Economist Nouriel Roubini, who correctly forecast the current financial crisis, believes the U.S. economy will suffer its most severe downturn since the 1950s thanks to that crisis.
“I expect the worst U.S. recession in 50 years,” he told Bloomberg TV. “There will be a cumulative fall in output of 4 percent from the peak, and unemployment will jump to 9 percent.”
The economic news just keeps getting worse for consumption, investment, and housing, Roubini points out. Retail sales and capital expenditures are tumbling.
“Fully 85 percent of aggregate demand — consumption and fixed investment — is now in free fall,” he says.
Federal Reserve interest rate cuts, which have brought the federal funds rate down 525 basis points to 1 percent, will have little impact, Roubini argues.
“They’ll probably cut another 50 basis points, but the trouble is that the rate is already close to zero, yet market rates are higher,” he says.
“The spread of high-yield bonds relative to Treasuries is 14 percentage points, like we’ve never seen before. There is a major credit crunch, so it doesn’t matter what the Fed does.”
Roubini says the economy needs “a major aggressive fiscal stimulus, a $300 billion to $400 billion package, because private demand is collapsing.”
Former Treasury Secretary Lawrence Summers, a potential Obama pick for Treasury secretary, feels the same way about a stimulus.
“I would go for speedy, substantial and sustained stimulus over a several-year interval,” he said at a recent conference.
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