Nouriel Roubini: Dr. Doom

This is from the Guardian (UK).

Although others predicted the present economic troubles Roubini made quite specific and accurate predictions. At the time most economists laughed him off. Now he is right as can be seen in the article some claim he was just lucky. It does not seem likely. More likely is that those who were wrong about him are jealous!
The predictions that Roubini makes about what happens next seem quite persuasive to me at least but then I am not an economist!




He told us so
They called him Dr Doom. He was the economist who three years ago predicted in detail a collapse of the housing market and worldwide recession - and was roundly ridiculed for it. Emma Brockes asks Nouriel Roubini what he foresees now



Nouriel Roubini: 'To say I was just lucky is nonsense. I made specific predictions that turned out to be right.' Photograph: Andrew Testa/Andrew Testa
The New York offices of Nouriel Roubini's consultancy firm are as spare as the times: a desk, a phone, some blank Post-it notes and 134 pages printed from Wikipedia listing every bank in the world, all a superhero in the new austerity needs. Three years ago, Roubini, an economist, was dismissed as a doom-monger for identifying massive vulnerability in the US banking system and predicting its collapse. Now he's a guru, attracting the interest not only of governments and bank chiefs, but of New York's premiere gossip website, which has wound him up so spectacularly and to a pitch of such fury that - along with "Where did all the money go?" and "Is now a good time to buy a house?" - the question one most wants to ask of Roubini is exactly what does happen at his loft parties in downtown Manhattan?
It was the New York Times that dryly labelled him Dr Doom, in a profile last year that identified Roubini as an unlikely hero of the financial crisis. In 2006 he made an address to the IMF in which he predicted that, among other things, the US economy was at risk of a housing bust and deep recession that would have dire consequences for the rest of the world. Today he smiles demurely and says other people predicted it, too, but no one was as specific as Roubini, nor as grave, nor as subject to what passes in the sober world of economics for ridicule. At the time, his speech was received as the endearing quirk of an incorrigible self-dramatist, and even now some say he got lucky. When asked about Roubini, the economist Anirvan Banerjee told the New York Times, "Even a stopped clock is right twice a day."
Mention of this makes Roubini rapidly jettison his modesty. He accuses economists who predicted growth in the build-up to the crisis of being as naive as Goldilocks and says, "They totally got it wrong. To say I was just lucky is nonsense. I made specific predictions that turned out to be right. Exactly." He cites a paper he wrote in February last year called 12 Steps To Financial Disaster, "in which every single step is exactly how the crisis unfolded during the past six months. Every single thing. I said two major broker dealers are going to go bust and there's not going to be any major independent broker dealer left in the next two years. It took seven months for Bear Stearns and Lehman to be gone. It's not a fuzzy case of me saying there would be a financial crisis. I was very specific. And I got it right. So." He shrugs and smiles tightly at the burden of being right in the face of widespread stupidity.
Why Roubini got there first had to do, perhaps, with his personal and professional backgrounds, and with what he calls his "holistic" approach to interpreting economic data. He was born in Istanbul, moved to Iran as a baby, then to Italy, where he grew up. He speaks four languages fluently (Farsi, English, Hebrew and Italian) and has worked around the world, including two years as a policy adviser to the US Treasury. What first tipped him off were similarities he noticed between developing parts of the world and the behaviour of the US economy. To his astonishment, he saw a pattern of economic movement in the US that by 2005 made it look like "an emerging market economy", with the same "irrational exuberance" that in his opinion could be followed only by a huge bust. "You look at history, you look at political data, you look at models, you look at comparisons," Roubini says. "This crisis is not a black swan event - a random outcome from a random distribution. This case is a build-up of vulnerabilities over time that will increase and provoke a crisis. There were tens of different signals that would eventually lead to a tipping point. The fact that there would be a crisis was totally obvious to me." With some sarcasm, he says, "People believed in the nonsense that home prices could rise every year by 20%. If that's not a bubble, what's a bubble? It doesn't take a genius."
