The Common Good is honored to host “Dr. Doom” Professor Nouriel Roubini on Wednesday, October 12th as he discusses the coming challenges of the US & Global Economy as part of our Economy and Business Series.
Roubini has been lauded for his stunning prediction of the financial crisis of 2008. What is ahead?
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Nouriel Roubini, an American economist born in Istanbul, Turkey, was raised in Italy and educated at in Milan and at Harvard University. He has been a practicing economist at the IMF, the Federal Reserve, World Bank, and the Bank of Israel, served as senior economist at the Council of Economic Advisors during the Clinton Administration and at the Treasury Department as senior advisor to Timothy Geithner. He teaches at New York University’s Stern School of Business and is chairman of Roubini Global Economics, an economic consultancy firm.
Roubini is renowned for having predicted both the collapse of the US housing market and the worldwide recession which started in 2008. Roubini’s predictions views have earned him the nickname “Dr. Doom” in the media. As Roubini’s descriptions of the current economic crisis have proven to be accurate, he is today a major figure in the U.S. and international debate about the economy.
-2008, Fortune magazine wrote, “In 2005 Roubini said home prices were riding a speculative wave that would soon sink the economy. Back then the professor was called a Cassandra. Now he’s a sage”.
The New York Times notes that he foresaw “homeowners defaulting on mortgages, trillions of dollars of mortgagebacked securities unraveling worldwide and the global financial system shuddering to a halt”.
In September 2006, he warned a skeptical IMF that “the United States was likely to face a oncein-a-lifetime housing bust, an oil shock, sharply declining consumer confidence, and, ultimately, a deep recession”.
-Nobel laureate Paul Krugman adds that his once “seemingly outlandish” predictions have been matched “or even exceeded by reality.”
Although he is ranked only 512th in terms of lifetime academic citations, he was #4 on Foreign Policy magazine’s list of the “top 100 global thinkers.”
-In the 1990s, Roubini studied the collapse of emerging economies. He used an intuitive, historical approach backed up by an understanding of theoretical models to analyze these countries and came to the conclusion that a common denominator was the large current account deficits financed by loans from abroad. Roubini theorized that the United States might be the next to suffer, and as early as 2004 began writing about a possible future collapse. Business Week magazine writer Michael Mandel, however, noted in 2006 that Roubini and other economists often make general predictions which could happen over multiyear periods.
In September 2006, he foresaw the end of the real estate bubble: “When supply increases, prices fall: that’s been the trend for 110 years, since 1890. But since 1997, real home prices have increased by about 90 percent. There is no economic fundamental—real income, migration, interest rates, demographics—that can explain this. It means there was a speculative bubble. And now that bubble is bursting.” In the Spring 2006 issue of International Finance, he wrote an article titled “Why Central Banks Should Burst Bubble.” in which he argued that central banks should take action against asset bubbles. When asked whether the real estate ride was over, he said, “Not only is it over, it’s going to be a nasty fall.”
By May 2009, he felt that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic”. He expected the full recession to last 24 or 36 months, and believed in the possibility of an “L-shaped” slow recovery that Japan went through in The Lost Decade.
In his opinion, much of the current recession’s cause is due to “boom-and-bust cycles,” and he feels the U.S. economy needs to find a different growth path in the future. “We’ve been growing through a period of time of repeated big bubbles,” he said. “We’ve had a model of ‘growth’ based on overconsumption and lack of savings. And now that model has broken down because we borrowed too much.” He feels that too much human capital went into financing the “most unproductive form of capital, meaning housing” and would like to see America create a model of growth in more-productive activities. He feels that “sustainable growth may mean investing slowly in infrastructures for the future, and rebuilding our human capital,” by investing in renewable resources . “We don’t know what it’s going to be,” he says, “but it’s going to be a challenge to find a new growth model. It’s not going to be simple.”
Recovery from recession
In August 2009, Roubini predicted that the global economy would begin recovering near the end of 2009, but the U.S. economy is likely to grow only about one percent annually during the next two years, which is less than the three percent normal “trend.”
Roubini notes that the subprime issues are a global, and not just a U.S. problem. In an interview with author James Fallows in late spring of 2009, he stated, “People talk about the American subprime problem, but there were housing bubbles in the UK, in Spain, in Ireland, in Iceland, in a large part of emerging Europe, like the Baltics all the way to Hungary and the Balkans. It was not just the U.S., and not just ‘subprime.’ It was excesses that led to the risk of a tipping point in many different economies.”
His pessimism is focused on the short-run rather than the medium or long-run. In Foreign Policy (Jan/Feb 2009), he writes, “Last year’s worst-case scenarios came true. The global financial pandemic that I and others had warned about is now upon us. But we are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst”.
In 2010, he again warned that despite an improved economy with rising stock markets, the crisis was not over and new bubbles were on the horizon:
“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.”
In late May 2010, markets around the world began dropping due partly to problems in Greece and the Eurozone. “Roubini believes Greece will prove to be just the first of a series of countries standing on the brink,” writes theTelegraph. ]Roubini explains the new issues governments must deal with:
“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 is the author of several books, including:
§ Crisis Economics: A Crash Course in the Future of Finance
§ Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies
§ Political Cycles and the Macroeconomy
§ New International Financial Architecture
For more information and videos on Nouriel Roubini, visit our speaker pagehere.