US Economy Facing 'Death by a Thousand Cuts': Roubini

The US economy faces a difficult time ahead as consumers stop spending and the fallout escalates from the collapse of the commercial real estate market, economist Nouriel Roubini told CNBC.

CNBC.com Nouriel Roubini

Repeating his prediction that the economy faces a threat of a "double-dip" recession and at best a slow-growth U-shaped recovery, Roubini said in a live interview that more banks will fail and residential real estate prices have more room to decline.

Additionally, non-government bonds will face pressure, the securitization market is all but dead, the credit markets are still frozen and consumers will continue to save more rather than spend and boost growth.

"It's going to be death by a thousand cuts," said Roubini, chairman of RGE Monitor and economics professor at New York University's Stern School of Business. "The financial system is severely damaged, and it's not just the banks."

Roubini predicted more than 1,000 financial institutions could fail before all is said and done.

At the same time, he said housing prices are likely to fall another 12 percent in the next year—40 percent overall since the market began its steep decline—and about half of all homeowners will owe more on their mortgages than their houses are worth.

"The gap between supply and demand is so huge we could stop producing new homes for a year to get rid of all the inventory," he said. "This price adjustment, in my opinion, is going to continue for another year."

In addition to assessing the current problems, Roubini reflected on the year since Lehman Brothers collapsed and its effects on the financial markets. Roubini was among the most prescient economists in predicting the failure of the financial system, though he has said that aggressive intervention has prevented the worst-case scenario from happening.

Many in his field have blamed regulators for allowing Lehman to collapse, but Roubini said the system would have failed regardless of what happened to the Wall Street titan.

"We already were in the middle of a very severe crisis. Saying that bailout out Lehman, everything would have been OK, is nonsense," he said. "Lehman was a symptom of the crisis, not the cause of the crisis."

He warned, though, that regulators are repeating some of the same mistakes made during the financial crisis, this time with the commercial real estate market. Allowing forbearance in the deeply troubled sector will mask underlying problems that will come back and bite the economy, he said.

Still, he said Federal Reserve Chairman Ben Bernanke, whom Roubini had criticized harshly when the financial crisis began, took strong measures to avoid a complete collapse of the system.

"I criticized Bernanke for many of the mistakes he made before the crisis," Roubini said. "But I give him credit for his actions that led to the avoidance of another Great Depression."

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