The danger signs in a period of irrational exuberance look obvious in hindsight, and Roubini reels them off in a steely monotone, without pausing for breath: "People believing things they should not believe and trusting people they shouldn't trust... no market discipline, internal mismanagement, massive conflicts of interest within financial institutions, the SSC [State Securities Commission] not doing its job, entire brokerage units going bust, Bear is bust, Lehman's is bust, Morgan Stanley and Goldman Sachs are now converted into bank holding companies. What's the biggest scandal? Lehman? Madoff? They're all part of the same phenomenon."
Goldman Sachs was angry with Roubini for making public statements about its poor financial health, and fought back through press statements accusing him of working from nothing more than gut instinct. (This was before the investment bank posted losses of $2.2bn.) Like the BBC's Robert Peston, he has been accused of making a bad situation worse by talking it up in public. Roubini finds this absurd. "If Ben Bernanke speaks, he can move markets, but this idea that the media is making a bigger fuss than there is [cause for] is silly. This is the worst financial crisis we've had since the Great Depression. It's going to be the worst recession the global economy has had for the last 50 years. If anything, the media were ignoring what was going on for too long. The idea that it's all driven by panic and by lack of confidence, in my view, is nonsense. If you are a consumer, think about the fundamentals: negative savings for the last couple of years, debt growth, falling home prices, losing 50% of your equity values, falling employment, everything else is going wrong for you. Of course consumer confidence is going down the tube, but is it because people are irrational? No. Your income is falling, you lose your home, you lose on the stock market. Debt, income, jobs, houses, wealth, all the things that affect welfare. If that's not bad, what's bad?"
From an academic point of view, the question of what will happen next is fascinating because, says Roubini, it is "uncharted territory. Totally unorthodox monetary policy." He sees the size of the bank bail-outs as a necessary evil, but thinks they were pushed through without sufficient conditions or transparency, "with no real voting rights or board membership or other forms of control. I think the terms of some of those rescues have been excessively generous." When it comes to it, he says, "Who is getting all this money?"
It is tempting to turn to Roubini for answers as to a fortune-teller and with the same credulity that got us into this mess in the first place. But his track record makes it irresistible and he isn't shy of offering more predictions. The first is that, in his opinion, we might as well write off 2009 completely. Financially speaking it is, he says, "lost". In the game of Worst-Case Scenario, Roubini looks at the world's advanced economies and considers those most at risk of going bankrupt - of becoming the next Iceland - to be small western European nations. "If a big institution in Switzerland or the Netherlands or Belgium or Ireland were in trouble, the country doesn't have the resources to bail them out."
Britain is in as bad a state as the US and is further hampered, says Roubini, by "fiscal constraints" and the need for a European consensus that makes aggressive bail-outs more difficult to implement. In terms of the housing market, he sees it falling in both America and Britain this coming year by a minimum of 15% and possibly by as much as 25%. "Just to get back to where housing prices were before this bubble started, they'd have to fall in real terms by 50%. So we're half of the way there."
More hedge funds will go bust, but the trickle-down effect hasn't even begun to be felt yet. "The losses now are mostly in mortgages; wait until it hits commercial real estate, the credit card companies, the auto loans, the student loans, the corporate bonds. There's a whole pile of stuff. The financial system is insolvent. It's technically bankrupt."
We need some light relief. This seems a good time to bring up Roubini's spat with Gawker, the New York gossip website that, in what its founder Nick Denton describes to me as a "delicious episode", reprinted a leaked email Roubini sent to friends inviting them to one of his glamorous soirees, boasting that Scarlett Johansson had moved into the loft upstairs from him, having paid two and a half times more for it than he paid for his, and coyly referring to himself in the third person. Details also emerged of an artwork on Roubini's wall depicting some aspect of female genitalia. Given the wealth of this material, it was inevitable that Roubini should thenceforth be referred to on Gawker as the "playboy professor" who inhabited a "vulva" and "vagina-encrusted Tribeca loft", but the episode went from mildly bathetic to jaw-dropping when, instead of laughing it off, Roubini posted an extraordinary late-night rant on Denton's Facebook page in which he called him "a little loser antisemitic jerk", a "Nazi" and a "McCarthist bigot", and portentously defended what he called his "loft cultural events" - all of which, of course, Denton immediately posted on Gawker. I ask Roubini if he regretted that course of action, and he gives me a look of such angry disappointment that I want to hide under my chair.
