and Libertarians have worked for the last three decades to remove all such controls, and this is the result.

Ex-Senator Phil Gramm was a key Libertarian removing such controls. As Chair of teh Senate Banking committee, he had the Glass Stegal limitations on banking removed shortly before leaving office, and he and his wife Wendy are indirectly responsible for the collapse of Enron. [Wendy rewrote the SEC guidance that let Enron run free, then left government for a position on Enron's Board of Directors.]

We can thank our friendly Republicans and conservatives for the financial disaster that has already started. Again, just like the Depression. We can just hope that bankers have learned enough since the 1930's to limit the damage.