Economist Who Predicted The 2008 Financial Crisis Warns Of Further Banking Turmoil & Recession In US

Nearly a month after the sudden collapse of California-based Silicon Valley Bank, which was followed by Switzerland¡¯s second-biggest bank Credit Suisse collapsing and getting merged with bigger rival UBS, the trouble does not seem to be over.

Nouriel Roubini, the noted economist who had correctly predicted the 2008 financial crisis and is also referred to as Dr Doom, thinks that more financial institutions in the US will be in trouble.

Problems Faced By Banks

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¡°Recently, the problems of the banks have come from what is referred to as market or duration risk, meaning having long-term securities whose value is falling as interest rates are going higher, but we are going go from market risk to credit risk, because now there is a beginning of a credit crunch in the banking system, especially the regional banks that lend money to households, to corporations, to businesses, to commercial real estate,¡± he told CNBC in a recent interview this week.

He explained that as the credit crunch increases, there will be a recession in the US economy and once that happens there will be more non-performing loans and more defaults and therefore, there will be more stress for parts of the US banking system.

Also Read: Looking Back At The Last 4 Global Recessions & Why They Happened

Recession Chances In The US

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Nouriel Roubini also shed light on the US jobs situation and said the tight labour market implies wage inflation is still too high in the US.

¡°Paradoxically, the fact that the labour market is still tight, the low unemployment rate, ageing of the population, restrictions on migration, falling labour force participation rate implies that the wage inflation is still too high,¡± he said.

Monthly jobs data for March last week suggested the unemployment rate was down to 3.5 percent, In economist Roubini¡¯s opinion, the Federal Reserve (US' central bank) has to increase interest rates even more to achieve the two percent inflation target and if the central bank does that, there can be a recession and financial instability in the US.

¡°In the short run that may prevent a recession, in the short run the stock market may rally, but if you blink then there will be a de-anchoring of inflation and inflation expectation, there will be a more severe wage price spiral,¡± he said, as per the report.

He believes the Fed, like most major central banks, will pause rate hikes. Earlier this month, India's central bank, the Reserve Bank of India (RBI) paused rate hikes after six back-to-back repo rate hikes, contrary to what market watchers and economists were expecting.

Roubini recalled the 1970s which saw some of the highest inflation rates in the US and the Fed was behind the curve, ultimately inflation got out of control and there was stagflation because of negative supply shocks. Roubini also pointed to a contradiction between achieving price stability, maintaining growth and financial stability.

It remains to be seen whether the US banking crisis drags on amid deepening recession fears, or if the banking system will be able to handle the turmoil and come out stronger.