I just checked in with Nouriel Roubini, official economic pessimist

and wish I hadn't. For months now he's been predicting that the US will have a recession in 2007, triggered by the burst of the housing bubble. The crash of the subprime mortgage market has been in the news lately, most recently in this article by Gretchen Morgenson of the New York Times (who, by the way, is this year's speaker at our Finance Symposium - mark your calendars for April 13). She exposes the same type of shenanigans in this market that we saw in the Enron - World Com - etc. scandals a few years ago. To whit, an analyst at Bear Stearns, which has financial ties with New Century Financial, provided an upbeat analysis of New Century while its stock value was in the middle of a tail spin. Shortly after the analysis the stock fell from $15 to $3, leaving the suckers who bought the analyst's story holding the bag. And of course the Bush Treasury Department is pushing now for relaxing many of the regulations under Sarbanes-Oxley that have held companies to stricter reporting requirements.

Anyway, yesterday Roubini dismissed ten reasons the conventional wisdom says we should not be worried about the crash of the subprime housing market. The parts that worry me most:

Consensus View #5: There is no contagion from mortgages to other credit risks.
Ugly Reality #5: There is the beginning of a slow contagion to other credit risks: widening of spreads to near junk for major broker dealers; widening of CDS spreads for corporates and non residential real estate as measured by CDX, iTraxx and CMBX indices.

Consensus View # 6: There is no contagion from the housing recession to other sectors of the economy.
Ugly Reality #7: There is already significant contagion from the worst housing in decades to the other sectors of the economy: auto is in a recession; manufacturing is in a recession; employment growth is slowing down; every component of real investment (residential, non-residential, equipment and software, inventories) fell in Q4 and is falling at a faster rate in Q1. And now the saving-less and debt-burdened consumer is faltering too as two mediocre consecutive months – January and February – of retail sales show. The US consumer is on the ropes and at its tipping point.

Consensus View #7: The economy will experience a soft landing and the mortgage disaster will have no macro impact.
Ugly Reality #7: The economy will experience a hard landing, at best in the form of a growth recession (growth in the 0%-1%) for most of 2007 or, more likely, an actual recession starting in Q2. Greenspan thinks a recession by Q4 has a 30% probability; the Fed’s yield curve model prices a 54% probability of a recession in 2007.

Consensus View #8: If the soft landing is at risk and the economy may have a hard landing the aggressive easing by the Fed will prevent such a recession.
Ugly Reality #8: The coming aggressive easing by the Fed will not prevent the US hard landing for the same reasons why the aggressive Fed easing in 2001 did not prevent a recession then: when you have a glut of investment/capital goods – then tech goods, today housing glut, consumer durable and auto glut – the demand for such goods becomes interest rate insensitive. So the Fed will try but will not be able to rescue the economy.

Consensus View #9: The world will happily decouple from a US hard landing
Ugly Reality #9: Decoupling of growth for Europe, Asia and emerging markets will occur only if the US has a soft landing. If the US experiences a hard landing there will be no decoupling whatsoever.

Consensus View #10: The recent financial markets turmoil is a temporary blip; the financial party will happily continue.
Ugly Reality #10: Previous market corrections were temporary blips and market opportunities because macro fundamentals were sound. The spring 2006 “inflation scare” turned out to be a “scare” without basis; thus markets recovered after a brief turmoil. Today we do not have a “growth scare”; we have US growth fundamentals that are severely weakening and leading to the risk of a hard landing. In that scenario the market will not have a brief correction; instead all sorts of risky assets – equities, commodities, corporate credit risks, emerging market assets – will have a severe downturn once sucker rallies following expectations of a Fed ease will run out of steam when the reality of a hard landing sinks in.