Economist Nouriel Roubini. Reuters.
New Delhi: Banking crisis in the United States is not over, warned ‘Doctor Doom’ Nouriel Roubini, saying that more banks and financial institutions are expected to go bankrupt in the current condition, leading to recession-like situation.
The noted economist also sounded an alarm to investors that inflation is expected to continue in developed markets.
US banking crisis not over
“I don’t think it (US banking crisis) is over. I see more financial institutions in trouble. The recent problems of US banks have come from duration risk, meaning having long-term securities whose value is falling as interest rates are going higher. But we are going 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,” Roubini said in an interview with CNBC-TV18.
The economist further said that as the credit crunch intensifies in the system, there will be a recession in the US economy.
“Once there is a recession in US, there will be more non-performing loans (NPLs), and more defaults. Therefore, there will be more stress for parts of the US banking system,” Roubini said.
The comments of Roubini, who predicted the 2008 financial crisis, come almost a month after California-based Silicon Valley Bank in the US collapsed last month.
Wage inflation ‘still too high in the US’
Talking more about the US economy, Roubini said the tight labour market implies wage inflation is still too high in the country.
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“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.
How to protect from inflation?
One can do several things to protect himself from inflation, Roubini said. They can invest in:
– Short term safe bonds
– Inflation-indexed bonds
– gold and other precious metals
– de-dollarisation
– green metals
– sustainable forms of real estate.
Fed should increase rates even more
Roubini said to achieve 2 per cent inflation target, the US Federal Reserve (Fed) has to increase interest rates even more. He went on to say that if the Fed raises rates, “there can be a recession and financial instability in the US.”
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The economist further said he is of the opinion that there is a contradiction between achieving price stability, maintaining growth and financial stability.
“If the Fed blinks, then there will be a de-anchoring of inflation expectation in US,” Roubini said.
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