Economist Nouriel Roubini says the Bush administration’s $700 billion plan to bail out troubled banking institutions won’t put an end to the financial crisis.
The House rejected the plan on Monday, but it is likely to return for a vote in the days ahead. The Dow cratered on the rejection, falling 777 points on Monday.
The plan as written doesn’t address two essential areas, the former Clinton adviser says in an interview with Bloomberg TV.
“First, you have to recapitalize the banking system with injections of public and private money,” says Roubini, who accurately forecast many elements of the credit crisis.
“Second, you have to reduce the debt burden of the household sector, because there are millions of households that are essentially bankrupt,” he says.
“Unless you get that debt reduction, you will have millions of foreclosures, and the financial crisis will get worse.”
Assuming Congress ultimately passes the plan, financial markets will initially rise, Roubini predicts.
“That’s because you’re effectively bailing out shareholders and unsecured creditors of the financial system,” he says.
“But since the fundamental issues of recapitalizing the banking sector and reducing household debt won’t be addressed, the results of this will fizzle out.”
Roubini sees financial markets rebounding for a few days if the bailout plan passes. “Then when reality sets in -- a serious recession and financial crisis -- markets will fall again,” he says.
The bank failures stemming from the crisis have just begun, Roubini says.
“There are about 700 banks in critical condition,” he maintains. “I believe 100 to 150 of them, with about $1 trillion in assets, will essentially go bankrupt in the next year.”
A majority of House Republicans voted against the bailout plan Monday.
The plan is unlikely to work and heads the country toward the “slippery slope to socialism,” Jeb Hensarling (R-Tex.) said on the House floor.
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