BBC — World financial crisis ‘not over’ (Click for VIDEO) [2:17]

BBC — Nouriel Roubini: “The real economy still looks very weak”

By Michelle Fleury

Business reporter, BBC News, New York

The US economist widely credited with having
predicted the financial crisis has warned we are already “planting the
seeds of the next crisis”.

Nouriel Roubini told the BBC that
he is concerned about the growing gap between the “bubbly and frothy”
stock markets and the real economy.

Over the last six months, the Dow Jones Industrial Average has risen about 45%.

But Mr Roubini says he sees an economy where consumers are “shopped out” and “debt burdened”.

‘Crisis not over’

Based
on the run up in share prices in recent months, investors appear to be
betting that good times are around the corner. A view not shared by Mr
Roubini.

“The crisis is not yet over,” the New York University professor said.

“I see an economy where the consumers are shopped out, debt burdened, they have to cut back consumption and save more.

“The
financial system is damaged… and for the corporate sector I don’t see
a lot of capital spending because there is a glut of capacity.”

Mr Roubini believes US house prices have further to fall, straining America’s fragile recovery.

‘Frothy markets’

Property
prices have already declined sharply. According to the National
Association of Realtors, the national median has dropped almost 13%
from a year ago to $177,700 (£110,100).

Many believe the crises
in the residential market could spread to the commercial real estate
market causing more headaches for the banks.

So where does the “froth” in the markets come from?

Mr
Roubini – like many other economists – believes it is engineered by the
Federal Reserve and the government which has been pumping cash into the
economy to dampen the pain of the recession.

“There is a wall
of liquidity chasing assets,” he said. “But I think that there is a
growing gap between what is the asset prices and the real economy.”

Although
he thinks there will be a correction, he believes some of the mistakes
of the past can be avoided if reforms are implemented .