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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.
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