9 August 2011
Nouriel Roubini has been proven right once again.
At this most difficult of times it is not surprising that we are getting deluged with opinions. Some people are telling us to buy, some are telling us to sell, and some are telling us to sit tight -- they can't all be right.
In the search for the best answer, wouldn't it make sense to listen to someone who has a track record of getting these calls right? But what if this person's views are negative, so negative in fact that he is typically derided as a 'doom-monger'? Should you reject his views as too extreme, or should you take a deep breath, suspend your disbelief, and listen?
Dr Doom
Well, the person I am talking about is Nouriel Roubini. Of Turkish origin, he is not short of intellect, being a professor of economics at New York Stern with a doctorate from Harvard. His bearish tendencies have gained him the nickname 'Dr Doom'.
During his long academic career, Roubini spent a considerable amount of time studying the emerging market crises in Asia and Latin America. In particular, he worked at the IMF in 2001 as it battled the financial meltdown in Argentina.
These experiences were crucial in his calling the credit crunch. "I've been studying emerging markets for 20 years, and saw the same signs in the US that I saw then, which was that we were in a massive credit bubble," he said.
Calling the crunch
On 7 September 2006 Roubini stood before an audience of economists at the IMF and announced that a crisis was brewing. He warned that, in the coming months and years, the United States would suffer a massive housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.
He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of pounds worth of mortgage-backed securities unravelling worldwide and the global financial system shuddering to a halt. These developments would cripple or destroy hedge funds, investment banks and other major financial institutions.
After his presentation people were dismissive -- the moderator of the event even joked, "I think perhaps we will need a stiff drink after that." Two years later, I don't think anyone was laughing. You don't need me to tell you Roubini was shown to be on the money in spectacular fashion.
Roubini's success in predicting the credit crunch turned him from an obscure academic to a major figure in the debate about the world economy. He had become a prophet: a prophet of doom.
Predicting the crisis of 2011
So fast forward to 2010. Despite recovering economies and stock markets, Roubini said that the crisis was not over: "We are just at the next stage. This is where we move from a private to a public debt problem... We socialised part of the private losses by bailing out financial institutions and providing fiscal stimulus to avoid the great recession from turning into a depression. But rising public debt is never a free lunch, eventually you have to pay for it."
Then, in May 2010, the first Greek debt crisis hit. Here was Roubini's take on the situation: "We have to start to worry about the solvency of governments. What is happening today in Greece is the tip of the iceberg of rising sovereign debt problems in the eurozone, in the UK, in Japan and in the US. This... is going to be the next issue in the global financial crisis."
Roubini had called the financial crisis, the second leg of the Credit Crunch, that is just emerging at the moment.
So, what next?
So, you may be interested in hearing what Nouriel Roubini is predicting right now.
Firstly, is the US and Europe's economic slowdown just a 'soft patch', or is it something worse?
Roubini is clear -- we are likely to enter a second recession. "The first half of 2011 showed a slowdown of growth -- if not outright contraction -- in most advanced economies. Optimists said this was a temporary soft patch. This delusion has been dashed. Even before last week's panic, the US and other advanced economies were odds-on for a second severe recession."
What about the European debt crisis? "...the eurozone periphery is now contracting, or barely growing at best. The risk that Italy or Spain -- and perhaps both -- will lose access to debt markets is now very high. Unlike Greece, Portugal and Ireland these two countries are too big to be bailed out."
So what can we do? Well Roubini recommends short-term fiscal stimulus, rather than the fiscal tightening that is occurring in most countries, followed by medium-term fiscal austerity. He also recommends further quantitative easing and the European Central Bank cutting interest rates to zero.
Perhaps most revealingly, he says: "Another recession may not be preventable. But policy can stop a second depression. That is reason enough for swift and targeted action."
Now, everyone is fallible, and Roubini has got some of his calls wrong in the past, but I am minded to agree with his view that things are going to get worse before they get better. I don't know about you, but I am battening down the hatches.
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