Lost ‘Animal Spirits’ Worsen Economy, Roubini Says (Update1)
By Eric Martin, Thomas R. Keene and Ken Prewitt
July 10 (Bloomberg) -- The worst recession in half a century may be prolonged because consumers see few signs job losses and declines in home prices are ending, economists Nouriel Roubini and Robert Shiller said.
“The fundamental problem, as Franklin Delano Roosevelt said in 1933, is fear,” Shiller, a Yale University professor, said yesterday on Bloomberg Radio’s “Surveillance.” The Great Depression was deepened by a “sense of lost confidence or animal spirits that was a self-fulfilling prophecy. The worry is that we will have the same kind of issue arising again,” he said.
The U.S. needs another stimulus package because President Barack Obama’s initial $787 billion plan hasn’t been implemented fast enough, according to Shiller. Roubini, an economics professor at New York University, said more spending is necessary to avoid stagnation like Japan’s in the 1990s.
Concern the economy isn’t recovering after 18 months of contraction pushed stocks down in the last four weeks after the Standard & Poor’s 500 Index rallied 40 percent since March 9. Roubini and Shiller said a lasting improvement in consumer sentiment is needed before U.S. growth can resume.
In 2006, Roubini predicted the credit crisis that led to $1.5 trillion in losses for financial firms. Shiller is co- creator of the national home-price index that bears his name and the author of the books “Irrational Exuberance” and, with George Akerlof, “Animal Spirits.”
‘Wave of Defaults’
The economy shrank 5.5 percent in the first quarter and 6.3 percent in the fourth quarter of 2008, the worst six months since 1958, according to data compiled by Bloomberg. Sentiment among U.S. consumers dropped in July after four monthly gains as unemployment approached 10 percent, a report showed today. The Reuters/University of Michigan preliminary index of consumer sentiment fell by more than forecast to 64.6 from 70.8 in the prior month.
The savings rate reached 6.9 percent in May, the highest since December 1993, spurring concern that consumer spending will wane. Roubini said it will climb to at least 11 percent.
The recession will probably continue for six months as companies struggle to pay their creditors, he said. The cost of protecting corporate bonds in the U.S. from default jumped to the highest in six weeks on July 8, according to Phoenix Partners Group data.
“The wave of corporate defaults is going to be massive,” Roubini said. “We’re not out of the woods.”
Unmanageable Risks
Both Shiller and Roubini said a lack of regulation allowed banks to take unmanageable risks, leading to the government’s takeover of American International Group Inc. and the collapse of Lehman Brothers Holdings Inc.
Home prices in 10 major U.S. metropolitan areas fell 0.7 percent in April, the least since June 2008, according to a S&P/Case-Shiller home-price index, the latest sign that the worst of the housing slump may be passing. Sales of existing homes increased in April and May, while new construction rose in May from a record low.
“A slowing in the rate of decline is good news, and it suggests that it will continue to slow in coming months,” Shiller said.
To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Thomas R. Keene in New York tkeene@bloomberg.net; Ken Prewitt in New York at kprewitt@bloomberg.net.
Last Updated: July 10, 2009 13:55 EDT |
