Nouriel Roubini, who was predicting the collapse of the financial system not so long ago and urging that the banking system be nationalized, isn’t breathing his old industrial-strength fire and brimstone anymore. If I read him right in an interview he just did with Forbes, Roubini’s expectations for what’s in store for the economy now are way, way on this side of apocalyptic. In particular, he sees GDP growth this year at around 2.7%, just below the consensus view. Corporate earnings are “very good,” he tells Forbes, while home prices are “probably close to a bottom.”
What the heck happened to the L-shaped recovery? Roubini’s view is now squarely within the mainstream expectation. Good for him. The facts changed, and so he changed his opinion. Keynes would be pleased.
That said, there’s still some doom in the old doctor yet. Where, for instance, does he get off saying stuff like this?
Most banks are holding [their CRE portfolios], still 100 cents on the dollar, on their books, even it's worth more like 50, 60 at best. And the Fed has decided to use regulatory forbearance to fudge it, to pray and delay, extend and pretend.
Loans worth 50 cents on the dollar are sitting on banks’ books at par? That’s just not true. Since the housing blowup began in earnest in 2008, the banking industry has issued two years’ worth of audited financial statements. Those audits, I hasten to add, have been conducted under the eye of increasingly cranky regulators. Loan classification criteria have become more strict. Suspect classes of borrowers are being given less and less of the benefit of the doubt. Auditors and regulators have brought the hammer down in a fairly major way. After all this, if a loan needed to have been written down, it’s been written down. And as far as Roubini’s talk about “forbearance,” goes, if you talk to a banker lately, he’ll tell you that’s the last thing on regulators’ minds.
(For that matter, if Roubini really believes the banking industry is still carrying big chunks of assets on its balance sheet at hugely inflated prices, he can’t possibly believe his own economic forecasts. Rather, he still ought to be expecting that the roof is about to cave in.)
Similarly, Roubini tells Forbes “the housing sector is double dipping,” even though, elsewhere, he admits that he thinks the market is close to a bottom. And he calls for “an across-the-board reduction of [delinquent consumers’ debt] burden to restructure just the face value of [their] mortgages.” So every delinquent borrower should get an automatic loan modification.
Where does he get this stuff? Can you imagine the trigger of defaults that would occur if the banking industry (whether induced to by the government or not) unilaterally reduced loan principal owed by their delinquent borrowers? There wouldn’t be a current mortgage left anywhere in the country. It would be a disaster.
I understand that scary predictions and over-the-top policy prescriptions are part of the Roubini brand. Nouriel wouldn’t be Nouriel without them. But he might at least keep them consistent with his official forecast. Trust me, if the predicament of the U.S. consumer is so dire that the only way out is an automatic loan mod to every delinquent borrower in the country, the economy ain’t growing by 2.7% this year. As for the rest of Roubini’s flamboyant statements, I suspect he’s just making ‘em up.
What do you think? Let me know!