No, he says, he didn't regret it. He then reprises the rant, embellishing it with references to the KGB, Denton's sexual orientation and a sweary suggestion of what the man might do with himself, which he belatedly asks me not to quote. For the sake of the record, I feel obliged to clarify that the piece of art in question is described by Roubini as the work of a highly regarded feminist artist whom he won't name and which doesn't, he assures me, look anything like a vulva.
There is a short, weird silence after which all I can think to ask, tremulously, is whether he has ever met Gordon Brown. Roubini switches back into his professorial mode without a ripple. No, he says, he hasn't met him - he was out of town that day - but thinks he is "a very thoughtful person" with "a very sophisticated understanding of economic issues". He has high hopes for the Obama administration and the economic team he has chosen. "It's an excellent team, they're very serious. But the recession train has left the station; even if they do everything right, perfectly, the benefits may only be seen in 2010."
As I get ready to leave, Roubini returns, compulsively, to the Gawker episode. He has every right to feel aggrieved about the spiteful forwarding of a private email, but he really can't see that laughing it off is the only effective response, nor that the tone was one chiefly of mischief, not malice. After the interview, Denton remarks, "How can such a brilliant economist, at the height of his reputation, be quite so clueless?"
Stubbornness is, of course, what got Roubini to where he is today. As we wait for the lift, he muses on the other side of his reputation. "This Dr Doom thing," he says. "You know, when it happens, I'll be the first person to say we're at the bottom and things can only get better. But we're not there yet." The doors close on him smiling with an air of grace under fire and he turns, with a chivalrous nod, to retreat to his office and more serious matters.
• Nouriel Roubini is taking part in the first debate of the Guardian's event series: Capitalism in crisis. For more info and to book tickets for the event go to guardian.co.uk/capitalismincrisis

Hazardous path out of crisis...Joergen Moeller.

This is from atimes.
This is an interesting article that both traces the origin of the global financial crisis and suggests steps towards getting out of it. If Moeller is correct a reduction in the standard of living in the US is a collateral consequence of policies that will solve the crisis. It is doubtful that Americans will be willing to put up with such policies which also result in lower GDP in the US compared with some other countries.
Moeller's suggestion that the dollar will depreciate shows no sign of happening. For the present the dollar is still a refuge in the storm and yields on Treasury Bills are high and are sought as a safe haven with little risk.
Moeller also is an avid free trader. Many countries may not prosper in a free trading system and in tough economic times protectionism is likely to be more attractive to many. There are signs of this even in the Obama rhetoric. Also, although Moeller rightly sees the growth of mergers in these crisis times, it is not clear that this is at all progressive. As he points out the new behemoths may not be competitive and will have enough political and economic clout to be able to act irresponsibly and effect government policies negatively.




Hazardous path out of crisis
By Joergen Oerstroem Moeller
The global financial crisis lands an acute challenge on the table for policymakers in Asia, as it is the only place in the world having room to maneuver for active economic policies and is in possession of the world's savings. For some time, the question was open as to whether deregulation and privatization - the policies of president Ronald Reagan and prime minister Margaret Thatcher - were permanently shifting the paradigm of the global economy, or were just another cyclical wave of political preferences. Now we know. It was a cycle. For the past 30 years the world has lived under the spell that the market gets its right. This was the basis for economic and financial policies first in the US, then Europe and after that most

other countries. Bastion after bastion of well-established and renowned enterprises, many of them public utilities, were transferred from public ownership (service to the population) to private ownership (where the priority is profit). The philosophy was that profit would ensure efficiency and that would guarantee the high-quality service the public looked for. The global financial crisis demonstrates that if left alone, the market tends to get it wrong - not right. When the assumption has been proved wrong, the policies cannot and will not be kept in place unchanged. More international regulation and control will certainly be included on government agendas. That does not necessarily mean that deregulation and privatization will be rolled back completely, but it does mean that more deregulation and privatization is unlikely to take place and that some of the privatized enterprises probably will be brought back under public ownership. It is noteworthy that US mortgage guarantors Fannie Mae and Freddy Mac have been nationalized - deprivatized, so to speak - and insurance giant AIG is in reality undergoing a similar process. Forced by circumstances, a US administration judged to be the least likely to nationalize and deprivatize has ordered two of the most spectacular and far-reaching nationalizations of financial institutions the world has seen. This lesson will not easily be forgotten. Second, a new wave of concentration of financial institutions is under way. The Bank of America
has bought Merrill Lynch and there will be other mergers and acquisitions. The days where genuine competition ruled between the mayor financial institutions are gone and will not come back. The world will be left with a few mastodons so powerful and in possession of enormous financial might that they soon will throw their weight around with regard to economics and politics. We witness the gradual phasing out of specialized financial institutions, crowded out by the mega institutions without healthy competition and where wrong decisions may cause havoc because of their size. Until recently we could hope that if a financial institution got it wrong, the other ones might have got it right - not so anymore. Out of this may not come a more robust system, but a more fragile one. Third, deregulation and privatization gave birth to investment funds. Many having enjoyed themselves during a spending spree buying public utilities one after another, they now may face a rough time. Many operated on the assumption that the valuation of the assets (bridges, toll roads, airports and so forth) would continue to rise, allowing them to expand by increasing borrowing using new loans to repay former loans. Now these assets are starting to fall in value, with the inevitable consequence that it won't be long before we read about such investment funds in difficulties. They excelled in complicated and opaque financial operations selling and buying among each other, sometimes between different subsidiaries inside the same mother company, and often publishing obscure annual reports. Their owners were sometimes pension funds, which did not want to undertake such risks under their own name. Fourth, it has so far primarily been the American and British financial systems that have been in the firing line, with some Japanese banks also exposed. We cannot be sure that the rest of Asia and the eurozone continue to be relatively unharmed. It seems, however, a reasonable fair assumption that, if they are drawn in, the repercussions will be smaller than for the US and the UK. One wonders what the consequence of that will be for the future global financial system. It is difficult to see the US regain its former position after having demonstrated such incompetence. For years, observers have amused themselves by pointing out that the eurozone was no match for London as a financial center. Perhaps perceptions will change. Perhaps investors will start to feel more at ease investing via more cautious, more conservative, and less sophisticated but also less risky financial institutions in the eurozone, and perhaps financial centers in Asia will start to emerge for real. Fifth, the world needs a financial system ready to take calculated risks; otherwise many investments will not be undertaken. The virtue of a good financial system is that it knows how to weigh pros and cons and gets it right most of the time. For the next years, the global financial system will tend to be cautious and the risk for the global economy is that it may be too cautious, always thinking of 2008 and fearing to repeat mistakes. Human nature indicates and history shows this kind of behavior. After a period of assuming unsustainable risks the world may move into a period with a financial system that is too risk-aversive. Many developing countries and newly industrialized countries will feel the pinch, and this may lead to lower global growth. The global authorities face a challenge to tell the financial system that even if it is understandable in view of the 2008 crisis that they prefer to avoid risks, continued global growth requires some risks and accordingly it should not be too cautious. The balance must be found. The world may end up with a financial