The shape of things to come

Nouriel Roubini wins the prize for metaphor of the week: will the US recession be shaped like a V (short and shallow), a U (a bit more sustained at the bottom, but with recovery after 12-18 months); a W (a double dip, in other words) – or, horror, an L (a protracted slump like Japan’s in the 1990s after, er, its housing bubble burst)?

Roubini says his own view is closest to a U – because, he says, the last 2 recessions (1990-91 and 2001) were 8 months each, and this is worse (see the post for why).  Still, for me the real story here is that Roubini thinks the L to be unlikely: he’s been the bear of bears for months (and generally correct with it), so light at the end of the tunnel from the Stern School’s Mr Downturn is a welcome thing indeed.  He thinks an L is unlikely, by the way, because:

…the policy response of the US is already more aggressive than the one of Japan. Japan waited almost two years after the bursting of its bubble to ease monetary policy; and it waited two years before providing fiscal stimulus. In the US, instead, both monetary and fiscal stimulus have started in earnest early on.

Also Japanese postponed the necessary corporate and banking restructuring for years keeping alive zombie firms and zombie banks via inappropriate forms of forbearance. In the US both private and especially public efforts to restructure the impaired assets and firms will start faster and more aggressively. Thus the risk of a decade-long economic stagnation is quite limited so far.