Last Updated Mar 26, 2009 5:04 PM EDT
Is economist Nouriel Roubini a prophet or a perpetual pessimist
who happened to get it right? In 2004, the New York University
professor started to see disturbing trends he thought would lead to a
crippling U.S. recession and a global slowdown. While other economists echoed
his view at times, Roubini was the most consistent and bearish, even when his
predictions failed to happen. So, most mainstream economists dismissed him
simply as a perma-bear.
Five years after his initial warnings, he's one of the most sought-after advisers in the
world, strategizing with entities like Congress and international finance
While other economists thought the real estate bubble would
burst, they didn't realize the extent of the devastation because housing is
only about 6 percent of America's GDP. Roubini, however, was one of the
few who saw the link between housing and consumer spending, which makes up more
than 70 percent of the U.S. GDP and about 25 percent of the world's purchases
of goods and services. As real estate prices soared, consumers used home equity
loans to finance more expenditures.“(T)he only way you can liquefy
your wealth is by using your home as your ATM machine, and that is exactly what
has happened in the last few years,” Roubini told an audience at the
International Monetary Foundation in 2006.
Roubini also saw the makings of a massive, global trade imbalance. The U.S. was borrowing from China to purchase Chinese goods. China was buying commodities from Latin America and the Middle East to produce those goods. If China experienced any internal disruptions and it stopped financing the U.S., the dollar would devalue, consumer spending would drop, and a global economic slowdown would result.
Bottom line: America was borrowing from other countries to
fund consumption and housing rather than
productive investments that create exportable goods and services. Roubini
concluded the trend was unsustainable. “The bursting of the housing
bubble is going to lead to broader systemic banking problems,” he
told the IMF audience. “The rest of the world is not going to be able
to decouple from the U.S. even if it is not going to experience an outright
recession like the United States.”
While many economists rely mostly on rigorous econometric
formulas, Roubini assumes that quantitative methods alone can't explain
unprecedented moves in the global economy. So, he adds a heavy dose of
intuition, historical analogies, and circumstantial observation to his work. He
derives most of his forecasts from simple data like supply-and-demand
models and ratios of home price versus rent and home price versus income.
Other economists use computers to crunch data, but Roubini uses his brain, says
Christian Menegatti, lead analyst at Roubini's firm RGE Monitor.
His nontechnical framework has been likened to those used by
noted economists Joseph Stiglitz and Paul Krugman. And Roubini told the New
York Times that Alan Greenspan and John Maynard Keynes have influenced his
methodology. His approach to economics isn't radical, but his style can be
considered flamboyant, says Brad Setser, who co-wrote a book with Roubini and is now a fellow at the Council on Foreign Relations Center for Geoeconomics. A recent Roubini blog post illustrates the
point: “(T)hese Bush hypocrites who spewed for years the glory of
unfettered wild west laissez faire jungle capitalism allowed the biggest debt
bubble ever to fester without any control (and) have caused the biggest
financial crisis since the Great Depression.”
Anirvan Banerji, director of research at the Economic Cycle
Research Institute, praises Roubini for correctly capturing the nature of the
crisis but points out that his timing was repeatedly off. What if the Fed had
adjusted interest rates or businesses stopped hiring based on impending
recessions that didn't occur?
But, Darrell Duffee, a finance professor at Stanford's
Graduate School of Business, says timing is not so important. "His
skeptical commentary has been very, very useful," says Duffee, who added
that Roubini's warnings were meant to straighten out the financial sector.
Indeed, in November 2004, Roubini warned on his blog, “(S)erious
financial distress from unsustainable fiscal and current account deficits
cannot be ruled out.”
Banerji also criticizes Roubini for changing his
justifications for the recession as he kept missing the timing. First it was
the trade deficit, then oil price shocks, then the housing downturn, and finally
the credit crisis, Banerji says. "There's something lacking in terms
of understanding what triggered the recession," he adds.
Supporters argue that Roubini emphasized different
vulnerabilities but his overarching argument remained the same. "The U.S.
wasn't borrowing from the world to finance productive investment (and) that
process would end badly," says Setser.
Roubini expects things to get worse before they get better
and predicts the recession will last at least until the end of 2009. In
general, he advocates for the government to stabilize the economy through
monetary and fiscal policy. Here are his recommendations to stop the credit
- Temporarily freeze all foreclosures.
- Create massive fiscal stimulus packages of at least $400
billion for public works, infrastructure
spending, unemployment benefits, and tax rebates to lower-income households.
Provide grants to state and local governments in dire need of funding.
- Coordinate interest-rate cuts globally.
- Temporarily insure all bank deposits. Allow insolvent banks
to shut down and partially nationalize solvent but distressed banks.
- Open credit lines to solvent financial institutions and
- Inject money into banks by buying equity.
- Coordinate a global effort to gradually adjust trade
Policy makers around the world have heeded most of Roubini's
suggestions. Hopefully the one who saw it all coming sees the correct solution