Hundreds of U.S. banks will fail, warns leading economist

NEW YORK -- The United States is in the second inning of a recession that will last for at least 18 months and help kill off hundreds of banks, influential economist and New York University Professor Nouriel Roubini told Barron's this week.
Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Mr. Roubini said -- at least US$1-trillion and more likely US$2-trillion.

The banks will become insolvent because of mounting losses as a result of the housing bust and because they have only written down their subprime loans so far, he said. Still in front of them are their consumer-credit losses, for which they lack the reserves, Barron's reported.

He also said there are hundreds of millions of dollars outstanding in home-equity loans that could be worth zero, too.

U.S. consumers, meanwhile, are "shopped out" and saving less, while the Federal Reserve's performance in handling the crisis has been poor, Mr. Roubini said, because it failed to see that the problem extended beyond subprime mortgage debt.

Now, Mr. Roubini told Barron's, the government is overregulating, bailing out troubled participants and intervening in every market.

"The regulators should investigate themselves for bailing out Fannie Mae and Freddie Mac, the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities," he told Barron's. "It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich."