Nouriel Roubini is an unlikely looking Dr Doom. In fact, the man who apparently predicted the global recession is as well known for his hectic party schedule as he is for being something of an economic Cassandra.
But given a microphone and a packed audience, he delivers a devastating critique of today’s economic order and a dire warning of further crises to come, unless politicians take radical action. Roubini has become a celebrity thanks to his 2006 call on a US recession resulting from the view that the boom in house prices and mortgage debt was unsustainable. Initially, it was not a popular view.
Now he is a film star with a cameo role in Wall Street: Money Never Sleeps, Oliver Stone’s sequel to his 1980s parable of financial greed and stupidity. Roubini has studied crises for years and can quickly reel off a list of affected countries. “People ask me – how come you predicted this early on?” he told a packed lecture hall at the LSE in London in May.
“These things are predictable. I had studied for 10 years financial crises in emerging markets and, after I had written a book on it, I looked at the US and its asset bubble and its fiscal deficit, current account deficits and overvalued currency. To me it looked like a typical emerging market economy on the verge of a crisis.”
He does not claim to be a lone fortune-teller. Raghuram Rajan, former chief economist at the International Monetary Fund (IMF), William White at the Bank of International Settlements and British anti-poverty campaigner Ann Pettifor all issued their own dire warnings, but Roubini’s survives as the most famous. So when he talks about where he sees the next stage of the crisis unfolding, people listen. And he has warned that economic troubles, despite austerity plans and bank levies or capital requirements being raised by governments, are far from over.
“People are seeing the beginning of a recovery in the US, the eurozone, the UK, Japan and much more in the emerging markets,” he says. “The question is: is this crisis over or not?” And he believes the history of the Great Depression, which began with the Wall Street crash in 1929 but did not fully end until 1939, and Japan’s lost decade, demonstrate the risk that the current economic depression could be here for years to come. “There may be long cycles in which elements of one crisis morph into another one – and you get a second leg,” he thinks.
The obvious sign of this second leg is the European debt crisis that hit Greece in April and triggered a domino effect that forced eurozone leaders, and the IMF, to come up first with €110bn for Greece, followed by putting €750bn on standby in case of further budget crises.
Roubini refuses to rule out the disintegration of the euro. “There is a risk of the break up of monetary union and the eurozone,” he says. “What has happened in Greece is just the tip of an iceberg.”
To prevent the end of the single currency, member states are faced with an unappetising menu of options to restore growth without leaving the euro. The first is several years of deflation to push wages down to levels that mean they could compete with Germany – an option Roubini thinks politically impossible.
The second is structural reform, which he says would mean shutting down inefficient companies and making more people redundant. Finally, the euro’s exchange rate could fall sharply, with the risk of an inflationary spike down the line.
“Some of the periphery may decide the benefits of exiting [the euro] might be greater than the costs of staying in,” Roubini warns. “So there is the possibility of the breakup of monetary union.” In the UK, sterling fell sharply against the dollar over the past six months, dropping 15 percent from $1.67 to $1.42. While that has provided some relief for exporters, Roubini believes the UK needs to embark on tough fiscal consolidation. But can the coalition deliver results? Roubini was sceptical.
“They say they are committed, but we will see. When the tough choices on cutting spending and raising taxes [come up], we will see how willing the two parties are to work together,” he said in the first weeks of the new government. “Historical examples suggest two-party coalitions tend to have larger deficits than unified majority governments. My worry is that, when you look at advanced economies, you see governments that tend to be relatively weak and unable to do the right thing.”
But he really gets gloomy over governments’ efforts to reform the local – and to some extent the global – financial system to ensure a crisis of the magnitude we have seen cannot happen again. On this, Roubini devotes two chapters of his new book, Crisis Economics, to detailed prescriptions for reform. But clearly he is not confident that anyone will listen.
“What is being proposed in the UK, the US and the G20 goes in the right direction but is not enough. My fear is that these reforms are cosmetic,” he says, highlighting proposals for higher capital requirements, caps on leverage ratios, an insolvency regime and putting derivatives onto open exchanges.
“It is time to think about what leads over and over again to huge banking crises that then lead to massive fiscal costs,” he says. “Unless we address that problem – as people such as Mervyn King have said – we need more radical reforms.”
According to Roubini, bailing out the US and UK banking industries only served to turn banks that were too big to fail into banks that were even bigger – JP Morgan, Bank of America and Citi – and that can operate in the knowledge they could expect to be bailed out again.
Another justification for reintroducing the Glass-Steagall Act, born in 1932 to legislate for the separation of investment banking and retail banking, in the US is that banks and their manifold, overlapping risks have simply become too complex for a chief executive to manage effectively.
Then there is the added complication of each bank manager or trader operating on their own profit and loss account. Roubini calls the job “mission imposs ible” – throwing weight behind economist and former Federal Reserve chairman Paul Volcker’s proposal to prevent investment banks trading on their account or owning hedge funds.
“I’m not against risky stuff,” he protests. “If you want to be a hedge fund, take a lot of risk. If you do well, you do well. But if you don’t, you go bankrupt and shut down. It is not fair to use taxpayers’ money to allow risky stuff.”
Roubini is clearly angered by the efforts of the banking lobby to push back against what he sees as “mild” reforms that the US Senate passed on 20 May. He says the new regime needs to go further, including taxes designed to induce more prudent behaviour and recoup the costs of the bailout. But the appetite for it may have long passed.
“The sense on Wall Street is that we are back to business as usual,” he says. “If we don’t address unfairness by doing it right, the political backlash will be severe. In [the UK] you will have to have quite painful cuts because we decided to bail out the banks and the bankers. But what is the fairness in that?”
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