In the Financial Times' "View from the Markets," Aline van Duyn, the FT's US markets editor, interviewed Professor Nouriel Roubini:

The United States is at the beginning of what will be a severe economic contraction. In the US, when consumers face negative equity, they have an incentive to walk away from their homes. If this occurred on a large scale, which seems likely if no changes are made, then financial institutions could face losses as high as a trillion dollars and a systemic banking crisis could result.

In order to minimize the effects of the housing downturn, the fed has aggressively used both new instruments and traditional monetary policy. An effective solution would need to recognize that the face value of mortgages needs to be reduced. It is not enough to only provide liquidity. Instead, debt itself must be reduced so that people can afford to stay in their homes. The bill currently in Congress -the Frank-Dodd bill- could help make this happen. It is most likely the only policy proposal that could make a meaningful difference. If the bill was passed, financial losses would be limited, and a systemic financial banking crisis might be avoided. Nonetheless, the US would still experience a significant economic contraction.

Stock markets are currently pricing a short and shallow recession for the US, but it is unlikely that we will in fact face such a shallow downturn. Instead, there is likely to be significant downward pressure on stock prices which will make equities very risky. In the coming year, investors should stick with relatively safe assets such as cash and government bonds. Additionally, if the US recession is severe enough, it will cause a significant slowdown of economic growth in other parts of the world as well, so equities all over the world will be quite risky.

Policy reaction in the US has been aggressive enough that we should not end up in a stagnation similar to what Japan experienced. Instead, we will likely experience a recession lasting 12-18 months.

The three-part video series is available in its original format on the Financial Times' website. This summary was prepared by Crystal Oswald-Herold of the Atlantic Community's editorial team.

Dr. Nouriel Roubini is an economics professor at New York University and Chairman of RGE Monitor.