Nouriel Roubini, Professor of Economics at NYU Stern, joins Yahoo Finance's On The Move panel to discuss how the government has handled the coronavirus pandemic.

Video Transcript

ADAM SHAPIRO: We want to turn our attention to what's happening on Capitol Hill with the stimulus package pending, $2 trillion. To help us understand how this could impact the economy is Nouriel Roubini. He's a professor of economics at NYU's business school, the Stern School.

And, Nouriel, you were with us within the last 10 days, and you said it would be possible to avoid-- you used the word depression-- if the stimulus package was large enough. Do you still feel that's accurate?

NOURIEL ROUBINI: Well, at this point it's clear that we are going to have a recession that's more severe than the Global Financial Crisis. Even the IMF, even folks on Wall Street that weeks ago were talking about a mild correction or a V-shaped recovery-- now Goldman Sachs, JPMorgan, Morgan Stanley say in the second quarter output's going to fall between 25% to 30% annualized. So we're already in a state in which there's going to be a very severe recession, worse than the Great Financial Crisis.

It's been front-loaded. This has been actually so far worse even than the Great Depression because the freefall of output did not occur like in the previous episodes in three years but in three weeks. The stock market, the credit spreads, the unemployment rate, credit markets seizing, employment, economic activity, consumption, investment, capex, everything is in a freefall. It's not a V. It's not a U. It's not an L. It's an I. It's a straight one down. So right now we are on the verge of something that could be worse than the Great Financial Crisis, the condition under which we could get into another greater depression.

Now the good news is that the central banks are doing everything necessary. Pretty much all the kitchen sink of policy tools that were used 10 years ago are being used again. Fiscal policy has been behind the curve. We'll see whether this package is passed, but we'd need similar types of packages not just in the United States but also in Europe and other parts of the world.

But I think that the key things for the market and for the economy is going to be to deal with the spread of the pandemics because markets are not going to stabilize. Today they're up because there will be a fiscal deal. But if the news are going to be, as they've been for the last week, that the rate of spread of contagion is 30% per day, that means that every three days, the number doubles. In a month from now, we'll have half a million cases in the United States.

And therefore we're not going to be able to reopen economic activity. Economic activity is already worsening more than expected. Therefore the economy can still tank. The market can go lower after the good news of today. And if that happens and the contagion is not stopped, then we'll have the condition for having a depression, not a recession.

JULIA LA ROCHE: Nouriel, it's Julia La Roche here. So what I'm hearing from you is that the best-case scenario is that short-lived recession that you're referring to, that we get to growth in the fourth quarter. But as you're referencing, that depends on-- that's contingent upon the kitchen-sink federal monetary-- Federal Reserve monetary policy, getting the virus under control, getting the right fiscal stimulus.

So I'm wondering-- because even that scenario doesn't sound so great. The depression scenario that you lay out sounds really dire. Are we past the point of no return at this point?

NOURIEL ROUBINI: We're not past the point of no return. There will be a great recession more severe than the Global Financial Crisis. That's consensus. You ask anybody now on Wall Street. They say this is going to be worse than 10 years ago. That's agreed. Was not a month ago, but now we're there.

The question is are we going to have a three-quarter severe recession worse than 10 years ago and then by the fourth quarter we have a recovery, or is going to get worse? I think the condition under things get worse are the following one. First of all, if we don't do a full lockdown of the economy for a month or two the way China did and the way Italy is doing right now, this thing is going to explode. So the idea of reopening everything in a week, after two weeks doesn't make any sense. Even in the UK, Boris Johnson decided we're going to shut down everything, lock down fully and compulsory. We're not doing it, and that's dangerous.

Even if we were to do that, by next winter we know that these virus is going to mutate, and we're not going to have a vaccine until another 18 months. And unless we find miracle antivirals or therapy is going to work, every study scientifically suggests there's going to be a return of this infection under a different form mutated. So by the time we're supposed to recover in Q4 it will be winter, and we'll have another round of this thing-- maybe less severe than this time around but again.

Secondly, by that point the stimulus is going to run out of steam, and for how long we can do budget deficits of 10% of GDP fully monetized by the central bank? We can do it for a year. Can we do it for two years in a row? At some point given the supply shocks that imply there will be less production, there will be bottlenecks. If you monetize fiscal deficit, you're going to have stag deflation, meaning recession and inflation at the same time-- stagflation. That's a risk we're facing right now.

And on top of everything else, there is a bunch of geopolitical risk. US and China, there is a collision course. There are a bunch of revisionist powers like China, Russia, North Korea, and Iran that are going to be interfering in our election. We'll see what's going to happen with the election. There is a risk of rigged election and confusion and political chaos.

And I would not even rule out that Iran is going to strike the United States by the middle of the year. They'll start a war in the Middle East because they need to have regime change in the US. If Trump stays in power, the regime is dead, so they're going to escalate conflict in the Middle East.

So we have the combination of having a pandemic that might not be contained, running out of policy bullets, and having rising geopolitical risk that could lead to what I've called the greater depression rather than the greater recession. That's a risk we're facing right now.

The greater recession was already baked in in the numbers and is consensus. The question is whether there are downside risks. I see downside risks compared to the baseline of a greater recession.

JULIE HYMAN: Nouriel, it's Julie here. So we're talking about potential depression or a greater recession here in the US. Talk to me more about what a global recession or even depression could look like. Because in addiction to the countries that you mentioned-- yes, China coming back online slowly, but Italy shut down. Britain shut down. Now India talking about a 21-day lockdown for a nation of 1.3 billion people. Are we going to see a coordinated global depression?

NOURIEL ROUBINI: Well, what has happened this time around is usually when there is a recession in one country, in one region of the world, there is economic growth in other parts of the world. This time around it's as if an asteroid had hit planet Earth all at once and you have a complete collapse of economic activity in US, Europe, in Japan, in China, in Asia, in emerging markets, in advanced economies. We have not seen anything like this.

And even China, where output collapsed at the rate of 40% in the first quarter, is not going to recover in the second quarter because now the consensus is that in the US and Europe and other advanced economies economic activity is going to collapse at the annual rate of 40% in the second quarter. So how can China recover when it's a major exporting country when the rest of the world is going to have a more severe recession in Q2 than Q1? So in Q1, China faced a negative supply shock. In the Q2 quarter, it's going to face a massive demand shock, and that's going to exacerbate the global economic contraction.

Now we know everybody in the world there will be a recession in Q1 and Q2, and it's going to spill over in Q3. The question is whether by Q4 you have a recovery or you end up into a depression. And I think the answer to that depends on whether we do the right policy action on the health side. We're not doing it in the United States. We're not doing it everywhere in Europe.

That, I think, is the biggest risk. The idea that you're going to release the rules about kind of social distancing in a week from now is totally crazy. I mean, look at what happened in Italy when they did it too little, too late, and now there is a nightmare. US in a week from now or two weeks from now is going to be worse than Italy at this rate of increase of the spread of the contagion.

So if we don't do the right health response because we want to jump-start the economic activity too soon, it's going to be a nightmare. And by next winter there's going to be another round of this virus mutated, and we're going to run out of policy bullets because we cannot run 10% of GDP this year, next year, another year, let alone other geopolitical risks that are looming over the horizon.

That's why I worry--

ADAM SHAPIRO: OK.

NOURIEL ROUBINI: --about a greater depression, not a greater recession. The greater recession is baked in for the world. You have to start to worry about the greater depression.