Bloomberg (October 14, 2008) Roubini Sees Worst Recession in 40 Years, Rally's End (click for video):

From Bloomberg:

Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to ``sputter.''

``There are significant downside risks still to the market and the economy,'' Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. ``We're going to be surprised by the severity of the recession and the severity of the financial losses.''

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

``This will be the first round of recapitalization of the banks,'' Roubini said. ``The government has to decide to intervene much more directly in the provision of credit and the management of these companies.''

U.S. stocks staged the biggest rally in seven decades yesterday on the government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars. The Standard & Poor's 500 Index rose 12 percent. It gained as much as 4.1 percent and fell as much as 1.1 percent today.

`Really Tanking'

``The stock market is going to stop rallying soon enough when they see the economy is really tanking right now,'' Roubini added.

The U.S. unemployment rate stood at a five-year high of 6.1 percent last month. Home prices in 20 U.S. metropolitan areas fell 16 percent in July from a year earlier, the most since records began in 2001, according to the S&P/Case-Shiller home- price index. Bank seizures may push home prices down further, scaring away buyers in coming months, after U.S. foreclosures rose at the fastest rate in almost three decades in the second quarter, according to the Mortgage Bankers Association.

Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be ``closer to $3 trillion,'' up from his previous estimate of $1 trillion to $2 trillion. The International Monetary Fund estimated $1.4 trillion on Oct. 7. Financial firms have so far reported $637 billion in losses, according to data compiled by Bloomberg.

I spent the weekend in Washington attending the IMF annual meetings and giving a series of talks in a variety of public and private fora (IADB talk, C-Span interview, Euro 50 Group meeting, IMF panel, etc.). After last week crash in stock markets and financial markets (and it was indeed a crash as during the week equity prices fell as much as the two day crash of 1929) policy makers finally realized the risk of a systemic financial meltdown, they peered into the systemic collapse abyss a few steps in front of them and finally got religion and started announcing radical policy actions (the G7 statement, the EU leaders agreement to bailout European banks, the British plan to rescue – and partially nationalize - its banks, the European countries plans along the same lines, and the Treasury plan to ditch the initial TARP that was aimed only buying toxic assets in favor of plan to recapitalize – i.e. partially nationalize – US banks and broker dealers. While many details of these plans are fuzzy and there will be some national variants the contour of the approach are similar and close to the recommendations that I made in this forum. Here are the main policy actions that will be undertaken