Professor Nouriel Roubini predicted a global financial collapse in 2006.

Roubini Global Economics:

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.” Alan Greenspan, The Age of Turbulence.

That used to be Mr Greenspan’s view of the US housing bubble. He was wrong, alas. So how bad might this downturn get? To answer this question we should ask a true bear. My favourite one is Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor.

He first predicted a US recession in July 2006

From Roubini in August 2006 article:

I have also argued before that the effects of housing on US economic growth and the role of housing in tipping the US economy into a recession in early 2007 are more significant than the role that the tech sector bust in 2000 played in tipping the economy into a recession in 2001. There are three reasons:

1. The direct effect of the fall in residential investment in aggregate demand will be as high as the effects of the fall in real investment in the 2000-2001episode. Then, real investment fell by about 2% of GDP. This time around the fall in residential investment alone – let alone the role other components of real investment, such as software and equipment, that are already falling in Q2 – will be as large as residential investment could fall from the peak of about 6.2% of GDP (the highest level since the 1950s) to as low as 4% of GDP at the bottom in 2007.

2. The wealth effect of the tech bust was limited to the elite of folks who had stocks in the NASDAQ. The wealth effect of now falling housing prices – yes median prices are starting to fall at the national level - affects every home-owning household: the value of residential real estate has also increased to 48.5% of household wealth in 2006 from from 38.7% in 1996. Also, the link between housing wealth rising, increased home equity withdrawal (HEW) and consumption of durable and non durables is very significant (see RGE’s Christian Menegatti brief on this), much more than the effect of the tech bubbles of the 1990s. Last year, out of the $800 billion of HEW at least $150 or possibly $200 billion was spent on consumption and another good $100 billion plus went into residential investment (i.e. house capital improvements/expansions). It is enough for house price to flatten – as they already did recently – let alone start falling - as they are doing now since they are beginning to fall in major markets – for the wealth effect to disappear, the HEW dribble to low levels and for consumption to sharply fall. Note that this year there will be large increases in the borrowing costs for $1 trillion of ARM’s while this figure for 2007 will be $1.8 trillion. Thus, debt servicing costs for millions of homeowners will sharply increase this year and next.

3. The employment effects of housing are serious; up to 30% of the employment growth in the last three years was due directly and indirectly to housing. The direct effects are job lost in construction, building materials, real estate brokers and sales agents, and employees of the mortgage finance industry. The indirect effects imply that the role of housing is even larger than 30%. The housing boom led to a boom in consumer durables spending on home appliances and furniture. Indeed, in Q2 real consumption of such goods was already negative: as you have less new home built and purchased and less old homes refurbished and expanded, you get less purchases of home appliances and furniture. There are also other indirect effects of the housing bust on employment, even on the purchases of motor vehicles. Indeed, the current auto sector slump is not unrelated to the housing slump. As the Financial Times put recently, the sharp fall in the sales of Ford's pick-up trucks is related to the housing slump as such truck are widely purchased by real estate contractors. And indeed in Q2 real consumer durables (that include both cars, home appliances and furniture all related to housing) already fell, consistent with the view that we have now have a glut in the stock of consumer durables (durables consumption has a investment-like nature to it as such goods last for a long time). Thus, as housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy.

From Roubini in July 2006 article:

It is hard to predict with certainty whether the U.S. and global economy will suffer of serious stagflation or even a recession (my bearish views are fleshed out in my recent blogs here and here)

Professor Nouriel Roubini served as a senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department under Clinton Adminstration; has published numerous policy papers and books on key international macroeconomic issues.