'Dr Doom' Nouriel Roubini Says Fed's Dilemma Has Transformed Into A Trilemma: 'That Looks Like Mission Impossible'

Prominent economist Nouriel Roubini, known as “Dr. Doom” for his precise prediction of the 2008 financial crisis, reportedly said the Federal Reserve is staring at a trilemma of maintaining price stability, growth and financial stability which he thinks is “mission impossible.”

What Happened: "…as you raise rates, you create more stresses for both creditors and for borrowers and therefore you have only one policy instrument — in this case the Fed funds rate — to reach three targets, i.e. price stability, growth and financial stability. To me, that looks like mission impossible," he told Yahoo Finance.

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Roubini also believes that the business model of many regional banks is broken and that the “worst is still ahead.”

"They have a narrow deposit base. They have a large amount of uninsured deposits. They’ve massive losses on their securities. Even the value of the loans is falling. They have exposure to commercial real estate. And many of them, if you measure it correctly given the change in interest rates, are now insolvent," he said.

Funding Costs: Roubini also highlighted the cost of funding issue for banks. Retail deposits are considered to be the cheapest source of funding for banks. However, trust deficit amongst depositors as well as attractive money market fund returns have contributed to depositors pulling their money out of banks amidst the recent banking crisis. As a result, lenders are likely to find it difficult to replenish their deposit base.

"If they have to raise money not at 50 basis points on the deposits because people can get 4% or 5% on safe money market T-bills, then you have a problem in terms of cost of funding and value of their assets. So I think that the worst in terms of severe banking stress is still ahead of us," Roubini asserted.

The economist also noted that a credit crunch in the system is going to significantly reduce economic growth. "They lend to SMEs, they lend to households, they lend to commercial and residential real estate, that credit crunch is going to tip the U.S. economy into a recession later this year," he added.

Photo by World Economic Forum on Flickr

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