Roubini on the Hill: the rut of recession

Nouriel Roubini and other economic pundits testified before the Joint Economic Committee on Capitol Hill today. An excerpt from his prepared remarks, where he says the market hasn't responded all that well to the government's moves so far:


The hope that economic contraction in the US and other advanced economies would be short and shallow — a V-shaped six-month recession — has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the US and close to two years in most of the rest of the world. And, given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession — like the one experienced by Japan after the collapse of its real estate and equity bubble — cannot be ruled out.

Indeed, the growing disconnect between increasingly aggressive policy actions and strains in the financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of US$30 billion in March, the rally in equity, money and credit markets lasted eight weeks. When the US Treasury announced a bailout of mortgage giants Fannie Mae and Freddie Mac in July, the rally lasted just four weeks. When the US$200 billion rescue of these firms was undertaken and their US$6 trillion in liabilities taken over by the US government, the rally lasted one day.
Until the recent US and European measures were announced, there were no rallies at all. When AIG was bailed out to the tune of US$85 billion, the market fell 5 percent. Then, when the US$700 billion US rescue package was approved, markets fell another 7 percent in two days. As authorities in the US and abroad took ever more radical policy steps in the last few weeks, stock, credit and money markets fell further, day after day for most days. Even the rally following the G7 statement and radical policy actions taken to back stop the financial system lasted only one day and was followed by two weeks of sharply falling equity prices and rising CDS and credit spreads. Policy authorities seem to have lost their credibility in financial markets as - until recently – their actions were step by step, ad hoc and without a comprehensive crisis resolution plan.

TK: Roubini argues for mortgage relief to help households find more disposable income and big injections of federal money in infrastructure projects to soften the "hard landing" the U.S. will feel from the recession. Bottom line, produce marketers and retailers better be prepared to hone their value message in the months ahead.