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Roubini, Zandi: Mortgage defaults as economic therapy


Mark Zandi, chief economist and co-founder of Moody's, and President Obama at a fiscal responsibility summit in 2009.

(Photo Credit: Bill O'Leary/The Washington Post)

By Howard Schneider

Top economists Nouriel Roubini and Mark Zandi took the stage at an International Monetary Fund conference room on Friday and presented a novel spin on the mortgage defaults still plaguing the home industry: they may be "therapeutic." Instead of letting the housing market continue to bleed out slowly for years to come, they should be accelerated so that home prices and household equity can start to recover, Roubini and Zandi said..

The banks "can digest it," after a period in which the major financial institutions have raised new capital and strengthened their balance sheets, said Zandi, head of Moody's Analytics.

Roubini went further, proposing a massive, nationwide mortgage writedown instead of clogging bank offices and bankruptcy courts with case by case renegotiations.

The U.S. economy, Roubini said, won't recover until households unburden themselves from excessive mortgage debt. Roubini's suggestion: get it over with in one fell swoop that would lower overall household debt to a reasonable level, free up cash currently going to mortgage payments, and put families on a more secure financial footing. Banks could even be protected, to some degree, by warrants that would give them a share of the profit in any eventual sale -- essentially a forced conversion of mortgage debt into equity.

It was a bit of a repeat performance at the IMF for Roubini, who on the same stage in 2006 said the U.S. was heading for a "hard landing" that would drag the world down with it.

There was not much good news Friday from "Dr. Doom."

The probability of a double dip recession? Forty percent and rising, he said.

Key risks? Not only do households need to shed debt, but Greece, perhaps Ireland, and eventually other countries are heading for a default and there are fewer and fewer tools to pick up the pieces. Between the various bailout programs and other measures around the world, Roubini said, debt and losses have been first socialized onto government books, and then "supernationalized" onto the books of the IMF and the European Union.

If another calamity hits, "there won't be someone from Mars coming to bail out the IMF or the EU."

By Howard Schneider  |  September 17, 2010; 4:57 PM ET
Categories:  International Monetary Fund  
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Posted by: Anonymous | September 18, 2010 6:14 AM | Report abuse

Don’t be frightened by Roubini who may be was right by chance in 2007/2008 when the subprimes cracked.
He had also predicted a gloomy year for banks in 2009….and the banking sector , beside all equities indices, has performed extraordinary well since April 2009!

He was in the movie Festival in Cannes in 2010, and without doubt ,the guy has turned more as a movie-maker about economy than a serious economist (as he used to be) .

Fame has changed his habits of working !

What i’m sure of is Roubini has missed to predict the rally on stocks from spring 2009. I just would like to remind you his statements in Newsweek on 2009 April 24 ; his interview in the FT on 2009 August 23….Have a look ! Doctor Doom (talking about himself as Dr Realist !) was gloomy with the same words he can be nowadays.

So don’t get worried just because there are Roubini’s words and predictions !

About his attraction for movies (and actresses) in Cannes movie Festival , just read his full page interview with Gillian Tett (an attractive journalist ) on May 8/9 2010 in the Financial Times..
You can discover the bachelor economist is said to be constantly surrounded by glamorous women !! The FT article makes you realize Roubini is acting more and more as a play-boy , less and less as an economist”

Posted by: FREDDY | September 18, 2010 12:27 PM | Report abuse

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