Roubini Urges 1.5 Point Rate Cut to Avert Disaster
Nouriel Roubini, the professor who two years ago predicted the financial crisis, said world financial officials should orchestrate interest-rate cuts of at least 1.5 percentage points to help avert a depression.
A temporary guarantee of all bank deposits, unlimited liquidity for solvent financial institutions and fiscal-stimulus measures are also needed, the New York University professor of economics said in a commentary e-mailed today to Roubini Global Economics subscribers.
“It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging-market economies to avoid this economic and financial disaster,'' said Roubini, 50. From late 2006, he highlighted the dangers flowing from a likely U.S. housing crisis.
The economist urged immediate action as officials from the International Monetary Fund, World Bank and Group of Seven nations meet in Washington this weekend. Stocks tumbled around the world today as the yearlong credit crisis deepened, sending Japan's Nikkei 225 Stock Average to its worst weekly drop in history. The MSCI World Index was set for its biggest weekly decline since records began in 1970.
In the U.S., the Dow Jones Industrial Average fell below 9,000 for the first time since 2003 yesterday. More than $4 trillion has been erased from global equities this week.
Investor Panic
“At this stage the risk of an imminent stock-market crash — like the one-day collapse of 20 percent plus in U.S. stock prices in 1987 cannot be ruled out,'' said Roubini. “The financial system is breaking down, panic and lack of confidence in any counterparty is sharply rising and investors have totally lost faith in the ability of policy authorities to control the meltdown.''
In a coordinated emergency move on Oct. 8, the Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank cut their benchmark rates by half a percentage point. Switzerland also took part and China announced a cut at the same time.
Roubini proposed “another rapid round of policy rate cuts of the order of at least 150 basis points on average globally.''
Officials are trying a range of approaches. U.S. Treasury Secretary Henry Paulson plans to buy stakes in banks, U.K. Chancellor Alistair Darling wants guarantees for their lending and German Finance Minister Peer Steinbrueck is pushing for greater regulation.
Bursting Bubbles
One of Roubini's proposals is an agreement between countries with current-account deficits and those with surpluses to maintain orderly financing of deficits and “avoid a disorderly adjustment of such imbalances.''
The world is experiencing the simultaneous bursting of housing, equity, bond, credit, commodity, hedge-fund and private-equity bubbles, the economist said, and even better- performing economies such as Brazil, Russia, India and China are at risk of “a hard landing.''
The threat of a global financial meltdown means a decade- long “L-shaped'' recession — like Japan's after its real estate and equity bubbles burst — cannot be ruled out, Roubini said.
As demand falls, the next challenge may be deflation as the world faces a glut of excess capacity and goods, he said.