Economist Nouriel Roubini was interviewed by US News & World Report recently, and was asked about Obama’s economic team, and whether he thought the recession would turn into a depression:
What advice do you have for President-elect Obama?
First of all, he has a great team. He doesn’t need my advice; he has excellent people like Tim Geithner and Larry Summers—they are people that know markets, know policy, know the financial sector and the economy. The advice is essentially a combination of aggressive fiscal policy, more aggressive recapitalization of financial institutions, and plans to reduce the debt burden of the household sector, and the Fed continuing to do aggressive quantitative easing.
Are we headed for a depression?
I don’t believe we are going to be in a depression—we could end up like Japan that had essentially economic stagnation for a decade with deflation. You know, the “L”-shaped recession. At this point the “U”-shaped recession could turn into an “L”-shaped recession if we don’t fix the financial system, and the credit crisis becomes worse and if we don’t get a massive fiscal stimulus. So, a lot depends on our policy reaction. If our policy reaction is appropriate, by 2010 there will be some recovery of growth. The only risk is that the recovery of growth could be so weak that it feels like a recession even though we are technically out of it. So there is a risk of something like a Japanese-style, multiyear economic stagnation. I would not rule it out, but it is not my benchmark scenario. I think there is a one-third probability it will end up that way, but a two-thirds probability that we will end up in a severe, two-year-long recession. And that would be by any standard the worst recession that the U.S. has experienced in the last 60 years.