Roubini, who predicted the 2007-2008 global financial crisis and earned the moniker “Dr. Doom” on Wall Street, laid out his thinking in a new interview with the McKinsey Global Institute’s Forward Thinking podcast.

The New York University professor warned about the “huge buildup of debt” worldwide in recent decades. He described bankrupt “agents” or “zombies”—whether households, corporations, financial institutions, governments, or countries—that were able to survive despite high debt levels because of low interest rates.

“Even institutions that were effectively insolvent and bankrupt could survive. And during the GFC, we bailed them out,” he said. In the U.S., part of the Emergency Economic Stabilization Act of 2008 was the $700 billion Troubled Asset Relief Program, set up to buy toxic assets from banks.

“And we bailed them out again during the COVID crisis, where initially there was a massive backstop of every type of institution,” Roubini added.

‘Severe recession’ ahead

Now, with the Fed and other central banks forced to fight high inflation by raising interest rates, he considers a “severe recession” likely in the next year. 

On Wednesday, the Fed continued its inflation fight by raising its key interest rate by a quarter-point, despite fears that doing so could increase the recent turmoil in the banking sector. Mark Zandi, chief economist of Moody’s Analytics, described the hike as “unnecessary,” while Tesla CEO Elon Musk went further, calling it “foolish.”  

Roubini thinks the Fed and other central banks are now in a lose-lose position. Raising rates could shake the banking system and lead to greater instability, but lowering them could spur higher inflation. “It’s too late to find a solution that prevents a hard landing and prevents severe financial stresses,” he said earlier this week on Bloomberg TV.

“We avoided the debt crisis a couple of times,” he told Forward Thinking. “We kicked the can down the road. We bailed out and backstopped a lot of people. But now the game is over because you have inflation and you have to raise interest rates…so that’s where the risk of the mother of all debt crises occurs.”

Asked on the podcast if there’s a particular trigger to watch for as to “when things will break,” he noted a few factors.

‘A situation of distress’

First, he said, “For households and corporates, your income is falling. Households, because of falling real wages and potentially unemployment. For firms, because your profits are reduced if your revenues are falling. So that’s your P&L, there’s already stress.”

Thanks to high interest rates, meanwhile, asset prices have fallen as companies have faced higher borrowing costs and reduced liquidity. “Even cash gave you a negative real return because of inflation,” Roubini said.

And if you’re a highly leveraged household or company, he added, “you have a shock to your debt servicing capacity.” For consumers that could mean debt that is more costly to pay off, be it mortgages, credit cards, or auto loans, or, for companies, bank loans.

Data recently released by Cox Automotive showed the severe delinquency rate on car loan payments in America was the highest in 17 years.

Roubini likened the danger to the Bermuda Triangle, adding, “You have a hit to your income, to your asset values, and then to the burden of financing your liabilities. And then you end up in a situation of distress if you’re a highly leveraged household or business firm.”

If such distress is widespread enough, he added, you end up with a systemic crisis in household and corporate debt, with defaults and delinquencies. As far as he’s concerned, it isn’t far away.