Top Economist Warns ’the Worst Is Ahead of Us’ as Bank Crisis Will Lead to ‘Serious Credit Crunch’

Nouriel Roubini, professor at New York University, speaks during the 2022 Concordia Annual Summit in New York, on Sept. 21, 2022. (John Lamparski/Getty Images for Concordia Summit)

Noted economist Nouriel Roubini has warned that the worst is yet to come for the U.S. economy in the wake of the recent banking turmoil, which could lead to a serious credit crunch.

Roubini, who is nicknamed “Dr. Doom” for being one of the first economists to call the recession fo 2008–09, made the comments during an interview with Fox Business’s “The Claman Countdown” on April 10.

Roubini was asked if First Republic Bank’s announcement in a regulatory filing on Friday that it will suspend its quarterly dividend on preferred stock indicates U.S. banks and global financials may face further turmoil ahead.

First Republic Bank had in March suspended dividend payments on its common stock as a “measure of prudent oversight” after seeing its stock price plunge by more than 80 percent, but has so far staved off a collapse.

Roubini told Fox said that many regional banks, including First Republic, appear to be facing challenges with their business model right now, which could impact the wider economy.

“I think the problems are with the regionals, but the regional banks are significant lenders to households for mortgages, for small businesses, for SMEs [small and medium enterprises], for commercial real estate. And therefore we’re going to have a credit crunch,” Roubini said.

‘Serious Credit Crunch’

He added that the fundamental problem with regional banks is that they have a “narrow deposit base” combined with large amounts of uninsured deposits and that Americans are “realizing that they can earn, say 4 or 5 percent on money market T-bills that are insured by the government when they get close to zero on their deposits,” which means banking issues could likely continue at such regional institutions.

The economist said that a credit crunch would mean it is less likely that the Federal Reserve will achieve its aim of a soft landing and that the U.S. economy could instead experience a deep recession, “much greater than before.”

“So we’re facing a serious credit crunch for a good chunk of the U.S. banking system,” he said. “The worst is ahead of us because the Fed and other central banks are facing a dilemma. They have to reach price stability. They have to maintain economic growth and avoid a recession. And they have to maintain financial stability. Interest rates have to rise further because inflation is still well above target. That’s going to cause a hard landing of the economy.”

Roubini, the CEO of Roubini Macro Associates and an economics professor at New York University, issued a similar warning last month during an interview with Australia’s ABC, where he noted that central banks that opt not to raise interest rates further risk experiencing a “de-anchoring of inflation and inflation expectation,” which could lead to macroeconomic instability, thus leaving them in a tight spot.

Banking Turmoil

Shortly after Roubini’s interview, Silicon Valley Bank, which was the sixteenth largest bank in the United States, collapsed due to a combination of rising interest rates, a dry-up in venture capital, and a high percentage of uninsured customer deposits as well as a large number of deposits that were invested in Treasury bonds, which are highly sensitive to interest rates.

Two days later, regulators closed New York-based Signature Bank, which had recently made headlines over its alleged involvement in the now-bankrupt crypto firm FTX, and which also had a high share of uninsured deposits.

Silvergate Bank, a crypto-focused financial institution, also announced earlier in March that it plans to wind down its operations and voluntarily liquidate due to what is said were “recent industry and regulatory developments.”

Around 70 percent of total deposits at First Republic Bank, which held $176.4 billion in deposits at the end of 2022, are uninsured, Forbes reported.

Roubini’s recent comments come as experts, including Man Group CEO Luke Ellis, have warned that a significant number of banks could fail in the next two years, with smaller, regional banks in the United States and challenger banks likely facing higher risks.

Despite his warning on Monday, Roubini noted that market experts anticipate the U.S. economy won’t reach rock-bottom “for a while.”