When How the World Works first assessed the exceedingly dour economic forecasting of Nouriel Roubini -- the Econoblogger of Doom -- way back in September 2006, I suggested that his prediction that the coming housing bust would be the "ugliest ever" might put his reputation on the line, and that he would "look a little foolish if housing settles down softly and then rebounds next year, while the economy swims merrily along."
Maybe he had a crystal ball, maybe he just got lucky. Whatever -- his recent track record makes it hard to dismiss his continuing gloom. So when he says that the coming recession will be especially bad, pay attention.
The recession of 2008 will be more severe [than the last two recessions] for several reasons: first, we have the biggest housing bust in U.S. history with home prices likely to eventually fall 20 to 30 percent; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, U.S. households -- whose consumption is over 70 percent of GDP -- have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted.
But then again, maybe a devastating recession could be a good thing.
Not good for the millions of Americans who would be individually crushed by a downturn, of course, but, at least as far as some economists see it, good for the long term health of the American economy. Blogging in the Financial Times, economist Willem Buiter is perplexed at the unanimous recommendation by American economists for a short term stimulus fix to cushion the looming blow, when all that will really be achieved in the long term, is more pain. Americans need to start saving, he declares, and the only way that's going to happen is if a recession forces them to. (Thanks to Naked Capitalism for the tip.)
Therefore, to restore a sustainable external balance and to accumulate the financial assets that will support a greying U.S. population in the style it would like to and hopes and expects to be accustomed to, the U.S. private and public sectors must save more. To get to a higher saving and wealth trajectory, the U.S. economy will first have to pass through the valley of the shadow of deficient effective demand, rising excess capacity and growing unemployment. Postponing the necessary adjustment will just make the pain of the eventual unavoidable correction that much greater.
The valley of the shadow of deficient effective demand. Which I guess means paying off your credit card bills and engineering a balanced budget.
The postulate that living on credit is fundamentally unsustainable is hard to disagree with.
But the ostriches in the Fed, the White House and the Capitol are unmoved by such concepts as unsustainability. The prevailing ethos is myopic at best: let's just put out this immediate fire, because it threatens today's comfort level. Postponing adjustment raises the expected cost of the eventual adjustment, but that is then and this is now. Also, something may turn up. Santa Claus could exist after all. We may learn to harness as a source of renewable energy the hot air put out by the Congress.
It is hard to have a rational discussion with those who embody and express the views of a nation that is in denial. The U.S. establishment and political class, and quite possibly much of its electorate, are indeed in denial, and not just about the need for an early traverse to a higher national saving rate. The economic, social and political model of the U.S. has developed serious albeit remediable flaws and needs major surgery. Unfortunately none of those running for office today are likely to be willing or able to wield the scalpel as required.