U.S. Should Enact $400 Billion Stimulus, Roubini Says

By John Brinsley

Oct. 27 (Bloomberg) -- The U.S. government should enact an economic stimulus package of between $400 billion and $500 billion before the end of the Bush administration in January, New York University professor Nouriel Roubini said.

Roubini, who predicted the current financial crisis in 2006, said the economy risks falling into “a self-fulfilling animal spirit recession that is more severe than otherwise” because of the collapse of credit markets and weak consumer and corporate spending.

“The only way to increase aggregate demand is going to be through” government spending on roads, bridges and other infrastructure, Roubini said at a Bloomberg conference in New York. “We need a huge plan, $300 billion is not going to be enough. I think we’re going to need a plan of $400 billion to $500 billion.”

U.S. Treasury officials and other policy makers are grappling with financial turmoil that has pushed down the Standard & Poor’s 500 Index by 42 percent this year, its worst annual retreat since 1931.

“If we don’t do that fiscal stimulus today, three months from now, six months from now the collapse of the real economy is going to be so severe that anything we’re doing today to recapitalize the financial system is going to be undone,” Roubini said.

Tax Rebates

President George W. Bush in February signed into law a $168 billion measure that sent tax rebates of as much as $600 to individuals and $1,200 to couples. Checks went to 111 million households beginning in May.

Government efforts to revive lending have made central banks around the world the “lender of first resort” while credit and other markets remain “extremely dysfunctional,” Roubini said.

“Financial markets are becoming totally unhinged,” he said. “Fundamentals don’t matter, valuation doesn’t matter the only thing that matters right now is flows, and the flows out there are sellers, and no buyers.”

Investors withdrew a record $43 billion from hedge funds last month, according to TrimTabs Investment Research in Sausalito, California. The Goldman Sachs VIP Basket of stocks with the most hedge fund ownership has lost 47 percent this year, more than eight of 10 industries in the S&P 500.

“We’re entering literally a vicious circle where economies are spinning down, financial markets are spinning lower, and the policy makers in my view -- and that’s my biggest fear -- have lost control of what’s going on in financial markets,” Roubini said.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net