We have to realize that at the core of all this is a liquidity bubble coupled with easy lending practices, around the world. G-20 conference urged nations to raise rates and I believe them. I think still there is too much liquidity in the system and it will still take 3 more quarters to clear that out (assuming central banks keep rates up). So I think a US recession in late 2007 or early 2008, instead of early 2007 as predicted.
What can lead to the “ugly” recession pointed by Roubini will be lots of defaults and banks suffering, causing lending standards to tighten and big job losses. If Fed lowered rates a lot (below 4%), it may help soften the recession. But a weak dollar will increase oil and commodity prices thus spiralling inflation again and Fed will not be able to lower rates. Lot of money has moved from commodities to stock market by hedgies in last 3 months and they will move back to commodities. If foreign investors also decided to pull money out of US because of dollar decline, it will cause markets to nose dive. If big job losses happened then it will change the psychology of the “resilient” consumer that hasn’t seen a real recession for quite sometime. This will be the “ugly” recession predicted.
However, the Fed as well as many investors and economists think/hope that dollar will slowly decline, commodity prices will rise again but not shoot up, housing may go bust only on coasts and not across the country, consumer will slowly increase savings and economy can move slowly back on track from <1% growth in 2007 to something around 3% in 2008. I believe it is difficult for this scenario to happen but UK has shown that monetary policy can help avoid recession.