system being extremely solid because it does not dare to lend, which is why it is there. A strange outcome to a crisis started by reckless lending. The present crisis is due to one single factor and nothing else: high and persistent imbalances in the US building up over decades and culminating in explosive growth of these during the past eight years. The US government's liabilities and long-term commitment stands at almost US$50 trillion - four times total annual production. The total federal debt is more than $10 trillion. Next year, the budget deficit will probably surpass $500 billion. The balance of payments has been in deficit for years. Total demand can surpass production for some years - as it has - but not indefinitely. The longer it lasts, the more painful the alignment will be. It has become a global crisis because the US was and still is the largest and most powerful economy, with one-quarter of global production. Consequently, a solution must be a global one defining the burden-sharing between the US and the rest of the world. Restoring balance for the US economy requires lower demand or increased production and/or a combination of both. Demand can be reined in by restrictive economic policies, but that will deepen the recession. Stimulating policies can be applied to combat recession through an upswing, but will aggravate the imbalances. The policy implication is that US fiscal and monetary policies cannot be applied effectively. Years of irresponsible policies have removed any room of maneuver. It is good to hear plans of expansionary economic policies, but where does the money come from? More borrowing, and if so from whom? Private households already dissaving, a business sector facing alarming falls in profit, a maimed financial sector? The rest of the world is already up to the hilt with Treasury bonds, it definitely does not want to accumulate more of these. That leaves us with two not very attractive policies: depreciation of the US dollar and/or protectionism. They can do at least some of the job by reducing real incomes, thus cutting total demand and enhancing competitiveness and thus stimulating production through exports. It looks fine, but it isn't. What the US gains the rest of the world loses. These policies redress US imbalances by shifting them to other countries. Only if other countries are willing to accept this will such policies work. And they can only be expected to do so if the US is ready to enter into some kind of arrangement ensuring that their burden is accompanied by a comparable effort by the US. Irrespective of which policies are set in motion, the result is a transfer of purchasing power from America to other countries and a lower real income for the US - a lower share of global gross domestic product (GDP). The US can scream or squirm or whatever it likes, this is going to happen. Here follows a sketch about how to manage adjustment and minimize the negative repercussions: First, the US undertakes to reduce oil consumption, in particular in the transport sector. For an incoming administration, the opportunity arises to introduce a new energy policy. The political question is whether the American people, having resisted such measures for years, are now finally ready. Second, a commitment by everybody to refrain from protectionist steps, thus guaranteeing continued free trade and international investment banning any attempts to solve one's own problems by shifting them to other countries. There is talk about relaunching the Doha-round, and that would be wonderful, but let us have both feet on the ground and not jump for the moon however desirable it looks. Third, policymakers announce guidelines for a US dollar depreciation, signaling that a falling US dollar is the preferred option and thus removing the risk that such a policy triggers speculation. Major economic powers must align domestic monetary policies in particular interest rate changes so as not to open windows for speculators to exploit any differences. Fourth, measures to stimulate domestic demand in countries having room to maneuver to do to uphold global demand. The recently announced Chinese stimulus package amounting to $586 billion and composed of three elements - loose monetary policy, tax reductions and investments - is a step in the right direction. Fifth, a US commitment to follow economic policies in conformity with guidelines normally laid down by the International Monetary Fund (IMF) for countries needing assistance to sort out economic imbalances. The interpretation is limits for deficits on the public budget and the balance of payments. Sixth, the top 10 or 20 global economic powers (not G-10, but the 10 countries with the largest share of global GDP) agree to coordinate economic policies to better synchronize the global business cycle. Seventh, a keen awareness of the risk to the global economy of countries that may not be able to weather the crisis sliding into political anarchy and economic chaos, thus joining the list of failed states. This is where the world really needs preemptive and preventive policies. The normal blueprint imposing restrictive economic policies will not do in these circumstances; something more imaginative is needed to keep the economy going. The IMF should step in, but the IMF does not possess money itself. It borrows from member countries to lend to other member countries. Only if creditors find it attractive or necessary will they place the necessary funds at the disposal of the IMF, and global leaders must create an atmosphere in which they are ready to do so. These seven steps look like a tall order, and other methods to rebalance the US economy without too much harm for the rest of the world may be available - but they are not easy to spot. Joergen Oerstroem Moeller is Visiting Senior Research Fellow, Institute of Southeast Asian Studies, Singapore and Adjunct Professor Singapore Management University & Copenhagen Business School. (Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved.