Roubini: Politics Are Now the Main Problem

Famous for his bearish views, Nouriel Roubini is not overly concerned about a double-dip recession occurring in the U.S. right now. But he is worried about the potential economic impact of the political gridlock he says is crippling Washington.

In a conversation last week at the 92nd Street Y in New York with Matthew Bishop, American business editor of The Economist, Roubini, who teaches economics at New York University's Stern School of Business and famously predicted the global economic meltdown back in 2006, said he expected economic growth in the U.S. to be 2% over the next few years, with unemployment hovering between 9% and 10%. "There is a two-thirds probability of my basic scenario of a moderate recovery, maybe a 20% probability of a double-dip," he said.

However, he warned there are "many things that could lead to the risk" of a double-dip recession, including failure to deal with fiscal problems and keeping interest rates too low for too long.

A Lack of Will

Roubini said he was concerned about the political gridlock in Washington, where "the Democrats are not yet at a point where they are realizing that some control on spending is necessary. The Republicans in Congress... are closer to those Tea Party Republicans who say absolutely no new taxes of any sort.

"I think they live in a delusional world in which they... claim they want to lower budget deficits, but they're not willing to do anything on the revenue side to deal with it. There's no way to reduce this deficit only on the spending side... If the Democrats veto the spending cuts and the Republicans veto the tax increases, then runaway deficit means either default or more likely printing money and causing inflation," Roubini said.

Noting that there are similar political divisions in Germany and Japan, among other nations, he added, "What needs to be done, we know it on the fiscal side. The question is can you have governments that are weak, divided, no bi-partisanship? Unfortunately in the U.S. and many countries, I don't see the political will, that's why I'm worried."

Europe Up in the Air

Roubini said it was an "open question" if the euro will survive. "I see certainly Greece and maybe other countries being forced down the line to restructure their debts in a coercive way, call it default... That doesn't imply exit from the [European] Monetary Union... The monetary union is challenged like never before and the risk is that over the next five years, one or more of those laggards may be deciding or forced to exit."

At the same time, it is unlikely Germany would leave the European Monetary Union, in part because that would mean it would also have to leave the European Union. "The chances are more that they are going to say let the Greeks and others get out, and have a hard core of more homogeneous countries with fiscal discipline that are going to form the core of a stronger euro."

Roubini also gave Treasury Secretary Timothy Geithner and others on the Obama administration's economic team credit for the current economic recovery. "Of course, we have now a huge fiscal deficit, we still have to do regulatory reform, there are many challenges, and there have also been specific policy mistakes, like bailing out too many institutions, that could have been handled differently... but compared to the alternative -- risk of a new depression -- things have improved in the right direction."