Even Dr. Doom seemed to be all sunshine and lollipops yesterday. Nouriel Roubini, one of the few economists to accurately predict the magnitude of the economic crisis, told a Chilean investors’ conference in New York that "the freefall of the economy” is over. “There is light at the end of the tunnel," he said. "And the light at the end of the tunnel for once is not the one of an incoming train.”

You can probably guess what happened from there. As Wall Street whooped with joy, stocks promptly rallied. But before long, Dr. Doom was clearly agitated again. He put out a statement last night refuting overly hopeful media reports on his remarks:

“It has been widely reported today that I have stated that the recession will be over 'this year'” and that I have 'improved' my economic outlook. Despite those reports─however─my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.

“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19 months into that recession. If as I predicted the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end."

Still, whether he thinks the recession will end in December or January, it's significant that even Roubini is helping to solidify the shaky consensus that we might be looking at a bottom.

But read the entire release before you reach for the champagne. He also thinks a W-shaped recession is possible, which means we'd be dipping back down again in short order. What's more, he's emphatic that the recovery─no matter when the recession ends─ going to be long, slow, jobless, and generally miserable. So much for sunshine and lollipops.

(From Longorshortcapital.com and, indirectly, from Matt Taibbi.)

California is $26 billion in the red and handing out IOUs. The solution is likely to include both tax hikes and spending cuts.

Which should lawmakers do more of?

Tad Dehaven: Cut spending. This mess is the direct result of years of excessive spending. If, since 1990, California had just spent at the rate of inflation and population growth, it would have a $15 billion surplus. Taxes are already high in California. Raising them any higher would be about the worst thing it could do; it would kill whatever growth is out there.

Nick Johnson: Increase taxes. It’s Econ 101 to say that spending cuts exacerbate a recession and cost more jobs than tax increases do. California could lay off every single state employee and still not balance its budget. The worst thing is to cut services families rely on. Obviously, cuts in spending are inevitable, but tax increases have to be a bigger part of the solution.

Our Verdict
Voters already rejected a mishmash of proposed tax increases, and Arnold is dead set against any more, having already raised them by $12 billion. Hiking cigarette taxes by $1.50 makes sense, but more cuts seem inevitable.

Dehaven is a budget analyst with The Cato Institute. Johnson is director of the State Fiscal Project at the center on Budget Policy and Priorities.

Check out this very interesting article from GlobalPost about how the financial crisis has led to a spike in conflict and violence around the world this year. As the author, Thomas Mucha, notes, "economics matters." Don't we know it.

By the way, one other point on this topic that I would draw out: natural-resource prices have been as volatile as they've ever been over the last 12 months. Given that the majority of conflict happens in commodities-rich areas, that's probably a key catalyst for the growing violence as well.

Could the next bubbles already be brewing, this early in a recovery? That’s what a number of sources I speak with have been saying in the past few weeks. Economists are worried about the price of oil, minerals, and other commodities─even though they’ve taken a slight dip in the past few days, they are still at prices far higher than usual at this point in the economic cycle. Ditto U.S. and European stocks, and especially emerging-market equities, which are really booming as everyone continues to dream of the days of double-digit returns. Even real estate is spiking again in places like China, Hong Kong, and a handful of other big cities in developing countries.

What’s driving this? An excess of spare cash around the world. Despite the downturn, there are still plenty of people holding lots of money on the sidelines, and they are itching to find a place to put it. If I had to pick the most worrisome bubble of the moment, I’d probably look east to China. Since last December, Chinese banks have given close to a trillion dollars in loans to help companies expand (year-on-year lending was up an unbelievable 1,000 percent at the start of this year). When I was in China in May, even bankers at state- run institutions were starting to worry that not all of this money was making its way into the real economy, and that much of it was being recycled into the stock markets and housing, possibly setting the stage for the next big painful bubbles there.

Policymakers in China and elsewhere are going to be reluctant to take any action around brewing bubbles right now, because the recovery isn’t yet entrenched. This is worrisome, because it could set the stage for yet another boom-bust cycle (more on that in a future cover story from our Morgan Stanley columnist, Ruchir Sharma). I wonder when we might once again enter the period that Goldman Sachs chief economist Jim O’Neill calls “the Twilight Zone”─a delicate time between boom and bust. This is when “the economic fundamentals that support a boom begin to break apart, but a future bust also becomes more likely.” This period must be managed with care by politicians. Tomorrow, I’ll blog more on the Twilight Zone and how we might make our way out of it unscathed in the future. 

CIT is definitely not too big to fail. At least for now. Maybe the company's CEO, Jeffrey Peek, will find a more receptive audience in the Administration as bankruptcy nears, but for now, its $80 billion in assets was deemed sufficiently small enough to squeeze through the bankruptcy process.

Or, looked at another way, perhaps Peek and his employees just didn't give enough money to the Democrats.

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Get ready for 10 percent unemployment. That's the message from the Fed.

Every quarter, the five members of the Federal Reserve Board and the presidents of the 12 regional Federal Reserve Banks give their best guesses about the economic outlook. The latest batch of numbers--released July 15--indicate that the Fed's gotten both more optimistic and more pessimistic. How could that be?

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