'I Am Dr. Realist'

Most other economists rolled their eyes when Nouriel Roubini warned in a September 2006 speech to the International Monetary Fund that the global bubble was going to burst. They nicknamed him "Dr. Doom"—and then the hard times hit. As finance ministers and central bankers from the world's major economic powers gather in Washington this weekend, they might consider listening to what Roubini has to say now. The New York University professor told NEWSWEEK's Lally Weymouth why he sees more trouble ahead and what the recovery will look like. Excerpts:

Weymouth: What do you believe is happening to the economy today?
Roubini: The rate of economic contraction you have seen in the last two quarters—6 percent annualized—is going to slow down. The optimists are already talking about the "green shoots" of spring, about economic activity becoming positive. [They say] we will have positive growth in the third quarter, and in the fourth quarter we will grow 2 percent over the previous quarter. They expect that next year, growth will go back to above 2 percent.

Compared with this optimistic consensus, I believe that the rate of economic contraction is going to slow from minus 6 percent in the last two quarters to minus 2 percent by the fourth quarter. Next year, I believe that the growth rate is going to be 0.5 percent for the U.S. average. Even if we are technically out of a recession, we are going to feel like we are in a recession. The bottom of the economy is not going to be in three months, but rather toward the beginning or middle of next year.

So you are still Dr. Doom?
No, I am not Dr. Doom. I am Dr. Realist. I don't believe we are going to end up in a near depression. Six months ago I was more worried about an L-shaped near depression. Today, after the very aggressive policy actions taken by the U.S. and other countries, the risk of that near-depression L has been reduced from 30 percent to 15 or 20 percent. We are instead in the middle of a U.

You think the Obama administration is on the right track?
I have to give credit to the administration. Within 30 days of coming to power, they did an $800 billion stimulus package, a new program to deal with mortgages and foreclosures, and also a bank plan that when Treasury Secretary Tim Geithner came with details, made the markets rally sharply. Each one of these three programs has some flaws. The fiscal stimulus could have been more front-loaded. For the mortgages, eventually you are going to need a reduction of the face-value principal of the mortgages. And on the banks, I believe after the stress tests it is going to be obvious that even some of the largest banks are so fundamentally in trouble that you cannot buy their toxic assets. You need to take over these banks on a temporary basis, clean them up and then sell them back to the private sector.

You have to nationalize these banks?
Yes. If you do not like the dirty N word, you can call it a "temporary takeover."