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12 Aug 2022 6:42
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  •   Home > News > Business > Features

    Professor Gives Economy An 'F' Grade

    Over the past six months I have varied my opinion about the seriousness of the world financial situation from moderately bad to terrible to 'muddle through'. Right now I am steering back to a 'terrible' viewpoint based on the continuation of bad news relating to international liquidity.

    Investment Research Group
    Investment Research Group
    While some issues have been dealt with relatively successfully, most notably with the subprime mortgage market in the US, other related impacts of a tightness in the availability of credit globally continue to be felt. There is every chance of more bad news to come.

    One opinion I respect comes from Nouriel Roubini, an economics professor at New York University's Stern School of Business. He is not a disaster theorist like many commentators yet his outlook is just about as bad.

    In a recent interview with Bloomberg he stressed his view that the coming recession, particularly in the USA, will be the worst in decades, and the financial crisis is the worst since the Great Depression. He believes a large number of banks are close to insolvent and will require a government bailout.

    Non-bank institutions like Goldman Sachs and Merrill Lynch will need to be taken over by a bank. "This is a systemic financial crisis. There is no end to it. The home prices are falling; the housing recession is getting worse. It's spreading to the entire economy. And it's a vicious circle between a contracting economy and greater credit and financial losses feeding on the economy. At this point, you cannot prevent the recession. You cannot prevent a severe financial crisis," he warns.

    However, some of the bailouts so far have helped people whose bad decisions caused the crisis in the first place. "I think this bailout of Wall Street, of the rich and the well connected, is not right. You have to first wipe out the shareholders.

    "If you're going to put public capital, the shareholders should be gone. You replace management that was corrupt and inefficient.

    "There has been a systemic moral hazard in financial markets. This is just privatising the gains and socializing the losses. At this point, this is just reckless. This is not the right plan."

    Curiously, Roubini is not predicting a continuation of inflationary pressures. That's because economic growth is going to cease or slow down, reducing demand. “We're going to be in a severe financial crisis, you're going to have a slacking labour market that's going to control wage and labour costs. You're going to have a slacking goods market controlling the price. And even oil prices are going to fall sharply."

    His outlook for shares is hardly buoyant. He notes the US share market has corrected 20% so far and he thinks it’s going to fall another 20% this year alone. In the typical US recession, the fall in equity prices is around 30%. This time he believes is a worse recession, therefore equity prices are going to fall further.

    His outlook is for approximately 18 months so readers with a longer term outlook should not be thinking about putting all their money under the bed. But stick with safe investments.

    One of these days, and it is likely to be years, markets will again turn around and all the serious money will go to investors who have been brave and patient.

    © 2022 David McEwen, NZCity

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