An Interview with Bob Shiller and Nouriel Roubini

The afternoon rally in US stocks was largely on the back of Nouriel Roubini's prediction that the recession will end by year end. To some, this is the capitulation of the last Bear, one that had earlier in the year, painted scenarios of a Great Depression and financial ruins and chaos.

But to be fair, these views were not new, as in an interview, together with Bob Shiller on the 11 July 2009, both of them agreed that the worst was over and a recovery was in sight by the end of the year. Before elaborating further, a quick introduction first... Robert Shiller is the co-designer of the famous Case-Shiller Housing Index used widely in the the US. He is also a Professor, at the Yale University. Nouriel Roubini, Professor, New York University, is the famous doomsayer that gripped markets in late 2008 with his warnings of financial ruins.

Today, the markets again exhibited selective hearing. Whilst Roubini talked about the end of the recession, he also talked about a period of exceptionally slow recovery of 1% or less in the US for the next 2 years. Here is the summary of the 11 July interview:

Essentially, both panelists agreed the recession would end soon (6 months), but the recovery would be exceptionally slow as this is a balance sheet recession, and the sharp falls in all asset classes, would force a deleveraging at corporate and consumer level. The consequence of such recovery is zero job growth. Hence, unemployment would rise for the next 12 months, peaking at over 11%.

The risk of this is a self-fulfilling reverse "animal spirit", as Bob Shiller described it, that discouraged consumers from spending. Roubini simply described this as a rationale response to the fear of job losses and falling asset prices. Nonetheless, both agreed that the consumer is a spent-force. Hence, Bob Shiller said we have no choice but accept that fiscal intervention has to be considered.

In fact, both also agreed that a second fiscal package is probably required, if unemployment turned out to be expectedly weak. But would the political landscape allow it? Would foreign investors still happily fund the US deficit? Against this, there was also the risk that to appease the US public and foreign investors, the US might prematurely withdraw the stimulus. These were mistakes Japan made back in the 1990s. Would they be repeated?

In short, the US is not out of the woods. Policy responses over the next 12 months will be key. But sadly, markets are too short-sighted to think about them. It seems only bloggers with too much time on their hands bother with such issues. Oh well, at least these topics make good conversation piece. Happy reading.