Tags: nouriel | Roubini | government | inaction | spending | risking | recovery

Roubini: Deficit Means Long Rates Headed Higher

Thursday, 17 Feb 2011 12:49 PM

Nouriel Roubini, the NYU economist credited with predicting the financial crash as early as 2007, now warns that government inaction on spending is risking the recovery he believes is under way.

He points to four major risks to the incipient recovery: high unemployment, another housing and commercial real estate decline, state and local government defaults, and the huge U.S. deficit.

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Nouriel Roubini
“The bond vigilantes have woken up in Europe,” he told publisher Steve Forbes in an interview. “They’ve not yet woken up in the U.S. But if you keep on running a trillion-dollar budget deficit plus for as far as I can see, long rates could go up.”

He figures that even a 5 percent correction in home prices from here would put 40 percent of U.S. homes underwater. Commercial real estate faces similar challenges; he believes that $2 trillion of commercial property debt outstanding likely is worth about half its supposed face value.

Aside from reducing the federal deficit, Roubini believes that the ultimate solution is to come up with a one-size-fits-all answer to the housing crisis.

“A good chunk of the household sector is effectively insolvent,” Roubini says, “buried under a mountain of mortgage debt, credit cards, auto loans, student loans, personal loans. And once you have such a massive problem, you cannot resolve it case by case, household by household. You need to have something of an across-the-board reduction of that burden.”

The percentage of homes in some stage of foreclosure was 4.63 percent in the fourth quarter, according to the Mortgage Bankers Association (MBA). It was 4.39 percent in the third quarter and 4.58 percent in the fourth quarter of 2009. Florida, Nevada, and New Jersey averaged greater than 6.82 percent.

Homes in the “seriously delinquent” category reached 8.57 percent nationwide on average, the MBA found. Florida and Nevada stood out at greater than 11.69 percent.

"As we had predicted last quarter, the percent of loans in the foreclosure process increased in the fourth quarter, largely due to the foreclosure paperwork issues that were being addressed in September and October," MBA Vice President Michael Fratantoni said in a statement.

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Nouriel Roubini, the NYU economist credited with predicting the financial crash as early as 2007, now warns that government inaction on spending is risking the recovery he believes is under way. He points to four major risks to the incipient recovery: high unemployment,...
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